Enron- Reaction Paper # 2

Enron: The Smartest Guys in the Room The documentary film, Enron: The Smartest Guys in the Room, is a story about the greed in corporate America that is always exposed after the fact. The film examines the 2001 collapse of Enron. At the time of the collapse, Enron was the largest bankruptcy in history. The Enron story is one of money and politics, which are two areas that embody the culture of big business in America. The film does a great job of illustrating the laissez-faire culture that allowed Enron to rise to prominence while simultaneously exposing the rabid fraud behind the façade of success. Along with the rise and fall of the Enron stock price, one of the consistent themes of the film is the scandals and the lies behind the company’s success. The film separates each scandal and builds off that scandal to show how Enron was able to manipulate the public into believing its greatness. The name Enron is now synonymous with fraud; the reality is that greedy smart people created the tragedy. The film examines the fraud starting with the Enron Oil trading scandal, the tenure of CEO Jeff Skilling, the mystery of Enron executive Lou Pai, the hiring and tenure of Andrew Fastow as CFO, the California energy crises, and the eventual bankruptcy of Enron. During each of these mini Enron eras the person who always loomed in the background was Kenneth Lay the man who based his career on the belief of deregulation. The Enron Oil trading occurred in the late 1980’s. This involved traders for Enron Oil who made risky bets that eventually proved to be disastrous. The traders lost over $85 million with no oversight or care from upper management. The film makes an effort to connect Kenneth Lay, who was CEO at the time, to the risky bets. Lay claims to have had no knowledge of the risky bets and alleges to have been kept in the dark about such trades. Ultimately, Enron survived this $85 million dollar financial loss but it opened the company to a culture of gambling and greed. From this point forward it appears that the company was never the same and its sole purpose was to make money no matter the moral cost. The tenure of Jeff Skilling consumes a large portion of the documentary. His hiring and tenure is also the catalyst of Enron’s greatest success and its tragic failure. Skillet created an elitist culture, introduced Enron to mark-to-market accounting, and the Performance Review Committee (“PRC”) where the bottom 15% of staff were cut every year. The film claims that Skilling transformed himself from being a nerd to a macho risk taking business man. Sklling also took a liking to other macho exectuives, the film called these guys, “guys with spikes.” It was also during this time that Skilling hired Andrew Fasto as the CFO. During the early portions of Skilling’s tenure Enron experienced tremendous growth and its stock price rose to unappreciated heights. A major part of this success was the mark-to-market accounting which allowed Enron to book profits in the present on future deals. Skilling was able to create a culture of invincibility and the government along with the media was all too willing to watch it happen without any sort of close scrutiny. Behind the scenes Enron was actually losing money on failed business ventures but these were never disclosed because there was no requirement to do so. The U.S. government and its respective agencies failed the American people once again because it did not uncover this fraud. Skillet resigned from the position of CEO after cashing out his

stock and destroying the company. Although the film does not mention his trial, I did additional research and learned that he is presently in prison until 2028. For all of his flaws, Skillet was smart enough to hire Fasto as the CFO, a man who masterfully hid the Enron losses and allowed the company to make billions despite a failed business model. Fasto sole role in the Enron scandal was to hide the Enron’s loses in smaller companies whose sole purpose was to assume Enron debt. Fasto was able to attract outside investors to put money into these smaller companies because of his connection to Enron and his position as CFO. He was the first of the main corporate executives to be arrested. Fasto’s story is wrought with conflicts of interest and fraud. Of all the executives tied to the Enron scandal Fasto appears to have shown the least amount of resistance during the government investigation. Although the documentary does not spend a great deal of time on Lou Pai, his story is not unique in corporate America. Pai’s role in the company as the head of Enron Energy Services gave him the title of the invisible CEO. The film focuses on some of Pai’s personal life, in that he enjoyed strippers and spending vast amounts of money at strip clubs. What is most interesting about Pai is that he resigned from his position with $250 million in personal earnings and he did so well before Enron collapsed. The shame in his story is that those shareholders that lost out can never recoup the money he earned. At the time of his departure there was no way to truly investigate his motivations and thus, of all the executives he has been mostly unharmed by the collapse. The most disturbing part of the film is the California electricity crisis. Enron’s role in the crisis is distinguishing but it also shows just how out of touch the Enron executives and employees were with reality. A major part of the crises was Enron’s push for deregulation, which eventually allowed Enron to control the California energy market. A powerful moment in the film is a recorded conversation between two traders, one trader describes the energy crises as stealing and then rephrases it as arbitrage. This moment reflects the belief that somehow Enron employees, even below upper management, were able to justify their shady business practices. The film focuses on scandal after scandal with different employees involved in those scandals. However, one character is there at the beginning and at the end--Kenneth Lay. Early on in the film we learn that Lay comes from a humble background and did not grow up with a lot of money. In that sense, he is a self made man and one expect that he would have more compassion for those who work hard for their money. However, Lay is depicted as a man with little regard for those outside of his inner Enron circle. Lay was able to maintain an image of righteousness while looting Enron and its shareholders. Lay’s belief in deregulation and his continuous push for free-markets is what allowed Enron’s stock price to rise in the manner it did. Although the film does not make any outright allegations of political wrong doing it did highlight some interesting relationships. Among those are both Bush’s presidents connection to Lay. Moreover, the California Governor Davis’ demise was linked to the California deregulation and energy crises. His downfall opened the door for Arnold Schwarzenegger, someone was tangentially connected to Enron because he met wit Lay at the Penisula Beverly Hills Hotel during the heart of the crises. The premise of the meeting was to introduce solutions to the California crises. Two years following the meeting Governor Davis was out and Schwarzenegger was the new governor of California. At every crucial moment in the film, Lay and Skillet were shown on stage

speaking to their Enron employees. Interestingly enough up to the point when he retired Skilling was always reporting positive results no matter the Enron stock price. On August 14th 2001 when Skilling resigned the stock price of Enron was at $36. Two months later when the SEC began to investigate Enron the stock it was trading at $19. Lay addressed the Enron employees during the stock price fall and he reported good news. Behind the scenes Lay had sold $26 million dollars in stocks. On 12/3/2001 the stock was trading at 40 cents on the dollar and Enron filed for bankruptcy. How can these human beings can be so greedy to the point having no regard for anyone. The culture of big business and big money in America allows people such as Lay, Skilling, Pai, and Fasto to make millions in the short-term at the expense of people who work hard and earn sometimes 1% of the pay of some of these executives. The strongest point made by the film is that corporate America and especially the securities industry is need of a major overhaul. I believe that any correction and any future regulation must begin with an examination of the political relationships and a reengineering of executive pay where it is linked to the health of the company for 10 to 20 years down the line.