Government Affairs Blog

The Smartest Guys in the Room

These days I don’t get to the cinema as much as I used to so have only recently got around to watching The Smartest Guys in the Room: the amazing rise and scandalous fall of Enron on television.  The documentary is based on the book by Bethany McLean and Peter Elkind. 

It’s a fascinating film that details how it all went very wrong for a company that was doing okay and decided it would be great.  Those on the Left will see the story as an indictment of the market and global capitalism.  Those on the Right will argue that the smartest guys were actually crooks and the film tells us nothing about how we distribute goods and services.

The problem with Enron was that they didn’t have anything that could make them great.  They were in a sector that wasn’t that profitable and the company had had debt.  Kenneth Lay, the CEO and later Chairman then CEO and Chairman, argued for deregulation of the energy market.  He pretty much got it from the Reagan Administration.  He also got agreement that Enron could claim current profit in their accounts based on income to come in the future.  One would think you wouldn’t have to be an accountant to see the potential danger in this but it seems at the time everyone thought this was perfectly okay.  Well almost everyone.  There were voiced that warned against it but they were seen as spoil sports.  One should point out it was also perfectly legal.

As a wholesale energy market was created through deregulation, Enron’s share price began to rise.  And so the company’s value was based on profits that didn’t exist yet and the fact that people were investing in the company.  The next thing to happen was the dotcom boom and Enron’s entrance into broadband.  Here Enron clearly misled their investors by stating the technology they had was well advanced when it wasn’t.  The share price kept rising.

The most disturbing thing of all was what the company did in California.  Remember the energy crisis there?  It was the one that led to Arnold Schwarzenegger becoming Governor.  From tapes of the Enron traders it is clear that they rigged the market by causing shut downs of power stations and then pushing up the price of energy.  How could they do this?  Because energy was a scarce commodity but only because they made sure that it was.

Separate companies were created by Enron’s Andy Fastow, disowned by Lay and Skilling (Enron CEO) that invested in Enron.  These companies received loans from major US investment banks.  The investments helped sure up the share price. 

Inevitably this house of cards was going to collapse.  Enron’s slogan was ‘ask why’.  At the end of the film they do exactly that.  Like anything in this world there isn’t an easy answer.  A complex set of circumstances helped people who believed in the ‘greed is good’ philosophy pervert the market.  There were many failures here. 

Simon Goldie is Head of Communication at The Chartered Institute of Taxation – www.tax.org.uk - and a member of the CIPR GAG committee