The Smartest Guys in the Room : The Amazing Rise and Scandalous Fall of Enron

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Like its subject, The Smartest Guys in the Room is ambitious, grand in scope, and ruthless in its dealings. Unlike Enron, the Texas-based energy giant that has come to represent the post-millennium collapse of 1990s go-go corporate culture, it's also ultimately successful. Penned by Fortune scribes Bethany McLean and Peter Elkind, the 400-page-plus chronicle of the scandal digs deep inside the numbers while, wisely, maintaining focus on the "smart guys" deep-frying the books. The likes of paternal but disengaged CEO Ken Lay (dubbed "Kenny Boy" by George W. Bush, one of many prominent public figures with whom he rubbed shoulders), cutthroat man-behind-the-curtain Jeff Skilling, and ethically blind numbers whiz Andy Fastow vividly come to life as they make a mockery of conventional accounting practices and grow increasingly arrogant and bind to their collective hubris. They're not a likable lot, and the writers find it difficult to suppress their astonishment and revulsion with the crew who rapidly went from golden boys and girls of the financial world to pariahs when the bill finally came due. The authors' unrepressed sarcasms are more than often unnecessarily given the scope of the outrage. Enron's leading lights were or a time celebrated for their ability to concoct nearly unfathomable business schemes to hide mounting shortfalls and keeping track on their machinations can be a chore, but, by sticking hard to the story behind the fall, McLean and Elkind have reported and written the definitive account of the Enron debacle. --Steven StolderEnron is the biggest business story of our time and this book is the one and only book that will give readers the full story, to help them understand this amazing business saga.

Reader Reviews:

This is an important read for those who wish to understand how NOT to run a company that had more potential that any other Fortune 500 company in history. Lay and Skilling were a bunch of egoists and lousy managers who believed cronyism and nepotism were benefital to running a company. They failed and with them the dream of several thousand American's. This is a scrupulously detailed account of Enron's house of cards that survived far too long and now serves as a case study at most business schools. Yes, it is long and sometimes tedious reading but it serves as the definitive word on the Enron debacle. Particularly timely now with the high profile trial scheduled for later this month and a highly praised DVD on the subject near release.In 1998, the top 200 most highly compensated employees at Enron took home $193 million. In 1999, that increased to $402 million. In 2000, it was $1.4 billion; each of the top 200 made over $1 million and 26 employees made over $10million. In 2001, the year Enron went bankrupt, 15 employees made over $10 million. (p. 241) I begin my review with this because, after reading this book, it appears to me that this sums up what the real purpose of Enron as a corporation was. It wasn't to provide benefits for its customers or shareholders (though those who sold at the right time did extremely well), it was to make money for the executives and senior employees.

The Smartest Guys in the Room tells the story of Enron, starting before its formation with Kenneth Lay's career in the energy business, to its creation out of Houston Natural Gas when it (under the guidance of Lay as CEO) purchased the InterNorth pipeline company, three times its size. HNG's skillful negotiations (by John Wing) led to the smaller company's management team ending up in charge--an acquisition that bears some similarity to tiny Global Crossing's acquisition of Frontier Communications.

The book covers a huge cast of players and some terribly complex financial arrangements (the details of which are only summarized for the layman in this book), but the narrative still works well and it reads like a mystery novel. It is as sympathetic as it can be to many of the characters and to the company--the basic ideas behind energy trading make sense, though the implementation by Enron was flawed by the fact that Enron managed everybody's trades rather than using a neutral exchange or direct exchanges between partners where neither was Enron.

It is clear that the senior leadership of Enron who were not complicit in the arrangements designed to conceal debt from shareholders and the general public were at the very least negligent in their fiduciary responsibilities--Lay's main offense seems to be a completely reckless disregard for what was going on in his company, and it's somewhat
plausible that he remained a true believer until the end. The fact that he read aloud this written question in front of employees suggests a certain amount of naivete or detachment: "I would like to know if you are on crack. If so that would explain a lot. If not, you may want to start because it's going to be a long time before we trust you again." (p. 376)

The book documents the role to which there was complicity in these deceptive financial arrangements by the auditors (Arthur Andersen) and various banks (such as Citibank and J.P. Morgan Chase) which were desperate for the massive financial fees from Enron's business. It describes the poorly designed regulatory framework in California which Enron exploited to its advantage (again in ruthless and deceptive ways).

It's a large book (414 pp.) with an extensive index, but is a relatively quick read for its size. It makes it clear that Enron has earned its place in the pantheon of hated companies, but it's not so clear that the steps taken in the wake of Enron, like the Sarbanes-Oxley Act, will prevent such things from happening again--especially compared to a much simpler regulatory framework which just holds executives personally and criminally liable for corporate misbehavior.I was facinated by the story of Enron having been the Chief Financial Officer of a company listed on the American Stock Exchange for some 15 years, I can assure you that these types of accounting schemes have been around for a very long time. I first came across let's call stock manipulation accounting working for Litton Industries in the late 1960's. Although Litton did not violate any accounting rules they did take advantage of the rules to portray the company in a better light than it actually was. WallStreet went along with the scheme.



Later I came across other companies who stretched the acounting rules even further than normally done and who used all of the off balance sheet schemes that Enron used. I believe that the Enron people were really not aware of the fact that they were profitable only on paper and had been running a ponzi scheme all along. Yes shareholders and employees lost a lot of money but in my opinion they never were entitled to it to begin with. Whenever you find a company that is extremely profitable and looks like it is a super buy be careful on WallStreet there are no bargains just properly priced secutities.

Financial scandals of this kind regularily appear at the terminal point of a long bull market run. The average investor gets caught up in the WallStreet hype and becomes an "expert" investor and in the end he looses his poke.

No investor under any circumstances should have more than 5% of his portfolio in a single security.

To learn how to invest in the market and avoid a catastropic event such as the Enron debacle, I recommend a little book titled How to Make Money in the Stock Market-Buy 2,500 different stocks for $1000 - Pay no Commission by Gordon L. Eade If you are familiar with the basics of investing (e.g., understand stocks and bonds, know how mutual funds work), then this is an ideal book for you to learn how to implement these superior strategies. Eade tells you why you should stop paying attention to Wall Street, the media, and almost everyone else, and follow a proven investment method that is the most likely to lead you to success in the long run. These are proven strategies.

The book promotes Modern Portfolio Theory (MPT), which use new Wall Street products such as index funds and exchange traded funds to obtain excellent returns with minimum risk. He shows you how to mix various asset classes. The author explains the theory's underpinnings in ordinary clear language making it easy to understand its applications in the real world. Model portfolios are provided to achieve planned results with a minimum degree of risk.


The Smartest Guys in the Room: The Amazing Rise and the Scandalous Fall of Enron

By Bethany McLean and Peter Elkind

I arrived at The Smartest Guys in the Room oddly enough by reading the books mentioned in the Berkshire Hathaway letter to shareholders by Warren Buffett, which looks like this (so far):

Berkshire Hathaway's letter to shareholders by Warren Buffett
/
/
/
The Smartest Guys ---The Fountainhead----When Atlas Shrugged-----The Alchemist
In the Room
/
\
The Intelligent
Investor
\
/
When Genius--- Horatio Alger--- A History of Interest Rates 2000BC to the Present
Fails ----- Buffett:The Making of an American Capitalist---Against the Gods
\
/
In an Uncertain
World
/
\
Damn Right

For much more Buffett / Munger suggested reading check out my Blog http://www.bloglines.com/blog/KevinKingston?id=84

It's very interesting to read about the personalities and drive that the dealmakers at Enron had while they were building the company. It's also a good reminder to keep a level head and a sharp sense of right and wrong while building either a company or an empire. I would bet that the Enron dealmakers did not go into business figuring they would cut every corner, lie, cheat and steal to make it to the top. Most likely their misdealings started small and escalated to the point where they could not be stopped because things were just too far out of control.

Charlie Munger says it's very important to read as much about business blunders as possible; this way you can hopefully learn from the mistakes others have made. Well I'll tell you there were a lot of mistakes at Enron so you have plenty to learn from this book.

If you like doing business deals you will appreciate this book and the, "do the deal at any cost attitude" portrayed again and again in it. Hopefully it will help you take a second look at those numbers and make sure your not doing the deal just for the sake of getting another one done.

Its also mind boggling to see just how far one of the largest companies in the world can push the envelope on all fronts, even with outside auditors, analysts and endless business partners. It's a great portrayal of business in the 90's while internet mania blinded so many and made even more feel invincible because of the rising market repeatedly bailing them out. Many of these feelings (and actions stemming from those feelings) were rampant in tech related companies during this time. Enron just took it to the next level.

The book really takes you back to almost a nostalgic time in American business when deals were being done and people were making fortunes while mistakes were covered up by a rising market. It also shows you just how far greed can take you once you let it get a grip on you.

By Kevin Kingston, author of: A 20,000% Gain in Real Estate



My Blog:
http://www.bloglines.com/blog/KevinKingston

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