Bethany McLean, co-author with Peter Elkind of the book Enron: The Smartest Guys in the Room recently visited Sydney for the release of the new documentary based on her book. The film (which is written and directed by Alex Gibney) and the book chronicle the collapse of giant energy company Enron, the repercussions of which are still being felt in corporate America.
Fortune reporter Bethany McLean first became involved in the Enron story when a source suggested she take a closer look at Enron’s financial statements. At that time, Enron stock traded at around US$70 a share and the company was often touted as a beacon of corporate excellence and success. The thought that anything was possibly wrong inside the walls of Enron was heresy.
Enron Director Alex Gibney |
Realising that things didn’t quite add up, McLean interviewed Enron CEO, Jeff Skilling and asked him some very basic questions. Top of the list was ‘How does Enron make its money?’ A very straight forward question, but one that Jeff Skilling chose to ignore. Instead he became quite agitated and intimidating, and questioned McLean’s integrity as a reporter.
A few days later Enron’s Chief Financial Officer (CFO) Andy Fastow and other Enron heavyweights met with McLean to ensure that she understood the answers they were giving. After three hours she was none the wiser but Fastow left the meeting saying ‘I don’t care what you say about the company. Just don’t make me look bad.’
The story that McLean uncovered (and published as ‘Is Enron Overpriced?’ in the 5 March issue of Fortune) was about a deeply entrenched culture of financial mismanagement and corruption that involved the Enron board, Wall Street Traders, accountants Arthur Anderson and securities analysts that set the stock price. The very regulatory bodies established to prevent such corruption all put their hands out for a slice of the pie rather than stopping Enron from participating in illegal activities.
Some of these activities are mind-boggling in their brashness. For instance, take Tim Belden, head of Enron’s West Coast Trading Desk in Portland Oregon. In what became known as the ‘Silverpeak Incident’, Belden exploited California’s rules deregulating the state’s energy market and by creating congestion on power lines he caused electricity prices to rise, all at a cost to Californian consumers of US$7 million. Realising that power outages also pushed up the price of electricity, Belden and his operation organised some fake ones.
Or take Enron CFO Andy Fastow. Enron’s Board of Directors exempted him from the company’s code of ethics so that he could run a private equity fund to raise money for and do deals with Enron. Fastow’s funds become one of the key tools Enron used to manage its balance sheet and make investors think that it was performing better than it really was.
Dodgy accounting allowed Enron to right off losses as profit. The company’s foray into the broadband market, for example, was estimated to cost approximately US$60 million for the first year. This was on the books as profit, despite the fact that the broadband business made no money. The success of Enron was all on paper.
The whole nature of Enron’s business became focused on boosting its share price with the top brass all cashing in tens of millions of dollars worth of shares before the inevitable crash and burn.
What is so interesting about the Enron story for Bethany McLean is that it is a real study of human nature:
Enron, in the end, is story about really fascinating characters. From [company founder]Ken Lay son of a Baptist Minister, who lived with no indoor plumbing until he was 11 years of age, who rose to the heights of American big business to Jeff Skilling often described as incandescently brilliant, but a complicated and at times desperate and delusional character who really created the modern Enron. It’s proof of the old saying that truth is stranger than fiction.
Skilling not only created the modern Enron, he also built a macho culture that included extracurricular activities such as hazardous trail bike expeditions and skydiving. Those at the top practically had to risk there lives to stay in the good books. Skilling cashed in and resigned only weeks before the company’s collapse and still maintains he knew of no signs that anything was wrong.
Former Enron Chairman Kenneth Lay |
According to the film’s director Alex Gibney there has been much talk about the relationship between the Bush family and ‘Kenny Boy’ Lay:
We tried very hard to find a smoking gun and only really found it during the California energy crisis, when Bush aggressively did nothing as California was being ravaged by Enron and the other energy companies. Bush had an ideological rationale ‘trust in the force: the magic of the marketplace.’ His inaction had wide-ranging consequences for California’s economy and, ultimately, for its political landscape.
While the US government is complicit in the failings at Enron, Gibney explains that there is more complexity to these issues than simple corruption.
The relationship between big business and politics will be intimate as long as politicians need increasingly large sums of money to run for office. But Enron doesn’t focus on the relationship between business and politics. Rather, the film examines how different real-world capitalism is from our textbook explanations of supply-and-demand. The world of investment banking and big business is a world unto itself in which a few powerful people wheel and deal and, particularly in the case of vital markets like energy, exert ‘market power’ that has nothing to do with competition or open relationships between consumers and producers.
[The Enron story] is important because it takes the predatory nature of ‘business as usual’ to its logical extension. Enron is not an exception to the rule; it’s an exaggeration of the way things too often work.
Ultimately the film is an extremely effective and powerful documentary. It’s stylish, entertaining, enlightening, thought-provoking and at times enraging. This is the must-see documentary of the year.
Enron: The Smartest Guys in the Room is currently in release through Dendy films.
Donate To New Matilda
New Matilda is a small, independent media outlet. We survive through reader contributions, and never losing a lawsuit. If you got something from this article, giving something back helps us to continue speaking truth to power. Every little bit counts.
