The Smartest Guys in the Room: The Amazing Rise andScandalous Fall of Enron

By Bethany McLean and Peter Elkind. Penguin Group, NY, NY, 2003.

414 pages; $26.95. ISBN 1-5918-4008-2

Reviewed by Larry M. ParkerCase Western Reserve University

The Smartest Guys in the Room is a superb book about the Enron disaster.Fortune writers McLean and Elkind have done a masterful job of exploringthe complexities of Enron. In general, the authors have presented a detailed,factual analysis without being judgmental. At first this reviewer was sur-prised the authors could present such incredibly unethical actions, bothpersonal and corporate, in such a detached manner. However, one canappreciate the benefit of this approach. Many readers probably becomeincreasingly angry as they progress in the book with the people and eventsthe authors described. If the authors had injected their indignity (which theydid only indirectly through quotes from others), I suspect some could havebecome too upset to finish the book. The accounts are often almost un-believable. A drawback of this approach is that at times this reviewer felt hewas reading a very long newspaper article, rather than an amazing story ‘‘ofhuman weakness, of hubris and greed and rampant self-delusion; of am-bition run amok; of a grand experiment in the deregulated world; of abusiness model that didn’t work; and of smart people who believed theirnext gamble would cover their last disaster – and who couldn’t admit theywere wrong.’’(p. xxv).

Much of the book describes the cast of characters. It is fascinating to readabout each person, but almost overwhelming to try to imagine all thesepeople together in one organization. Any one of the key individuals seemedcapable of severely tainting an organization, and some of the supportingcharacters were at least as deplorable as the key people. It is truly a situationin which a fiction writer would not be bold enough to invent such people,because readers of fiction would probably not be able to believe such low-life could exist – at least, not within one entity. Ken Lay, founder and CEOof Enron, may be the most well-known Enron figure, and clearly set the tone

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for the culture of Enron. Lay was, among other things, a ruthless hypocritewho pretended Enron was based on ‘‘Christian values’’ (p. 3). He toutedEnron as sincere, honest and respectful, operating with ‘‘absolute integrity.’’(p. 89) In a memo he stated ‘‘Ruthlessness, callousness and arrogance don’tbelong herey . We work with customers and prospects openly, honestlyand sincerelyy’’ (p. 89). But in reality the completely dysfunctional culturecreated largely by Lay and COO Jeff Skilling created ‘‘corporate killers’’(p. 121) who were encouraged to backstab and take advantage of anyone –customer, supplier, lender or fellow employee. Skilling, a former McKinseyconsultant, persuaded outsiders that he was reinventing corporate culture bycreating a Darwinian meritocracy. He believed that team players were los-ers. Skilling, whose personality seems almost maniacal, created a ‘‘chaotic,destructive free for all.’’ (p. 56).

The authors describe many other fascinating characters in addition to Layand Skilling to help explain the development of the entire Enron culture.A good example is John Wing, a ‘‘forgotten man of the Enron saga’’ (p. 44).This reviewer had never heard of him, but he was key to understandingmuch of the Enron culture. Wing was the founder of Enron International.He was loud, irritating, arrogant, cunning, fast, decisive and relentlesslyruthless. This executive was the first to demonstrate that Lay could be weakand indecisive, bullying the CEO time and again. Wing was one of the fewwho made real profits for Enron instead of just accounting or paper profits,but he was so nasty even Enron fired him three times – and rehired him eachtime. In addition to showing the path around Lay, Wing blatantly andrepeatedly exploited Enron for his own gain, setting the stage for others torealize such actions would be tolerated, even encouraged. Wing pocketedmillions when he left Enron, and was succeeded by Rebecca Mark, who hadbecome successful in large part by sleeping with the boss, and who alsosucceeded in looting Enron. Mark and Wing also helped set the sexualprecedent for the permissiveness that seemed prevalent in Enron. In fact,Wing escaped unscathed because he sold his Enron stock after Rich Kinder,President and COO of Enron, was ushered out by Lay. Lay moved Kinderout because Kinder was having an affair with Lay’s executive secretary,infuriating Lay, even though Lay was having an affair with another of hissecretaries. A member of the Enron Board of Directors, when asked aboutthis apparent hypocrisy, simply summarized that ‘‘Some people would makethe point that it was his own secretary, versus the boss’s secretary.’’ (p. 97).

Chapter 11, Andy Fastow’s Secrets, alone might be worth the price ofthe book. Early in the chapter the authors explain, ‘‘there are only threeways for companies to fundy growth. They can take on debt, issue stock,

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or draw from their existing cash flowy . But all three of these tactics wereruled out by Enron.’’ (p. 150). Fastow’s job largely consisted of taking careof this situation. Securitization and establishment of Special Purpose En-tities (SPEs) were the keys to his success – as long as it lasted. Fastow’s earlysecuritizations (basically, selling future revenues from contracts at a dis-count to generate cash) were actually legitimate, and sucked in institutionalinvestors such as CALPERS and G.E. Later deals became more and moreshaky, with few of the SPEs actually meeting the 3% requirement to remainoff the books of Enron. But Fastow, aided by his equally manipulativelieutenants Ben Glisan and Michael Kopper, became a master of form oversubstance, and the auditors, Arthur Andersen, did not object. His dealsdeftly generated paper profits and cash, hid debt, and sometimes converteddebt to equity. His manipulations fit nicely with Enron’s overall approach tobusiness, which had evolved to making deals of little substance. Few of thedeals made by Fastow or Enron traders made sense. But Enron’s RiskAssessment and Control (RAC), a dazzling group of risk assessment spe-cialists who were supposed to stop moves that were too risky, was too weakto do anything. The head of RAC, Rick Buy, and the chief accountingofficer, Rick Causey, were completely unable to stand up to Skilling, Fastowand other Enron executives. The auditors, Arthur Andersen, were moreinterested in facilitating Enron’s plans than critically examining them.

The authors make it obvious that Enron was doomed long before itsactual collapse. Rank and file auditors of Arthur Andersen, as well as na-tional level partners, understood that Enron was trouble. Chase took out abillion dollar insurance policy to cover risk associated with Enron, andCitibank spread its risk by selling notes to investors. Those in the naturalgas industry would no longer deal with Enron if it could be avoided. It isclear that Enron was in an inescapable death spiral of arrogance, greed,dishonesty, deceit, corruption and backstabbing. Enron executives weremagicians capable of transforming the grim reality into the magnificentillusion desired by Skilling and Lay. But virtually all of the Enron’s efforts,well described by the authors, simply delayed disaster. Enron was truly afinancial time bomb that had to eventually explode. The Enron forays intoelectricity (including the California power fiasco) and almost comicalbroadband trading (‘‘they didn’t really have any business’’ (p. 284)) de-scribed in later chapters simply provide the context for the denouement ofthe Enron tragedy.

Another impressive aspect of this book is that so much insight is provi-ded into so many arenas. Enron International transactions help us under-stand why so many people in many countries distrust global capitalism. For

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example, the $20 billion Dabhol, India, scheme is one of the great inter-national financial disasters, and probably deserves a book of its own. Itstands as ‘‘the biggest fraud in India’s history’’ and made India ‘‘a countrywhere every single person hates one company.’’ (p. 79). We can also un-derstand how Enron’s machinations provide abundant and appropriateammunition for opponents of mark to market accounting and deregulation.Additionally, it is staggering to see how bright people from stalwart insti-tutions such as McKinsey, Harvard and the late Arthur Andersen can be-come enmeshed in destructive patterns of greed. Enron, as presented byMcLean and Elkind, provides a microcosm in which we can see much ofwhat troubles society. The book does not provide an easy story line tofollow, but it is well worth the effort to study the book and piece the factsinto a remarkable tale.