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Selects: How Enron Fooled the World · Stuff You Should Know

0:00
Speaker 1: Hey, guys, it's me Joshun For this week's select I've
0:03
Speaker 1: chosen our twenty twenty three episode on the Enron scandal.
0:07
Speaker 1: It's a pretty interesting episode, at the very least, just
0:11
Speaker 1: because of the mind bogglingly nuts stuff that these guys
0:14
Speaker 1: did all in the pursuit of money and personal gain.
0:19
Speaker 1: Not only did they swindle entire states, they also, as
0:23
Speaker 1: a nice cherry on top, wiped out the life savings
0:25
Speaker 1: of thousands of their own employees. It's the kind of
0:29
Speaker 1: thing that was such a big deal. It left us
0:31
Speaker 1: stain on American society as a whole, just by how
0:34
Speaker 1: cynical it made everybody about what people can get away
0:37
Speaker 1: with just in the pursuit of wealth. At any rate,
0:40
Speaker 1: I hope you enjoyed this episode. It's a good one.
0:47
Speaker 2: Welcome to Stuff You Should Know a production of iHeartRadio.
0:57
Speaker 3: Hey, and welcome to the podcast.
0:59
Speaker 1: I'm Joshu and there's Chuck and Jerry's here, and it's
1:01
Speaker 1: stuff you should know.
1:03
Speaker 4: We you mean it.
1:04
Speaker 3: You should know this stuff because this is serious.
1:08
Speaker 1: Corporate malfeasance that I think it's probably not an American
1:11
Speaker 1: over the age of twenty walking around who doesn't know
1:14
Speaker 1: about this somehow, some way, to some degree. I know
1:18
Speaker 1: they teach about this stuff in business school. It's been
1:22
Speaker 1: written on extensively, but I mean I didn't understand the
1:26
Speaker 1: ins and outs of it until I started researching this,
1:29
Speaker 1: and it's quite shocking. And that shocking thing that I'm
1:33
Speaker 1: talking about is the rise.
1:36
Speaker 3: And fall of Enron, one of.
1:38
Speaker 1: The greatest swindles in corporate American history, maybe in corporate
1:44
Speaker 1: history in the world, definitely in corporate American.
1:47
Speaker 4: History for sure.
1:49
Speaker 2: I'm really glad you picked this because I didn't know
1:50
Speaker 2: all the ins and outs either, because this is you know,
1:54
Speaker 2: when I was a young late twenties, early thirty something,
1:57
Speaker 2: didn't have a care in the world. Sure, And I
2:01
Speaker 2: finally watched The Smartest Guys in the Room today.
2:06
Speaker 3: Yeah, I saw it last night.
2:08
Speaker 4: Yeah.
2:08
Speaker 2: The documentary based on the book, and we'll get to
2:12
Speaker 2: the authors and stuff. It was Peter Elkind and.
2:15
Speaker 3: Who was a co author, Bethany McLain.
2:17
Speaker 4: Okay, he was the lead author.
2:19
Speaker 2: Even Okay, I knew she wrote the original articles and Forbes,
2:23
Speaker 2: so she co authored the book and she's in the documentary,
2:26
Speaker 2: as is Elkland. And it really is worth the watch.
2:30
Speaker 2: But just want to point out that this is an
2:33
Speaker 2: overview of the Enron scandal. It's pretty clear once you
2:37
Speaker 2: start poking around that this could be like a ten
2:39
Speaker 2: part series.
2:40
Speaker 3: Yeah for sure.
2:41
Speaker 2: And there probably is a podcast series out there that
2:44
Speaker 2: covered just Enron. So there's lots of sort of ins
2:47
Speaker 2: and outs that we won't be able to touch on,
2:49
Speaker 2: but we can definitely give her the overview, which was
2:53
Speaker 2: that Enron was a corporation. Originally it was a natural
2:58
Speaker 2: gas line pipeline operator, but they quickly, well not quickly,
3:05
Speaker 2: they got out of that business almost entirely when certain
3:09
Speaker 2: people were hired and we'll sort of get to all
3:11
Speaker 2: this in a minute too. Certain people, when certain people
3:15
Speaker 2: were hired that basically said, you know what, we don't
3:18
Speaker 2: we should even be in the pipeline industry. We should
3:22
Speaker 2: invent almost a new kind of industry, which is to
3:25
Speaker 2: use energy as financial instruments, and we should become a
3:32
Speaker 2: trading company that trades natural gas and eventually paper pulp
3:38
Speaker 2: and electricity and you name it. Like, we'll get into
3:42
Speaker 2: all the things that they sort of pivoted to. But
3:46
Speaker 2: in rounds started, I guess we should start at the
3:48
Speaker 2: beginning when they in nineteen eighty five when Houston Natural
3:52
Speaker 2: Gas Company merged with a company called Inter North and
3:56
Speaker 2: they combined to form this b large energy corporation in Texas,
4:02
Speaker 2: mainly natural gas, and the chief executive of HMNG at
4:07
Speaker 2: the time was a man named ckn or Kenneth Lay,
4:10
Speaker 2: who you might have heard of.
4:12
Speaker 1: Yeah, and if you haven't prepared to meet ken Lay
4:15
Speaker 1: several times across this episode from the outset, I think
4:21
Speaker 1: Houston Natural Gas and Inner North, we're both profitable, but
4:25
Speaker 1: I saw that neither one of their the companies really
4:28
Speaker 1: benefited from the merger, although it did expand their pipeline network.
4:32
Speaker 1: Really it just protected them from a hostile takeover. But
4:36
Speaker 1: it was just a just a standard gas company, you know,
4:39
Speaker 1: no big frills or anything like that. I think the
4:42
Speaker 1: first year it posted a fourteen million dollar loss. Put
4:45
Speaker 1: that in your in your hat and smoke it later
4:49
Speaker 1: with a pin. Okay, in that the first year Enron
4:55
Speaker 1: was around, in nineteen eighty five, it posted a fourteen
4:58
Speaker 1: million dollar loss.
5:00
Speaker 3: Remember that for later, Okay.
5:01
Speaker 4: Yeah.
5:01
Speaker 2: Also, something else you should put in your hat for
5:04
Speaker 2: later is the fact that Kenneth Lay, the gentleman I
5:07
Speaker 2: mentioned who was the CEO of Houston Natural Gas was
5:10
Speaker 2: also very very tight with the Bush family, originally the
5:16
Speaker 2: elder Bush and later on George W. As Governor of Texas,
5:21
Speaker 2: big donor to their causes politically, and they ended up
5:26
Speaker 2: having a very sort of you scratch my back, al
5:29
Speaker 2: scratch yours kind of relationship.
5:31
Speaker 1: Yeah, it's I mean like I just started twirling around
5:35
Speaker 1: over and over again out of anger, like multiple times
5:38
Speaker 1: throughout the documentary, because they really go into some good
5:42
Speaker 1: details about that. But the upshot of the whole thing
5:45
Speaker 1: is George H. W and George W. Bush would not
5:52
Speaker 1: probably have been able to help en Ron out as
5:54
Speaker 1: much as they did had it not been for, of course,
5:58
Speaker 1: Ronald Reagan and the sweeping deregulations that occurred in starting
6:03
Speaker 1: in the eighties. There was just a spirit of deregulation
6:06
Speaker 1: which was, as Ronald Reagan said, they quoted in the documentary,
6:10
Speaker 1: Government's not the solution to our problems. Government is the problem.
6:13
Speaker 1: And there was this idea that was really huge in
6:16
Speaker 1: the eighties that if you got government out of the way,
6:21
Speaker 1: competition was going to drive innovation, was going to lower prices,
6:26
Speaker 1: was going to benefit society in myriad ways. That is
6:29
Speaker 1: not untrue The problem is when you deregulate fully and
6:35
Speaker 1: just basically say we're checked out from now on until
6:38
Speaker 1: something really bad happens. Something bad always happens. That's the
6:43
Speaker 1: problem with deregulation in the eighties, not that there's a
6:46
Speaker 1: problem with deregulation, that it was done incorrectly, like it
6:49
Speaker 1: seems to be every single time.
6:51
Speaker 2: Yeah, I mean, Reagan is also in the documentary quoted
6:54
Speaker 2: as talking about the magic of the marketplace, and we
6:58
Speaker 2: talked about this over and over on the show. And
7:00
Speaker 2: this is not an attack on conservatism, but deregulation in
7:05
Speaker 2: the marketplace and letting the free market decide things is
7:08
Speaker 2: one of the core tenets of conservatism generally. And what
7:13
Speaker 2: we've always kind of hammered home after years, and you
7:16
Speaker 2: said it in one way, but I'll say it in another,
7:18
Speaker 2: is it never takes into account humans are the ones
7:22
Speaker 2: that are operating these systems. And when you have money,
7:26
Speaker 2: lots and lots of money, and you have humans operating systems,
7:30
Speaker 2: there are inevitably going to be greedy humans with so
7:35
Speaker 2: much hubris that they sell their souls to make money.
7:40
Speaker 2: And that's what happens every single time. Yet it's still
7:44
Speaker 2: lessons are still not learned that there are certain kinds
7:48
Speaker 2: of humans, and they always seem to be they always
7:51
Speaker 2: seem to be the ones in charge here of these systems.
7:53
Speaker 2: They will take advantage of them to the detriment of
7:57
Speaker 2: the little guy and the little lady. And that is
8:00
Speaker 2: that would happened with Enron.
8:02
Speaker 1: Yeah, And I don't know if it's always like they're
8:04
Speaker 1: not taking into account human greed. I think most of
8:08
Speaker 1: the people who are powerful enough to deregulate federal energy
8:13
Speaker 1: regulations don't really care. In a lot of cases, they
8:17
Speaker 1: know that they're going to make a boatload of money
8:19
Speaker 1: by the time the thing really kind of blows up
8:21
Speaker 1: sometime down the line. I think it could be either one.
8:25
Speaker 1: But there was a big c change in nineteen eighty four,
8:30
Speaker 1: a big change to regulation. The Federal Energy Regulatory Commission said, Hey,
8:36
Speaker 1: you can now buy and sell gas natural gas from
8:41
Speaker 1: any seller anywhere in the United States. You don't have
8:45
Speaker 1: to just buy and sell within your state. And that
8:47
Speaker 1: opened up an entirely new market, and all of a sudden,
8:51
Speaker 1: you can make a lot more money moving this stuff around.
8:55
Speaker 1: But like you said, they figured out at Enron, you
8:59
Speaker 1: can make even more money by selling this stuff as
9:02
Speaker 1: commodities and trading on like futures and turning them into
9:06
Speaker 1: financial instruments, not actual just natural gas or oil or electricity,
9:11
Speaker 1: but the concepts of them, the right to sell it
9:14
Speaker 1: or buy that. Sometime down the road that changed absolutely everything.
9:19
Speaker 2: Yeah, and this is when things when you get into
9:21
Speaker 2: finance like this, it's not that my eyeballs glaze over.
9:26
Speaker 2: It just becomes almost and I say almost not real
9:32
Speaker 2: because it's it is kind of not real. It becomes
9:35
Speaker 2: a form of gambling in a way. And that's very
9:38
Speaker 2: much what happened to Enron in a lot of ways.
9:39
Speaker 2: And you'll kind of see here and there throughout the episode.
9:42
Speaker 2: But they as a company, after that eighty four decision,
9:47
Speaker 2: made a very faithful decision of their own in nineteen
9:50
Speaker 2: eighty nine, just a few years later, when they got
9:52
Speaker 2: a consulting firm on board Mackenzie and Company in particular
9:56
Speaker 2: consultant for that company named Jeffrey Skilling, to create what
10:01
Speaker 2: they called the a Gas Bank, which was basically, like
10:04
Speaker 2: I said earlier, like, hey, why don't we just be
10:06
Speaker 2: an intermediary between buying and selling of gas? And it
10:10
Speaker 2: was going so well that two short years later, Skilling
10:14
Speaker 2: left there and went to work full time.
10:17
Speaker 3: At Enron that's the John Gooing theme, oh.
10:20
Speaker 2: Sure, and eventually working his way up to the CEO
10:23
Speaker 2: of that company.
10:25
Speaker 1: Yes, so he was he but for the most part
10:28
Speaker 1: he was the right hand man, but essentially co CEO
10:33
Speaker 1: with Ken Lay, who I think took him on as
10:36
Speaker 1: a protege. And Jeffrey Skilling was the one who said,
10:39
Speaker 1: let's set up this market. And he also transformed the
10:44
Speaker 1: company's culture. One of the things he came up with
10:48
Speaker 1: was the idea that every year they should review and
10:52
Speaker 1: rate every employee, and the bottom ten percent of employees
10:56
Speaker 1: should be fired.
10:57
Speaker 3: So every year he.
10:58
Speaker 1: Was planning on fire hiring ten percent of their workforce,
11:02
Speaker 1: so about two thousand people every year. And the reason
11:05
Speaker 1: he was doing this is because he's saying, we can
11:07
Speaker 1: do better. We can hire the best and the brightest,
11:09
Speaker 1: We'll replace those people with much better people, and then
11:12
Speaker 1: the ones who are doing really well now we'll get
11:15
Speaker 1: moved to the back, and we'll just constantly be improving
11:17
Speaker 1: on the people that we're hiring. It makes sense in
11:20
Speaker 1: a really machiavellian kind of way, but it's also psychotic
11:24
Speaker 1: as well.
11:25
Speaker 2: Yeah, and the way I understood it from the documentary.
11:28
Speaker 2: It wasn't just like regular upper management reviews of the
11:32
Speaker 2: people that report to them, but it was all the
11:35
Speaker 2: employees rating one another like within their department.
11:39
Speaker 4: Isn't that right?
11:39
Speaker 3: Yeah, that's what I took it as too, So.
11:41
Speaker 2: I mean, you don't have to like be a a
11:46
Speaker 2: soothsayer to see where that heads when. And it certainly
11:50
Speaker 2: creates competition if that's what they're all about with, you know,
11:54
Speaker 2: sort of the charter of the company creating more competition
11:57
Speaker 2: by deregulating. They sort of did the same thing than
12:00
Speaker 2: the ranks and created a very I mean I've seen
12:03
Speaker 2: it described everywhere as just overly macho and testosterone fueled.
12:09
Speaker 3: Yeah.
12:10
Speaker 2: It seems like the traders there were were hired and
12:14
Speaker 2: kept on that were especially aggressive. And there are interviews
12:17
Speaker 2: in the documentary about some of these men who were
12:22
Speaker 2: traders that were like, you would cut the throat of
12:26
Speaker 2: the guy next to you on the trading floor, your
12:28
Speaker 2: fellow employee if you felt like you could make a
12:31
Speaker 2: few extra bucks.
12:32
Speaker 1: Yeah, and that was very much encouraged, not just by
12:34
Speaker 1: Jeffrey's skilling, but ken Lay had a history of at
12:39
Speaker 1: the very least turning a blind eye, if not actively
12:42
Speaker 1: encouraging people to break the law, do immoral stuff that
12:47
Speaker 1: may or may not have been legal, all in the
12:50
Speaker 1: interest of maximizing profits. Like, if you were making money
12:54
Speaker 1: and you got in trouble, you didn't get fired because
12:58
Speaker 1: you made money for the company. That's all all that
13:00
Speaker 1: mattered was making money for the company. So in that sense,
13:03
Speaker 1: Jeffrey Skilling was a really great protege for ken Lay.
13:06
Speaker 1: But he was like ken Lay on steroids, and I
13:09
Speaker 1: get the impression, and ken Lay is always or back
13:13
Speaker 1: in the day, he was a master at presenting this
13:16
Speaker 1: really laid back, almost.
13:21
Speaker 3: Detached persona.
13:23
Speaker 1: But if you watch the documentary and you read about him,
13:27
Speaker 1: you really get the impression that he knew exactly what
13:30
Speaker 1: outcome was ten steps down the road by just nudging
13:34
Speaker 1: this thing over here, nudging that thing over there, all
13:36
Speaker 1: with plausible deniability, but at the same time presiding over
13:41
Speaker 1: this incredibly complex, complicated, masterful machination that was all dedicated
13:48
Speaker 1: to the service of making money by whatever means possible.
13:52
Speaker 2: Yeah, and Lay, I mean the reason the documentary is
13:54
Speaker 2: called The Smartest Guys in the Room is because I
13:59
Speaker 2: think an equivalent everyone would admit that kin Ley and
14:03
Speaker 2: Jeffrey Skilling, and we should introduce you to a young
14:06
Speaker 2: recruit named Andrew Fastaal who is a key player eventually
14:10
Speaker 2: becoming the CFO, and was up to all kinds of shenanigans.
14:14
Speaker 2: But these were brilliant guys with amazing ideas, and a
14:18
Speaker 2: lot of the ideas that they had for this company
14:21
Speaker 2: were really good and ahead of their time. But they
14:24
Speaker 2: had the notion that you should be able to trade
14:28
Speaker 2: and make money off of great ideas and not necessarily
14:31
Speaker 2: the results of those great ideas, because time and time again,
14:35
Speaker 2: as you'll see as we tell this story, these ideas
14:39
Speaker 2: were not making actual money, maybe because some of them
14:43
Speaker 2: were ahead of their time, but that didn't matter because
14:45
Speaker 2: they had ways, very creative ways to hide those debts
14:49
Speaker 2: and losses. And that's the whole sort of fall of
14:52
Speaker 2: Enron is wrapped up in that statement. But these are
14:55
Speaker 2: all really really smart guys, and they were really really
15:00
Speaker 2: good at making money, and maybe we should take a
15:03
Speaker 2: break there. It's a nice little set up, all right,
15:05
Speaker 2: and we'll come back and talk a little bit more
15:07
Speaker 2: about their lobby to deregulate, and then some of the
15:10
Speaker 2: early Shenanigans.
15:11
Speaker 4: Right after this.
15:13
Speaker 3: Should know, large holds of.
15:21
Speaker 5: SKUs watched s k as good.
15:35
Speaker 1: Okay, So after about six years after that big deregulation
15:40
Speaker 1: from FIRK that said you can buy gas and sell
15:42
Speaker 1: it at wherever in the country. That opened up a
15:44
Speaker 1: huge market, there was another watershed deregulate deregulation that's that
15:51
Speaker 1: reversed an act that went back to nineteen thirty five,
15:55
Speaker 1: the Public Utilities Holding Company Act. Pooka love that one
16:00
Speaker 1: that said, if you are generating and selling electricity, you
16:05
Speaker 1: are a local utility and we're going to regulate you
16:09
Speaker 1: like you were providing the life blood of America, because
16:13
Speaker 1: they are Electrical utilities provide the life blood of America
16:17
Speaker 1: and have since long before nineteen thirty five. And in
16:21
Speaker 1: nineteen ninety they managed to get that reversed and now
16:24
Speaker 1: all of a sudden, anybody could buy an electric utility.
16:27
Speaker 1: And Enron definitely jumped on that.
16:30
Speaker 2: Yeah, for sure, their lobby was strong to put up mildly.
16:34
Speaker 2: They hired lobbyists to lobby different states. In those states,
16:40
Speaker 2: as no surprise, ended up getting millions of dollars flowing
16:44
Speaker 2: back toward Enron. I think they hired a lobbyists for
16:49
Speaker 2: at least thirty seven states. They also helped overturn along
16:53
Speaker 2: nineteen eighty eight that said the military has to buy
16:56
Speaker 2: power from local utilities, and now let's open that back up.
17:02
Speaker 2: Pretty soon, Enron got a twenty five million dollar contract
17:05
Speaker 2: for supplying electricity to Fort Hamilton and Brooklyn. And these
17:10
Speaker 2: are just, I mean, twenty five million ins up being
17:13
Speaker 2: peanuts in the grand scheme. But these are just examples
17:16
Speaker 2: as they sort of ramped up to their schemes of
17:19
Speaker 2: how they deregulated or lobbied to get things deregulated such
17:23
Speaker 2: that it was allowed to happen.
17:25
Speaker 4: Right.
17:25
Speaker 1: And one of the things, one of the schemes that
17:27
Speaker 1: got the attention of the entire country in two two
17:32
Speaker 1: thousand and one was an electrical scheme in California. California
17:38
Speaker 1: had undergone its own electrical deregulation power deregulation, but it
17:42
Speaker 1: had had adopted this weird patchwork compromise law or set
17:49
Speaker 1: of laws that just had loopholes you could drive a
17:52
Speaker 1: truck through, and that were just really created all sorts
17:55
Speaker 1: of legal gray areas. And so rather than just kind
17:59
Speaker 1: of like here they're biting around the edges, seeing what
18:01
Speaker 1: they could do. Instead, the energy traders at Enron started
18:08
Speaker 1: figuring out how to move energy out of the state,
18:11
Speaker 1: wait for the state to be like, hey, we need
18:13
Speaker 1: some energy, and move it back at incredibly inflated prices.
18:19
Speaker 1: They would purposefully take electrical utilities that they owned offline
18:25
Speaker 1: to generate more demand, a spike in demand, and so
18:28
Speaker 1: they could raise prices again. And they actually basically crippled California.
18:34
Speaker 1: I think I saw that California had a couple dozen
18:38
Speaker 1: blackouts in six months after that deregulation, after Enron started
18:43
Speaker 1: coming in and messing with stuff, whereas the six months
18:46
Speaker 1: before deregulation they had had one blackout. So if you
18:49
Speaker 1: watch the documentary and you listen, you know, you read
18:52
Speaker 1: some other sources about it. This was an entirely fabricated
18:58
Speaker 1: scarcity of electricity. There's plenty of it, and Ron just
19:01
Speaker 1: figured out that they could kind of pull this lever
19:03
Speaker 1: in that lever and charge way more by creating this
19:06
Speaker 1: fake scarcity.
19:07
Speaker 2: Yeah, and by pulling a lever like literally sometimes they
19:12
Speaker 2: called up a power company, a power plant and said
19:16
Speaker 2: pull the lever to the off position, and they have
19:19
Speaker 2: them on tape, you know, they played this in the documentary.
19:21
Speaker 2: Well they'll they called one in Las Vegas and said, hey, man,
19:25
Speaker 2: can you take this thing offline for a few hours
19:28
Speaker 2: and just just make something up because a rolling blackout
19:32
Speaker 2: meant big money all of a sudden, California again was
19:36
Speaker 2: buying their own energy back at a higher rate. And
19:39
Speaker 2: Governor Gray Davis at the time, and this is you know,
19:42
Speaker 2: I'm not like giving some full throated endorsement to any
19:46
Speaker 2: effectiveness of Gray Davis as a governor because I really
19:48
Speaker 2: don't know, but he definitely was sort of left holding
19:52
Speaker 2: the bag and scratching his head like what's going on here?
19:55
Speaker 2: Like We've got plenty of energy, and it just all
19:59
Speaker 2: through the document people are saying like this just isn't
20:02
Speaker 2: adding up in California. And some of those tapes that
20:05
Speaker 2: they play of these traders, like there was that natural,
20:09
Speaker 2: uh wildfire that broke out that jeopardized one of the pipelines,
20:14
Speaker 2: and these guys are on, you know, on tape on
20:17
Speaker 2: the phone with each other saying burn, baby, burn, because
20:20
Speaker 2: that's good for business if it knocks something offline, and
20:23
Speaker 2: is you know, make laughing at like uh, you know,
20:27
Speaker 2: old Grandma's like sweating in the summer heat because they
20:30
Speaker 2: can't get air conditioning, like the most vile, reprehensible kind
20:34
Speaker 2: of stuff in the name of making the alminer mighty
20:37
Speaker 2: dollar that you could imagine.
20:39
Speaker 1: What's also interesting is they don't really go into detail
20:41
Speaker 1: about it, but it's it appears to have also been
20:45
Speaker 1: a coup to get rid of Gray Davis and replace
20:48
Speaker 1: him with Arnold Schwarzenegger. Yeah, because ken Lay held a
20:51
Speaker 1: meeting at the Peninsula Hotel in Los Angeles and he
20:56
Speaker 1: invited Arnold Schwarzenegger. This was long before Ard Arnold's Shortzenegger
21:00
Speaker 1: was known to have had like real political aspirations. He
21:04
Speaker 1: wasn't governor yet wasn't running for governor over a problem
21:07
Speaker 1: that Enron created. It was like that level of In
21:11
Speaker 1: addition to also just making billions and billions of dollars
21:14
Speaker 1: by strangling the state, they also managed to replace the
21:17
Speaker 1: executive of the state as well to somebody who is
21:20
Speaker 1: much more friendly to them.
21:21
Speaker 2: Yeah, and get rid of in the of course he
21:23
Speaker 2: didn't like knock them off or anything. But in California,
21:26
Speaker 2: you can ever recall it seems to come up every
21:30
Speaker 2: twelve years or so where Californians aren't happy with the governor,
21:33
Speaker 2: and so if recall vote passes, you can have just
21:37
Speaker 2: an election out of nowhere and replace that governor. While
21:42
Speaker 2: this is going on, you know, kin Leigh stands on
21:45
Speaker 2: a stage and says, we're making money in spite of California,
21:50
Speaker 2: not because of California. So just lying through their teeth
21:54
Speaker 2: on stage to their shareholders. And you know, all these
21:57
Speaker 2: little schemes had little nicknames. The one where they got
22:01
Speaker 2: energy out of California just to make them buy it
22:03
Speaker 2: back was called Ricochet. There was one called death Star,
22:07
Speaker 2: and they're on tape like joking about like, hey, let's
22:09
Speaker 2: have a nice friendly name for this one, like death Star.
22:12
Speaker 2: So they're just they're playing games with people's livelihood essentially.
22:17
Speaker 1: And lives you can make a case as well, for sure.
22:21
Speaker 1: So three of those traders plagued guilty. Jeffrey Richter, John Forney,
22:26
Speaker 1: and Timothy Belden were three of those traders who manipulated
22:29
Speaker 1: California's energy market, costing the state between forty and forty
22:34
Speaker 1: five billion dollars in retrospect of unnecessary electrical prices and costs.
22:42
Speaker 2: All Right, so Enron is doing great, They're making a
22:45
Speaker 2: lot of money and we should point out that this
22:48
Speaker 2: is just you know, Ricochet was just one little scheme.
22:51
Speaker 2: They had all sorts of schemes along the way to well,
22:57
Speaker 2: we'll get to those between nine six though. In two
23:00
Speaker 2: thousand and one, like as far as the stock market
23:03
Speaker 2: world was concerned in Run was a Darling Fortune named them,
23:07
Speaker 2: I think six years straight America's most innovative company.
23:10
Speaker 4: Every single year in a row.
23:12
Speaker 2: Yeah, But what was going on behind the scenes is
23:16
Speaker 2: these ideas and these investments in schemes that they had.
23:21
Speaker 2: You know, some of them made money, but a lot
23:22
Speaker 2: of them didn't make any money at all, and they
23:25
Speaker 2: just became really really good at hiding that fact.
23:28
Speaker 1: Yes, that was the whole thing. Like, they were very innovative.
23:33
Speaker 1: They were ahead of their time in a lot of ways.
23:35
Speaker 1: Like they got into building broad band high speed internet
23:39
Speaker 1: access in like two thousand or two thousand and one,
23:42
Speaker 1: something like that, and.
23:44
Speaker 4: This was I looked it up.
23:45
Speaker 1: It wasn't until two thousand and seven that half of
23:48
Speaker 1: all US Internet users had broadband, so this was way
23:52
Speaker 1: ahead of time. And then also they also got into
23:55
Speaker 1: the video on demand market. They tried to partner with Blockbuster,
23:59
Speaker 1: and this was these things were basically like the progenitor
24:03
Speaker 1: of Zoom and Netflix. But these guys were trying this
24:06
Speaker 1: in two thousand and two thousand and one, so it's visionary.
24:10
Speaker 1: The problem is they were ahead of their time. The
24:12
Speaker 1: infrastructure wasn't there that the I think the customer base
24:16
Speaker 1: even wasn't there. So there's stuff that they were doing
24:19
Speaker 1: wasn't making money, which is not bad in and of itself.
24:23
Speaker 1: What was bad was when they were covering it up.
24:25
Speaker 1: And the schemes that they used to cover it up
24:28
Speaker 1: are so involved in complex, but also so fascinating that
24:35
Speaker 1: they would they would have the audacity to do this
24:37
Speaker 1: because there's no there's no fudging it, there's no like, oh,
24:40
Speaker 1: this is kind of questionable. This was just fleecing all
24:45
Speaker 1: of their investors, all of their employees, fleecing the entire world.
24:48
Speaker 1: There was a handful of executives at Enron who were
24:51
Speaker 1: fleecing the entire world to the tune of tens and
24:54
Speaker 1: tens and tens of billions of dollars every year in
24:57
Speaker 1: revenue that apparently didn't actually exist.
25:01
Speaker 2: Yeah, it's pretty clear that at a certain point they
25:04
Speaker 2: lost their way and that they weren't as concerned about
25:07
Speaker 2: being a company that made money, and the only thing
25:11
Speaker 2: that mattered was that as a corporation was that they
25:15
Speaker 2: kept their stock price high, right, because that's where that's
25:18
Speaker 2: where all the money was they had as long as
25:21
Speaker 2: they could keep that stock price high and keep shareholders,
25:25
Speaker 2: especially their employees, encouraging their employees to get you know,
25:28
Speaker 2: get paid in company stock, like use every penny of
25:31
Speaker 2: your paycheck that you can to buy this company stock.
25:34
Speaker 2: Because Ron stock was soaring, it was doing really, really well,
25:38
Speaker 2: and all the while it was you know, it's called
25:40
Speaker 2: pump and dump. They would drive up the value of
25:42
Speaker 2: their stock and then the upper echelon and you see
25:45
Speaker 2: this time and time again in the corporate world. The
25:47
Speaker 2: CEOs and the CFOs and the upper management are the
25:50
Speaker 2: one who then sell off their stock and walk away
25:54
Speaker 2: with you know, some of them hundreds of millions of dollars.
25:59
Speaker 2: And you know some of the schemes that you talked
26:01
Speaker 2: about was they found ways to move debt around. We
26:06
Speaker 2: mentioned Fastyle was one of their hires, and he was
26:09
Speaker 2: hired and I think his late twenties, early thirties, and
26:11
Speaker 2: quickly rose up the ranks to CFO and he started
26:15
Speaker 2: a company called LSM which stood for Leah, Jeffrey, and Matthew,
26:21
Speaker 2: which are named after his wife and kids. Sort of ironically.
26:25
Speaker 2: That was like such a sweet tribute to them. And
26:28
Speaker 2: the only purpose of this company was to have all
26:31
Speaker 2: kinds of sort of little sub companies that would absorb
26:35
Speaker 2: the debt and where they could move debt around from
26:38
Speaker 2: Enron to make it invisible to the shareholders, right, so
26:41
Speaker 2: they could prove on a balance sheet that you had
26:43
Speaker 2: this money coming in in the way of you know,
26:46
Speaker 2: people investing in the company, but then you're hiding the
26:49
Speaker 2: losses and so everyone thinks you're doing great.
26:52
Speaker 1: So the way that I saw it explained, Investipedia actually
26:55
Speaker 1: has a couple of really good articles about this that
26:57
Speaker 1: are just wonky enough to like understand it, but also
27:00
Speaker 1: so wonky that you just like, I have no idea
27:02
Speaker 1: what I'm reading. And the way they put it was basically,
27:06
Speaker 1: if Enron had, like a good example is they build
27:08
Speaker 1: a power station in India that was a huge loss.
27:12
Speaker 1: It was just a generally bad idea, and they sunk
27:15
Speaker 1: billions and millions of dollars into this power station and
27:18
Speaker 1: without realizing any money whatsoever. I think they abandoned it
27:21
Speaker 1: before it even came online. They would take this and
27:25
Speaker 1: sell it to one of these special purpose vehicles or
27:29
Speaker 1: special purpose entities, which was a tangentially related company that
27:34
Speaker 1: the company Enron was not on the hook to pay
27:38
Speaker 1: off its debts for right, and they would take that,
27:42
Speaker 1: and then that special purpose vehicle would go out and
27:45
Speaker 1: try to sell it, sell that terrible toxic asset, and
27:51
Speaker 1: they would use Enron stock as the collateral right. And
27:57
Speaker 1: because Enron stock was just through the room, everybody was saying, sure,
28:01
Speaker 1: we'll give you a loan, sue, We'll give you some
28:03
Speaker 1: money for that terrible idea of a power plant that
28:05
Speaker 1: you abandoned, because you're backing it up with Enron stock.
28:08
Speaker 1: And as long as the time that that stock came
28:11
Speaker 1: to was far enough away, and as long as Enron
28:14
Speaker 1: stock kept going up, this house of cards could be
28:17
Speaker 1: held together. But that's not at all how it worked.
28:20
Speaker 1: The upshot of it is that they could take toxic assets,
28:24
Speaker 1: move them off of their books to these special purpose.
28:27
Speaker 3: Entities, and then they would take.
28:29
Speaker 1: The money that these special purpose entities would go borrow
28:33
Speaker 1: against that toxic asset and they would count that on
28:37
Speaker 1: their books as revenue. So they were hiding debt, boosting
28:42
Speaker 1: their revenues to just ridiculous heights for stuff that just
28:46
Speaker 1: should not have been counted as revenue.
28:48
Speaker 2: Yeah, and just to be clear, they didn't invent the
28:50
Speaker 2: special purpose entity, And an SPE is not some evil
28:55
Speaker 2: creation in and of itself. It is it's an entity
28:58
Speaker 2: that a lot of corporations, businesses use where it's just
29:02
Speaker 2: it's sort of like has a very narrow purpose in
29:05
Speaker 2: that they create this thing when they might use it
29:08
Speaker 2: to purchase an asset or move an asset, so the
29:11
Speaker 2: company as a whole may not be on the hook
29:14
Speaker 2: if anything goes wrong. It sort of mitigates risks. So
29:17
Speaker 2: it's not some evil purpose in and of itself. But
29:19
Speaker 2: they were manipulating these such and starting all of these
29:23
Speaker 2: things under Fastau's guidance with his LSM sort of sub corporation,
29:28
Speaker 2: and eventually LSM two. I think that they were making
29:32
Speaker 2: I think they hit ninety dollars in August of two thousand,
29:39
Speaker 2: market cap of the whole company at seventy billion, which
29:43
Speaker 2: made it the seventh largest publicly traded company in the
29:47
Speaker 2: world at that point.
29:49
Speaker 1: Yeah, so that's a market cap of seventy billion. Remember
29:54
Speaker 1: that in nineteen eighty five. Its first year, it posted
29:57
Speaker 1: losses of fourteen million. Within in fifteen years, they posted
30:02
Speaker 1: revenue of one hundred billion dollars billion dollars in fifteen Yeah,
30:08
Speaker 1: in sales in fifteen years. That's what happened to that
30:11
Speaker 1: company when they brought Jeffrey Skilling on board. Jeffrey Skilling
30:14
Speaker 1: brought Andrew Fastau on board, and people just started going
30:18
Speaker 1: nuts making money anyway they could.
30:21
Speaker 4: Yeah.
30:21
Speaker 2: The other thing we should mention too is another sort
30:24
Speaker 2: of slick trick is that Skilling's idea and they got
30:28
Speaker 2: approval and I wasn't clear how or where this approval
30:31
Speaker 2: comes from, but to use something called mark to market accounting,
30:36
Speaker 2: which is basically when you can where you can rate
30:41
Speaker 2: the financial health of your company based on not theorized
30:46
Speaker 2: but just on future earnings basically and not necessarily what
30:51
Speaker 2: they're worth that day, so anticipated future value instead of
30:56
Speaker 2: its purchase costs.
30:58
Speaker 4: Did you get how that.
30:59
Speaker 2: They were because it seemed like they were all like
31:01
Speaker 2: super psyched that they got approval for marked to market accounting.
31:04
Speaker 1: Yeah, that would have been the sec the Securities and
31:08
Speaker 1: Securities Exchange Commission, who would have given that approval. And
31:12
Speaker 1: just like a special purpose entity marked to market accounting
31:16
Speaker 1: is it's totally legitimate, it's recognized as generally accepted accounting principle.
31:21
Speaker 1: But there's a lot of room for temptation to just
31:26
Speaker 1: basically say this deal with Blockbuster, we haven't made a
31:30
Speaker 1: penny off of it, but we can we can cite
31:33
Speaker 1: the future earnings from it now now that we booked
31:37
Speaker 1: this deal, and I think it'll probably be worth a
31:41
Speaker 1: billion dollars, just a total guess. And you're not supposed
31:46
Speaker 1: to do it like that. You're supposed to do it
31:47
Speaker 1: much more realistically and legitimately. But they had enough leeway
31:51
Speaker 1: that they were able to take marked to market accounting
31:54
Speaker 1: and use it to their to their benefit in that way,
31:57
Speaker 1: and in doing that, they pumped up their their revenue
32:00
Speaker 1: through the roof. Like the deal would just be inked.
32:03
Speaker 1: They wouldn't have seen a penny from it, and they
32:05
Speaker 1: would add it to their balance sheets as revenue.
32:08
Speaker 2: Yeah, it would become part of the ledger before like
32:10
Speaker 2: a real penny.
32:10
Speaker 1: Was made exactly, and sometimes the pennies weren't made. And
32:13
Speaker 1: if the pennies weren't made, don't forget, those debts would
32:16
Speaker 1: be moved to a special purpose entity, so they wouldn't
32:19
Speaker 1: have these toxic assets on their books, even though they
32:22
Speaker 1: very much owned and were indebted for these toxic assets.
32:27
Speaker 2: Still yeah, I mean, like I said, these were brilliant
32:31
Speaker 2: people and like they had all their bases covered except
32:34
Speaker 2: for the fact that we all know that a house
32:36
Speaker 2: of cards will eventually fall. It's that hubrius thing that
32:41
Speaker 2: just blinds people into thinking that it will always like
32:45
Speaker 2: when that kind of money is rolling in. I think
32:48
Speaker 2: it blinds certain people so much that they don't understand
32:53
Speaker 2: a who it's hurting at the time, or they don't care,
32:57
Speaker 2: or they think it's always going to be rolling in
32:59
Speaker 2: like this, or they think, hey, I'm gonna get mine now.
33:03
Speaker 2: Because there were people in Enron. I mean, there will
33:05
Speaker 2: talk about a whistleblower that eventually sort of came out
33:09
Speaker 2: and a journalists who are poking around, but there were
33:12
Speaker 2: people that started looking at this company the Darling of
33:15
Speaker 2: Wall Street and saying something's not right here, like something's
33:18
Speaker 2: not adding up, Like you can't even explain how your
33:22
Speaker 2: cash flows through your business kind of way that makes
33:25
Speaker 2: any kind of coherent sense. And anytime they were confronted
33:28
Speaker 2: with this Skilling and his cronies would. They would get
33:33
Speaker 2: very haughty about it and just be like, well, what
33:35
Speaker 2: do you mean we can't explain that? Like, sure we can,
33:38
Speaker 2: it's really easy.
33:39
Speaker 3: You just can't understand.
33:41
Speaker 2: Yeah, you just can't understand it, right, Oh, it makes
33:43
Speaker 2: your blood boil.
33:44
Speaker 1: Let's let's take a break and then we'll come back
33:46
Speaker 1: and talk about the downfall.
33:47
Speaker 3: How about that? Yeah, the downfall definitely should know draw
33:55
Speaker 3: large Also r.
33:58
Speaker 5: Y skid as what why sk as good.
34:08
Speaker 4: To you?
34:08
Speaker 3: Should? Okay, chuck.
34:13
Speaker 1: So, one question that people might be asking is how
34:17
Speaker 1: were these guys allowed to use this accounting and get
34:20
Speaker 1: away with it? Why were people even investing in buying
34:23
Speaker 1: shares of this this company when it was just so
34:27
Speaker 1: fraudulent and and just ridiculously fraudulent too, not even subtly fraudulent.
34:32
Speaker 1: And the answer is the the company was such a
34:36
Speaker 1: Wall Street darling that financial analysts would not understand what
34:41
Speaker 1: they were hearing on these earnings reports, but would still
34:44
Speaker 1: give it a stamp of like buy. The other thing
34:48
Speaker 1: that really really helped was the banks. Wall Street banks
34:51
Speaker 1: were very much complicit in this as well. And then
34:55
Speaker 1: the thing that helped the most was Arthur Anderson, the venerable,
34:59
Speaker 1: eighty plus year old accounting firm.
35:02
Speaker 4: The oldest one of the country.
35:04
Speaker 1: Yeah, that was a third party accountant to Enron. Was
35:08
Speaker 1: so cozy that they actually hired all of Enron's internal
35:13
Speaker 1: auditing staff, made them Arthur Anderson's staff, and then opened
35:17
Speaker 1: one hundred and fifty person office for Enron in Enron's
35:21
Speaker 1: own in Enron's headquarters and Arthur Anderson office in Enron's
35:25
Speaker 1: headquarters made up of former Enron auditors. That's who was
35:30
Speaker 1: watching the show. And so Arthur Anderson had such a
35:34
Speaker 1: good reputation that because they were signing off on this,
35:38
Speaker 1: because the Wall Street analysts are saying, yeah, it's a buye,
35:40
Speaker 1: people were just like, I'm buying, I'm buying, and it
35:43
Speaker 1: kept the stock prices going up and up and up
35:45
Speaker 1: because nobody was paying attention enough.
35:49
Speaker 2: Yeah, there was one person in the dock that said
35:52
Speaker 2: that kind of crystallized it, which was like, I'm paraphrasing,
35:55
Speaker 2: but he was talking about the fact that when this
35:58
Speaker 2: kind of stuff pops up in corporations, like it's not
36:02
Speaker 2: like this, the n runs are everywhere. There is all
36:05
Speaker 2: kinds of mouthfeasance. For sure, in the corporate world, but
36:09
Speaker 2: he basically said, somewhere along the way, it doesn't get
36:12
Speaker 2: this big because a legal team says you can't do this,
36:16
Speaker 2: or your accountants say you can't do this, or the
36:19
Speaker 2: bank say we can't get involved in this. And Ron
36:22
Speaker 2: seemed to be one of those sort of unicorns where
36:26
Speaker 2: every person along the way just zip their mouth shut
36:30
Speaker 2: even though the numbers weren't adding up, and was complicit
36:33
Speaker 2: in this right.
36:35
Speaker 1: And there was a trader that was interviewed in the
36:37
Speaker 1: documentary who said, like it was ironic that Enron's slogan
36:42
Speaker 1: was asked, why why does something.
36:44
Speaker 4: Happen like that?
36:45
Speaker 3: Why can't we do it that way?
36:46
Speaker 1: And that this trader said, I didn't ask myself why
36:49
Speaker 1: because I didn't want to know. I suspected things were
36:52
Speaker 1: weird or ry, and I just didn't want to know
36:54
Speaker 1: because it was my job. I was making tons of money.
36:57
Speaker 1: And I think you can probably get that excuse out
36:59
Speaker 1: of just about anybody who was complicit in this larger
37:02
Speaker 1: small but Arthur Anderson that was the one that really
37:06
Speaker 1: really helped things along. And as we'll see, they didn't
37:08
Speaker 1: manage to survive the scandal.
37:10
Speaker 2: Yeah, they were Oh man, there was that one part
37:13
Speaker 2: of the documentary where they were talking about Fastyles, you know,
37:17
Speaker 2: Shell companies, and he was in a meeting that was
37:20
Speaker 2: secretly taped and they're basically like, well, wait a minute,
37:23
Speaker 2: it looks like you're on the buying and selling sides
37:26
Speaker 2: of these transactions, right, And he was like, yeah, basically,
37:31
Speaker 2: but I've always got Ellen Jay's interest at heart, and
37:34
Speaker 2: the whole time he's skimming money and they believe that skilling,
37:38
Speaker 2: and Ley knew that, like, hey, I'm sure that fast
37:41
Speaker 2: Ols is skimming money off the top for himself, right,
37:44
Speaker 2: Who cares? Because this guy's taking care of business for
37:47
Speaker 2: us exactly.
37:48
Speaker 1: And I think he skimmed about thirty five million dollars
37:51
Speaker 1: for himself. He stole from Emron and they looked the
37:54
Speaker 1: other way because the stuff he was doing was so unethical,
37:58
Speaker 1: so illegal that he basically earned it as far as
38:02
Speaker 1: they were concerned to have his hand in the cookie
38:06
Speaker 1: jar like that. So I think you kind of mentioned
38:09
Speaker 1: there were some people who were like, wait, what's going
38:11
Speaker 1: on here. One of the first people was Bethany McClain,
38:14
Speaker 1: the journalists who ended up writing the Smartest Guys in
38:17
Speaker 1: the Room.
38:18
Speaker 3: She is awesome.
38:19
Speaker 1: She started out writing a story for Fortune magazine back
38:22
Speaker 1: in March of two thousand and one titled is Enron Overpriced?
38:26
Speaker 1: And she was one of the first people to publicly
38:30
Speaker 1: say how is Enron making its money? But she wasn't
38:33
Speaker 1: the first to hit on this. There's another guy named
38:36
Speaker 1: Jim Chanos of Kainiko's Securities, I think maybe, and I
38:42
Speaker 1: think he's in the documentary, but he started shorting Enron
38:46
Speaker 1: in two thousand because he noticed very simply their cost
38:51
Speaker 1: of capital, so the cost of doing business was more
38:55
Speaker 1: than their return on investment, which automatically means that they
38:59
Speaker 1: were not a profitable company, which totally was contradicted by
39:03
Speaker 1: all of their earnings reports and filings. And he saw
39:06
Speaker 1: this and he said, this is this is this is
39:09
Speaker 1: not right, and I'm going to start making money off
39:12
Speaker 1: of the future downfall of this company and made hundreds
39:16
Speaker 1: and hundreds of millions of dollars shorting and Ron stock
39:19
Speaker 1: starting in two thousand.
39:21
Speaker 4: Yeah.
39:22
Speaker 2: The whistleblower two was an executive main named Sharon Watkins,
39:27
Speaker 2: and she pops up a lot in the documentary. Obviously
39:30
Speaker 2: is key to the story. She didn't whistle blow while
39:35
Speaker 2: this was all going on. It was sort of after
39:37
Speaker 2: the ship started sinking. But we'll talk a little bit
39:41
Speaker 2: about how that all happened and where she ended up.
39:44
Speaker 2: But what happened in August of twenty twenty one. Skilling
39:48
Speaker 2: had replaced lay a CEO in February of that year,
39:51
Speaker 2: and on August fourteenth, twenty twenty one, Skilling out of nowhere,
39:55
Speaker 2: and he had just taken the reins, you know, a
39:57
Speaker 2: handful of months before he Skilling quit out of nowhere.
40:00
Speaker 2: He resigns, he cited personal reasons, And what was going
40:05
Speaker 2: on was the you know, the Titanic sprung a leak, right,
40:10
Speaker 2: and as they described in the documentary, he was one
40:13
Speaker 2: of the first rats to try and get off the
40:15
Speaker 2: sinking ship.
40:17
Speaker 3: Yeah.
40:17
Speaker 1: And it's like, if you are a CEO of a
40:22
Speaker 1: huge company, you don't just leave like that. That is
40:26
Speaker 1: an enormous red flag. There's like a whole process and
40:29
Speaker 1: procedure for finding your replacement, grooming them, introducing them to
40:33
Speaker 1: the rest of the world. You don't just leave like that.
40:37
Speaker 1: And that was such a red flag that that whistleblower,
40:40
Speaker 1: what's her name, Sharon Watkins. Yeah, she wrote an anonymous
40:44
Speaker 1: letter Delay basically saying, hey, there's a lot of fishy
40:48
Speaker 1: stuff going on around here, and now that Skilling suddenly departed,
40:53
Speaker 1: like everyone's going to start having questions and this whole
40:56
Speaker 1: house of cards is going to fall, and Lay it
41:00
Speaker 1: apparently didn't do much about it, and she came to
41:03
Speaker 1: Lay later on and said, I'm the person who wrote
41:05
Speaker 1: that anonymous letter, and I'm really concerned about this, and
41:09
Speaker 1: ended up trying to keep it in the company because
41:12
Speaker 1: I think I get the impression that she thought it
41:15
Speaker 1: was something, especially now that Skilling was gone, that could
41:18
Speaker 1: be resolved internally. I think she really underestimated the extensiveness
41:24
Speaker 1: of the corruption and yeah at the company and thought
41:29
Speaker 1: it was a few people, when really it was a
41:32
Speaker 1: large cadre of people who all were complicit in this.
41:35
Speaker 1: And I get the impression that's why she didn't really
41:39
Speaker 1: blow the whistle publicly at that point. But apparently ken Lay,
41:43
Speaker 1: once he found out that it was Sharon Watkins, consulted
41:48
Speaker 1: legal council to figure out how to fire her legally.
41:51
Speaker 4: Yeah.
41:52
Speaker 2: The same day that Skilling resigned, on August fourteenth, the
41:56
Speaker 2: broadband division that we talked about earlier reported one hundred
41:59
Speaker 2: and thirty seven million dollar loss analysts and.
42:03
Speaker 4: We should point out too.
42:04
Speaker 2: As far as the analysts go, they were always installing
42:07
Speaker 2: friendly analyst and only working with friendly analysts. But they
42:10
Speaker 2: finally got the clue they dropped their ratings for the stock.
42:14
Speaker 2: The end came very, very swiftly for Enron. On October twelfth,
42:19
Speaker 2: Arthur Anderson's I mean you still remember all the shredding
42:23
Speaker 2: jokes on late night TV that ran for months and months.
42:26
Speaker 2: Arthur Anderson's legal counsel said, everybody shred everything, destroy every
42:31
Speaker 2: file that you have on Enron, And in one day
42:35
Speaker 2: they shredded literally one ton of paper.
42:38
Speaker 1: Yeah, and that was just one day. They apparently shredded
42:41
Speaker 1: around the clock from October twenty second to November eighth,
42:45
Speaker 1: and that was just one ton one day. They shredded
42:47
Speaker 1: literal tons of documents, just shred, shreded, shread. If you
42:51
Speaker 1: were an executive at Anderson, you were probably working a
42:54
Speaker 1: late night shift shredding alongside everybody else. It was like that,
42:58
Speaker 1: And it was apparently at a time time where you could
43:00
Speaker 1: legally do that and not be you know, indicted for it.
43:06
Speaker 1: But that was not a good look when it came
43:08
Speaker 1: out that Arthur Anderson was the auditors of this company
43:13
Speaker 1: were shredding tons of documents, and the SEC got into
43:16
Speaker 1: this and they said that they're going to start investigating
43:19
Speaker 1: finally the special purpose entities that Fastau had set up,
43:24
Speaker 1: and so Enron fired Fastau that same day. And I
43:28
Speaker 1: think that was in November or late October of two
43:33
Speaker 1: thousand and one. And right after that, on November eighth,
43:38
Speaker 1: en Ron said, hey, everybody, do you remember all of
43:41
Speaker 1: our all that money we said we made going back
43:45
Speaker 1: to nineteen ninety seven, We're going to need to restate
43:47
Speaker 1: our earnings. One of the first things they did was
43:51
Speaker 1: they reported a six hundred and eighteen million dollar loss
43:55
Speaker 1: for Q three of two thousand and one. Q one
44:00
Speaker 1: they posted a four hundred and six million dollar profit,
44:04
Speaker 1: Q two a four hundred and four million dollar profit,
44:07
Speaker 1: Q three a six hundred and eighteen million dollar loss.
44:10
Speaker 1: So they finally came clean. They finally said this accounting
44:14
Speaker 1: is off, and this is how radically it's off.
44:17
Speaker 2: Yeah, I mean that is if a company is restating
44:22
Speaker 2: their earnings for that period of time at all, like
44:26
Speaker 2: mistakes can happen, but that's a that's a real bad sign.
44:29
Speaker 2: They almost got a lifeline in I guess late October
44:35
Speaker 2: of that year when they tried to merge with a
44:38
Speaker 2: company called Dynagy Incorporated, and that deal, that deal fell apart.
44:44
Speaker 2: On November twenty eighth, they backed out of the deal
44:47
Speaker 2: Dynagy did and then what is this Four days later
44:51
Speaker 2: on December tewod Run filed for the largest Chapter eleven
44:56
Speaker 2: bankruptcy in US history.
44:58
Speaker 3: Up to that time.
44:59
Speaker 1: Sixty five I zero point five billion dollar company filed
45:03
Speaker 1: for bankruptcy. That just did not happen. If you had
45:06
Speaker 1: that kind of money, you could have a fire sale
45:09
Speaker 1: and sell off stuff for way less than you paid
45:11
Speaker 1: for it, but you could still survive. And that just
45:14
Speaker 1: goes to show you, like just how fraudulent this company was.
45:17
Speaker 1: They couldn't have a fire sale and make up that
45:19
Speaker 1: kind of that kind of the debt that they owed
45:22
Speaker 1: I think was seventy two billion dollars I think in
45:25
Speaker 1: debt that they finally were found to have owed, and
45:29
Speaker 1: at the time it was the biggest. In two thousand
45:31
Speaker 1: and eight, we saw what big really was. Yeah, Lehman Brothers,
45:34
Speaker 1: for example, had six hundred and thirty nine billion dollars
45:38
Speaker 1: in assets when it filed for bankruptcy and went under.
45:41
Speaker 1: But at the time Enron was like eye popping as
45:45
Speaker 1: far as bankruptcies went for corporations.
45:48
Speaker 2: Can you imagine the wave of a relief that swept
45:53
Speaker 2: through Dynagy Incorporated. Yeah, the particular bankruptcy a few days
45:59
Speaker 2: later after they backed out.
46:00
Speaker 1: Yeah, that one. Just offhand conversation at the vending machine
46:04
Speaker 1: over a packet of checks mix, like, save Dynagy forever.
46:09
Speaker 4: You know, this seems like a bad deal to me.
46:11
Speaker 1: Crunch Crunch, You're right, and Dynagy, by the way, went
46:14
Speaker 1: on to become Apple.
46:18
Speaker 2: So the fallout from this, there are a lot of victims.
46:22
Speaker 2: Twenty thousand employees. Twenty thousand employees lost their job. And
46:30
Speaker 2: how long did they have to get out? What is
46:31
Speaker 2: saying the second day? I think they had the day.
46:33
Speaker 2: I think it was less than that. I feel like
46:35
Speaker 2: it was hours or something. Basically, pack your s and
46:38
Speaker 2: get out of here, everybody. Yeah, and like literally, this
46:42
Speaker 2: huge tall building has thousands of people just leaving all
46:46
Speaker 2: day with banker's boxes with their contents of their desk
46:49
Speaker 2: in it, like the ultimate movie trope. Every employee that
46:54
Speaker 2: had been told for years and years, hey, you got
46:57
Speaker 2: to invest everything you can in that form because Enron
47:01
Speaker 2: is I mean, look at the stock we're going places
47:05
Speaker 2: and that money will be safe there.
47:07
Speaker 4: They obviously lost.
47:09
Speaker 2: Almost everything that was a you know, the rank and
47:11
Speaker 2: file employees. That was one in the documentary that said
47:14
Speaker 2: he had about close to three hundred and fifty thousand
47:16
Speaker 2: dollars in stock that he ended up dumping for twelve
47:19
Speaker 2: hundred dollars.
47:21
Speaker 4: Yeah, they froze.
47:23
Speaker 2: The stock accounts of the rank and file while upper
47:26
Speaker 2: management was actively still cashing out.
47:29
Speaker 1: Yeah, that was a really scummy move. They, i'm sure,
47:33
Speaker 1: purposefully changed four oh one k providers in the midst
47:36
Speaker 1: of all this. And when you do that, there's a
47:39
Speaker 1: minimum thirty day freeze as you transfer assets over, so
47:43
Speaker 1: these poor employees couldn't sell their shares, like you said,
47:47
Speaker 1: while the executives were making tens and tens of millions
47:52
Speaker 1: of dollars worth of option trades. Yeah, I mean it's
47:56
Speaker 1: just mind boggling. That to me is probably the worst
47:58
Speaker 1: part of the whole thing.
48:00
Speaker 2: Well, and you know, tie with that, their severage package
48:03
Speaker 2: averaged about four five hundred dollars for the average employees,
48:07
Speaker 2: while management bonuses totaled more than fifty five million. And
48:11
Speaker 2: that's just bonuses, that's not cashing out stocks and Livia
48:16
Speaker 2: who helped us put this together, great job on this article. Yeah, agreed,
48:20
Speaker 2: pointed out something like other fallout like you'd never even
48:23
Speaker 2: think about, which was Ron was a very big investor
48:26
Speaker 2: in donor in local nonprofits in Houston, and all of
48:30
Speaker 2: a sudden, all that money is cut off, and like
48:32
Speaker 2: the Red Cross chapter had to cut its budget from
48:35
Speaker 2: twelve million dollars to nine million dollars in one year,
48:38
Speaker 2: largely because the money dried up from Enron.
48:42
Speaker 4: So the fallout was far and wide.
48:44
Speaker 2: And that's not even mentioning, like we're talking about the
48:47
Speaker 2: employees who had stock in the company, like every other
48:51
Speaker 2: human being that had just stock in in Ron that
48:53
Speaker 2: had nothing to do with it, lost all their money.
48:56
Speaker 1: Yeah, I mean the stock price was at ninety at
49:00
Speaker 1: one point and it dropped down to I think forty
49:03
Speaker 1: something since in like a year basically, So, Yeah, the
49:08
Speaker 1: employees in particular and the retirees who had already left
49:12
Speaker 1: and whose pension funds were just totally evaporated, meaning you're
49:16
Speaker 1: gonna have to go get a job as a Walmart
49:18
Speaker 1: greeter now because you can't afford anything. They are definitely
49:22
Speaker 1: the greatest victims of all this. I saw ken Lay's
49:25
Speaker 1: lawyer afterward portray ken Lay as the greatest victim of
49:29
Speaker 1: all of it, because he apparently lost a few hundred
49:32
Speaker 1: million dollars, and he didn't say it himself, but he
49:38
Speaker 1: definitely tried to say, like, I lost so much money,
49:41
Speaker 1: there's no way I could have known what was going on,
49:44
Speaker 1: and that fell on deaf ears. And that same defense
49:47
Speaker 1: was used by Jeffrey Skilling too, I didn't know what
49:50
Speaker 1: was going on. So what they tried to do was
49:52
Speaker 1: pin the whole thing on Andrew Fastau, who had been fired,
49:56
Speaker 1: who had skimmed thirty something million dollars himself, demonstrated he
50:01
Speaker 1: was a criminal. They made it. They tried to play
50:05
Speaker 1: like he was a rogue CFO that had done all
50:08
Speaker 1: of this under the very nose of Jeffrey Skilling and
50:10
Speaker 1: ken Lay, and that they hadn't known. And the public, Congress,
50:15
Speaker 1: the courts, juries, everybody said, you have to be kidding us.
50:20
Speaker 4: Yeah, And they were right. In the end.
50:22
Speaker 2: Fastyle pleaded guilty to two counts of wirefraud and securities
50:26
Speaker 2: fraud in return for being a witness against Skilling and Lay.
50:31
Speaker 2: I think had a ten year sentence for what was
50:34
Speaker 2: going to be a much larger sentence, ended up serving
50:37
Speaker 2: five years and then got out into twenty eleven and started,
50:42
Speaker 2: you know, getting paid as a speaker to corporations about
50:46
Speaker 2: business ethics.
50:48
Speaker 4: You know.
50:49
Speaker 2: To his credit, I guess twenty years on he came
50:52
Speaker 2: out officially and apologized for everything. Seems to really have
50:57
Speaker 2: turned the corner and learned a less and although he
51:00
Speaker 2: never knows what is going on in someone's heart from
51:03
Speaker 2: the outside, Arthur Anderson completely went away, the oldest counting
51:08
Speaker 2: form accounting firm in the country, never recovered, completely folded
51:13
Speaker 2: and went out of business. The Sarbanes Oxley Act was
51:18
Speaker 2: enacted basically because of Enron in two thousand and two,
51:21
Speaker 2: which was and I remember, I remember years ago when
51:25
Speaker 2: we were working in our early days at how Stuff Works,
51:28
Speaker 2: there was a lot of like Sarbanes Oxley talk.
51:32
Speaker 4: Do you remember that stuff?
51:33
Speaker 1: Yeah, because they came up with the Frank Dodd Act
51:37
Speaker 1: to basically undo or combat against future stuff from the
51:42
Speaker 1: two thousand and eight financial crisis. Yeah, this was the
51:44
Speaker 1: same thing six years prior. Like Enron had such a
51:49
Speaker 1: huge effect that they passed the law that basically point
51:51
Speaker 1: for point outlawed all the stuff that Enron had done.
51:55
Speaker 1: They did the same thing with the Dodd Frank actor.
51:57
Speaker 2: They tried to and of course know certain people will
52:01
Speaker 2: say Sarbanes octually has no real teeth anymore because they're
52:04
Speaker 2: not even funding the oversight that they promised. Other people,
52:08
Speaker 2: you know, the diehard free marketers will say, that's actually
52:12
Speaker 2: too restrictive. Uh, we're not able to be competitive anymore
52:16
Speaker 2: because you've got all these rules now to make sure
52:18
Speaker 2: we're not defraunding people of billions of dollars.
52:21
Speaker 3: Right, Yeah, you're making it hard to exploit people.
52:24
Speaker 1: Yeah. So there was actual convictions like this is crazy.
52:29
Speaker 1: And one of the hardening things, Chuck is if you
52:31
Speaker 1: watch like these congressional hearings on this, people from both
52:36
Speaker 1: sides of the aisle are grilling these guys. Oh yeah,
52:40
Speaker 1: No one was apologizing to them for their you know,
52:43
Speaker 1: their colleague from the other side of the aisle asking
52:45
Speaker 1: you know, mean questions. Everyone was mad at these guys.
52:49
Speaker 1: The whole world hated Jeffrey Skilling and Ken Lay and
52:53
Speaker 1: Andrew Fastow.
52:54
Speaker 2: He was so smug up there man answering those questions. Oh,
52:58
Speaker 2: in the face of all that he was still so
53:00
Speaker 2: smug about it.
53:01
Speaker 1: I looked up whether he ever apologized, and I could
53:04
Speaker 1: not find it. I don't think Jeffrey Skilling ever apologized.
53:07
Speaker 1: I think he went throughout his entire time in prison
53:10
Speaker 1: basically saying like he was a victim, that this was unfair,
53:14
Speaker 1: but he was imprisoned. He was an executive that was
53:17
Speaker 1: in prison. That just does not happen lately. He was
53:20
Speaker 1: convicted of nineteen counts froud conspiracy, insider trading. He got
53:25
Speaker 1: twenty four years in prison and ended up serving twelve,
53:28
Speaker 1: which is I mean, yeah, that sucks, but years not
53:33
Speaker 1: to sneeze, No, for sure, that's a long time to
53:35
Speaker 1: do in the clink. And then ken Lay he was
53:39
Speaker 1: convicted on ten counts, but he wasn't able to be
53:42
Speaker 1: sentenced because he died of a heart attack six weeks
53:44
Speaker 1: after being convicted, and I think his conviction was vacated.
53:50
Speaker 2: Yeah, Skilling now is out and works at an oil
53:56
Speaker 2: and gas analytics startup. It seems that other people I
54:01
Speaker 2: think we Yeah, I mentioned that fast I was on
54:03
Speaker 2: the speaker circuit. The whistleblower. Ms Watkins was named Times
54:09
Speaker 2: Person of the Year in two thousand and two and
54:13
Speaker 2: I believe it is also now a paid speaker and
54:16
Speaker 2: executive in residence at Texas State University. And then there
54:21
Speaker 2: was a matter of because I was like, Lyvia didn't
54:25
Speaker 2: get to it, but I was like, well, surely there
54:26
Speaker 2: was some sort of making it right for these people
54:31
Speaker 2: who lost all this money right. And there were lawsuits
54:35
Speaker 2: that came out and settlements that came out. Different people
54:39
Speaker 2: ended up being paying different things. I think it was
54:41
Speaker 2: a seven point two billion dollar settlement from Enron. I
54:47
Speaker 2: believe the banks were on the hook. I can tell
54:50
Speaker 2: if the banks were on the hook for some of
54:51
Speaker 2: that or if it was a separate thing.
54:54
Speaker 3: I don't know.
54:55
Speaker 1: I saw that they squeezed a total of twenty billion
54:57
Speaker 1: out of Enron before they like let it go.
55:00
Speaker 4: Oh okay.
55:02
Speaker 1: I don't know, but I did see the banks were
55:04
Speaker 1: definitely on the hook just for being complicit. I don't
55:06
Speaker 1: know if that was an addition though, either.
55:08
Speaker 4: Yeah. I think yeah.
55:10
Speaker 2: It says right here that the bulk of the settlements,
55:13
Speaker 2: almost seven billion of it, came from JP Morgan, Chase
55:16
Speaker 2: City Group, the Canadian Imperial Bank of Commerce. Oh yeah,
55:20
Speaker 2: Lehman Brothers chipped in, Bank of America chipped in the
55:24
Speaker 2: Big five auditing firm Arthur Anderson. Of course we talked
55:27
Speaker 2: about they chipped in. I think, well, I don't see
55:32
Speaker 2: how they could have chipped in it they went out
55:33
Speaker 2: of business, but.
55:34
Speaker 1: I guess they chipped in before they went out of business,
55:37
Speaker 1: all right. So you know, if you hear the story,
55:41
Speaker 1: especially if you're used to us in our podcast, you
55:44
Speaker 1: might be like, well, guys, you didn't really get to
55:47
Speaker 1: the other side of the story. There is no other
55:51
Speaker 1: side of the story. This is one of those rare
55:54
Speaker 1: stories that is basically black and white. It was just
55:59
Speaker 1: there's no redemption, there's no explaining it away, there's no
56:03
Speaker 1: apologizing for it. It's just it was just as wrong
56:07
Speaker 1: as it appears. So that's why we didn't include the
56:10
Speaker 1: other side of the story in this one.
56:12
Speaker 2: Yeah, I don't think there's anyone out there who's going
56:15
Speaker 2: to bat for Enron.
56:16
Speaker 1: It's there's somebody, there's somebody, and they will leave it
56:18
Speaker 1: on our Apple.
56:19
Speaker 2: Reviews, right, they totally will Ron didn't get a fair
56:23
Speaker 2: shake from these times, totally.
56:26
Speaker 3: Neither did a.
56:27
Speaker 4: Hitler or Satan.
56:28
Speaker 3: You got anything else, I got nothing else.
56:31
Speaker 1: Well, I don't have anything else either. If you want
56:34
Speaker 1: to know more about Enron, go watch the smartest Guys
56:36
Speaker 1: in the Room. Definitely will leave you wanting more, and
56:39
Speaker 1: there's plenty to read about, including some great contemporary articles
56:44
Speaker 1: all over the internet. And since I said contemporary instead
56:47
Speaker 1: of contemporaneous, it's time for listener mail.
56:53
Speaker 2: This is a little wordy, but it's it's We don't
56:54
Speaker 2: often do shout outs and tributes, but this is a
56:57
Speaker 2: really special one, so we're doing it nice. Hey guys,
57:00
Speaker 2: this is from Gavin, recent college graduate and history enthusiast,
57:04
Speaker 2: and Gavin says, I've been listening since I was fifteen,
57:07
Speaker 2: over seven years now. My mom was the one who
57:10
Speaker 2: introduced me to the show, and we've both been listeners
57:12
Speaker 2: ever since. I'm pretty sure she listens to every episode
57:15
Speaker 2: that you guys put out. My mom was also the
57:17
Speaker 2: person who imparted a thirst for knowledge and learning in
57:20
Speaker 2: me as a child. I've had great many teachers in
57:23
Speaker 2: my life, and I'm very thankful for them, but my
57:24
Speaker 2: mom has always been my greatest encouragement and my role
57:27
Speaker 2: model as a student and as a person. Over the
57:30
Speaker 2: past four years in college and directly after I got
57:33
Speaker 2: really busy, moved twelve hours from home, and it meant
57:35
Speaker 2: I stopped listening to podcast including you guys. I know.
57:40
Speaker 2: More importantly, I also lost touch with my mom. I
57:43
Speaker 2: didn't completely ghost he or anything, but I still did
57:45
Speaker 2: not reach out to her nearly as much as I
57:47
Speaker 2: wanted to or needed to. But often when I eventually
57:50
Speaker 2: would that, she would ask me if I listen to
57:52
Speaker 2: stuff you should Know recently, and she'd have an episode
57:54
Speaker 2: to recommend because I think you'd really enjoyed this one. Luckily,
57:58
Speaker 2: now have a job where I'm having more flexible hours,
58:01
Speaker 2: and over that time, I've picked stuff he should Know
58:03
Speaker 2: back up, re energize my love for knowledge, and learned
58:06
Speaker 2: that my mom has given me that my mom had given.
58:08
Speaker 4: Me years ago.
58:10
Speaker 2: All this to say, you guys mean a lot to
58:11
Speaker 2: me and my mother, and I thank you for that.
58:14
Speaker 2: You've helped me stay connected to her in a way
58:16
Speaker 2: that I would not have been able to do otherwise.
58:19
Speaker 2: I'd just like to take this chance to thank my mom.
58:22
Speaker 2: I know you're listening, Mom, I know we'll talk about
58:24
Speaker 2: this episode later, And thank you for encouraging me and
58:27
Speaker 2: understanding that I love you even when I'm not great
58:30
Speaker 2: at communicating it.
58:32
Speaker 4: Man, boy, this one's really pulling at the heartstrings.
58:35
Speaker 2: Yeah, every time I pick up a book or listen
58:37
Speaker 2: to a podcast or write a paper, I think of you, Mom,
58:40
Speaker 2: and I know that I always will. I love you,
58:43
Speaker 2: And this is the only way I know how to
58:44
Speaker 2: tell you properly. Kevin, you can pick up the phone
58:49
Speaker 2: and say this stuff my friend.
58:52
Speaker 4: He is back to you. Guys, you got a great show.
58:54
Speaker 2: I hope we have many more years of remaining, learning
58:57
Speaker 2: and growing together. And that lovely, lovely sentiment is from
59:01
Speaker 2: Gavin and Fayetteville, Tennessee.
59:04
Speaker 3: That was amazing. Gavin, hats up, Chuck.
59:06
Speaker 1: I totally get why you chose that shout out to
59:09
Speaker 1: be the one to break the rule.
59:11
Speaker 2: Yeah, it should have been along Mother's Day, around Mother's.
59:14
Speaker 1: Day, but well we can replay it around Mother's Day first,
59:17
Speaker 1: select how about that instead?
59:19
Speaker 4: It's the the inrun episode, right.
59:22
Speaker 1: If you want to be like Gavin and just be
59:24
Speaker 1: a super great person, but not request a shout out,
59:27
Speaker 1: Just be a super great person, we want to hear
59:30
Speaker 1: from you. Also, while I'm thinking of it, go check
59:33
Speaker 1: out our social feeds. They used to suck, Now they're great. Also,
59:37
Speaker 1: if you want to get in touch with this, like
59:39
Speaker 1: I said, You can hit us up via email at
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59:47
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