Selects: How Enron Fooled the World

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Hey, guys. It's me Josh and for this week's Select. I've chosen our 2023 episode on the Enron scandal. It's a pretty interesting episode at the very least just because of the mind bogglingly nut stuff

that these guys did all in the pursuit of money and personal gain. Not only did they swindle entire states, they also as a nice cherry on top wiped out the life savings of thousands of their own employees.

It's the kind of thing that was such a big deal. It left a stain on American society as a whole just by how cynical it made everybody about what people can get away with just in the pursuit of wealth. At any rate, I hope you enjoy this episode.

It's a good one. Welcome to "Stuff You Should Know." A production of "I Heart Radio." Hey and welcome to the podcast. I'm Josh and there's Chuck and Jerry's here

and it's stuff you should know.

“What you mean it, you should know this stuff.”

'Cause this is a serious corporate malfeasance that I think is probably not an American over the age of 20 walking around who doesn't know about this, somehow some way to some degree. I know they teach about this stuff in business school.

It's been written on extensively, but I mean, I didn't understand the ins and outs of it until I started researching this and it's quite shocking and that shocking thing that I'm talking about is the rise and fall of Enron,

one of the greatest swindles in corporate American history. - Maybe in corporate history in the world, definitely in corporate American history. - For sure, I'm really glad you picked this 'cause I didn't know all the ins and outs either

because this is, you know, when I was a young late 20s or early 30 something didn't have a care in the world. - Sure.

- And I finally watched the smartest guys in the room today.

- Yeah, so last night. - Yeah, the documentary based on the book and we'll get to the authors and stuff, it was Peter Elkend and who was a co-author? - Bethany McLean, and you was the lead author, even.

- Oh, okay, I knew she wrote the original articles in Forbes, so she co-authored the book and she's in the documentary. As is Elkend, and it really is worth the watch, but just wanna point out that this is an overview

of the Enron scandal. It's pretty clear when she start poking around that this could be like a 10-part series. - Yeah, sure. - And there probably is a podcast series out there

that covered just Enron. So there's lots of sort of ins and outs that we won't be able to touch on, but we can definitely give you the overview, which was, the Enron was a corporation.

Originally, it was a natural gas line pipeline operator, but they quickly, well not quickly, they got out of that business almost entirely when the certain people were hired and won't sort of get to all this in a minute too.

- Certain people's right. - When certain people were hired that basically said, you know what, we should even be in the pipeline industry. We should invent almost a new kind of industry,

and we should become a trading company

“that trades natural gas and eventually paper pulp”

and electricity and you name it, like we'll get into all the things that they sort of pivoted to, but Enron started, I guess we should start at the beginning when they, in 1985, when Houston natural gas company merged with a company called Intern North,

and they combined to form this large energy corporation in Texas, mainly natural gas and the chief executive of HNG at the time was a man named Ken or Kenneth Lee, who you might have heard of. - Yeah, and if you haven't prepared a meat Ken Lee,

several times across this episode. From the outset, I think Houston natural gas in Intern North, we're both profitable, but I saw that neither one of the companies really benefited from the merger, although I did expand their pipeline network,

really it just protected them from a hostile takeover. - Right, but it was just a standard gas company, you know, no big frills or anything like that.

I think the first year it posted a $14 million loss.

Put that in your hat and smoke it later with a pin. In that, the first year Enron was around in 1985, it posted a $14 million loss. Just remember that for later, okay?

“- Yeah, also something else you should put”

in your hat for later, is the fact that Kenneth Lee, the gentleman I mentioned, who was CEO of Houston natural gas, was also a very, very tight with the Bush family. Originally the elder Bush and later on George W, as Governor of Texas, big donor to their causes politically,

and they ended up having a very sort of, you scratch my back out scratch yours kind of relationship. - Yeah, it's, I mean, like I just started twirling around over and over again out of anger, like multiple times throughout the documentary.

'Cause they really go into some good details about that. But the upside of the whole thing is George HW and George W Bush would not probably have been able to help Enron out as much as they did had it not been for, of course, Ronald Reagan and the sweeping deregulations

that occurred in starting in the '80s. There was just a spirit of deregulation, which was, there's Ronald Reagan said, and they quoted in the documentary, "Government's not the solution to our problems.

"Government is the problem." And there was this idea that was really huge in the '80s that if you got government out of the way, competition was going to drive innovation, was going to lower prices,

was going to benefit society in myriad ways. That is not untrue.

The problem is when you deregulate fully

and just basically say, "We're checked out from now on "and tell something really bad happens. "Something bad always happens." That's the problem with deregulation in the '80s. Not that there's a problem with deregulation

that it was done incorrectly, like it seems to be every single time. - Yeah, I mean, Reagan is also in the documentary quoted as talking about the magic of the marketplace. And we've talked about this over and over on the show,

and this is not an attack on conservatism, but deregulation in the marketplace and letting the free market decide things is one of the coordinates of conservatism, generally.

And what we've always hammered home here after years

and you've said it in one way, but I'll say it in another is it never takes into account humans are the ones that are operating these systems. And when you have money, lots and lots of money, and you have humans operating systems,

there are inevitably gonna be greedy humans with so much hubris that they sell their souls to make money.

“And that's what happens every single time,”

yet it still lessons are still not learned, that there are certain kinds of humans and they always seem to be the ones in charge here of these systems, they will take advantage of them to the detriment of the little guy and the little lady.

And that is 100% what happened within Ron. - Yeah, and I don't know if it's always like, they're not taking into account human greed. I think most of the people who are powerful enough to deregulate federal energy regulations

don't really care in a lot of cases. I know that they're going to make a boatload of money by the time the thing really kind of blows up sometime down the line. I think it could be either one,

a big change to regulation.

“The Federal Energy Regulatory Commission said,”

"Hey, you can now buy and sell gas, natural gas, from anywhere in the United States. You don't have to just buy and sell within your state." And that opened up an entirely new market. And all of a sudden, you can make a lot more money

moving this stuff around. But like you said, they figured out, and Ron, you could make even more money by selling this stuff as commodities and trading on like futures

and turning them into financial instruments, not actual just natural gas or oil or electricity, but the concepts of them, the right to sell it or buy that sometime down the road, and that changed absolutely everything.

- Yeah, and this is when things, when you get into finance like this, my, it's not that my eyeballs glaze over, it just becomes almost, and I say almost not real

because it is kind of not real. It becomes a form of gambling in a way,

“and that's very much what happened in Ron in a lot of ways,”

and you'll kind of see here and there throughout the episode. But they as a company, after that 84 decision, made a very faithful decision of their own in 1989, just a few years later,

when they got a consulting firm on board, McKinsey and Company, an in particular consultant for that company, named Jeffrey Skilling, to create what they called

the gas bank, which was basically like I said earlier,

like, hey, why don't we just be an intermediary between buying and selling of gas, and it was going so well that two short years later, Skilling left there and went to work full time at in Ron. - Yeah, that's an ongoing thing.

- Oh, sure, and eventually working his way up to the CEO of that company. - Yes, so he was, but for the most part, he was the right-hand man, but essentially co-CEO with Ken Le,

who I think took him on as a protege, and Jeffrey Skilling was the one who said, let's set up this market. And he also transformed the company's culture. One of the things he came up with was the idea

that every year they should review and rate every employee. And the bottom 10% of employees should be fired. So every year he was planning on firing 10% of their workforce. So about 2,000 people every year, and the reason he was doing this is because he's saying,

we can do better, we can hire the best in the brightest. We'll replace those people with much better people, and then the one who are doing really well now, we'll get moved to the back, and we'll just constantly be improving on the people

that we're hiring. It makes sense in a really mockery valley in kind of way, but it's also psychotic as well. - Yeah, and the way I understood it from the documentary, it wasn't just like regular upper management reviews

of the people that report to them, but it was all the employees rating one another like within their department.

“Isn't that right? - Yeah, that's what it took it as, too.”

- So I mean, you don't have to be a sous-sayer to see where that heads when, and it certainly creates competition. If that's what they're all about with the sort of the charter of the company creating more competition by deregulating,

they sort of did the same thing within the ranks, and created a very, I mean I've seen it described everywhere as it's just overly macho and testosterone fueled. - Yeah. - It seems like the traders there were hired

and kept on that were especially aggressive, and there are interviews in the documentary about some of these men who were traders that were like, you would cut the throat of the guy next to you on the trading floor, your fellow employee,

if you felt like you could make a few extra bucks. - Yeah, and that was very much encouraged not just by Jeffrey Skilling, but Ken Lay had a history of the very least turning a blind eye if not actively encouraging people to break the law,

to immoral stuff that may or may not have been legal, all in the interest of maximizing profits. Like if you were making money and you got in trouble, you didn't get fired because you made money for the company, that's all that mattered was making money for the company.

So in that sense, Jeffrey Skilling was a really great protege for Ken Lay, but he was like Ken Lay on steroids. And I get the impression,

Ken Lay is always, or back in the day,

he was a master at presenting this really laid back, almost detached persona, but if you watch the documentary and you read about him, you really get the impression

By just nudging this thing over here, nudging that thing over there, all with plausible deniability. But at the same time, presiding over this incredibly complex complicated masterful machination that was all dedicated to the service of making money by whatever means possible.

- Yeah, and Lay, I mean, the reason the documentary is called the smartest guys in the room, is because, I think unequivocally, everyone would admit that Ken Lay and Jeffrey Skilling and we should introduce you to a younger recruit

named Andrew Fastow, who was a key player, eventually becoming the CFO and was up to all kinds of shenanigans.

But these were brilliant guys with amazing ideas

and a lot of the ideas that they had for this company were really good in ahead of their time,

“but they had the notion that you should be able to trade”

and make money off of great ideas and not necessarily the results of those great ideas, because time and time again, as you'll see, as we tell this story, these ideas were not making actual money. Maybe because some of them were ahead of their time,

but that didn't matter because they had ways of your creative ways to hide those debts and losses and that's the whole sort of followed-in run, is wrapped up in that statement. But these are all really, really smart guys and they were really, really good at making money.

And maybe we should take a break there. It's a nice little setup. And we'll come back and talk a little bit more about their lobby to deregulate and then some of the early shenanigans right after this.

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This is Sweat for your five. Listen to Sweat for your five with Lele Ponds as part of my third podcast network on the I Heart Radio App, Apple Podcast, or wherever you get your podcasts. I'm Munga Shittegather and I'm back for the new season of the podcast Skyline Drive. This time I'm diving into a rabbit hole of pet tides, organoids, blood boys, blue zones

and brain replacement to try to understand what this longevity of session is all about. What it really means to live forever for all of us. I learned about some rad science. I can make a brain for you and then we can test what draw is the best for your brain. A supposed to his brain.

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your podcasts. Okay, so after about six years after that big deregulation from FERC that said you can

watershed deregulation that reversed an axe that went back to 1935.

The public utilities holding company act, Puka, love that one. That said, if you are generating and selling electricity, you are a local utility and we are going to regulate you, like you are providing the lifeblood of America. Electrical utilities provide the lifeblood of America and have since long before 1935. And in 1990, they managed to get that reversed, and now all of a sudden anybody could buy

an electric utility and and run definitely jumped on that. Yeah, for sure. They're lobby was strong to put it mildly. They hired lobbyists to lobby different states in those states as no surprise, ended up getting millions of dollars flowing back toward N-Ron.

“I think they hired lobbyists for at least 37 states.”

They also helped overturn a long 1988 that said the military has to buy power from local

utilities and they said, now let's open that back up and pretty soon N-Ron got a $25 million

contract for supplying electricity to Fort Hamilton and Brooklyn. These are just, I mean, 25 million ends up being peanuts in the grand scheme, but these are just examples as they sort of ramped up to their schemes of how they deregulated or lobby to get things deregulated such that it was allowed to happen. Right.

And one of the things, one of the schemes that got the attention of the entire country in 2000, 2001, was an electrical scheme in California. California had undergone its own electrical deregulation power deregulation, but it had adopted this weird patchwork compromise law or set of laws that just had loop holes you could drive a truck through and that we're just really created all sorts of legal gray areas.

And so rather than just kind of like here they're biting around the edges, seeing what they could do, instead the energy traders at N-Ron, started figuring out how to move energy out of the state, wait for the state to be like, hey, we need some energy and move it back at incredibly inflated prices. They would purposefully take electrical utilities that they owned offline to generate more

demand, a spike in demand, and so they could raise prices again.

And they actually basically crippled California.

“I think I saw that California had a couple dozen blackouts in six months after that deregulation”

after N-Ron started coming in and messing with stuff, whereas the six months before deregulation they had had one blackout. So if you watch the documentary and you read some other sources about it, this was an entirely fabricated scarcity of electricity. There was plenty of it.

N-Ron just figured out that they could kind of pull this lever in that lever and charge way more by creating this fake scarcity. Yeah. And by pulling a lever, it's like literally sometimes they called up a power company, a power plant and said pull the lever to the off position and they have them on tape, you know,

they play this in the documentary.

“Well, they'll, they called one in Las Vegas and said, hey, man, can you take the”

thing offline for a few hours and just just make something up because a rolling blackout meant big money. All of a sudden California again was was buying their own energy back at a higher rate and Governor Gray Davis at the time. And this is, you know, I'm not like giving some full-throated endorsement to any effectiveness

of Gray Davis as a governor because I really don't know. But he definitely was sort of left holding the bag and scratching his head like what's going on here like we've got plenty of energy and just all through the documentary people are saying like this just isn't adding up in California and some of those tapes that they play of these traders like there was that natural wildfire that broke out that

jeopardize one of the pipelines and these guys are on, you know, on tape on the phone with each other saying burn baby burn because that's good for business if it knocks something offline and is, you know, making laughing at like, you know, old grandmas like sweating in the summer heat because they can't get air conditioning like the most viral reprehensible kind of stuff in the name of making the almighty dollar that you

could imagine. What's also interesting is they don't really go into detail about it but it appears to have

because Ken lay held the meeting at the peninsula hotel in Los Angeles and he invited

Arnold Schwarzenegger. This was long before Arnold Schwarzenegger was known to have had like real political aspirations, he wasn't governor yet, wasn't running for governor over a problem that Enron created. It was like that level of, in addition to also just making billions and billions of dollars by strangling the state, they also managed to replace the executive of the state as well

to somebody who is much more friendly to them. Yeah, and get rid of in, of course, it didn't like not come off or anything but in California you can, you can ever recall, it seems to come up every 12 years or so, where Californians aren't happy with a governor and so with recall of Vogue passes, you can have just an election out of nowhere and replace that governor.

While this is going on, you know, Ken lay stands on a stage and says, we're making money in spite of California, not because of California. So just lying through their teeth on stage to their shareholders and you know, all these little schemes had little nicknames, the one where they got energy out of California just to make them buy it back was called Ricochet, there was one called Death Star and

they're on tape like joking about like, hey, let's have a nice friendly name for this one like Death Star. So there's, there are playing games with people's livelihood essentially. Who lives, you can make it in a case as well, for sure. So three of those traders, plague guilty, Jeffrey Richter, John Forney, and Timothy Belden

were three of those traders who manipulated California's energy market, costing the state

between 40 and 45 billion dollars in retrospect of unnecessary electrical prices in costs.

All right, so Enron is doing great. They're making a lot of money and we should point out that this is just, you know, Ricochet was just one little scheme. They had all sorts of schemes along the way to, well, we'll get to those. Between 96 though in 2001, like as far as the stock market rules concerned, Enron was

“a darling, fortune named them, I think, six year straight America's most innovative company,”

every single year in a row. Yeah, but what was going on behind the scenes is these ideas and these investments and schemes that they had, you know, some of them made money, but a lot of them didn't make any money and all, and they just became really, really good at hiding that fact. Yes, that was the whole thing, like they were very innovative.

They were ahead of their time in a lot of ways, like they got into building broadband high speed internet access in like 2000 or 2001, something like that. And this was, I looked it up, it wasn't until 2007 that half of all U.S. internet users had broadband. So this was way of time and then also, they also got into the video on demand market.

They tried to partner with Blockbuster and these things were basically like the progenitor of Zoom and Netflix, but these guys were trying this in 2000, 2001.

So it's visionary, the problem is, they were ahead of their time, the infrastructure wasn't

“there, the, I think the customer base even wasn't there.”

So there's stuff that they were doing, wasn't making money, which is not bad in and of itself. What was bad was when they were covering it up and the schemes that they used to cover it up are so involved and complex, but also so fascinating that they would, they would have the audacity to do this because there's no, there's no fudging it.

There's no like, oh, this is kind of questionable. This was just fleasing all of their investors, all of their employees fleeceing the entire world. There was a handful of executives at Enron who were fleeceing the entire world to the tune of tens and tens and tens of billions of dollars every year in revenue that apparently

didn't actually exist. Yeah. It's pretty clear that a certain point they lost their way and that they weren't as concerned

“about being a company that made money and the only thing that mattered was that as a corporation”

was that they kept their stock price high because that's where, that's where all the money was. Instead, as long as they could keep that stock price high and keep shareholders, especially their employees, encouraging their employees to get, you know, get paid in company stock. Like, use every penny of your paycheck that you can to buy this company stock because

Enron stock was, was soaring it was doing really, really well and all the while it was, you know, it was called pump and dump. They would drive up the value of their stock and then the upper echelon and you see this

or the one who then sell off their stock and walk away with, you know, some of them hundreds

of millions of dollars and, you know, some of the schemes that you talked about was they found ways to move debt around.

“We mentioned fastaw was one of their hires and he was hired and I think his late 20s”

early 30s and quickly rose up the ranks to CFO and he started a company called LSM, which stood for Leah Jeffrey and Matthew, which are named after his wife and kids sort of ironically, it was like such a sweet tribute to them. And the only purpose of this company was to have all kinds of sort of little sub companies that would absorb the debt and where they could move debt around from Enron to make it

invisible to the shareholders, right? So they could prove on a balance sheet that you had this money coming in and the way of, you know, people investing in the company, but then you're hiding the losses and so everyone thinks you're doing great. So the way that I saw it explained in Vesta Pedia actually has a couple of really good

articles about this that are just wonky enough to, like, understand it but also not so wonky that you just, like, I have no idea what I'm reading and the way they put it was

basically, if Enron had, like, a good example is they built a power station in India.

That was a huge loss. It was just a generally bad idea and they sunk billions of millions of dollars into this power station without realizing any money whatsoever.

“I think they abandoned it before it even came online.”

They would take this and sell it to one of these special purpose vehicles or special purpose entities, which was a tangentially related company that the company Enron was not on the hook to pay off its debts for, right? And they would take that and then that special purpose vehicle would go out and try to sell it.

Sell that terrible toxic asset and they would use Enron stock as the collateral, right? Because Enron stock was just through the roof, everybody was saying, sure, we'll give you a loan, sure, we'll give you some money for that terrible idea of a power plant that you abandoned because you're backing up with Enron stock. And as long as the time that that stock came due was far enough away and as long as

Enron stock kept going up, this house of cards could be held together, but that's not at all how it worked. The upshot of it is that they could take toxic assets, move them off of their books to these special purpose entities. And then they would take the money that these special purpose entities would go borrow against

that toxic asset and they would count that on their books as revenue. So they were hiding that boosting their revenues to just ridiculous heights for stuff that just should not have been counted as revenue. Yeah, and just to be clear, they didn't invent the special purpose entity and an SPE is not some evil creation in and of itself.

It is an entity that a lot of corporations and businesses use where it's just sort of like has a very narrow purpose in that they create this thing when they might use it to purchase an asset or to move an asset. So the company is a whole may not be on the hook if anything goes wrong. It sort of mitigates risks.

So it's not some evil purpose in and of itself, but they were manipulating these such and starting all of these things under fast house guidance with his LSM sort of sub-corporation and eventually LSM too, I think that they were making, I think they hit $90 in August of 2000 market cap of the whole company at 70 billion, which made it the seventh largest publicly traded company in the world at that point.

Yeah, so that's a market cap of 70 billion, remember, in 1985 it's first year, it posted

losses of 14 million within 15 years, they posted revenue of $100 billion in 15 and sales in 15 years.

“That's what happened to that company when they brought Jeffrey Skilling on board, Jeffrey Skilling”

brought Andrew Festa on board and people just started going nuts, making money anyway they could. Yeah, the other thing we should mention too is another sort of slick trick is that Skilling's idea and they got approval and I wasn't clear how or where this approval comes from, but to use something called Mark to market accounting, which is basically when you can

rate the financial health of your company based on not theorized, but just on future earnings

instead of its purchase cost. Did you get how they were approved because it seemed like they were all like super-sector, they got approval for Mark to market accounting? Yeah, that would have been the SEC, security security's exchange commission. Who would have given that approval and just like a special purpose entity, Mark to market

accounting is totally legitimate, it's recognized as generally accepted accounting principle. But there's a lot of room for temptation to just basically say, this deal with blockbuster. We haven't made a penny off of it, but we can cite the future earnings from it now that

“we booked this deal, and I think it'll probably worth a billion dollars.”

Just a total guess, and you're not supposed to do it like that, you're supposed to do it much more realistically and legitimately, but they had enough leeway that they were able to take Mark to market accounting and use it to their benefit in that way and in doing that, they pumped up their revenues through the roof, like the deal would just be inked. They wouldn't have seen a penny from it, and they would add it to their balance sheets as

revenue. Yeah, it would become part of the ledger before a real penny was made. Exactly, and sometimes the pennies weren't made, and if the pennies weren't made, don't forget those debts would be moved to a special purpose entity, so they wouldn't have these toxic assets on their books, even though they very much owned or indebted for these toxic assets

still. Yeah, I mean, like I said, these were brilliant people, and like they had all their bases covered, except for the fact that we all know that a house of cards will eventually fall.

It's that hubris thing that just blinds people into thinking that it will always, like

“when that kind of money is rolling in, I think it blinds certain people so much that”

they don't understand who it's hurting at the time, or they don't care, or they think it's always going to be rolling in like this, or they think, hey, I'm going to get my now, because there were people in, in Ron, I mean, they were, we'll talk about whistleblower that eventually sort of came out in a journalist who were poking around, but there were people that started looking at this company, the darling of Wall Street and saying, something

is not right here, like something's not adding up, like you can't even explain how your cash flows through your business, and a way that makes any kind of coherent sense, and anytime they were confronted with this, a skilling in his cronies, they would get very hotty about it, and just be like, well, what do you mean we can't explain that? Like, sure we can, it's really easy.

You just can't understand. Yeah, you just can't understand it. All right. Oh, it makes your blood boil.

“Let's take a break, and then we'll come back and talk about the downfall.”

How about that? Yeah, the downfall. Hey, I'm how to caught me, host of the podcast, Joy 101 with Hoda Cotby. Okay, if you know me, you know this.

I'm always searching for inspiration, for support, and useful tools to help maximize joy.

So, this podcast lets us uncover all of that together. We're going to have these meaningful conversations with the world's most fascinating people, like when actress Olivia Munn shared how she overcame fierce health challenges that she never saw coming. I've gone through breast cancer, and then helped my mother through breast cancer, and that

was more difficult. There's a lot of people who understand post-parner depression. I was not prepared for post-parner anxiety. Olympic champ Sean Johnson revealed why she had no choice, but to be a gymnast. There was something about gymnastics that was intoxicating to me.

It's given me a belief that we all have one of those treasures inside of us. We just have to find it. Listen to Joy 101 with Hoda Cotby on the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. My first guest is Harry Seltin, Shethida, Luke, and Yirin.

I'm so excited on the bounce, you bet, and you have surprises, many surprises. Welcome to Sweet Rio 5 with a good chat comes to life. What a f*****t, it's like what I'm talking about, it's like, oh my god, oh my god, oh (beep)

- I never saw you talking to anyone.

That's what you told me. (speaking in foreign language) - Yes. - Yes. (speaking in foreign language)

(laughs) (speaking in foreign language) - I do only person I know that love starbursts. (speaking in foreign language) (speaking in foreign language)

(speaking in foreign language)

Listen to sweet for your five with lelepons

“as part of my Zen Buddha podcast network”

on the I Heart Radio App, Apple Podcast or wherever you get your podcasts. - I'm Munga Shut together and I'm back for the new season of the podcast Skyline Drive. This time I'm diving into a rabbit hole of pet tides,

organoids, blood boys, blue zones, and brain replacement to try to understand what this longevity of session is all about. And what it really means to live forever for all of us. (upbeat music)

- I learned about some rad science. - I can make a brain for you. And then we can test what draw is the best for your brain. - That's true. - A supposed to his brain.

- Here are some hard truths. - I would expect Indians to age faster, but I did not expect it to be almost a four to five year acceleration and get myself into a world of trouble. - I'd say probably start bone smashing.

- There's a word. - Make it look more defined. They say it works. I don't know.

“- Listen to Skyline Drive, how to live forever”

on the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. (upbeat music) - Okay Chuck, so one question that people might be asking is how were these guys allowed

to use this accounting and get away with it? Why were people even investing in buying shares of this company when it was just so fraudulent and just ridiculously fraudulent too? Not even subtly fraudulent.

And the answer is, the company was such a Wall Street darling

that financial analysts would not understand what they were hearing on these earnings reports, but would still give it a stamp of like buy. The other thing that really, really helped was the banks, Wall Street banks, we're very much complicit in this as well.

And then the thing that helped the most was Arthur Anderson, the venerable 80 plus year old accounting firm, the oldest one was a country. - Yeah, that was a third party accountant to Enron, was so cozy that they actually hired

all of Enron's internal auditing staff, made them Arthur Anderson staff and then opened 150 person office for Enron in Enron's headquarters. At Arthur Anderson office, in Enron's headquarters,

made up of former Enron auditors. That's who was watching the show. And so Arthur Anderson had such a good reputation that because they were signing off on this, because the Wall Street analysts were saying,

yeah, it's a buy. People were just like, I'm buying, I'm buying, and it kept the stock price just going up and up and up. Because nobody was paying attention enough. - Yeah, there was one person in the dock that said

that kind of crystallized it, which was like, I'm paraphrasing, but he was talking about the fact that when this kind of stuff pops up in corporations, like, it's not like this, the Enron's are everywhere. There is all kinds of malfeasance for sure

in the corporate world, but he basically said,

somewhere along the way, it doesn't get this big because a legal team says you can't do this. Or you're a countenance, say you can't do this, or the bank say, we can't get involved in this. And Enron seemed to be one of those sort of unicorns

where every person along the way, just zip their mouth shut even though the numbers weren't adding up and was complicit in this. - Right, and there was a trader that was interviewed in the documentary who said, like, it was ironic

that Enron's slogan was ask why? Like, why do something happened like that? Why can't we do it that way? And that this trader said, I didn't ask myself why, because I didn't know, I suspected things were weird

or Ryan, I just didn't want to know because it was my job, I was making tons of money.

“And I think you could probably get that excuse out”

of just about anybody who was complicit in this larger small. But Arthur Anderson, that was the one that really, really helped things along. And as we'll see, they didn't manage to survive this scandal.

- Yeah, there were, oh man, those that one part of the documentary where they were talking about fastiles, you know, shell companies. And he was in a meeting that was secretly taped in their basically like, well wait a minute,

it looks like you're on the buying and selling sides of these transactions, and he was like, yeah.

Basically, but I've always got LMJ's interest at heart.

In the whole time, he's skimming money and they believe that skilling and lay knew that like, hey, I'm sure that fastiles is skimming money off the top for himself. - Right, who cares?

'Cause this guy's taking care of business for us. - Exactly. And I think he skimmed about $35 million for himself.

- He stole from M. Ron and they looked the other way

“because the stuff he was doing was so unethical,”

so illegal that he basically earned it

as far as they were concerned. To have his hand in the cookie jar like that. So, I think you kind of mentioned, there were some people who were like, wait, what's going on here?

One of the first people was Bethany McClain, the journalist who ended up writing the smartest guys in the room. - She's awesome. - She's awesome.

She started out writing a story for Fortune Magazine back in March of 2001 titled, "Is Enron Overpriced?" And she was one of the first people to publicly say, how is Enron making its money? But she wasn't the first to hit on this.

There's another guy named Jim Channos of Cynicos. Securities, I think, maybe. And I think he's in the documentary, but he started shorting Enron in 2000 because he noticed very simply their cost of capital,

so the cost of doing business was more than their return on investment,

“which automatically means that they were not a profitable company,”

which totally was contradicted by all of their earnings reports and filings. And he saw this and he said, this is not right, and I'm going to start making money off of the future downfall of this company

and made hundreds and hundreds of millions of dollar shorting Enron stock starting in 2000. - Yeah, the whistleblower, too, was an executive main name Sharon Watkins. And she pops up a lot in the documentary,

obviously, is key to the story. She didn't whistleblow. While this was all going on, it was sort of after the ship started sinking, but we'll talk a little bit about how that all happened

and where she ended up. But what happened in August of 2021, skilling had replaced Lay at CEO and February of that year. And on August 14th, 2021, skilling out of nowhere,

and he had just taken the reins, you know, a handful of months before. He skilling quits out of nowhere. He resigns, he cited personal reasons, and what was going on was the,

you know, the Titanic sprung a leak. And as they described it in the documentary,

he was one of the first rats to try and get off the sinking ship.

- Yeah, and like, if you are a CEO of a huge company, you don't just leave like that. That is an enormous red flag. There's like a whole process and procedure for finding your replacement,

grooming them, introducing them to the rest of the world. You don't just leave like that. And that was such a red flag that that whistleblower, what's your name, Sharon Watkins? - Yeah.

- She wrote an anonymous letter to Lay basically saying, hey, there's a lot of fishy stuff going on around here, and now that skilling suddenly departed, like everyone's going to start having questions in this whole house of cards is going to fall.

And Lay apparently didn't do much about it, and she came to Lay later on and said, I'm the person who wrote that anonymous letter, and I'm really concerned about this. And ended up trying to keep it in the company,

'cause I think I get the impression that she thought, it was something especially now that skilling was gone, that could be resolved internally. I think she really underestimated the extensiveness of the corruption,

and yeah, at the company, and thought it was a few people. When it really, it was a large cadre of people who all were complicit in this.

“And I get the impression that's why she didn't really”

blow the whistle publicly at that point, but apparently, Ken Lay once he found out that it was Sharon Watkins consulted legal counsel to figure out how to fire her legally. - Yeah, the same day that skilling resigned on August 14th,

the Broadband Division that we talked about earlier, reported $137 million loss analysts, and we should point out too, as far as the analysts go,

they were always installing friendly analysts

and only working with friendly analysts, but they finally got the clue. They dropped their ratings for the stock. The end came very, very swiftly for Enron. On October 12th, Arthur Anderson's,

I mean, you still remember all the shredding jokes on late night TV that ran for months and months. Arthur Anderson's legal counsel said, "Everybody shred everything." Destroy every file that you have on Enron,

and in one day, they shredded literally one ton of paper. - Yeah, and that was just one day, they apparently shredded around the clock from October 22nd to November 8th. And that was just one ton, one day,

they shredded literal tons of documents. It's just shreds, shreds, shreds. If you're an executive at Anderson,

alongside everybody else. It was like that. And it was apparently at a time where you could legally do that and not be indicted for it. But that was not a good look when it came out

that Arthur Anderson was the auditors of this company were shredding tons of documents. And the SEC got went to this and they said that they're going to start investigating finally the special purpose entities that fast out had set up.

And so Enron fired fast out that same day. And I think that was in November or late October of 2001, and right after that, on November 8th, Enron said, "Hey, everybody,

“do you remember all of our, all that money we said we made,”

going back to 1997, we're going to need to restate our earnings." One of the first things they did was they reported

a $618 million loss for Q3 of 2001.

Q1, they posted a $46 million profit. Q2, a $44 million profit. Q3, a $618 million loss. So they finally came clean. They finally said this accounting is off.

And this is how radically it's off. Yeah, I mean, that is, if a company is restating their earnings for that period of time, right? At all, like, a mistake can happen, but that's a real bad sign.

They almost got a lifeline in, I guess, late October of that year when they tried to merge with a company called Dynagee Incorporated. And that deal, that deal fell apart on November 28th. They backed out of the deal, Dynagee did.

And then what is this four days later on December 2nd, Enron filed for the largest chapter 11 bankruptcy in US history.

Up to that time, $65.5 billion company filed for bankruptcy.

That just did not happen. If you had that kind of money, you could have a fire sale and sell off stuff for way less than you paid for it, but you could still survive. And that just goes to show you just how fraudulent this company was.

They couldn't have a fire sale and make up that kind of debt that they owed.

“I think was $72 billion, I think, in debt,”

that they finally were found to have owed. And at the time, it was the biggest. In 2008, we saw what big really was. Yeah, Lehman Brothers, for example, had $639 billion in assets when it filed for bankruptcy

and went under. But at the time, Enron was like eye popping as far as bankruptcy's went for corporations. Can you imagine the wave of a relief that swept through Dynagee incorporated?

Yeah, when in Russia. Do you clear bankruptcy a few days later after they backed out? Yeah, that one just offhand conversation at the vending machine over a packet of checks mixed, like, save Dynagee forever, you know?

This seems like a bad deal to me, Crunch, Crunch. You're right. And Dynagee, by the way, went on to become Apple. Right.

“So the fallout from this, there are a lot of victims,”

20,000 employees, 20,000 employees, lost their job and how long did they have to get out? What is saying? Dang, I think they had the day. I think it was less than that.

I feel like it was hours or something.

Basically, pack your S and get out of here, everybody.

And like, literally, this huge tall building has thousands of people just leaving all day with bankers boxes with their contents of their desk in it, like the ultimate movie trope. Every employee that had been told for years and years,

hey, you got to invest everything you can in that for a long day. Because in run is, I mean, look at the stock. We're going places and that money will be safe there. They obviously lost almost everything. There was a, you know, the rank and file employees.

It was one in the documentary that said, he had about close to $350,000 in stock. They heated up dumping for $1200. Yeah. They froze the stock accounts of the rank and file

while upper management was actively still catching out. Yeah, that was a really scummy move. They, I'm sure purposefully changed 401k providers in the midst of all this. And when you do that, there's a minimum 30 day freeze

as you transfer assets over. So these poor employees couldn't sell their shares. Like you said, wow, the executives were making tens and tens of millions of dollars worth of option trades.

I mean, it's just mind-boggling.

“That to me is probably the worst part of the whole thing.”

Well, and, you know, tie with that, you'd, their severance package, averaged about $4,500 for the average employees while management bonuses totaled more than $55 million. And that's just bonuses.

That's not cashing out stocks in Libya who helped us put this together, great job on this article. Yeah, agreed. Pointed out something like, other fallout,

like you never even think about,

which was in Ron was a very big investor and donor in local nonprofits in Houston. And all of a sudden, all that money is cut off. And like the Red Cross chapter had to cut its budget from $12 million to $9 million.

And one year largely because the money dried up from in Ron. So the fallout was far and wide. And that's not even mentioning. Like we're talking about the employees who had stock in the company

and like every other human being that had just stock in in Ron that had nothing to do with it, lost all their money. Yeah. I mean, the stock price was at 90 at one point.

“And it dropped down to, I think, 40 something”

since in like a year, basically. So yeah, the employees in particular and the retirees who had already left and whose pension funds were just totally evaporated, meaning you're gonna have to go get a job as a Walmart

greeter now because you can't afford anything. They are definitely the greatest victims of all this. I saw Ken Lays lawyer afterward. Pertray Ken Lays is the greatest victim of all of it.

Because he apparently lost a few hundred million dollars.

And he didn't say it himself. But he'd definitely tried to say like, I lost so much money. There's no way I could have known what was going on.

And that fell on deaf ears. And that same defense was used by Jeffrey Skilling, too. I didn't know it was going on. And so what they tried to do was pin the whole thing on Andrew Fastow, who had been fired,

who had skimmed 30 something million dollars himself. So he'd proven demonstrated he was a criminal. They tried to play like he was a rogue CFO that had done all of this under the very nose of Jeffrey Skilling and Ken Lays

and that they hadn't known. And the public Congress, the courts,

“juries, everybody said you have to be kidding us.”

Yeah, and they were right in the infastial, plea to guilty to two counts of wire fraud and securities fraud in return for being a witness. Again, Skilling and Lays, I think, had a 10-year sentence for what was going to be

a much larger sentence in it up serving five years. And then got out into 2011 and started getting paid as a speaker to corporations about business ethics, you know, to his credit, I guess, 20 years on, he came out officially and apologized for everything.

Seems to really have turned the corner

and learned to lessen although you never know

what is going on in someone's heart from the outside. Arthur Anderson completely went away. The oldest county form accounting firm in the country never recovered, completely folded and went out of business.

The Sarbanes Oxley Act was enacted basically because of Enron in 2002, which was, and I remember, I remember years ago, when we were working in our early days at how stuff works, there was a lot of like Sarbanes Oxley talk.

Do you remember that stuff? Yeah, because they came up with the Frank Dodd Act to basically undo or combat against future stuff from the 2008 financial crisis. Yeah, this was the same thing, six years prior.

Like Enron, it was such a huge effect that they passed the law that basically point for point outlawed all the stuff that Enron had done. They did the same thing with the Dodd Frank Act or they tried to.

And of course, certain people say Sarbanes Oxley has no real teeth anymore because they're not even funding the oversight that they promised other people, the die hard free marketers will say, that's actually too restrictive, we're not able to be

competitive anymore because you've got all these rules now to make sure we're not defrauding people to billions of dollars. Right, yeah, we're making it hard to exploit people. Yeah.

So there was actually a conviction. Like this is crazy. And one of the hardening things Chuck is if you watch like these congressional hearings on this, people from both sides of the aisle

are grilling these guys. Oh, yeah, no one was apologizing to them for their colleague from the other side of the aisle asking, you know, mean questions, everyone was mad at these guys. The whole world hated Jeffrey's killing

and Ken Lee and Andrew fast out. He was so smug up there, man, answering those questions.

I looked up whether he ever apologised and I could not find it. I don't think Jeffrey's killing ever apologised

“and I think he went throughout his entire time”

in prison, basically saying like he was a victim

that this was unfair, but he was imprisoned. He was an executive that was in prison. That just does not happen lately. He was convicted of 19 counts, frog conspiracy, insider trading. He got 24 years in prison and ended up serving 12.

Which is, I mean, yeah, that sucks. But it still doesn't know that this needs it. No, for sure, that's a long time to do in the clink. And then Ken Lee, he was convicted on 10 counts, but he was unable to be sentenced

because he died of a heart attack six weeks after being convicted. And I think his conviction was vacated. Yeah, skilling now is out and works. And an oil and gas analytics start up. It seems that other people, I think we,

yeah, I mentioned that fast out was on the speaker circuit. The whistleblower, Ms. Watkins, was named Times Person of the Year in 2002. And I believe is also now a paid speaker and executive and residents at Texas State University.

And then there was a matter of, 'cause I was like, living it and get to it, but I was like, well, surely there was some sort of

“making it right for these people who lost all this money, right?”

And there were lawsuits that came out and settlements that came out, different people ended up paying different things.

I think it was a $7.2 billion settlement from in-run.

I believe the banks were on the hook. I can tell if the banks were on the hook for some of that, or if it was a separate thing. I don't know. I saw that they squeezed a total of 20 billion out of in-ron

before they let it go. - Okay, I don't know, but I did see the banks were definitely on the hook just for being complicit. I don't know if that was in addition though either. - Yeah, I think, yeah, it says right here

that the bulk of the settlements, almost $7 billion that came from J.P. Morgan Chase, City Group, the Canadian Imperial Bank of Commerce. - Oh yeah. - Lehman Brothers, Chippedin, Bank of America, Chippedin,

the Big Five, Auditing firm, Arthur Anderson, of course we talked about, they Chippedin, I think, well, I don't see how they could have Chippedin if they went out of business, but. - I guess they Chippedin before they went out of business.

- All right. - So, you know, if you hear the story, especially if you're used to us in our podcast, you might be like, well guys, you didn't really get to the other side of the story.

There is no other side of the story. This is one of those rare stories that is basically black and white, it was just, there's no redemption, there's no explaining it away,

there's no apologizing for it. It's just, it was just as wrong as it appears. So, that's why we didn't include the other side of the story in this one. - Yeah, I don't think there's anyone out there

who's going to bat for in-run. - It's there somebody. - There's somebody and they will leave it on our Apple reviews. - Right, it totally will.

Everyone didn't get a fair shake from these guys. - Yeah, totally. - I didn't hit Lure or Satan. You got anything else? - I got nothing else. - Well, I don't have anything else either.

If you want to know more about Enron, go watch the smartest guys in the room, definitely will leave you wanting more, and there's plenty to read about, including some great contemporary articles,

all over the internet. And since I said contemporary instead of contemporaneous, it's time for a listener mail. (bell ringing) This is a little wordy,

but it's, we don't often do shout outs and tributes, but this is a really special one, so we're doing it. - Nice. - Hey guys, this is from Gavin, recent college graduate and history enthusiast.

And Gavin says I've been listening since I was 15, over seven years now, my mom was the one who introduced me to the show, and we both been listeners ever since. I'm pretty sure she listens every episode

that you guys put out. My mom was also the person who imparted a thirst for knowledge and learning in me as a child. I had great many teachers in my life, and I'm very thankful for them,

but my mom has always been my greatest encouragement

and my role model as a student and as a person. Over the past four years in college and directly after, I got really busy, we've 12 hours from home, and at then I stopped listening to podcast, including you guys, I know.

More importantly, I also lost touch with my mom. I didn't completely ghost her anything, but I still did not reach out to her nearly as much as I wanted to or needed to. But often when I eventually would,

she would ask me if I listened,

“if I listened to stuff you should know recently,”

and she'd have an episode to recommend because I think you'd really enjoy this one.

and over that time I picked stuff you should know back up, re-energize my love for knowledge and learn that my mom has given me, that my mom had given me years ago. All this to say, you guys mean a lot to me and my mother.

And I thank you for that. You've helped me stay connected to her in a way that I would not have been able to do otherwise. I'd just like to take this chance to thank my mom. I know you're listening, mom.

I know we'll talk about this episode later. And thank you for encouraging me and understanding that I love you, even when I'm not great at communicating it. - Man, boy, this one's really pulling it the heartstrings.

- Yeah. - Every time I pick up a book or listen to a podcast or write a paper, I think of you, mom,

and I know that I always will.

“I love you, and this is the only way I know how to tell you properly.”

Man, you can pick up the phone and say this stuff, my friend. - He's back to you guys. You got a great show. I hope we have many more years

of remaining learning and growing together. And that lovely, lovely sentiment is from Gavin and Fayetteville, Tennessee. - That was amazing, Gavin. Hats up Chuck.

I totally get why you chose that shout out to be the one to break the rule. - Yeah, it should have been a long mother's day. A round mother's day, but. - Well, we can replay it around Mother's Day

first to like, tell about that. Instead, it's the end run episode. - You're right, if you wanna be like Gavin and just be a super great person, but not request a shout out,

just be a super great person, we wanna hear from you. Also, while I'm thinking of it, go check out our social feeds. They used to suck, now they're great. Also, if you wanna get in touch with us,

like I said, you can hit us up via email at [email protected]. (upbeat music)

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- My first guest is Karen Tolton. - Chefita. - Look and eating. - Have surprise. - Have surprise?

- Many surprises. - Welcome to the sweet 305 podcasts where the new tech comes to life. - What? (beep)

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“This season on my podcast, Here's the Thing.”

I talked to composer Mark Shaman. - It's about the hang. It's the pleasure of hanging out with the people that you're with.

You know, Robin I was always a great hang.

And director Morgan Neville. - Film school teaches you all the wrong things about making documentary. - What do you want to say? - Documentaries all about your ear.

What do you hear? I feel like my job is listening really, really hard. - Listen to here's the thing, on the iHeart Radio app, Apple podcast, or wherever you get your podcasts.

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