The Smartest Guys in the Room (2003) tells the remarkable tale of energy trader Enron – once a poster child for market innovation on Wall Street – and its dramatic fall from stratospheric heights. These blinks detail a gripping story of financial deceit, while shedding light on the personalities that built Enron’s corporate culture and set it up for disaster.
Does it ever feel like history is repeating itself? It sure seemed that way in 2001 when the American energy colossus Enron filed for bankruptcy. The company’s demise due to huge debts and fraudulent business practices mirrored problems they had experienced years earlier, when first starting out.
In fact, in 1987, just two years after it was founded, Enron was already saddled with debt.
Enron was formed in 1985 through a merger between two pipeline companies, Houston Natural Gas (or HNG) and InterNorth. An intelligent and ambitious man named Ken Lay assumed the role of CEO, and in 1986 the company was renamed Enron.
Unfortunately for Lay, it wasn’t long before Enron was in dire financial straits. By early 1986, Enron reported a first-year loss of $14 million, and by January 1987 its credit rating was at junk status.
Enron had been engaging in dishonest business practices that had brought the company to the brink of bankruptcy, and a specific subdivision called Enron Oil was causing the most trouble. Enron Oil wasn't producing or selling oil, but simply speculating on oil prices; not only that, but the oil traders were manipulating their earnings.
For example, they would set up deals with fake companies that let them take a huge loss on one contract, only to cancel out these losses with a second contract that generated the same amount in profits. Their fictitious losses enabled them to move earnings from one quarter to the next.
Enron was trying to prove to Wall Street that it could turn a steadily increasing profit, a trend that the stock market is quick to reward. However, by 1987, Enron’s oil trading game had taken such a loss on high-risk bets that the entire company was on the verge of bankruptcy.
But Ken Lay was prepared to act. He assured analysts on Wall Street that this downturn was just a freak event that could never repeat itself. But as we now know, this kind of deceit and carelessness was at the very core of Enron’s company culture.