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Trial by Enron Part II: Facts


Ross M. Miller
Miller Risk Advisors
April 10, 2006

I am writing this after viewing the Enron documentary for the second time. No, I not a masochist; rather, I inflicted the movie on my graduate finance students in lieu of a standard final class meeting. They did not seem to mind and the strippers were popular with many of them. I found it useful to see the movie as part of a group.

What stuck in my mind the second time around was the issue of whether the various detractors of Enron, including the writer/director of the documentary and Bethany McLean, whose article/book served as background for the movie, had themselves behaved in an ethical manner.

The person who raised the ethics issue was none other than Jeffrey Skilling himself. Of course, because the documentary portrays Mr. Skilling as evil incarnate, the fact that he called Ms. McLean's ethics into question, she must automatically qualify for sainthood. It has been a while since I read Ms. McLean's Fortune piece on Enron (and, as noted in the previous commentary, I have yet to read her book), but I recall it being reasonably fair and if there were any ethical issues, those belong to the editors who featured the article with the words "Is Enron Overpriced" in large type on the magazine's cover.

As for the documentary, here are some facts about Enron that can help you judge the filmmaker's ethics for yourself:

Fact 1: A "smart guy" could make a lot more money working on Wall Street than at Enron.

The movie throws around millions of dollars around like it is a lot of money. And, except for people seriously involved in finance, it usually is. When Goldman, Sachs went public, for example, the senior partners got payouts that made Enron money look like chump changeenough money to run for the U.S. Senator from New Jersey several times over. And you don't even have to look to Wall Street to find executives with payouts that dwarf those of Enron. Consider Time Warner, parent of Fortune. The late Steve Ross paid himself an embarrassingly large salary as Time Warner's CEO and in more recent times Steve Case has not done too badly. Enron's guys were rich compared with the average documentary viewer, but not in comparison with the corporate elite. To the real players back in New York, the guys from Enron were just a bunch of Houston schlumps.

Fact 2: Enron was a friend to the environment.

Natural gas, Enron's bread and butter, is a clean fuel, much easier on the environment than crude oil. Enron was a strong supporter of the Kyoto accords because they hoped to play a major role in an international market for trading greenhouse gas credits. True, Enron did not support the environment out of the goodness of their heart, but because it was good business. Nonetheless, they did support it. If fifty years from now Manhattan is under a hundred feet of water, how many people will say that this could have all been prevented if only Enron had never gone bankrupt?

Fact 3: Enron supported Al Gore's presidency and Enron might well have survived if he had been elected president.

Enron bashers just love the fact that W. called Ken Lay "Kenny Boy," as if this proves some illicit link between the two. In fact, lots of Enron money went to Al Gore's campaign and the only reason that W. got more money from Enron was that he had inauguration expenses and Gore did not. Al Gore would certainly have had the U.S. sign on to the Kyoto accords and Enron might well have been golden as a result.

Fact 4: Rebecca Mark made a major contribution to Enron's downfall.

The Enron documentary showed us lots of R-rated footage of silicon-enhanced strippers, but not one second of Rebecca Mark, the stiletto-heeled bombshell whose serial misdeals created the hole that Andy Fastow tried to fill (along with his own pockets). Indeed, she is never mentioned once in the movie. The documentary both showed and ridiculed her Dabhol project, but without saying who was behind it or the string of her other failures that extended into Europe and through to South America. (Another error that I noticed on my second viewing is that the documentary indicates that Enron was the only company involved in Dabhol, neglecting to mention its two big partners, GE and Bechtel.)

Rebecca Mark was Jeff Skilling's main competition to succeed Ken Lay and she lost out to him in large part because of her inability to turn a profit. In the process of losing, she squandered enough capital to make it impossible for Skilling to run the firm the way that he wanted to, providing an innocent explanation for his resignation.

Fact 5: Weather derivatives are good business.

The Enron documentary implies that the company had lost its collective mind and had begun to engage in bizarre activities such as "trading weather." In some serious financial circles, Enron has been praised for its pioneering work in the establishment of markets for weather-related derivative securities, which are no joke.

Fact 6: Enron's human resource practices were typical of those employed throughout American business.

The movie takes Enron to task for rewarding its good employees, firing its bad employees, and letting employees evaluate one other. To varying degrees, every U.S. business does the same thing.

Because it sounds so brutal, the movie makes a big deal out of Enron's rank-and-yank system. Here, the movie was actually on to something; however, rather than focus on the poor souls who needlessly got canned, they whined about 30-year-olds making $5 million a yearcoincidentally, the amount necessary to keep them from defecting to its competitors.

GE had a tame version of rank-and-yank10% of GE employees were put on notice each year and many of them were able to pull themselves out of the cellar during a 1-year probationary period. Enron did not have time for employee rehabilitation and ended up chopping out approximately the bottom quarter of the company each year. Even Darwin himself would likely have a problem with that much natural selection.

Fact 7: Although Jeffrey Skilling avoided leaving a paper trial that points to him, he is left with the problem that he comes across as cold and unsympathetic.

Jeffrey Skilling is notable as the only major Enron figure to have given testimony prior to the current trial. I have viewed virtually every minute of Skilling that was aired on C-SPAN and he manages to come off even worse than the Enron movie portrays him. Unless Skilling gets a personality overhaul before his scheduled testimony this week, he stands an excellent chance of sending himself to jail. Undoubtedly, his legal team has advised him of the folly of testifying and he has ignored them.

Sadly, the Enron trial is not being televised. Based on whatever tidbits leak out of the trial, my next commentary will look at what Lay and Skilling are facing and at what point bad business behavior crosses over the line from poor judgment to abject criminality.

Copyright 2006 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to