PIPE DREAMS

Cover shown is paperback edition

You've heard about Enron, I'm sure. There never was a business that burgeoned so brilliantly (to outside appearances) and then collapsed so catastrophically. Sure, there have been companies brought down by wretched excess. Bigger firms have gone belly-up. But never — not even in the Savings & Loan Crisis — was there a match for Enron's combination of deceptive accounting methodology, off-the-balance-sheet shell-company chicanery, nepotism, rampant office politics, sexual hanky-panky, overweening egotism, unwarranted diversification, and sheer wasteful overspending.

Repercussions are still being felt, five years later. The Federal Energy Regulatory Commission (FERC) is only now closing out its probes into Enron's manipulation of California's energy markets in 2000 and 2001. Palo Alto, California, where I lived a few years ago, just announced in its year-end report that it paid $21.5 million to settle claims Enron brought against it for cancelling some of those energy contracts. (The city's taxpayers will have to trust that was the best deal possible, because the U.S. Bankruptcy Court slapped a gag order on its proceedings.)1 And of course thousands of lower-level Enron employees are left to deal with their Incredibly Shrunken Pensions. Those at the top of the tottering financial edifice did much better. But that may change; their court cases go to trial in January. And under the new federal bankruptcy laws, they may not be as well-insulated as Bryce says they are by Texas statutes.

In any case, the question of how such a debacle could come about is worth investigating. Texas journalist Robert Bryce began covering Enron's political activities in 1997. When it declared bankruptcy in 2001, he delved into that question. He presents the answers he found in this exhaustively researched book. His work deserves a wide audience.

The story of Enron's rise and meteoric fall is often fist-clenchingly grim, sometimes absurdly funny, and always fascinating. Like so many broadly similar patterns, it contains a "Distant Early Warning", a harbinger of ultimate disaster.

A Report from Enron's DEW Line

It's right there on pages 38-39: The key. The "smoking gun". The harbinger of all that transpired later. Intimations of the pattern of misbehavior that brought Enron down.

Enron Oil in Valhalla, New York was a small operation acquired as part of the InterNorth merger. In 1987, its chief, David Borget, began with others there to divert company funds to their personal accounts. Notified by a Manhattan bank about several such dubious deposits, Enron auditor David Woytek investigated. Chairman and CEO Ken Lay was informed, and later visited Valhalla to get an explanation. He was assured everything was hunky-dory. A followup team was fooled because Borget kept two sets of books. Lay took no action against the Enron Oil execs — even months later when additional reports of malfeasance began reaching him. Until October of that year, when word of bogus oil-delivery contracts broke. (Note the word "broke".) It developed that, due to Borget's desperate "doubling down" trading, Enron was on the hook for 87 million barrels of crude oil that it didn't have and couldn't deliver. Its exposure: About $1.5 billion. That's billion-with-a-B. Dirksens. Real money.

A fellow named Mike Muckleroy managed to work Enron through that crisis. But the company had to disclose what had happened and take an $85 million charge against earnings. Here's what CEO Kenneth Lay told a reporter afterward (page 42):

After Enron collapsed entirely in 2001, Lay claimed he hadn't known what was going on. Now, perhaps, it's possible to understand why. Can you say "wishful thinking"? Sure you can.

The core of Enron's problem, however, lay in two other men. Rich Kinder, its former president and COO, was an operations man through and through. Kinder made sure every department had a budget and stuck to it. He insisted on meeting profit targets, and most executives did. He was the inside man; Lay was the outside man. His managerial skill and fiscal discipline perfectly complemented Lay's political talents. He was being groomed for the CEO position, which would leave Lay as Chairman. Unfortunately, Kinder began an affair with Lay's secretary. This shattered the trust between Lay and Kinder, and Kinder left the company.2 It was Jeff Skilling, the high-rolling wheeler-dealer, who took over Kinder's role because, according to Bryce, there was no one else. Skilling didn't care about budgets. He immediately began a hiring binge, bringing in young, hot-shot traders like himself. By the end of his first year as president and COO, the number of employees on Enron's payroll had doubled — and so had its long-term debt. Of course, revenues were also on track to double by the end of that first year. But those revenues were based on multi-year projections, as allowed by the "mark-to-market" method of accounting.3 They were not cash in hand revenues; in fact, they might never be. But because traders' bonuses — which were paid in cash — depended on the value of their trades, they had every incentive to inflate their projections. As the discipline imposed by Kinder faded, Enron's culture changed to one in which nothing mattered but deal-making. "Deal flow" replaced cash flow. That metamorphosis proved to be fatal.

Other top people at Enron, including Ken Rice, Rebecca Mark, and Andrew Fastow, contributed to its implosion. But it was Skilling who set them free to do so, when he took over from Rich Kinder. There's a great deal more to the story, of course. I'll resist the temptation to try and summarize so much material. But I will pass along one item. I've mentioned sexual hanky-panky. This went on at Enron, as it goes on at many companies. It often results in people being transferred to separate them, in resignations or firings. Seldom does it contribute to the downfall of an entire company. But this was Enron. Several of the top execs carried on long-term extramarital affairs, and these were well-known throughout the company. One case was so blatant it became a running joke: Ken Rice and Amanda Martin would make out in Martin's office — an office with glass walls.4 Bryce reports that while these escapades became an accepted (or at least tolerated) part of Enron's culture, they caused other Houston companies to clamp down on romances lest they suffer a similar loss of reputation.

Problems outside of Enron contributed to its demise as well. The Big Five accounting firms, once squeaky clean, had begun to do consulting work for the firms they audited. Arthur Leavitt at the SEC strove to put some rules in place forbidding this, but lobbying by Enron blocked him. The big brokerage houses on Wall Street had similar conflicts of interest: because of the fees they earned by arranging mergers and other deals, their analysts tended to rubber-stamp the high-flyers with "strong buy" ratings.5 And the Bush administration was always ready to lend a helping hand to big business. Enron, like other companies, happily took advantage of these conditions. It's no mystery why so many big firms ran aground during the 1990s and just afterward.

In putting together this book, Bryce pored over bushels of business documents: press releases, annual reports, SEC filings, board meeting minutes, etc. He interviewed as many Enron survivors as he could. He distilled it all down into a history of the company with a wealth of detail: dates, revenues, profits, expenses. But, as he makes clear at the outset, the most important part of Enron's story is the people involved. Bryce reveals those people and their interactions in vivid detail. This is what makes his report worth reading. You won't find a better explanation of what went wrong at Enron, once the premier energy-trading company in America. Not only is it a good read, but its excellent index makes it easy to track back to the coverage of a given person or event.

There are a few defects in the book. Some portions are hard going. I confess I exhibited the MEGO response (Mine eyes glazeth over) when reading Chapter 30, which describes the bizarre house-of-cards shell companies Enron execs set up to simulate real revenue. You could say I was blitzed by Bryce's barrage of business blunders! Also, the author likes to bash certain corporate Big Shots in other companies. Freeport-McMoRan (page 107), Maxxam (page 116) and Robert Waltrip (page 182) are examples. What bothered me about this is that the bashing was unsupported, and seemed gratuitous. Then there are some errata, listed here in the usual manner.

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This page was last modified on 11 May 2019.