Hey, guys, it's me Joshun For this week's select I've chosen our twenty twenty three episode on the Enron scandal. It's a pretty interesting episode, at the very least, just because of the mind bogglingly nuts stuff that these guys did all in the pursuit of money and personal gain. Not only did they swindle entire states, they also, as a nice cherry on top, wiped out the life savings of thousands of their own employees. It's the kind of
thing that was such a big deal. It left us stain on American society as a whole, just by how cynical it made everybody about what people can get away with just in the pursuit of wealth. At any rate, I hope you enjoyed this episode. It's a good one.
Welcome to Stuff You Should Know a production of iHeartRadio.
Hey, and welcome to the podcast.
I'm Joshu and there's Chuck and Jerry's here, and it's stuff you should know.
We you mean it.
You should know this stuff because this is serious.
Corporate malfeasance that I think it's 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. It's been written on extensively, but I mean I didn't understand the ins and outs of it until I started researching this, and it's quite shocking. And that shocking thing that I'm talking about is the rise.
And fall of Enron, one of.
The greatest 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 was a young late twenties, early thirty something, didn't have a care in the world. Sure, And I finally watched The Smartest Guys in the Room today.
Yeah, I saw it last night.
Yeah.
The documentary based on the book, and we'll get to the authors and stuff. It was Peter Elkind and.
Who was a co author, Bethany McLain.
Okay, he was the lead author.
Even Okay, I knew she wrote the original articles and Forbes, 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 pretty clear once you start poking around that this could be like a ten part series.
Yeah for sure.
And there probably is a podcast series out there that covered just Enron. So there's lots of sort of ins and outs that we won't be able to touch on, but we can definitely give her the overview, which was that Enron was a corporation. Originally it was a natural gas line pipeline operator, but they quickly, well not quickly, they got out of that business almost entirely when certain people were hired and we'll sort of get to all
this in a minute too. Certain people, when certain people were hired that basically said, you know what, 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 electricity and you name it. Like, we'll get into
all the things that they sort of pivoted to. But in rounds started, I guess we should start at the beginning when they in nineteen eighty five when Houston Natural Gas Company merged with a company called Inter North and they combined to form this b large energy corporation in Texas, mainly natural gas, and the chief executive of HMNG at the time was a man named ckn 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 from the outset, I think Houston Natural Gas and Inner North, we're both profitable, but I saw that neither one of their 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. Put that in your in your hat and smoke it later with a pin. Okay, in that the first year Enron was around, in nineteen eighty five, it posted a fourteen million dollar loss.
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 who was the CEO of Houston Natural Gas was also 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 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 some good details about that. But the upshot of the whole thing is George H. W and George W. Bush would not probably have been able to help en Ron 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, as Ronald Reagan said, they quoted in the documentary, Government's not the solution to our problems. Government is the problem. And there was this idea that was really huge in the eighties 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 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 a problem 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 the magic of the marketplace, and we talked about this over and over on the show. And this is not an attack on conservatism, but deregulation 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 after years, and you said it in one way, but I'll say it in 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 going to be greedy humans with so much hubris that they sell their souls to make money. And that's what happens every single time. Yet it's still lessons are still not learned that there are certain kinds of humans, and they always seem 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 that would happened with Enron.
Yeah, And I 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 federal energy regulations 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. But there was a big c change in nineteen eighty four,
a big change to regulation. The Federal Energy Regulatory Commission said, Hey, you can now buy and sell gas natural gas from any seller anywhere in the United States. You don't have to just buy and sell within your state. And 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 at Enron, you can make even more money by selling this stuff as commodities and trading on like futures and turning them into financial instruments, not actual just natural gas or oil or electricity, but the concepts of them, the right to sell it or buy that. Sometime down the road that changed absolutely everything.
Yeah, and this is when things when you get into finance like this, it's not that my eyeballs glaze over. It just becomes almost and I say almost not real because it's it is kind of not real. It becomes a form of gambling in a way. And that's very much what happened to Enron in a lot of ways. And you'll kind of see here and there throughout the episode.
But they as a company, after that eighty four decision, made a very faithful decision of their own in nineteen eighty nine, just a few years later, when they got a consulting firm on board Mackenzie and Company in particular consultant for that company named Jeffrey Skilling, to create what they called the a 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 went to work full time.
At Enron that's the John Gooing theme, oh.
Sure, and eventually working his way up to the CEO of that company.
Yes, so he was he but for the most part he was the right hand man, but essentially co CEO with Ken Lay, who I think took him on as a protege. And Jeffrey Skilling was the one who said, let's set up this market. And he also transformed the company's culture. One of the things he came up with was 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 fire hiring ten percent of their workforce, so 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 we're hiring. It makes sense in a really machiavellian kind of way, but it's also psychotic 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 report to them, but it was all the employees rating one another like within their department.
Isn't that right?
Yeah, that's what I took it as too, So.
I mean, you don't have to like be a a soothsayer to see where that heads when. And it certainly creates competition if that's what they're all about with, you know, sort of the charter of the company creating more competition by deregulating. They sort of did the same thing than the ranks and created a very I mean I've seen it described everywhere as just overly macho and testosterone fueled.
Yeah.
It seems like the traders there were were hired and kept on that were especially aggressive. And there are interviews in the documentary about some of these men who were traders that were like, you would 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's skilling, but ken Lay had a history of at the very least turning a blind eye, if not actively encouraging people to break the law, do immoral stuff that 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 all that
mattered was making money for the company. So in that sense, Jeffrey Skilling was a really great protege for ken Lay. But he was like ken Lay on steroids, and I get the impression, and ken Lay is always or back in the day, he was a master at presenting this really laid back, almost.
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 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 that was all dedicated to the service of making money by whatever means possible.
Yeah, and Lay, I mean the reason the documentary is called The Smartest Guys in the Room is because I think an equivalent everyone would admit that kin Ley and Jeffrey Skilling, and we should introduce you to a young recruit named Andrew Fastaal who is a key player eventually becoming the CFO, and was up to all kinds of shenanigans. But these were brilliant guys with amazing ideas, and a lot of the ideas that they had for this company
were 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 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 ways, very creative ways to hide those debts and losses. And that's the whole sort of fall of
Enron is wrapped up in that statement. But these are all really really smart guys, and they were really really good at making money, and maybe we should take a break there. It's a nice little set up, all right, 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.
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SKUs watched s k as good.
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 another watershed deregulate deregulation that's that reversed an act that went back to nineteen thirty five,
the Public Utilities Holding Company Act. Pooka love that one that said, if you are generating and selling electricity, you are a local utility and we're going to regulate you like you were providing the life blood of America, because they are Electrical utilities provide the life blood of America and have since long before nineteen thirty five. And in nineteen ninety they managed to get that reversed and now all of a sudden, anybody could buy an electric utility.
And Enron definitely jumped on that.
Yeah, for sure, their lobby 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 toward Enron. I think they hired a lobbyists for at least thirty seven states. They also helped overturn along nineteen eighty eight that said the military has to buy power from local utilities, and now let's open that back up. Pretty soon, Enron got a twenty five million dollar contract
for supplying electricity to Fort Hamilton and Brooklyn. And these are just, I mean, twenty five million ins up being peanuts in the 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 in two two thousand and one was an electrical scheme in California. California had undergone its own electrical deregulation power deregulation, but it had had adopted this weird patchwork compromise law or set of laws that just had loopholes you could drive a truck through, and that were just really created all sorts
of legal 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 Enron 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. They would purposefully 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 a couple dozen blackouts in six months after that deregulation, after Enron 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
scarcity of electricity. There's plenty of it, and Ron just figured out that they could kind of pull this lever in that lever and charge way more by creating this fake scarcity.
Yeah, 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 for a few hours and just just make something up because a rolling blackout meant big money all of a sudden, California again 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 effectiveness of Gray Davis as 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 document people are saying like this just isn't
adding up in California. And some of those tapes that they play of these traders, like there was that natural, uh wildfire that broke out that jeopardized 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, make laughing at like uh, you know, old Grandma's like 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 alminer mighty dollar that you could imagine.
What's also interesting is they don't really go into detail about it, but it's it appears to have also been a coup to get rid of Gray Davis and replace him with Arnold Schwarzenegger. Yeah, because ken Lay held a meeting at the Peninsula Hotel in Los Angeles and he invited Arnold Schwarzenegger. This was long before Ard Arnold's Shortzenegger 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 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 of course he didn't like knock them off or anything. But in California, you can ever recall it seems to come up every twelve years or so where Californians aren't happy with the governor, and so if recall vote passes, you can have just an election out of nowhere and replace that governor. While this is going on, you know, kin Leigh 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. And 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 make a case as well, for sure. So three of those traders plagued guilty. Jeffrey Richter, John Forney, and Timothy Belden were three of those traders who manipulated California's energy market, costing the state between forty and forty five billion dollars in retrospect of unnecessary electrical prices and costs.
All Right, so Enron is doing great, They're making a lot of money 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 well, we'll get to those between nine six though. In two thousand and one, like as far as the stock market world was concerned in Run was a Darling Fortune named them, I think six years straight America's most innovative company.
Every single year in a row.
Yeah, But what was going on behind the scenes is these ideas and these investments in schemes that they had. You know, some of them made money, but a lot of them didn't make any money at all, 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 broad band high speed internet access in like two thousand or two thousand and one, something like that, and.
This was I looked it up.
It wasn't until two thousand and seven that half of all US Internet users had broadband, so this was way ahead of time. And then also they also got into the video on demand market. They tried to partner with Blockbuster, and this was these things were basically like the progenitor of Zoom and Netflix. But these guys were trying this in two thousand and two thousand and one, so it's visionary.
The problem is they were ahead of their time. The infrastructure wasn't there 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 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 employees, fleecing the entire world. There was a handful of executives at Enron who were fleecing the entire world to the tune of tens and tens and tens of billions of dollars every year in revenue that apparently didn't actually exist.
Yeah, it's pretty clear that at a 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 corporation was that they kept their stock price high, right, 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 this company stock. Because Ron stock 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 are the one who then sell off their stock and walk away with you know, some of them hundreds of millions of dollars. And you know some of the schemes that you talked
about was they found ways to move debt around. We mentioned Fastyle was one of their hires, and he was hired and I think his late twenties, early thirties, and quickly rose up the ranks to CFO and he started a company called LSM which stood for Leah, Jeffrey, and Matthew, which are named after his wife and kids. Sort of ironically.
That 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 Enron to make it invisible to the shareholders, right, so they could prove on a balance sheet that you had this money coming in in the way of you know, people investing 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 so wonky that you just like, I have no idea what I'm reading. 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 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 take that, and then that special purpose vehicle would go out and try to sell it, sell that terrible toxic asset, and
they would use Enron stock as the collateral right. And because Enron stock was just through the room, everybody was saying, sure, we'll give you a loan, sue, We'll give you some money for that terrible idea of a power plant that you abandoned, because you're backing it up with Enron stock. And as long as the time that that stock came to 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 to these special purpose.
Entities, and then they would take.
The money that these special purpose entities would go borrow against that toxic asset and they would count that on their books as revenue. So they were hiding debt, boosting their revenues to just ridiculous heights for stuff that just should not have been counted as revenue.
Yeah, 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 it's an entity that a lot of corporations, businesses use where it's just it's sort of like has a very narrow purpose in that they create this thing when they might use it to purchase an asset or move an asset, so the company as a whole may not be on the hook 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 Fastau's guidance with his LSM sort of sub corporation, and eventually LSM two. I think that they were making I think they hit ninety dollars in August of two thousand, market cap of the whole company at seventy billion, which made it the seventh largest publicly traded company in the world at that point.
Yeah, so that's a market cap of seventy billion. Remember that in nineteen eighty five. Its first year, it posted losses of fourteen million. Within in fifteen years, they posted revenue of one hundred billion dollars billion dollars in fifteen Yeah, in sales in fifteen years. That's what happened to that company when they brought Jeffrey Skilling on board. Jeffrey Skilling brought Andrew Fastau on board, and people just started going nuts making money anyway they could.
Yeah.
The other thing we should mention too is another 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 health of your company based on not theorized but just on future earnings basically and not necessarily what they're worth that day, so anticipated future value instead of its purchase costs.
Did you get how that.
They were because it seemed like they were all like super psyched that they got approval for marked to market accounting.
Yeah, that would have been the sec the Securities and Securities Exchange Commission, who would have given that approval. And just like a special purpose entity marked to market accounting is it's totally legitimate, it's recognized as generally accepted accounting principle.
But there's a lot of room for temptation to just basically say this deal with Blockbuster, 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'll probably be worth a billion dollars, just a total guess. 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 marked to market accounting and use it to their to their benefit in that way, and in doing that, they pumped up their their revenue through the roof. Like the deal would just be inked. They wouldn't have seen 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, 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. It's that hubrius thing that just blinds people into thinking that it will always like
when that kind of money is rolling in. I think it blinds certain people 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 Enron. I mean, there will talk about a whistleblower that eventually sort of came out and a 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 kind of way that makes any kind of coherent sense. And anytime they were confronted
with this Skilling and 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.
Yeah, you just can't understand it, right, Oh, it makes your blood boil.
Let's let's take a break and then we'll come back and talk about the downfall.
How about that? Yeah, the downfall definitely should know draw large Also r.
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To you?
Should? Okay, chuck.
So, 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 when it was just so fraudulent and and just ridiculously fraudulent too, not even subtly fraudulent. And the answer is the the company was such a 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. 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, the venerable, eighty plus year old accounting firm.
The oldest one of the country.
Yeah, that was a 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 one hundred and fifty person office for Enron in Enron's own in Enron's headquarters and Arthur Anderson office in Enron's headquarters made up of 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, it's a buye, people were just like, I'm buying, I'm buying, and it kept the stock prices 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 crystallized 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 n runs are everywhere. There 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 Ron seemed to be one of those sort of unicorns where every person along the way just zip their mouth shut even though the numbers weren't adding up, and was complicit in this right.
And there was a trader that was interviewed in the documentary who said, like it was ironic that Enron's slogan was asked, 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 because I didn't want to know. I suspected things were weird or ry, and I just didn't want to know because it was my job. I was making tons of money. And I think you can probably get that excuse out of just about anybody who was complicit in this larger small 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 about Fastyles, 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, right, 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 and they believe that skilling,
and Ley knew that, like, hey, I'm sure that fast Ols is skimming money off the top for himself, right, Who cares? Because this guy's taking care of business for us exactly.
And I think he skimmed about thirty five million dollars for himself. He stole from Emron and they looked the other way because the stuff he was doing was so unethical, so illegal that he basically earned it as far as they were concerned to have his hand in the cookie jar like that. So 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 Bethany McClain, the journalists who ended up writing the Smartest Guys in the Room.
She is awesome.
She started out writing a story for Fortune magazine back in March of two thousand and 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. There's another guy named Jim Chanos of Kainiko's Securities, I think maybe, and I 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 their return on investment, which automatically means that they were not a profitable company, which totally was contradicted by
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 whistleblower two was an executive main named Sharon Watkins, and she pops up a lot in the documentary. Obviously is key to the story. She didn't whistle blow while this was all going on. It was sort of after the ship started sinking. But we'll talk a little bit about how that all happened and where she ended up.
But what happened in August of twenty twenty one. Skilling had replaced lay a CEO in February of that year, and on August fourteenth, twenty twenty one, Skilling out of nowhere, and he had just taken the reins, you know, a handful of months before he Skilling quit out of nowhere.
He resigns, he cited personal reasons, And what was going on was the you know, the Titanic sprung a leak, right, and as they described in the documentary, he was one of the first rats 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 procedure for finding your replacement, grooming them, introducing them to the rest of the world. You don't just leave like that. And that was such a red flag that that whistleblower,
what's her name, Sharon Watkins. Yeah, she wrote an anonymous letter Delay basically saying, hey, there's a lot of fishy stuff going on around here, and now that Skilling suddenly departed, like everyone's going to start having questions and this whole house of cards is going to fall, and Lay it 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 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 yeah at the company and thought it was a few people, when really it was a large cadre of people who all were complicit in this. And I get the impression that's why she didn't really
blow the whistle publicly at that point. But apparently ken Lay, once he found out that it was Sharon Watkins, consulted legal council to figure out how to fire her legally.
Yeah.
The same day that Skilling resigned, on August fourteenth, the broadband division that we talked about earlier reported one hundred and thirty seven million dollar loss analysts and.
We should point out too.
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. The end came very, very swiftly for Enron. On October twelfth, 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 Enron, And in one day they shredded literally one ton of paper.
Yeah, and that was just one day. They apparently shredded around the clock from October twenty second to November eighth, and that was just one ton one day. They shredded literal tons of documents, just shred, shreded, shread. If you were an executive at Anderson, you were probably working a late night shift shredding alongside everybody else. It was like that, And it was apparently at a time time where you could legally do that and not be you know, indicted for it.
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 into this and they said that they're going to start investigating finally the special purpose entities that Fastau had set up, and so Enron fired Fastau that same day. And I think that was in November or late October of two
thousand and one. And right after that, on November eighth, en Ron said, hey, everybody, do you remember all of our all that money we said we made going back to nineteen ninety seven, We're going to need to restate our earnings. One of the first things they did was they reported a six hundred and eighteen million dollar loss
for Q three of two thousand and one. Q one they posted a four hundred and six million dollar profit, Q two a four hundred and four 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 if a company is restating their earnings for that period of time at all, like mistakes can happen, but that's a that's a real bad sign. They almost got a lifeline in I guess late October of that year when they tried to merge with a company called Dynagy Incorporated, and that deal, that deal fell apart.
On November twenty eighth, they backed out of the deal Dynagy did and then what is this Four days later on December tewod Run filed for the largest Chapter eleven bankruptcy in US history.
Up to that time.
Sixty five I zero point five billion dollar company filed for bankruptcy. That just did not happen. If you had that kind of money, you could have a fire sale and sell off stuff for way less than 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 that kind of the debt that they owed I think was seventy two billion dollars I think in debt that they finally were found to have owed, and at the time it was the biggest. In two thousand and eight, we saw what big really was. Yeah, Lehman Brothers, for example, had six hundred and thirty nine billion dollars in assets when it filed for bankruptcy and went under.
But at the time Enron was like eye popping as far as bankruptcies went for corporations.
Can you imagine the wave of a relief that swept through Dynagy Incorporated. Yeah, the particular bankruptcy a few days later after they backed out.
Yeah, that one. Just offhand 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, You're right, and Dynagy, by the way, went on to become Apple.
So the fallout from this, there are a lot of victims. Twenty thousand employees. Twenty thousand employees lost their job. And how long did they have to get out? What is saying the second 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. Yeah, and like literally, this huge tall building has thousands of people just leaving all day with banker's boxes with their contents of their desk
in it, like the ultimate movie trope. Every employee that had been told for years and years, hey, you got to invest everything you can in that form because Enron is I mean, look at the stock we're going places and that money will be safe there.
They obviously lost.
Almost everything that was a you know, the rank and file employees. That was one in the documentary that said he had about close to three hundred and fifty thousand dollars in stock that he ended up dumping for twelve hundred dollars.
Yeah, they froze.
The stock accounts of the rank and file while upper management was actively still cashing out.
Yeah, that was a really scummy move. They, i'm sure, purposefully changed four oh one k providers in the midst of all this. And when you do that, there's a minimum thirty day freeze as you transfer assets over, so these poor employees couldn't sell their shares, like you said, while the executives were making tens and tens of millions of dollars worth 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 severage package averaged about four five hundred dollars for the average employees, while management bonuses totaled more than fifty five million. And that's just bonuses, that's not cashing out stocks and Livia
who helped us put this together, great job on this article. Yeah, agreed, pointed out something like other fallout like you'd never even think about, which was Ron was a very big investor in donor in local nonprofits in Houston, and all of a sudden, all that money is cut off, and like the Red 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 Enron.
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 in Ron that 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, So, Yeah, the employees in particular and the retirees who had already left and whose pension funds were just totally evaporated, meaning you're gonna have to go get a job as a Walmart greeter now because you can't afford anything. They are definitely
the greatest victims of all this. I saw ken Lay's lawyer afterward portray ken Lay as the greatest victim of all of it, because he apparently lost a few hundred million dollars, and 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 ears. And that same defense was used by Jeffrey Skilling too, I didn't know what
was going on. So what they tried to do was pin the whole thing on Andrew Fastau, who had been fired, who had skimmed thirty something million dollars himself, 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 they were right. In the end.
Fastyle pleaded guilty to two counts of wirefraud and securities fraud in return for being a witness against Skilling and Lay. I think had a ten year sentence for what was going to be a much larger sentence, ended up serving five years and then got out into twenty eleven and started, you know, getting paid as a speaker to corporations about business ethics.
You know.
To his credit, I guess twenty years on he came out officially and apologized for everything. Seems to really have turned the corner and learned a less and although he never knows what is going on in someone's heart from the outside, Arthur Anderson completely went away, the oldest counting form accounting firm in the country, never recovered, completely folded
and went out of business. The Sarbanes Oxley Act was enacted basically because of Enron in two thousand and two, which was and I remember, I remember years ago when we were working in our early days at how Stuff Works, there was a lot of like Sarbanes Oxley talk.
Do you remember that stuff?
Yeah, because they came up with the Frank Dodd Act to basically undo or combat against future stuff from the two thousand and eight financial crisis. Yeah, this was the same thing six years prior. Like Enron had such a huge effect that they passed the law that basically point for point outlawed all the stuff that Enron had done. They did the same thing with the Dodd Frank actor.
They tried to and of course know certain people will say Sarbanes octually has no real teeth anymore because they're not even funding the oversight that they promised. Other people, you know, the diehard free marketers will say, that's 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.
Right, Yeah, you're making it hard to exploit people.
Yeah. So there was actual convictions like this is crazy. And one of the hardening things, Chuck is if you watch like these congressional hearings on this, people from both sides of the aisle are grilling these guys. Oh yeah, No one was apologizing to them for their you know, their colleague from the other side of the aisle asking you know, mean questions. Everyone was mad at these guys. The whole world hated Jeffrey Skilling and Ken Lay and Andrew Fastow.
He was so smug up there man answering those questions. Oh, 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. I 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 in prison. That just does not happen lately. He was
convicted of nineteen counts froud conspiracy, insider trading. He got twenty four years in prison and ended up serving twelve, which is I mean, yeah, that sucks, but years not to sneeze, No, for sure, that's a long time to do in the clink. 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, and I think his conviction was vacated.
Yeah, Skilling now is out and works at an oil and gas analytics startup. It seems that other people I think we Yeah, I mentioned that fast I was on the speaker circuit. The whistleblower. Ms Watkins was named Times Person of the Year in two thousand and two and I believe it 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, Lyvia didn't get to it, but I was like, well, surely there was some sort of making it right for these people who lost all this money right. 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 Enron. 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 Enron before they like let it go.
Oh okay.
I don't know, but I did see the banks were definitely on the hook just for being complicit. I don't know if that was an addition though, either.
Yeah. I think yeah.
It says right here that the bulk of the settlements, almost seven billion of it, came from JP Morgan, Chase City Group, 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 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 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 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, I don't think there's anyone out there who's going to bat for Enron.
It's there's somebody, there's somebody, and they will leave it on our Apple.
Reviews, right, they totally will Ron didn't get a fair shake from these times, totally.
Neither did a.
Hitler or Satan.
You got anything else, I got nothing else.
Well, I don't have anything else either. If you 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 contemporary instead of contemporaneous, it's time for listener mail.
This is a little wordy, but it's it's We don't often do shout outs and tributes, but this is a really special one, so we're doing it nice. 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 to every episode
that you guys 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 including you guys. I know.
More importantly, I also lost touch with my mom. I didn't completely ghost he 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 that, 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 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 my mom had given.
Me years ago.
All this to say, you guys mean a lot to me and my mother, 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 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.
Man, boy, this one's really pulling at the heartstrings.
Yeah, every time I pick up a book or listen to a podcast or write a paper, I think of you, Mom, and I know that I always will. I love you, And this is the only way I know how to tell you properly. Kevin, you can pick up the phone and say this stuff my friend.
He is 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 and Fayetteville, Tennessee.
That was amazing. Gavin, hats up, Chuck.
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 the inrun episode, right.
If you want to be like Gavin and just be a super great person, but not request a shout out, 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 iHeartRadio dot com.
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