Enron the Smartest Guys in the Room

- 16 years to go from 10bn assets to 65bn, took them 4 days to go bankrupt – all the makings of a gigantic scandal – fatal flaw was pride/arrogance/intolerance/greed, so blinded by money – house of cards built over a pool of gasoline – America’s largest corporate bankruptcy – Cliff Baxter Enron employee committed suicide after clashing with CEO Jeffery Skilling – Jan 30 02, Skilling maintained he did all in the interest of the company – nation’s 7th largest corp. – comparison to Titanic, where both Ken Lay and Skilling gave themselves bonus, lowered themselves into the lifeboat – Ken Lay maintained innocence – suspected political conspiracy since it was largest contributor to Bush Jr. ‘s campaign – Lay earned 300m in compensation and stocks over 4 years all gone – Bill Lerach Attorney: insiders sold off bn dollars of stock in preceding months – shredding at Enron, what evidence was lost? – 20000 employees lost their jobs, 2bn retirement funds gone – Ken was a Baptist preacher’s son, PHD in economics, is For Deregulation, gov not solution to the problem, gov. is the problem – founded in 1985, merger of gas pipes, let gas prices be determined by market price – biggest relationship b/w presidential family and a corporation – Bush Snr helped secure billions in subsidies for Enron, promoted Lay as deregulation ambassador at large – 1987, two oil traders made bets for Enron whether price of oil up or down – Louis Borgette took 3m funds put it in a personal account, offshore accounts, phony books, fake Lebanese guy M.Yass – at Board meeting, Lay was told that the Borgette was gambling away beyond their limits, Lay did nothing and said that it was the only part of the company making money, please keep making us millions – two traders had gambled away all of Enron’s reserves

The Man with the Big Idea – Jeff Skilling new way to deliver energy besides pipeline, stock market for natural gas, but with one condition of a certain accounting system (mark to market accounting allowed Enron to book future profits) with Arthur Andersen – Jeff had a Darwinian view, survival of the fittest – PRC performance review, fire 15 percent of workers each review – I am Enron – Jeff was a big risk taker and gambler, macho culture

Guys with spikes – Cliff Baxter was the main dealmaker, blunt guy, manic depressive, closest to Skilling - Lou Pai was a key Skilling Lieutenant, was running Enron Energy services (invisible CEO) only money and strippers motivated him, left Enron with most money 250m by selling all his stock to divorce his wife, mysterious guy, EES lost 1bn after he left, Lou became the 2nd largest landowner in Colorado

Love me love me – stock prices were always increasing, biggest bull market – pump and dump: top execs push stock price up then cash in their options since they were paid mostly in stock – convinced the investment community to invest because they were new and different – profits were going down instead due to their natural gas operations performing poorly – should not have invested in India since most could not afford the power the plant was producing – merger with PGE gave Enron access to California – employees invested their money in Enron

Love for Sale – analysts mostly recommended buying Enron stocks – relied mostly on info from Skilling – Merrill Lynch fired John Olson, a skeptical analyst of Enron and ML were rewarded with 2 investment

banking jobs – Enron created the market to sell bandwidth like a commodity – deal with Blockbuster for Movie on Demand, but deal collapsed and tech was not there – entered the weather market

The Emperor has no clothes – poster child for the new economy, since most internet companies went bust and DJI dropped several points – fortune reporter McLean investigated into the accounts and asked how Enron made its money – 3 hours in a meeting room told the reporter to not make Fastow look bad – came out with an article titled: Is Enron overpriced?

The Sorcerer’s Apprentice – Andy Fastow CFO use of structured finance – keep stock price up despite 30bn in debt – conjured imaginary companies (LJM for himself) – caught selling LJM funds to ML – up to 25 investment banks invested in LJM

Useful Idiots – Arthur A. received 1m a week, Law firm for Enron also did as well – banks were all knowing participants in the fraud –ML bought Nigerian power barges

Ask why asshole – analyst questioned why Enron could not release a banking statement like most financial institution – EES’s Tom White with 500m in losses for the division

California – experienced blackouts during winter even though they had enough capacity – CA’s energy market was deregulated – Tim Belden west coast trading desk – use of loopholes in the regulations – took power out of CA and when prices rose, they exported it back in – shut down power plants to create artificial shortages that would push prices up – betted that energy prices would go up – Milgram Experiment on shocking people with electricity – year long energy crisis cost CA 30bn – protests started against Skilling and Enron – FERC refused to intervene in federal caps for energy price in CA since FERC’s top exec was doing Enron’s bidding – Arnold became governor of CA instead of Davis

The Ship is Sinking – doubts about the company and erratic behavior of Skilling, Enron’s stock began to fall – traders ran Enron by then – shock exit by Skilling on claims of personal reasons, believed the company was in strong financial condition – Ken Lay took over as CEO

Jeffrey has left the building – Sherron Watkins initial whistleblower – sent a memo to Ken Lay – SEC launched an investigation when WSJ published an article on Fastow’s deals – Oct 23rd A. Andersen shredded more than 1 ton of paper – Fastow was fired when discovered he made more than 45m from LJM, made out as the fall guy – Ken Lay maintained innocence and ignorance throughout

It has a wonderful life – December 2, 2001, Enron declared bankruptcy – Skilling was unloading stock but egged employees on to buy in to Enron stock – froze the employee’s pensions – Baxter committed suicide – Fastow gave up 23m in assets and 10 year sentence in exchange for testifying against other Enron executives – A. Andersen oldest accounting firm fell along with Enron 29 000 lost their jobs – Enron being sued for 20bn by shareholders – 20000 lost their jobs, employees lost 1.2bn in retirement funds, 4500 average severance pays