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How Enron Fooled the World · Stuff You Should Know

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