Fearful Symmetry

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Enron: The Smartest Guys In The Room

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Max power

Max power

For the average person Enron, as a news story, seemed to be long over. But then it pops back up again with the news of top man Ken Lay dying; or the end of the trial of his partner in crime, Skilling – found guilty and sent down for over 24 years – their financial magician, Fastrow, having co-operating for a lesser sentence. But for the average employee of Enron, or its subsidiaries, who saw all the money they invested in their pension scheme evaporated, the story will never end.

Although being made before these recent above twists in the story the documentary Enron: The Smartest Guys In The Room provides a good summing up of the events, for those who have now forgotten them or did not now in the first place. Financial journalism is probably one of the hardest areas of non-fiction to do well, especially when aimed at the non-specialist. To make understandable insanely complex financial products and methods is hard, and to make them interesting is harder still. This film does a great job at that. I remember seeing one documentary made at the time of the collapse that perhaps went a little further into the details of Fastrow’s financial black magic. However this film goes into other areas in into fascinating detail on the personalities of the main participates and now has some critical distance on the main events that is put to good use.

Enron started as a supplier of energy – gas in particular. This was a steady provider of profits but seen as boring by economic prodigy Ken Lay. He took the company into totally unexplored areas, by economic voodoo turning it not into just a supplier but a whole market for energy. Like if a manufacturer such as Ford suddenly became the whole stock exchange. (They planned to create other markets in other areas, even at one point thinking seriously about trading in weather…) This market provided the opportunity for massive profits but also the potential for equally massive losses in what was effectively gambling. Early on the whole company was nearly bankrupted over one bad guess on were the market was heading, only swift action from an experience employee prevented it.

Extraordinarily, in retrospect, the company easily obtained deferred accounting for all of this. This meant they were able to announce profits, not as money they had actually made in the previous financial period, but on future money they thought they would make on any particular project. One power station they build in India eventually turned into huge loss (largely because India just didn’t need it at the time) – but it went down in the books at the start of the project as a big profit. Amazingly the film shows that Enron made internal, moral boosting, corporate videos for their employees making fun of the whole thing and showing how clever they were to be able to do it. Deferred accounting was legal, but to hide the actual losses it generated Fastrow had to create a vast matrix of front companies in which he circled the debt around, eventually loosing it completely. Another tactic to cover the losses was the fake selling and buying back of assets at advantageous times. This is were the actual frauds occurred. Deregulation was the mood at the time and one reason why Enron was never too closely looked at until it was too late, the film hints is, because of Lay’s close links to the Bush family. (He was always ‘Kenny-Boy’ to Bush senior.)

To the outside world Enron was a black box, a profit machine, with it’s internal financial workings hidden. Enron just said to anyone who asked how it could possibly generated such profits: ‘trust us, it works’. Any financial journalist or potential investor questioning this was slapped down as an idiot and the rest fell in line. It truly was the emperor’s new clothes. Only the persistence of a very few journalists managed to eventually crack them open.

This all took place during the boom years, fuelled by the rise of the new internet companies (Enron even had it’s own internet venture – for streaming movies. The technology was just not there at the time and it was a failure. More losses to hide.) There was talk of a shift-change in the economy. That the good times would continue forever. Unfortunately what was actually happening was a massive bubble. And bubbles always burst.

Although the film describes the various financial shenanigans, the film also concentrates on the personalities of those involved which adds a great deal of colour and interest to the movie. How Lay and especially Skilling went from economics nerds to, in their own eyes. American heroes with new trendy hair cuts, lasered eyes so they could ditch their glasses, and weekends spent off-road motorcycling. There is also great fun had with one particular secondary player, a financial guru, a mysterious oriental only interested in money and strippers, who was able to escape before the collapse, flying off to Hawaii with a massive pay day and his stripper girl-friend.

A whole other film could have been made out of the California sub-plot alone. When the state’s energy needs were deregulated and the energy companies, especially Enron, smelled blood in the water they went in like a pack of sharks tearing the system apart for massive profits. This led onto the downfall of the very grey Grey Davis, who had let it happen, and the subsequent rise of Arnie the Govenator. The film gets hold of the phone conversations between the traders – who laughed as the state experienced power-cuts and prices went through the roofs because they could shunt around the power to their advantage and take power stations up and down at will. (How they could actually get the power station engineers to do this is a question not answered by the film.)

Although lessons have been learnt, the film makes it all too obvious that this could easily all happen again. Later, when it was becoming increasing obvious that Enron was doomed, the higher-ups starting to liquidate their stock whilst simultaneously encouraging their employees to invest even more in their in-house pension schemes. Ultimately the film is a tragedy, with many employees, at all levels, in the company being left with ruined lives. But there is also something entertaining about seeing smug evil people taking a big big fall. Especially if they are supposed to be ‘the smartest guys in the room’.

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Written by Fearful Symmetry

July 9, 2009 at 12:26 pm

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