Enron: The Smartest Guys in the Room

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Enron: The Smartest Guys in the Room

****

 

Alcoa makes money by producing aluminum and selling it.

Ford makes money by building automobiles with that aluminum and selling them.

Exxon-Mobil makes money by selling gasoline to the people driving those Fords.

How did Enron make money? To this day, nobody knows for sure. And that’s the problem.

In “Enron: The Smartest Guys in the Room,” documentarian Alex Gibney explores the historic rise and fall of one of America’s most dishonest companies.

Gibney does a terrific job of explaining a twisted financial tale. And he blames all of us for accepting the perverse Wall Street culture that allowed it to happen.

The fatal flaw of Wall Street is that the stock market expects every corporation to make more money than last year. In fact, every quarter is expected to be a record-breaking earnings bonanza. A CEO knows that his company needs to keep growing or the stock will tank.

The guys who ran Enron – Jeff Skilling and Ken Lay – came up with a brilliant plan to always beat earnings expectations: they made up the numbers.

While Ford can’t claim to have sold a million more F-150s than it actually did, a company like Enron could fudge its numbers with impunity because no one really understood how it made money.

Enron’s business was to take advantage of the recently deregulated energy markets by buying and selling natural gas and electricity. How much money can you make as gamblers in an energy casino? Common sense says you’d lose money as often as you’d make it. According to Enron’s accounting books, they were raking it in.

The system made it disturbingly easy for them.

Enron was legally reporting their earnings using the Mark to Market method. In Mark to Market, a company signs a business deal and can report the profit that they expect to make from that deal as immediate actual profit.

Enron signed a deal with Blockbuster Video to buy and sell excess broadband bandwidth. That very quarter, Enron reported $10 billion from the business. In reality, trading broadband as a commodity was desperately stupid and they lost $billions. But the huge reported profit was already part of the official Enron bottom line.

Meanwhile, Enron retained its reputation as a top company by rewarding Wall Street analysts who wrote positive stories and attacking anyone who dared to publish a “Sell” rating on the stock.

Therefore, it was a surprise to everyone when the stock price plummeted from 90 in 2000 to less than 1. Well, everyone except for Jeff Skilling and Ken Lay, who sneakily cashed out their Enron shares before the crash.

The documentary doesn’t demonize the guys who ran Enron into the ground. Alex Gibney argues that Enron is just a symptom of a broken system where naughty companies are allowed to run amok.

We should be grateful to the wonderful companies that produce real products that make our world a better place. And we should be suspicious of corporations that produce nothing but money.

“Enron: The Smartest Guys in the Room” is a first-rate documentary. It makes a very complicated story understandable. And it warns us that it will absolutely happen again.