April 04, 2005

What We Don't Know About Enron

Maybe a lot, according to a new book by Kurt Eichenwald. He argues that Skilling and Lay may not have committed crimes, although Fastow almost certainly did. One reviewer comments:

Enron's executives made mistakes, and some committed serious crimes, but today's near-universal depiction of the company as a gang of evil crooks obscures the most important lesson of the saga: The differences between Enron and today's corporate success stories are smaller and more complex than they seem... Eichenwald's Enron, in other words, was neither a teeming hive of crooks, nor, equally ludicrous, a convent of gentle innocents mugged by senior management thieves. Rather, it was a Petri dish designed to nourish hyper-growth, for better and for worse. In Enron's fast and loose culture, engineered by Skilling, blessed by Lay, revenue producers were deified and managers stiffed. Finance and accounting were transformed from bean-counting functions to profit centers (a terrible idea). Business development executives were paid not on value created but on contracts signed, with execution left to dull managerial types. In the 1990s, with the economy and stock-market booming, this culture allowed the company to vault from being an obscure operator of gas pipelines to a global trading powerhouse. It also created a testosterone-charged, me-first atmosphere in which mistakes, risks, and early-warning signs were trampled in a hungry stampede. But these problems affect other companies, too, especially during a boom. So even with this potent fuel, Enron needed a catalyst to become a fireball. As Eichenwald tells it, his name was Andy Fastow...

OK, the reviewer's Henry Blodget, who brings his own...perspective...on that era. But I think the point is well-taken. Understanding exactly what happened at Enron is really important. The name has become synonymous with corporate malfeasance and anyone who ever touched the company has been tarnished (ask Paul Krugman). But hardly anyone can tell you what really caused the collapse. Blodget correctly notes that it wasn't the executive pay or the corporate jet. My take is that the company's senior management confused its business with its stock price - or perhaps more accurately, they made the stock price the company business. With their balance sheet massively levered to the stock, a significant correction turned into a fatal liquidity trap. Blodget says Fastow, incredibly, did not even have a debt maturity sheet. It probably would have been helpful, as things got out of hand, to know exactly how much money the company owed and when it was due. Another interesting review of the book is here.

1 Comments:

Blogger Jeff MacDonagh said...

It wasn't the executive pay?!

Perhaps I do need to read this book, because my understanding was that the infamous Raptor LPs and such were about getting the executives in on sweet deals. AIG may be deja vu all over again with its related entities. Lately, I've been thinking that almost all of these corporate meltdowns are rooted in executive pay issues.

One other comment, having been in graduate school in the late 1990s and seeing friends of mine take positions at Enron, I saw the "me-first" atmosphere was coupled with deregulation fever. Energy folks were sold hook, line, and sinker that deregulation would be bring enormous social benefits. Many of my friends at Enron truly believed that the harder they played their game, the better off society would be by having free energy markets.

6:04 AM  

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