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Name: The Smartest Guys in the Room
Rating: 4.4 (66 reviews)
Author: Bethany Mclean, Peter Elkind

Bethany Mclean, Peter Elkind

The Amazing Rise and Scandalous Fall of Enron

4.4 (66 ratings)

24 mins

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Entrepreneurial Stories

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The Smartest Guys in the Room
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What’s in it for me? Discover what led to the biggest bankruptcy case in US history.

Enron Corporation, the once-dominant American energy, commodities and services company, has come to be known as a synonym for fraud, corruption and disastrous debts. Enron’s fall from grace is probably the most scandalous business story of our times, its skyrocketing profits followed by the largest bankruptcy case in US history. But how does a respected company make it to the top of the business world, only to crumble into economic tragedy?

In these blinks, you’ll venture into Enron’s past to learn about the fascinating people behind this infamous scandal, and will see how greed and deceit can lead to such a dramatic demise.

You’ll also learn

why egomaniacs and backstabbers were welcome at Enron;
how financial structures sneakily camouflaged existing debts; and
what went on in the company’s closed-door meetings.

Enron, a company whose decades of deceit ended in bankruptcy, nearly met the same fate just two years after incorporating.

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.

What happened?

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.

Enron was fundamentally transformed when they found their visionary.

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.

Rebecca Mark was Enron’s poster child – and the person responsible for its toxic deal-making culture.

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.

With Jeff Skilling as president, trading became Enron’s core business – and brought a culture of risk taking and deception.

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.

Andrew Fastow created the financial structures that helped Enron disguise its debt, making himself rich in the process.

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.

Jeff Skilling thought he’d found Enron’s future in electrical energy and broadband, but both failed.

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.

Analysts loved Enron, even though many of them knew the company was hiding its debt.

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.

Concerns regarding Enron’s financial state arose in 2000 and were fueled by strange shifts in the company.

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.

Enron eventually collapsed under the weight of its massive debt and was forced to file for bankruptcy.

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.

Ken Lay, Jeffrey Skilling, Andrew Fastow and other Enron executives were found guilty of fraud and sentenced to prison.

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:

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What is The Smartest Guys in the Room about?

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.

Best quote from The Smartest Guys in the Room

Although it took place a long time ago, it seems obvious now that the Enron Oil scandal was the canary in the coal mine.

—Bethany Mclean, Peter Elkind

Who should read The Smartest Guys in the Room?

Anyone hoping to learn more about the cataclysmic downfall of Enron
People interested in the widespread use of fraudulent business practices
Any business leader, executive, CEO, analyst or accountant

About the Author

Bethany McLean authored Fortune’s March 2001 article “Is Enron Overpriced?” and in doing so became the first person at a national publication to openly question what went on at Enron. McLean now works as a contributing editor at Vanity Fair and a columnist at Reuters.

Peter Elkind, an award-winning investigative reporter, authored The Death Shift and Client 9: The Rise and Fall of Eliot Spitzer. He has previously published articles in The New York Times and The Washington Post and is now editor-at-large at Fortune.

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