FauxPolitik

Friday, May 19, 2006

My Enron Prediction: I have spent not a small amount of time familiarizing myself with the Enron debacle. I've read two books, including the excellently researched, although not tremendously written "Conspiracy of Fools", read the opening statements and the closing arguments of both the prosecution and the defense, plus a litany of actual and summarized testimony. I've tried to stay away from the talking heads as much as possible, except for those attorneys critiquing the performance of the lawyers (professional curiosity and all). After all this, I have several general opinions as to both the rise and fall of Enron, as well as the persons of Lay and Skilling:

1. Enron was a tremendous energy trading and facilitating company;

2. That went too far afield in trying to expand its business into untested and unfamiliar areas such as broadband;

3. Ken Lay was once a very innovative and creative businessman, who started Enron onto its road to success;

4. Who ultimately became more interested in the trappings of being an "ambassador" for Enron who met with politicians of various nations, and left the day-to-day operations to people like;

5. Jeff Skilling. He was a brilliant idea man, who pushed the envelope, finding new ways to say yes, rather than no. He engendered tremendous loyalty and picked smart people to help develop new business models for an energy company.

6. However, Skilling was ill-suited to the CEO role. He did not have a good nose for business-qua-business. He didn't want to worry so much about how to book revenue, value assets or worry over taxation, except to the extent that it was helpful in doing more deals.

7. The shift from hard assets and pure trading to deal-making (buying, selling, merging) ultimately led to Enron into a death spiral as it had to come up with new deals to make earnings (as it booked the entire value of a long-term deal immediately, rather than pro-rating it over time) --- this lead to tremendous end-of-year pressure to "creatively" find ways to keep beating the numbers.

8. Enron was a culture of me-first careerists, who were ranked on a punishing merit chart, which mandated that only 1/5 of the employees could be considered "the best" -- basically, failure for many was pre-ordained. Moreover, people were afraid, ultimately, to say no, even though Skilling didn't think that was the case.

9. Enron was failed by its accountants and lawyers who rather than advising caution at times, chose to value their income stream over prudent counseling. It's not clear that they encouraged fraud, but rather, they failed to often consider the long-term effects of their short-term advice.

10. Fastow, Kopper et ux. robbed the place blind, but not without a degree of head-in-the-sand attitude from those above and around them. The "Special Purpose Entities" were ultimately pie-in-the-sky fictions that no one at Enron cared to look at too closely for fear of what they might find.

11. Skilling and Lay both loved Enron and its employees, and the proof is that both kept the vast majority of their liquid wealth in Enron stock even until the end.

12. That said, they both were coy and at times quite misleading as to the financial truth of Enron as an objective observer would have seen things, not as an insider, who was drinking the Kool-Aid, was seeing things. They downplayed the major losses, and over-promoted the minor or phantom gains.

13. The company failed in part due to absolute lack of market confidence, the spectre of SEC and DOJ indictments, and credit downgrade. The rest was self-inflicted in one form or the other.

My Best Guess: Lay walks, Skilling gets indicted on a handful of counts (the indictment, by the way, is woefully inaccurate, overreaching, and inartfully drafted). There seems to be very little directly linking Lay to any willful or "blind eye" fraudulent acts. He mostly relied on others to tell him what the picture was and then to report it. He made some very hard decisions at the end to expose many of the losses, even when he had the chance to keep them hidden. He had 90% of his wealth in Enron stock -- hardly the acts of a master criminal intent on getting out rich. Skilling was more hands-on, he helped create many of the questionable practices at Enron, and although I sincerely believe that he sincerely believed in the health and righteousness of Enron, he by that time, was lost to the siren call of more deals, more power, more, more, more.

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