The Smartest Guys in the Room summary

Enron managed to pull itself out of its first crisis, but by the end of 1988 it was in hot water once again. The company’s main problem was that it didn’t have a business model that could turn real profits, an issue Enron hoped to solve by hiring Jeffrey Skilling.

Skilling, formerly a consultant for McKinsey and a graduate of Harvard Business School, joined Enron in 1990, taking the position of CEO at a new subdivision called Enron Finance. A very bright man, Skilling was a major force behind Enron’s transformation into a successful company – at least temporarily.

It was Jeff Skilling who transformed Enron, but until the mid-1990s, most people outside the company had no clue who he was. The face of Enron to the outside world was in fact Rebecca Mark – the female star in a male-dominated industry.

Until the 1990s, developing countries were usually overlooked by corporations in the West, even though they had massive populations and matching energy needs. Rebecca Mark was the head of a company subdivision called Enron Development, and her task was to strike energy deals with as many developing nations as possible, thereby flying Enron’s flag the world over.

In 1996, Enron announced that Jeff Skilling would be the company’s new president and chief operating officer, or COO. Newly installed at the top of the company, Skilling quickly began remaking Enron to suit his image. Trading became Enron’s central focus, but Skilling also de-emphasized old projects like pipelines and the production of natural gas.

Although Enron had already become the biggest name in the natural gas industry, Skilling wanted to go further. He wanted even more trading, and to deal not just in gas but to expand into the electric power sector as well, even though Enron was still an outside player in electricity.

While Skilling transformed the nature of Enron’s business, it was Andrew Fastow who transformed its finances.

It all began when Fastow, who had been a part of Enron’s financial division since 1990, was promoted to chief financial officer, or CFO, in 1998. He and his team went to work masterminding Enron’s finances to close the gap between the reality of the firm’s business and the picture Skilling and Lay wanted the world to see.

Enron couldn’t ride it’s fraudulent accounting practices forever. The company thought of them as a life preserver that would keep their business looking good until Skilling came up with another plan to make real profits.

Skilling’s first idea was to get into the electrical energy business, mainly because, by the mid-1990s, retail electricity was regulated by state governments. Enron was banking on the fact that the market would eventually be deregulated; when that happened, they would be perfectly placed to sell electricity straight to businesses and homes across the country.

Given what you now know about Enron, it might be hard to believe that Thomas Kuhn, president of the Edison Electric Institute, said the executives at Enron had “the aura of whiz kids, of golden boys who could do no wrong.” In fact, Skilling and Lay were even being mentioned in the same breath as the likes of Microsoft’s Bill Gates and Apple’s Steve Jobs.

Analysts had kept blind faith in Enron’s performance. Take Enron’s annual analysts meeting of January 2000, an annual affair in which Skilling and other executives reviewed each business unit’s performance.

On December 13th, 2000, Skilling was standing atop Enron’s peak: the company had just announced that he would take Ken Lay’s position as CEO. In celebration of his promotion, Business Week printed a reverential cover story, naming him America’s second-best CEO – just behind Microsoft’s Steve Ballmer. Skilling hadn’t even held the job for three months.

But despite the praise for Skilling, skepticism about Enron’s success was beginning to surface. On September 20th, 2000, Jonathan Weil – reporting for the Texas Journal, a regional supplement of the Wall Street Journal – published a story focusing on energy traders’ reliance on mark-to-market accounting, Enron’s essential tool for logging profits before the cash actually came in.

The day after Skilling’s resignation, a mid-level Enron veteran named Sherron Watkins mailed an anonymous letter to Ken Lay saying, “I am incredibly nervous that we will implode in a wave of accounting scandals.”

Nonetheless, Lay appeared unperturbed and, according to one Enron executive, “Ken thought there was nothing wrong with Enron that what was right with Enron couldn’t fix.” But regardless of what Lay said, Enron’s massive debt and plummeting stock were poised to send the company into a cash crisis.

In the wake of Enron’s collapse, everyone involved – even the board of directors – denied all responsibility. But by 2003, their charade was starting to fall apart, as prosecutors for the United States Department of Justice began issuing a long list of indictments. In the end, 33 people were indicted, and among them were 25 former Enron executives.

Here’s what happened to the people at the top – Lay, Skilling, Fastow and Mark: