Enron, greed, and capitalism
(VANCOUVER ISLAND) I’m about half way through Kurt Eichenwald’s mammoth book on the rise and fall of Enron, the American energy giant that imploded at around the same time as the collapse of the Twin Towers, bringing down thousands of corporate investors and private shareholders, and eroding if not eliminating any remaining confidence in the US banking and business complex. Conspiracy of Fools is an astonishingly readable book, given the depth of detail into which Eichenwald goes and the sheer breadth and scope of Enron itself and the cautionary tale he tells regarding its history. Far from being of interest only to business wonks, Conspiracy of Fools goes in painstaking detail, through the creation and astonishingly rapid success and growth of Enron; it charts its course by telling the story in much the way a police or legal procedural fiction would be written. The story of Enron is told as John Grisham would have written it, if he could have imagined perfidy and greed on the scale that is reported here.
The enormous cast of characters includes the senior executives of Enron and its subsidiaries, partner corporations, institutional investors, and auditors; but it also includes some of our favourite characters from non-fiction. We cross paths with minor characters including Karl Rove, Dick Cheney, George H.W. Bush, and George “Dubya” Bush during our immersion in the labyrinthine, yet oddly incestuous world of corporate finance and energy exploitation.
The odd thing though is that, although Enron was created as an energy corporation whose initial core business was the owning and operation of oil and gas pipelines and the production of electricity, as the story builds momentum, the reader can’t help but realise that the actual business of the corporation is incidental to what the executives and board of directors actually do at their desks and conference tables and golf courses. At this level of corporate activity, business is business, and the actual product or service in which the company specialises is almost completely irrelevant; doing deals is what they do. Any kind of deal. And the corporation, once it is successful, becomes a place where the very senior executives are doing deals, not for the benefit of the shareholders, but for themselves. They need the corporate structure, its access to capital, and the confidence of its shareholders in order to operate, though, and that’s where the unbelievable greed and breathtaking absence of ethics comes in. The principals of Enron, from its inception, were using accounting legerdemain to ensure that Enron hit quarterly and annual revenue and growth targets, despite their having done very little to actually increase revenue.
In 2000, Enron’s books showed 111 billion dollars in revenue and, before its bankruptcy, was named by Fortune as “America’s Most Innovative Company” for six consecutive years. Enron was the darling of the corporate world and attracted the best and the brightest and the greediest. Within the corporation, by the end of its run at the pinnacle of the capitalist world, there were personal fiefdoms, there were corporate CEOs, CFOs, and COOs who not only managed their own part of the company but were chief executives as well of subsidiaries and private companies. At times these executives were doing deals with Enron and engaged on both sides of negotiations between Enron and their own companies. This led to situations where someone could collect an enormous fixed personal bonus if the negotiations culminated in an advantage for Enron, or, if the negotiations went the other way, a huge personal profit
as the main shareholder of the corporate entity on the other side of the deal. Annual personal incomes of more than 20 million dollars plus huge bonuses were not at all uncommon. And much of this money was paid out of Enron profits that were largely illusory. The money had been created out of thin air.
The methods and techniques by which value was created were many and very esoteric; the criminals at the heart of the deception were brilliant at the arcane mechanisms of Wall Street. With that expertise, and the cooperation of their auditors and investment banks they manipulated their own books to show greater and greater profits and to see the share price rise so their stock options would be more and more valuable. As one reads Conspiracy, one is struck by how clearly the most occult practices of corporate financing are explained; nevertheless, it is likely to be over the heads of most non-expert readers. It doesn’t matter, though; Eichenwald is so familiar and comfortable with his subject that the book rolls along like an absurdly complex and engaging thriller. A simple example of how to create value out of thin air should suffice to give the sense of how these guys operated. Here’s how to do it:
Let’s say you and I are each the CEO of our own publicly traded company. We have no significant assets or cash. But you have a cat that I like and I have a dog that you like. I offer to sell you my dog for 1 million dollars. You agree to the price and offer me your cat at a million dollars. I like it; we do the deal. We can now report to our shareholders that we have just increased our asset base to
$1,000,000 from nearly nothing; we’re entitled to huge bonuses. Kick that kind of deal structure up by a few orders of magnitude of complexity and of financial value and you have an idea of the cynicism and greed of the players. It doesn’t matter that we’re not a pet trading company, it’s the deal that counts. You can see where we could go from here. We now each have an animal that we can prove is worth a million dollars and that can be borrowed against; whose future offspring we can sell now, gambling that the price of cats and dogs will increase; at the same time, we open another company (a hedge) and bet that the value of cats and dogs will decrease from the million-dollar mark (“shorting” in Wall Street jargon) and guarantee huge profits either way. It’s brilliant and it’s completely unethical and each incremental step to the multi-billion-dollar frauds was just on the dividing line between questionable and illegal.
What’s fascinating about the trajectory of Enron is that almost everyone involved in the fraudulently conducted businesses operated very slightly over the line; each tiny step brought them deeper and deeper into the dark side. As they succeeded in creating value out of nothing, they became so big, that, out of fear of losing Enron business, banks, auditing firms, and politicians found their own ethics being stretched to accommodate ever increasingly outrageous financial sleight of hand. What’s fascinating is how accumulating money justified the most egregious behaviour and how there never seemed to be an upper limit on how much these young business giants felt they had to have. Almost any one of them could have cashed out long before the collapse and had a tidy, ill gotten, nest egg of tens of millions of dollars. But like gambling addicts, they had to keep going back for another roll of the dice and a bigger slice of the pie, even though they had to know that sooner or later the whole house of cards had to come crashing down around their ears.
Conspiracy of Fools by Kurt Eichenwald is a fascinating and very readable deconstruction of perhaps the greatest business swindle in history. The knowledge of how Enron bilked its shareholders and the public out of billions of dollars, ought to make us angry enough to demand to know why Wall Street continues to operate on the same principles of business with a few minor regulatory tweaks here and there. Although the very top echelon executives paid an enormous price – jail sentences, millions of dollars in penalties – very little was done to address the system that made this all possible. Knowing that all this took place before the financial meltdown seven years later has to make us ask why on earth a massive shakeup that could have prevented the mortgage market collapse wasn’t undertaken.
And then we see the answer. Remember the years between 2001 and 2008? Yup…the years of Dubya.