How Enron Fooled the World

Until the 2007, the largest single corporate bankruptcy was Enron, a $67 billion energy trading company. Its decline was breathtaking, and while it’s a fascinating story of corporate malfeasance and greed, it’s also about the lives of ruined workers.

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Episode Transcript

Speaker 1 (00:01):
Welcome to Stuff you should Know, a production of I
Heart Radio. Hey, and welcome to the podcast. I'm Josh,
and there's Chuck and Jerry's here, and it's stuff you
should know. We mean it, you should know this stuff
because this is serious corporate mouthfeasance that I think it's

(00:23):
probably not an American over the age of twenty walking
around who doesn't know about this somehow, some way, to
some degree. I know they teach about this stuff in
business school. Um, it's been written on extensively, but I
mean I didn't understand the ins and outs of it until, um,
until I started researching this, and it's quite shocking. And

(00:46):
that shocking thing that I'm talking about is the rise
and fall of Enron, one of the greatest um swindles
in corporate American history, maybe in corporate history in the world,
definitely in corporate American history for sure. I'm really glad
you picked this because I didn't know all the ins
and outs either, because this is you know, when I

(01:08):
was a young late twenties, early thirties something, didn't have
a care in the world. Uh, And I finally watched
the smartest guys in the room today. Yeah, Yeah, the
documentary based on the book. UM, and we'll get to
the authors and stuff. It was Peter Elkind and who

(01:28):
was a co author, Bethany McClain. Okay, that was the
lead author even Okay, I knew she wrote the original
articles and Ford, so she co authored the book and
she's in the documentary, as is Elkland, and it really
is worth the watch. But just want to point out
that this is an overview of the Enron scandal. It's

(01:49):
pretty clear once you start poking around that this could
be like a ten part series. Yeah, for sure. And
there there probably is a podcast series out there that
covered just in Ron. UM. So there's lots of sort
of ins and outs that we won't be able to
touch on, UM, but we can definitely give her the overview,
which was the Enron was a corporation. Um. Originally it

(02:11):
was a natural gas line pipeline operator. UM. But they quickly,
well not quickly, UM, they got out of that business
almost entirely. When certain people were hired and we'll we'll
sort of get to all this in a minute too.
When certain people were hired that basically said you know what,

(02:32):
we don't we should even be in the pipeline industry.
We should invent almost a new kind of industry, which
is to use energy as financial instruments, and we should
become a trading company that trades natural gas and eventually
paper pulp and and electricity and you name it. Like,

(02:55):
we'll get into all the things that they sort of
pivoted to. But um in rounds started, I guess we
should start at the beginning when they when Houston Natural
Gas Company merged with a company called Enter North and
they combined to form this large energy corporation in Texas,

(03:15):
mainly natural gas. UH, and the chief executive of h
n G at the time was a man named mckin
or Kenneth Lay, who you might have heard of. Yeah,
and if you haven't prepared to meet ken Lay several
times across this episode. UM from the outset, I think, uh,
Houston Natural Gas and Inner North, we're both profitable. But

(03:38):
I saw that neither one of their um the companies
really benefited from the merger, although it did expand their
pipeline network. Really it just protected them from a hostile takeover.
But it was just a just a standard gas company,
you know, no big frills or anything like that. I
think the first year it posted a fourteen million dollar loss.

(03:59):
Put that in your uh, in your hat and smoke
it later with a pin. Okay uh. In that the
first year end Ron was around in it posted a
four two million dollar loss. Just remember that for later, Okay. Yeah. Also,
something else you should put in your hat for later
is the fact that Kenneth Lay, the gentleman I mentioned

(04:21):
who was the ZEO of Houston Natural Gas, was also
a very very tight with the Bush family, originally the
elder Bush and later on George W. As Governor of Texas,
big donor to their causes politically, and they ended up
having a very sort of you scratch my back, al

(04:43):
scratch yours kind of relationship. Yeah, it's I mean like
I just started twirling around over and over again out
of anger, like multiple times throughout the documentary because they
really go into um some good details about that. But
the upshot of the whole thing is George H. W
and George W. Bush Um would not probably have been

(05:06):
able to help Endron out as much as they did
had it not been for, of course, Ronald Reagan and
the sweeping deregulations that occurred in starting in the eighties.
There was just a spirit of deregulation, which was this
Ronald Reagan said, and they quoted in the documentary. Government's
not the solution to our problems. Government is the problem.

(05:27):
And there was this idea that was really huge in
the eighties, um that if you got government out of
the way, competition was going to drive innovation, was going
to lower prices, was going to benefit society in myriad ways.
That is not untrue. The problem is when you deregulate

(05:47):
fully and just basically say we're checked out from now
on until something really bad happens. Something bad always happens.
That's the problem with deregulation in the eighties, not that
there's am with deregulation, that it was done incorrectly, like
it seems to be every single time. Yeah, I mean
Reagan is also in the documentary quoted as talking about

(06:09):
the magic of the marketplace, and uh, we've talked about
this over and over on the show. And this is
not um an attack on conservatism, but deregulation in in
the marketplace and letting the free market decide things is
one of the core tenets of conservatism generally. And what
we've always kind of hammered home year after years, And

(06:30):
you said it in one way, but I'll satting another
is it never takes into account humans are the ones
that are operating these systems. And when you have money,
lots and lots of money, and you have humans operating systems,
there are inevitably gonna be greedy humans with so much
hubrists that they sell their souls to make money. And

(06:53):
that's that's what happens every single time. Yet it's still
lessons are still not learned that that there are certain
kinds of humans and they always seems to be they
always seem to be the ones in charge here of
these systems. They will take advantage of them to the
detriment of the little guy and the little lady. And
that is would happened with en Ron. Yeah, And I

(07:16):
don't know if it's always like they're not taking into
account human greed. I think most of the people who
are powerful enough to deregulate UM in federal energy regulations
UM don't really care. In a lot of cases, they
know that they're going to make a boatload of money
by the time the thing really kind of blows up
sometime down the line. I think it could be either one,

(07:39):
but the there was a big sea change in UM,
a big change to regulation. The Federal Energy Regulatory Commission said, hey, um,
you can now buy and sell gas natural gas UM
from any seller anywhere in the United States. You don't
have to just buy and sell within your state. And

(08:01):
that opened up an entirely new market and all of
a sudden, you can make a lot more money moving
this stuff around. But like you said, they figured out
and run, you can make even more money by selling
this stuff as commodities UM and trading on like futures
and turning them into financial instruments, not actual just natural

(08:23):
gas or oil or electricity, but the concepts of them,
the right to sell it or buy that sometime down
the road. And that changed absolutely everything. Yeah, and this
is when things when you get into finance like this.
My it's not that my eyeballs glaze over. It just
becomes almost uh and I say almost not real because

(08:46):
it's it is kind of not real. It's it becomes
a form of gambling in a way. And that's very
much what happened to en Ron in a lot of ways.
And you'll you'll kind of see here and there throughout
the episode. UM. But they as a company UM. After
that eight four s Jean made a very faithful decision
of their own in nine nine, just a few years later,
when they got a consulting firm on board Mackenzie and Company,

(09:09):
in particular consultant for that company named Jeffrey Skilling UH
to create what they called the Gas Bank, which was
basically like I said earlier, like, hey, why don't we
just be an intermediary between buying and selling of gas?
And it was going so well that two short years
later Skilling left there and Uh went to work full

(09:30):
time at en Ron. Oh sure, and eventually working his
way up to the CEO of that company. Yes, so
UM he was he but for the most part he
was the right hand man, but essentially co CEO with
ken Ley, who I think took him on as a protege.

(09:50):
And Jeffrey Skilling was the one who said, let's set
up this market UM. And he also transformed the company's culture.
One of the things he came him up with was
um the idea that every year they should review and
rate every employee, and the bottom ten percent of employees
should be fired. So every year he was planning on

(10:13):
firing ten percent of their workforce. About two thousand people
every year. And the reason he was doing this is
because he's saying, we can do better. We can hire
the best and the brightest, We'll replace those people with
much better people, and then the ones who are doing
really well now we'll get moved to the back and
we'll just constantly be improving on the people that were hiring.
It makes sense in a really Machia Valley and kind

(10:35):
of way, but it's also psychotics as well. Yeah, And
the way I understood it from the documentary, it wasn't
just like regular upper management reviews of the people that
that that report to them, but it was all the
employees rating one another like within their department. Isn't that right?
That's what I took it as too. So, I mean,

(10:56):
you don't have to like be a Sue Sayer to
see where that heads when uh, And it certainly creates
competition if that's what they're all about with uh, you know,
the sort of the charter of the company creating more
competition by deregulating. They sort of did the same thing
within the ranks and created a very I mean I've

(11:16):
seen it described everywhere as uh, it's just overly macho
and testosterone fueled UM. It seems like the traders there
were uh were hired and kept on that were especially aggressive.
And there are interviews in the documentary about about some
of these men who were traders that were like, you

(11:37):
would uh cut the throat of the guy next to
you on the trading floor, your fellow employee if you
felt like you could make a few extra bucks. Yeah,
and that was very much encouraged, not just by Jeffrey Skilling,
but ken Leigh had a history of UM at the
very least turning a blind eye, if not actively encouraging
people to break the law. Um you immoral stuff that

(12:01):
may or may not have been legal, all in the
interest of maximizing profits. Like if you were making money
and you got in trouble, you didn't get fired because
you made money for the company. That's all that mattered
was making money for the company. So in that sense,
Jeffrey Skilling was a really great protegee for Kenley. But
he was like ken Lay on steroids, UM and I

(12:23):
get the impression. And Kenley has always or back in
the day, he was a master at presenting this really
laid back, almost um detached persona. But if you watch
the documentary and you read about him, you really get
the impression that he knew exactly what outcome was ten

(12:45):
steps down the road by just nudging this thing over here,
nudging that thing over there, all with plausible deniability, but
at the same time presiding over this incredibly complex, complicated,
masterful machination um that was all dedicated to the service
of making money for by by whatever means possible. Yeah,

(13:06):
and and Lay. I mean, the reason the documentary is
called the Smartest Guys in the Room is because I
think unequivocally everyone would admit that Ken Lay and Jeffrey
Skilling and uh, we should introduce you to a younger
recruit named Andrew fast Al who was a key player
eventually becoming the CFO and was up to all kinds

(13:26):
of shenanigans. But these were brilliant guys with amazing ideas
and a lot of the ideas that they had for
this company. We're really good and ahead of their time.
But they had the notion that you should be able
to trade and make money off of great ideas and
not necessarily the results of those great ideas. Because time

(13:48):
and time again, as you'll see as we tell this story,
these ideas were not making actual money, maybe because some
of them were ahead of their time, but that didn't
matter because they had way very creative ways to hide
those debts and losses. And that's that's the whole sort
of followed in ron Is is wrapped up in that statement.

(14:08):
But these are all really really smart guys, and uh,
they were really really good at making money. And maybe
we should take a break there. It's a nice little
set up, and we'll come back and talk a little
bit more about their lobby to deregulate. And then some
of the early shenanigans right after this a large sk

(14:37):
as watch sks you should know. Okay, So after about
six years after that big deregulation from Firk that said
you can buy gas and sell it at wherever in
the country. That opened up a huge market, there was

(14:59):
another or watershed deregulate deregulation UM that that reverse an
act that went back to nineteen thirty five, the Public
Utilities Holding Company Act PUKA. I love that one that
said if you UM are generating and selling electricity, you
are a local utility and we're going to regulate you

(15:22):
like you are providing the life blood of America. Because
electrical utilities provide the lifeblood of America and have since
long before nineteen thirty five. And in ninete they managed
to get that reversed and now all of a sudden,
anybody could buy an electric utility. And Enron definitely jumped

(15:42):
on that. Yeah, for sure, they their lobby UH was
strong to put up mildly, they hired lobbyists to lobby
different states. In those states, as no surprise, ended up
getting millions of dollars flowing back towards en Ron UM.
I think they hired lobbyists for at least thirty seven states.

(16:05):
They also helped overturn along that said the military has
to buy power UM from local utilities, and they said,
now let's open that back up UM pretty soon, and
Ron got its twenty five million dollar contract for supplying
electricity to Fort Hamilton's in Brooklyn. And these are just
I mean, twenty million ends up being peanuts in the

(16:27):
grand scheme. But these are just examples as they sort
of ramped up to their schemes of how they deregulated
or lobbied to get things deregulated such that it was
allowed to happen. Right, And one of the things one
of the schemes that got the attention of the entire country.
UM in two thousand, two thousand one, UM was an

(16:48):
electrical scheme in California. California had undergone its own electrical
deregulation power deregulation, but it had had adopted this weird
patchwork compromise. Is UM law or set of laws that
just had looped loopholes you could drive a truck through,
and that we're just really created all sorts of legal

(17:10):
gray areas. And so rather than just kind of like
here they're biting around the edges seeing what they could do, instead,
the energy traders at UM enron UM started figuring out
how to move energy out of the state, wait for
the state to be like, hey, we need some energy,
and move it back at incredibly inflated prices. UM. They

(17:32):
would purposefully UM take electrical utilities that they owned offline
to generate more demand, a spike in demand, and so
they could raise prices again, and they actually basically crippled California.
I think I saw that California had UM a couple
dozen blackouts in six months after that deregulation. After Enron

(17:56):
started coming in and messing with stuff. Whereas the six
months before deregulation they had had one blackout. So if
you watch the documentary and you listen, you know, you
read some other sources about it. This was an entirely
fabricated um a scarcity of electricity. There's plenty of it,
and run just figured out that they could kind of
pull this lever and that lever and charge way more

(18:18):
by creating this this fake scarcity. Yeah. Uh, and by
pulling a lever like literally sometimes they called up a
power company, a power plant and said pull the lever
to the off position, and they have them on tape.
You know, they played this in the documentary. Well they'll
they called one in Las Vegas and said, hey man,
can you take this thing offline, uh for a few

(18:41):
hours and just just make something up? Because of rolling
blackout meant big money, um, all of a sudden, California
again was was buying their own energy back at a
higher rate. And Governor Gray Davis at the time, and
this is you know, I'm not like giving some full
throated endorsement to any um effectiveness of Gray Davis as

(19:01):
a governor because I really don't know, but he definitely
was sort of left holding the bag and scratching his
head like what's going on here? Like We've got plenty
of energy, and it just all through the documentary people
are saying like this just isn't adding up in California,
and some of those tapes that they play of these traders,

(19:21):
like there was that that natural, uh wildfire that broke
out that jeopardize one of the pipelines, and these guys
are on, you know, on tape on the phone with
each other saying burn, baby, burn, because that's good for
business if it knocks something offline. And is you know,
making laughing at like uh, you know, old Grandma's like

(19:41):
sweating in the summer heat because they can't get air conditioning,
like the most vile, reprehensible kind of stuff in the
name of making the all my mighty dollar that you
could imagine. What's also interesting is they don't really go
into detail about it, but it's um. It appears to
have also been a coup to get rid of Gray
Davis and replace him with Arnold Schwarzenegger because ken Lay

(20:04):
held a meeting at the Peninsula Hotel in Los Angeles,
UM and he invited Arnold Schwartzenegger. This was long before
Arnold Schwartzenegger was known to have had like real political aspirations.
He wasn't governor yet wasn't running for governor over a
problem that Enron created. It was like that level of
In addition to also just making billions and billions of

(20:27):
dollars by strangling the state, they also managed to replace
the executive of the state as well to somebody who
is much more friendly to them. Yeah, and get rid
of in the Uh. Of course he didn't like knock
him off or anything. But in California you can you
can never recall. It seems to come up every I
don't know twelve years or so where Californians aren't happy
with the governor. And so if recall vote passes, you

(20:49):
can have a have just an election out of nowhere,
uh and replace that governor. UM. While this is going on,
you know, Ken Lay stands on a stage and says,
we're making money in spite of California, not because of California.
So just lying through their teeth on stage to their shareholders. Uh.

(21:10):
And all. You know, all these little schemes had little nicknames,
the one where they got energy out of California just
to make them buy it. Back was called Ricochet. There
was one called death Star, and they're on tape like
joking about like, hey, let's have a nice friendly name
for this one, like death Star. So they're just they're
playing games with people's livelihood essentially, and lives you can

(21:31):
make a case as well. Um, So three of those
traders played guilty. Jeffrey Richter, John Forney, and Timothy Belden
were three of those traders who manipulated California's energy market UM,
costing the state between forty and forty five billion dollars
in retrospect of unnecessary UM electrical prices and costs. All Right,

(21:56):
so in Ron is doing great, they're making a lot
of money. Um, And we should point out that this
is just you know, Ricochet was just one little scheme.
They had all sorts of schemes along the way to uh,
well we'll we'll get to those, um. Between two thousand one,
like as far as the stock market world was concerned,

(22:17):
and run was a darling. Uh Fortune named them I
think six years straight America's most innovative company, every single
year in a row. But what was going on behind
the scenes is these ideas and these investments and uh,
schemes that they had. You know, some of them made money,
but a lot of them didn't make any money at all,

(22:38):
and they just became really really good at hiding that fact. Yes,
that was the whole thing. Like they were very innovative.
They were ahead of their time in a lot of ways.
Like they got into building broadband high speed internet access
in like two thousand or two thousand one something like that,
and this was I looked it up. It wasn't until

(22:59):
two thousand seven that half of all US Internet users
had broadband, so this was way ahead it's time. And
then also they also got into the video on demand market.
They tried to partner with Blockbuster um and this was
these things were basically like the progenitor of Zoom and Netflix.
But these guys were trying this in two thousand and

(23:21):
two thousand one, so it's visionary. The problem is they
were ahead of their time. The infrastructure wasn't there that that,
the I think the customer base even wasn't there. So
there's stuff that they were doing wasn't making money, which
is not bad in and of itself. What was bad
was when they were covering it up and the schemes
that they used to cover it up. Are so um

(23:44):
involved in complex but also so fascinating that they would
they would have the audacity to do this because there's
no there's no fudging it, there's no like, oh, this
is kind of questionable. This was just fleecing all of
their investors, all of their employs, fleecing the entire world.
There was a handful of executives at and Ron who

(24:05):
were fleecing the entire world to the tune of tens
intens in tens of billions of dollars every year in
revenue that apparently didn't actually exist. Yeah, it's pretty clear
that at certain point they lost their way and that
they weren't as concerned about being a company that made money,
and the only thing that mattered was that as a

(24:26):
corporation was that they kept their stock price high because
that's where that's where all the money was they had
as long as they could keep that stock price high
and keep shareholders, especially their employees, encouraging their employees to
get you know, get paid in company stock, like use
every penny of your paycheck that you can to buy

(24:47):
this company's stock. Because and en Ron stock was was soaring,
it was doing really, really well, and all the while
it was you know, it's called pump and dump. They
would drive up the value of their stock and then
the upper echelon and you see this time and time
again in the corporate world, the CEOs and the CFOs
and the upper management of the one who then sell
off their stock and walk away with you know, some

(25:10):
of them hundreds of millions of dollars. Uh. And you
know some of the schemes that you talked about was
they found ways to move debt around. Uh. We mentioned
Fastyle was one of their hires, and he was hired
I think his late twenties, early thirties, and quickly rose
up the ranks to CFO. And he started a company

(25:30):
called L s M, which stood for Leah, Jeffrey and Matthew,
which are named after his wife and kids. Sort of ironically.
It was like such a sweet tribute to them. And
the only purpose of this company was to have all
kinds of sort of little sub companies that would absorb
the debt and where they could move debt around from

(25:51):
en Ron to make it invisible to the shareholders, so
they could prove on a balance sheet that you had
this money coming in. And the way of you know,
people in vesting in the company, but then you're hiding
the losses and so everyone thinks you're doing great. So
the way that I saw it explained, Investipedia actually has
a couple of really good articles about this that are
just wonky enough to like understand it, but also not

(26:13):
so wonky that you're just like, I have no idea
what I'm reading um. And the way they put it
was basically, if Enron had, like a good example is
they build a power station in India that was a
huge loss. It was just a generally bad idea, and
they sunk billions and millions of dollars into this power
station and without realizing any money whatsoever. I think they

(26:34):
abandoned it before it even came online. They would take
this and sell it to one of these special purpose
vehicles or special purpose entities, which was a tangentially related
company that the company Enron was not on the hook
to pay off its debts for right, and they would

(26:55):
take that, and then that special purpose vehicle would go
out and try to sell it, sell that terrible toxic
asset um, and they would use Enron stock as the collateral. Right.
And because Enron stock was just through the roof. Everybody
was saying, sure, we'll give you a loan. Sure we'll

(27:16):
give you some money for that terrible idea of a
power plant that you abandoned because you're backing in up
with Enron stock. And as long as the time that
that stock came do was far enough away, and as
long as Enron stock kept going up, this house of
cards could be held together. But that's not at all
how it worked. The upshot of it is that they
could take toxic assets, move them off of their books

(27:39):
to these special purpose entities, and then they would take
the money that the special purpose entities would go borrow
against like that that toxic asset, and they would count
that on their books as revenue. So they were hiding debt,
boosting their revenues to just ridiculous um heights for stuff
that just should not have been counted as revenue. Yeah,

(28:02):
and just to be clear, they didn't invent the special
purpose entity. And an SPE is not some evil creation
in and of itself. It is uh, it's an entity
that a lot of corporations and businesses use. Where it's
just it's sort of like has a very um narrow
purpose in that they create this thing when they might
use it to purchase an asset or move an asset,

(28:24):
so the company as a whole may not be on
the hook. Uh if anything goes wrong. It sort of
mitigates risks. So it's not some evil purpose in and
of itself. But they were manipulating these such and starting
all of these things under Fastiles guidance with his LSM
sort of sub corporation, and eventually l s M two.
I think, uh that they were making I think they

(28:47):
hit ninety dollars in August of two thousand. Uh, market
cap of the whole company, it's seventy billion, which made
it the seventh largest publicly traded company any in the
world at that point. Yeah. Um, so that's a market
cap of seventy billion. Remember in the first year that

(29:10):
posted losses of fourteen million. Within fifteen years, they posted
revenue of one hundred billion dollars billion dollars in fifteen in. Yeah,
in sales in fifteen years. That's what happened to that
company when they brought Jeffrey Skilling on board. Jeffrey Skilling
brought Andrew fast Ole onboard, and people just started going

(29:31):
nuts making money anyway they could. Yeah, The other thing
we should mention too is another uh sort of slick trick,
is that Skilling's idea and they got approval and I
wasn't clear how or where this approval comes from, but
to use something called mark to market accounting, which is
basically when you can where you can rate the financial

(29:55):
health of your company based on uh, that's the arise,
but just on a future earnings basically and not necessarily
what they're worth that day, so and to anticipated future
value instead of its purchase costs. UM, did you get
how that they were approved because it seemed like they
were all like super psyched that they got approval for

(30:17):
mark a market accounting. Yeah, that would have been the
sec the Securities and UM Securities Exchange Commission, UM, who
would have given that approval. And just like a special purposentity,
mark a market accounting is it's totally legitimate, it's recognizes
generally accepted accounting principle. But there's a lot of room

(30:37):
for temptation to just basically say this deal with Blockbuster, Um,
we haven't made a penny off of it, but we
can we can cite the future earnings from it now
now that we booked this deal and I think it
will probably we worth a billion dollars just a total

(30:58):
gas And you're not supposed to do it like that.
You're supposed to do it much more realistically and legitimately.
But they had enough leeway that they were able to
take mark to market accounting and use it to their
to their benefit in that way, and in doing that,
they pumped up their their revenues through the roof. Like
the deal would just be inked. They wouldn't have seen

(31:18):
a penny from it, and they would add it to
their balance sheets as revenue. Yeah, it would become part
of the ledger before like a real penny was made exactly,
and sometimes the pennies weren't made. And if the pennies
weren't made, don't forget, those debts would be moved to
a special purpose entity so they wouldn't have these toxic
assets on their books, even though they very much owned
and were indebted for these toxic assets. Still, yeah, I mean,

(31:43):
like I said, these were brilliant people and like they
had all their bases covered except for the fact that
we all know that a house of cards will eventually fall. Uh.
It's that hubrist thing that just blinds people into thinking
that it will always like when that when that kind
money is rolling in. I think it blinds certain people

(32:03):
so much that they don't understand a who it's hurting
at the time, or they don't care, or they think
it's always going to be rolling in like this, or
they think, hey, I'm gonna get mine now. Because there
were people in in Ron I mean there we'll talk
about whistleblower that eventually sort of came out and a

(32:23):
journalists who are poking around, But there were people that
started looking at this company, the darling of Wall Street
and saying something's not right here, like something's not adding up,
Like you can't even explain how your cash flows through
your business in a way that makes any kind of
coherent sense. And anytime they were confronted with this Skilling

(32:44):
and the his cronies would they would get very haughty
about it and just be like, well, what do you
mean we can't explain that? Like, sure we can, it's
really easy. You just can't understand. You just can't understand.
It makes your blood boil. Let's let's take a breaking
the I'm back and talk about the downfall. How about that? Yeah,
the downfall? Sk as skof should know, okay, Chuck. So

(33:27):
one question that people might be asking is how were
these guys allowed to use this accounting and get away
with it? Why were people even investing in buying shares
of this this company UM when it was just so
fraudulent and and just ridiculously fraudulent to not even subtly fraudulent.
And the answer is the the company was such a

(33:50):
Wall Street darling that financial analysts would not understand what
they were hearing on these earnings reports, but would still
give it a stamp of like buy um. The other
thing that really really helped was the banks. Wall Street
banks were very much complicit in this as well. And
then the thing that helped the most was Arthur Anderson,

(34:11):
the venerable eighty plus year old um accounting firm. Yeah,
that was the third party accountant to Enron. Was so
cozy that they actually hired all of Enron's internal auditing staff,
made them Arthur Anderson's staff, and then opened a hundred
and fifty person office for Enron in Enron's own in

(34:36):
Enron's headquarters, and Arthur Anderson office in Enron's headquarters made
up a former Enron auditors. That's who was watching the show,
and so Arthur Anderson had such a good reputation that
because they were signing off on this, because the Wall
Street analysts are saying yeah to buy, people were just like,
I'm buying, I'm buying. And it kept the stock prices

(34:57):
going up and up and up because nobody was paying
attention enough. Yeah, there was one person in the dock
that said that kind of crystallize it, which was like,
I'm paraphrasing, but he was talking about the fact that
when this kind of stuff pops up in corporations, like,
it's not like this. The in runs are everywhere. There

(35:18):
is all kinds of mouthfeasance, for sure in the corporate world.
But he basically said, somewhere along the way, it doesn't
get this big because a legal team says you can't
do this, or your accountants say you can't do this,
or the bank say we can't get involved in this.
And in Ron seemed to be one of those sort
of unicorns where every person along the way just zip

(35:43):
their mouth shut even though the numbers weren't adding up,
and was complicit in this right um. And there was
a trader that was interviewed in the documentary who said
like it was ironic that um and Ron's slogan was
asked why, like why why does something happen like that?
Why can't we do it that way? And that this
trader said, I didn't ask myself why, I because I
didn't want to know. I suspected things were weird or ryan.

(36:06):
I just didn't want to know because it was my job.
I was making tons of money. And I think you
could probably get that excuse out. It's just about anybody
who was complicited in this large or small um. But
Arthur Anderson that was the one that really really helped
things along. And as we'll see, they didn't manage to
survive the scandal. Yeah, they were Oh man, there was
that one part of the documentary where they were talking

(36:28):
about uh fast Ols, you know, shell companies, and he
was in a meeting that was secretly taped and they're
basically like, well, wait a minute, it looks like you're
on the buying and selling sides of these transactions. And
he was like, yeah, basically, but I've always got Ellen
Jay's interest at heart, and the whole time he's skimming money.

(36:50):
And they believed that skilling and lay knew that, like, hey,
I'm sure that fast Ours is skimming money off the
top for himself, but who cares because this guy is
taking care of business for us exactly. And I think
he skimmed about thirty five million dollars for himself from
he stole from Mron and they looked the other way
because the stuff he was doing was so unethical, so

(37:12):
illegal that he basically earned it as far as they
were concerned to have his hand in the in the
cookie jar like that. So, um, I think you kind
of mentioned there were some people who were like, wait,
what's going on here. One of the first people was
Bethanie McClain, the journalists who ended up writing the Smartest
Guys in the Room. She is awesome. She started out

(37:33):
writing a story for Fortune magazine back in March of
two thousand one titled is Enron Overpriced? And she was
one of the first people to publicly say how is
Enron making its money? But she wasn't the first to
hit on this. Um. There's another guy named Jim Chanos
of um Kinkos um Securities, I think maybe, and I

(37:56):
think he's in the documentary, but he started shorting Enron
in two thousand because he noticed very simply their cost
of capital, so the cost of doing business was more
than the return on investment, which automatically means that they
were not a profitable company, which totally was contradicted by

(38:17):
all of their earnings reports and filings. And he saw
this and he said, this is this is this is
not right, and I'm going to start making money off
of the future downfall of this company and made hundreds
and hundreds of millions of dollars shorting and Ron stock
starting in two thousand. Yeah. The whistle blower two was

(38:37):
um An executive. Main name Sharon Watkins, and she pops
up a lot in the documentary obviously is key to
the story. Uh. She didn't whistle blow while this was
all going on. It was sort of after the ship
started sinking. Uh. But we'll talk a little bit about
how that all happened where she ended up. Um but

(38:58):
what happened in August one. Uh Skilling had replaced lay
as CEO in February of that year, and in August
fourte Skilling out of nowhere, and he had just taken
the reins, you know, a handful of months before he
uh Skilling quits out of nowhere, he resigns. Uh, he
stided personal reasons, And what was going on was the

(39:20):
you know, the Titanic sprung a leak, and as they
described in the documentary, he was one of the first
rats to to try and get off the sinking ship. Yeah.
And it's like, if you are a CEO of a
huge company, you don't just leave like that. That is
an enormous red flag. There's like a whole process and

(39:42):
procedure for finding your replacement, grooming them, introducing him to
the to the rest of the world. Um, you don't
just leave like that. And that was such a red
flag that that whistle blower, UM, what's her name is,
Sharon Watkins. She um wrote an anonymous letter Delay basically saying, Hey,
there's a lot of fishy stuff going on around here,

(40:03):
and now that Skilling suddenly departed, Um, like everyone's going
to start having questions in this whole house of cards
is going to fall and um, Lay apparently didn't do
much about it, and she came to Lay later on
and said, I'm the person who wrote that anonymous letter,
and I'm really concerned about this, and ended up trying

(40:24):
to keep it in the company because I think I
get the impression that she thought it was something, especially
now that Skilling was gone, that could be resolved internally.
I think she really underestimated the extensiveness of the corruption
and um yeah at the company and thought it was
a few people when really it was a large cadre

(40:46):
of people who all were complicit in this. And UM,
I get the impression that's why she didn't really um
blow the whistle publicly at that point. Um. But apparently
ken Ley, once he found out that it was Aaron
Watkins um consulted legal counsel to figure out how to
fire her legally. Yeah. Uh. The same day that uh,

(41:08):
Skilling resigned on August fourteenth, the broadband division that we
talked about earlier reported a hundred and thirty seven million
dollar loss analysts, and we should point out to as
far as the analysts go, they were always installing friendly
analyst and only working with friendly analysts. But they finally
got the clue they dropped their ratings for the stock. Uh.

(41:28):
The end came very very swiftly for en ron Um.
On October twelve, Arthur Anderson's I mean you still remember
all the shredding jokes on Late Night TV that ran
for months and months. Arthur Anderson's legal counsel said, everybody
shred everything, destroy every file that you have on en Ron.
And in one day they shredded literally one ton of paper. Yeah,

(41:52):
and that was just one day. They apparently shredded around
the clock from October twenty two to November eight, and
that was just one ton one day. They shredded literal
tons of documents, just shred, shred, shred. If you're an
executive at Anderson, you were probably working a late night
shift shredding alongside everybody else. Um. It was like that.

(42:12):
And it was apparently at a time where you could
legally do that and not be you know, indicted for it. Um.
But that was not a good look when it came
out that Arthur Anderson was the auditors of this company
were shredding tons of documents, and the SEC got w
into this and they said that they're going to start
investigating finally the special purpose entities that fast Out had

(42:36):
had set up, and so Enron fired fast Out that
same day. And I think that was in November or
late October of two thousand, two thousand one, and um,
right after that on November eight and Ron said, Hey, everybody,
do you remember all of our all that money we

(42:57):
said we made going back to We're gonna need to
restate our earnings. One of one of the first things
they did was they reported a six hundred and eighteen
million dollar loss for Q three of two thousand one
Q one. They pro they posted a four hundred and
six million dollar profit Q two, four hundred and four

(43:19):
million dollar profit, Q three a six hundred and eighteen
million dollar loss. So they finally came clean. They finally said,
this accounting is off, and this is how radically it's off. Yeah,
I mean that is uh if a company is restating
their earnings for that period of time right at all,
Like mistakes can happen, but that's a that's a real

(43:41):
bad sign. Um. They almost got a lifeline in I
guess late October of that year when they tried to
merge with a company called Dyna g Incorporated, and that deal,
that deal fell apart on November they backed out of
the deal Dyna Gy did and then what what is this?

(44:03):
Four days later on December two, in Ron filed for
the largest Chapter eleven bankruptcy in US history up to
that time, sixty five point five billion dollar company UM
filed for bankruptcy. That just did not happen. If you
had that that kind of money, you could have a
fire sale and sell off stuff for way less than

(44:24):
you paid for it, but you could still survive. And
that just goes to show you, like just how fraudulent
this company was. They couldn't have a fire sale and
make up that kind of UM. That kind of the
debt that they owed I think was seventy two billion
dollars I think in debt that they finally UM were
found to have owed. And at the time it was
the biggest UM. In two thousand and eight we saw

(44:45):
what big really was. Lehman Brothers for example, UM had
six hundred and thirty nine billion dollars in assets when
it filed for bankruptcy and went under. But at the
time and Ron was like eye popping as far as
bankruptcy these went for corporations. Can you imagine the wave
of relief that swept through dyna Gy Incorporated. Yeah, when

(45:10):
the particular bankruptcy a few days later after they backed out. Yeah,
that one just off hand conversation at the vending machine
over a packet of checks mix like save Dynagy forever.
You know, this seems like a bad deal to me.
Crunch Crunch right, and Dynagy, by the way, went on
to become Apple. Uh So the fallout from this, uh,

(45:34):
there are a lot of victims. Twenty thousand employees. Twenty
thousand employees lost their job. And how how long did
they have to get out? What? What is saying the
day I think they had the day? I think it
was less than that. I feel like it was hours
or something. Basically, pack your s and get out of
here everybody. And like literally this huge tall building has

(45:57):
thousands of people just leaving all day with anchors boxes
with their contents of their desk in it, like the
ultimate movie troupe Um. Every employee that had been told
for years and years, hey, you gotta invest everything you
can in that for because en Ron is I mean,
look at the stock we're going places and that money

(46:19):
will be safe there. They obviously lost almost everything. There
was a you know, the rank and file employees that
was one in the documentary that said he had about
close to three fifty dollars in stock that he ended
up dumping for twelve hundred dollars. Uh. They froze the
stock accounts of the ranking file while upper management was

(46:41):
actively still cashing out. Yeah, that was a really scummy move.
They I'm sure, purposefully changed for one K providers in
the midst of all this. And when you do that,
it's there's a minimum thirty day freeze as you transfer
assets over, so these poor employees couldn't sell their shares.
Like you said, Wow, the executives were making tens and

(47:04):
tens of millions of dollars worth of of option trades. Yeah,
I mean, it's just mind boggling. That to me is
probably the worst part of the whole thing. Well, and
you know, tie with that, their severange package averaged about
four thousand, five dollars for the average employees, while management
bonuses totaled more than fifty five million. And that's just bonuses,

(47:26):
that's not cashing out stocks. Uh. And Livia, who helped
us put this together, great job on this article, pointed
out something like other fallout like you never even think about,
which was en Ron was a very big investor and
donor and local nonprofits in Houston, and all of a sudden,
all that money is cut off and like the Red

(47:46):
Cross chapter had to cut its budget from twelve million
dollars to nine million dollars in one year, largely because
the money dried up from en Ron. So the fallout
was far and wide. And that's not even mentioning, like
we're talking about the employees who had stock in the company,
like every other human being that had just stock in

(48:06):
and Ron had nothing to do with it, lost all
their money. Yeah. I mean the stock price was at
ninety at one point and it dropped down to I
think forty something since in like a year. Basically. Um So, Yeah,
the the employees in particular, and the retirees who had
already left and whose pension funds were just totally evaporated,

(48:28):
meaning you're gonna have to go get a job as
a Walmart Greater now because you can't afford anything. Um.
They are definitely the greatest victims of all this. I
saw um ken Lay's lawyer afterward, Portray Kenley is the
greatest victim of all of it, because he apparently lost
a few hundred million dollars um and he um, I did.

(48:50):
He didn't say it himself, but he definitely tried to say, like,
I lost so much money, There's no way I could
have known what was going on, and that fell on
deaf or and that same defense was used by Jeffrey
Skilling too. I didn't know what was going on, and
so what they tried to do was pin the whole
thing on Andrew fast Out, who had been fired, who
had skimmed thirty something million dollars himself, so had proven

(49:14):
demonstrated he was a criminal. They made it. They tried
to play like he was a rogue CFO that had
done all of this under the very nose of Jeffrey
Skilling and Ken Lay and that they hadn't known. And
the public, Congress, the courts, juries, everybody said, you have
to be kidding us. Yeah, And and they were right.

(49:35):
In the end. Fastile pleading guilty to two counts of
wire frauds and securities fraud uh in return for being
a witness against Skilling and Lay I think had a
tenure sentence for what was going to be a much
larger sentence, ended up serving five years. Uh, and then
got out into and started, you know, getting paid as

(49:57):
a speaker to corporations about business ethics. UH. You know,
to his credit, I guess twenty years on he he
came out officially and apologized for everything seems to really
have turned the corner. UH and learned a lesson, although
you never knows what is going on in someone's heart
from the outside. UM. Arthur Anderson completely went away, the

(50:20):
oldestcounting form accounting firm in the country. UH. Never recovered,
completely folded and went out of business. UH. The Sarbanes
Oxley Act was enacted basically because of Enron in two
thousand two, which was UH. And I remember I remembered
years ago when we were working in our early days
at how stuff works, there was a lot of like

(50:43):
Sarbanes Oxley talk. Uh. Do you remember that stuff? Yeah,
because they came up with the Frank Dodd Um Act
to to basically undo or combat against future stuff from
the two thousand and eight financial crisis. This was the
same thing six years here, Like Enron was had such
a huge effect that they passed the law that basically,

(51:04):
point for point outlawed all the stuff that Enron had done.
They did the same thing with the Dodd Frank Actor.
They tried to UH. And of course, you know, certain
people say Sarbanes oxually has no real teeth anymore because
they're not even funding the oversight that they promised. Other people,
you know, the die hard free marketers will say it's

(51:25):
actually too restrictive. Uh, we're not able to be competitive
anymore because you've got all these rules now to make
sure we're not defraunding people of billions of dollars. Yeah,
you're making it hard to exploit people. So um, there
was actually convictions like this is crazy. And one of
the heartening things, Chuck is if you watch like these

(51:45):
congressional hearings on this um, people from both sides of
the aisle are grilling these guys. No one was apologizing
to them for their you know, their colleague from the
other side of the aisle asking you know me questions.
Everyone was mad at these guys. The whole world hated
Jeffrey Skilling and Ken Lay and Andrew fast Out. He

(52:08):
was smug up there man answering those questions in the
face of all that, he was still so smug about it.
I looked up whether he ever apologized, and I could
not find it. I don't think Jeffrey Skilling ever apologized.
To think, he went throughout his entire time in prison
basically saying like he was a victim, that this was unfair,
but he was imprisoned. He was an executive that was

(52:30):
in prison. That just does not happen lately. Um. He
was convicted of nineteen counts frog conspiracy, insider trading. He
got twenty four years in prison and ended up serving twelve,
which is I mean, yeah, that sucks, but no, for sure,
that's a long time to do in the clink. Um.

(52:51):
And then ken Lay he was convicted on ten counts,
but he wasn't able to be sentenced because he died
of a heart attack six weeks after being convicted. Um,
and I think his his conviction was vacated. Yeah, skilling
uh now is out and works uh and an oil
and gas analytics startup. Uh. It seems that other people, Um,

(53:14):
I think we Yeah. I mentioned that Fastile was on
the speaker circuit um the whistleblower. Um. Miss Watkins was
named Times UH Person of the Year in two thousand two,
and I believe is also now a paid speaker and
executive in residence at Texas State University. And then there
was a matter of because I was like, uh, Olvia

(53:38):
didn't get to it. But I was like, well, surely
there was some sort of um making it right for
these people. Who lost all this money? Right? Uh? And
there were lawsuits that came out and settlements that came out.
Different people ended up being paying different things. I think
it was a seven point two billion dollar settlement from

(53:58):
inn Ron Um. I believe the banks were on the hook.
I can tell if the banks were on the hook
for some of that or if it was a separate thing.
I don't know. I saw that they squeezed a total
of twenty billion out of and Ron before they like
let it go. Okay, I don't know, but I did
see the banks were definitely on the hook, but just

(54:18):
for being complicit. I don't know if that was in
addition though either Yeah, I think, uh yeah. It says
right here that the bulk of the settlements, almost seven
billion of it, came from JP Morgan, Chase City Group, Uh,
the Canadian Imperial Bank of Commerce, Oh yeah, Lehman Brothers
chipped in. Bank of America chipped in. The Big five
auditing firm Arthur Anderson. Of course we talked about they

(54:42):
chipped in. I think, well, I don't see how they
could have chipped in it they went out of business,
but I guess they chipped in before they went out
of business all right. So, um, you know, if you
hear the story, especially if you're used to us in
our podcast, you might be like, well, guys, you didn't
really get to the other side of the story. There

(55:03):
is no other side of the story. This is one
of those rare stories that is basically black and white.
It was just there's no redemption, there's no explaining it away,
there's no apologizing for it. It's just it was just
as wrong as it appears. So that's why we didn't
include the other side of the story in this one. Yeah,

(55:26):
I don't think there's anyone out there who's who's going
to bat for Enron. If there's somebody, there's somebody, and
they will leave it on our Apple reviews right, totally
will didn't get a fair shake from these totally Hitler
or Satan. You got anything else? I got nothing else.
Uh well, I don't have anything else either. If you

(55:47):
want to know more about Enron, go watch the Smartest
Guys in the Room. Definitely will leave you wanting more.
And there's plenty to read about, including some great contemporary
articles all over the Internet. And since I said content
a prairie instead of contemporanius, it's time for listener mail. Uh.
This is a little wordy, but it's it's We don't

(56:08):
often do UM shoutouts and tributes, but this was a
really special one, so we're doing it. Hey, guys, this
is from Gavin, recent college graduate and history enthusiast, and
Gavin says, I've been listening since I was fifteen, over
seven years now. My mom was the one who introduced
me to the show, and we've both been listeners ever since.
I'm pretty sure she listens every episode that you guys

(56:29):
put out. My mom was also the person who imparted
a thirst for knowledge and learning in me as a child.
I've had great many teachers in my life, and I'm
very thankful for them, but my mom has always been
my greatest encouragement and my role model as a student
and as a person. Over the past four years in
college and directly after, I got really busy, moved twelve
hours from home, and it meant I stopped listening to podcast,

(56:51):
including you guys. I know, more importantly, also lost touch
with my mom. I didn't completely ghost or anything, but
I still did not reach out to her nearly as
much as I wanted to or needed to. But often
when I eventually would, she would ask me if I
listen to stuff you should know recently, and she'd have
an episode to recommend because I think you'd really enjoyed
this one. Luckily, now have a job where I'm having

(57:13):
more flexible hours, and over that time, I've picked stuff
he should know, back up, re energize my love for knowledge,
and learned that my mom has given me that was
my mom had given me years ago. All this to say,
you guys mean a lot to me and my mother. Uh,
And I thank you for that. You've helped me stay
connected to her in a way that I would not
have been able to do otherwise. I'd just like to

(57:34):
take this chance to thank my mom. I know you're listening, Mom,
I know we'll talk about this episode later, And thank
you for encouraging me and understanding that I love you
even when I'm not great at communicating it. And boy,
this one's really pulling at the heartstrings. Every time I
pick up a book or listen to a podcast or
write a paper, I think of you, Mom, and I

(57:54):
know that I always will. I love you, And this
is the only way I know how to tell you properly. Uh. Kevin,
you can pick up the phone and saying this stuff
my friend. Uh, he's back to you. Guys, you got
a great show. I hope we have many more years
of remaining learning and growing together. And that lovely, lovely
sentiment is from Gavin in fayette Ville, Tennessee. That was amazing, Kevin, hatsop, Chuck.

(58:19):
I totally get why you chose that shout out to
be the one to break the rule. Yeah, it should
have been along Mother's Day, around Mother's Day, but well
we can replay it around Mother's Day first select how
about that instead it's the end run episode, right. Uh.
If you want to be like Gavin and just be
a super great person, but not request to shout out,

(58:41):
just be a super great person, we want to hear
from you. Also, while I'm thinking of it, go check
out our social feeds. They used to suck, now they're great. Also,
if you want to get in touch with this, like
I said, you can hit us up via email at
stuff podcast at iHeart radio dot com. Stuff you Should

(59:01):
Know is a production of I Heart Radio. For more
podcasts my heart Radio, visit the i heart Radio app,
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