Enron: The Smartest Guys in the Room
Alex Gibney (2005)
The subject of this documentary is the historic Enron collapse in September 2001.
The Enron scandal occurred prior to the blossoming of social media, and the corporate media deliberately minimized the criminal behavior that led to the collapse of the world’s largest energy company. They blamed Enron’s demise on “bookkeeping irregularities.” This film tells a very different story.
When Enron, which was founded in 1985, went bankrupt it was the largest corporate bankruptcy in history. Its late founder, Ken Lay, was close personal friends with Bush senior, who engineered millions in federal subsidies to help launch the company. Lay subsequently donated heavily to Bush junior’s presidential campaign.
Trading Energy Like Financial Derivatives
A big proponent of corporate deregulation, Lay teamed up with Jeff Skilling in 1990 to transform energy production and delivery (natural gas and electricity) into financial instruments that could be traded like derivatives.
To manipulate their stock prices, Enron employed two novel (and illegal) bookkeeping practices. With the first, mark-to-market accounting, they recorded potential future profits as real time revenue. The second accounting scam involved creating hundreds of “subsidiaries” to hide $30 billion of Enron debt from investors and regulators. Each subsidiary was personally managed by Enron Chief Financial Officer Andy Fastow, who pocketed $45 million from one deeply indebted subsidiary.
These devious accounting schemes allowed Enron to conceal that their company was losing millions of dollars a year. They kept the company afloat via $25 million bank loans from all the major Wall Street investment banks, using their overpriced stock as collateral.
Enron Bankrupts California
Prior to seeing this film I was vaguely aware that Enron was responsible for the California power crisis in 2000-2001 and the $38 billion deficit that led California governor Gray Davis to be recalled and replaced with Arnold Schwarzenegger. I had no idea of the criminal behavior behind the power crisis.
Enron’s purchase of Pacific Gas and Electric in the late nineties gave them total control of most of the state’s power generation and 26,000 miles of power lines. To drive up the cost of power, Enron’s unscrupulous energy traders caused rolling blackouts by “loaning” California power to other states and creating artificial shortages. They jacked the price of power even higher by deliberately shutting down regional power plants for “routine maintenance.” In this way, they succeeded in driving the cost of electricity from $30 per kilowatt to $1,000 per kilowatt.
Governor Davis declared a state of emergency while he pleaded with Bush junior and the Federal Energy Regulatory Commission (FERC) to impose a price cap on California electricity. By the time Congress forced FERC to implement a price cap, California was $38 billion in the hole and the Terminator was the new California governor.
Management Screws Enron Employees
Even more scandalous was the decision by Enron management to freeze trading by employees as the stock price plummeted. This enabled all the top executives to dump their stock while 29,000 employees had their pension plans wiped out.
Andy Fastow pleaded guilty to fraud and embezzlement charges (receiving a $23 million fine and 10 years in jail) in return for testifying against Skilling and Lay.
Skilling would receive a 14 year sentence for insider trading. Ken Lay was also convicted of insider trading but died of a heart attack (2006) prior to sentencing.