Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
by Bethany McLean, Peter Elkind
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Book Summary Information
Author: Bethany McLean, Peter ElkindEdition: Hardcover
Audio: English (Original Language)
Format: Bargain Price
Published: 2003-10-13
ISBN: N/A
Number of pages: 464
Book Reviews of Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
Book Review: Page-turner, great overview of Enron's rise and fall
Summary: 5 Stars
The Smartest Guys in the Room is an intelligently written, comprehensive look at the rise and fall of Enron. Even if you've seen the outstanding documentary of the same title (made after the book came out), I highly recommend reading the book. While the documentary does include information not available when the book was published (such as the truly scary audio recordings of Enron traders blithely manipulating CA's deregulation loopholes by rerouting electrical power or asking power plants to "find a reason to go offline" during CA's rolling-blackout nightmare), the book contains much more detail, as well as players barely mentioned in the documentary.
One of those players is Rebecca Mark, the glam Enron uber-exec in charge of international projects and a short lived venture into water "trading," who was vociferously criticized by Jeff Skilling (big shaper of Enron strategy who became president and COO in 1997), later ousted, and one of the lucky who cashed in millions in stock before Enron's decline. (Ironically, despite some huge debacles, Mark's international projects were among the few assets of value left standing when the dust of Enron settled.) The book also includes much more detail on the shady financial maneuverings of Enron, which arguably were prompted by Skilling's constant promises to Wall Street of increased quarterly earnings (regardless of Enron's actual state of profitability), followed by quarter's-end panic and a just-make-it-happen attitude throughout the company. Profitability was happening, but mainly on paper. Understanding Andy Fastow's off-balance-sheet schemes to hide losses, including the many complex "special purpose entities," can by heady bedtime reading for those of us unschooled in high finance, but it's endlessly fascinating nonetheless.
Though the story of Enron's rise and decline (from a $70-billion company with a stock price of over $80/share to below $10/share and then junk status and bankrupt in a remarkably short time) is fascinating, equally interesting (and related) is Enron's company culture, so vividly illustrated by authors McLean and Elkind. Enron morphed from a straightforward (albeit unsexy) Texas natural-gas supplier into a flashy, MBA-laden, power-trading company with a nearly myopic deal-making culture. Building and maintaining assets was old school; so to it seems were details like carrying through on deals, customer service, anything with a functionary flavor. It was all about trading, starting new businesses, anything visionary (even as Skilling kept selling Enron to Wall Street as a logistics company). One guesses it would have been hell to be a cube worker at Enron, cleaning up the messes created by deal makers upstairs.
For those of us who still think 6 figures is a high salary, it's astonishing to learn about the huge base salaries, multimillion-dollar bonuses, and big severance packages (who knew getting fired or quitting could be so lucrative!). Then there's the hubris of the trading pit. The superior attitude of the traders, other "new" company divisions, and even Skilling himself toward other areas of the company. The complicity of the lawyers and Arthur Andersen's accountants, who were supposed to ensure the company played by the rules (but who enjoyed such high fees and such an incestuous relationship with Enron they sometimes barely tried).
Much of the financial outlay defies common sense, even to those without any business background. Huge bonuses paid to Enron employees immediately for deals signed, based on projected profits (hypothetical and often hugely exaggerated), regardless of whether such deals ever made a dime. The ability to immediately "bank" such profits (yes, all projected profits even on a 30-year project) at quarter's end through the murky glories of mark-to-market accounting. Or Lay and the Board of Directors granting approval to Fastow to set up the special purpose entities (wherein Enron losses were hidden while investment banks were paid high returns for their no-risk (and therefore illegal) participation), and yet never directly asking Fastow specifically how much he was profiting from the funds. Lay and the directors thought Fastow would earn a modest return on his own money invested (Enron also paid him a substantial fee to manage the funds). But within a few years, Fastow and his wife profited a whopping $60 million from the funds, even as he was CFO of Enron and negotiating deals WITH Enron on behalf of the funds. Amazing. (One would think Fastow had nervous knots in his stomach each work day wondering when this sticky subject would come up, but it appears he was confused to the end about any impropriety.)
Kudos to coauthor Bethany McLean, who as a Fortune writer (amid the peak of Wall Street/analyst/investment banking hoopla and adoration over Enron stock) was one of the first to call up Jeff Skilling and say, in effect, "the numbers don't make sense." I'm now onto reading "Power Failure" by Sherron Watkins (the Enron accountant who warned Lay that Enron could implode due to accounting improprieties) and I think TSGITR will provide great background info.
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Summary of Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
The fall of Enron was much more than a business scandal. Not only did the events of October 2001 have a more damaging effect on the markets than 9/11 but, like Watergate, it was an event that sent shivers throughout the whole world. The subsequent unravelling of the truth would bring down CEOs, taint the President, destroy the accountants Arthur Andersen, and call into question corporate governance throughout the US. It was the beginning of the end of confidence in American stakeholder capitalism. This is an in-depth investigation of the fall of Enron.Like its subject, The Smartest Guys in the Room is ambitious, grand in scope, and ruthless in its dealings. Unlike Enron, the Texas-based energy giant that has come to represent the post-millennium collapse of 1990s go-go corporate culture, it's also ultimately successful. Penned by Fortune scribes Bethany McLean and Peter Elkind, the 400-page-plus chronicle of the scandal digs deep inside the numbers while, wisely, maintaining focus on the "smart guys" deep-frying the books. The likes of paternal but disengaged CEO Ken Lay (dubbed "Kenny Boy" by George W. Bush, one of many prominent public figures with whom he rubbed shoulders), cutthroat man-behind-the-curtain Jeff Skilling, and ethically blind numbers whiz Andy Fastow vividly come to life as they make a mockery of conventional accounting practices and grow increasingly arrogant and bind to their collective hubris. They're not a likable lot, and the writers find it difficult to suppress their astonishment and revulsion with the crew who rapidly went from golden boys and girls of the financial world to pariahs when the bill finally came due. The authors' unrepressed sarcasms are more than often unnecessarily given the scope of the outrage. Enron's leading lights were or a time celebrated for their ability to concoct nearly unfathomable business schemes to hide mounting shortfalls and keeping track on their machinations can be a chore, but, by sticking hard to the story behind the fall, McLean and Elkind have reported and written the definitive account of the Enron debacle. --Steven Stolder
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