Trial by Enron Part I: Myths
Ross M. Miller
Miller Risk Advisors
March 27, 2006
With Enron back in the headlines, it seems worthwhile to
dedicate a series of commentaries to the ongoing trial. Just the other
night, I viewed a DVD of the almost-direct-to-HDTV "documentary"
about Enron and found it to be laden with errors and omissions. Before
getting down to the trial itself, I thought that it might be worthwhile to
separate Enron myth from Enron fact. This installment will deal with the
myths, the next installment will deal with the facts, and then I will get
on with the trial itself after having the benefit of hearing Jeff Skilling
and Ken Lay's side of things.
I have not read the book upon which the Enron movie is
based because that is unnecessary given that I have read every available
primary reference source related to the case, something that clearly
neither the authors of the book nor the writer/director of its film
adaptation have bothered to do. While most of the myths that follow were
discussed in my book, What Went Wrong at Enron, they bear
Myth 1: Enron succumbed to a combination of greed and
The message of the Enron movie is clear: Enron was
filled with greedy guys who would kill their grandmothers to make an extra
dollar. (Actually, the movie has them stepping on some guy's neck.) The
Enron crowd hung out with strippers and engaged in "risky"
activities like riding dirt bikes up and down the Baja peninsula.
The problem here is that an enormous number of eminent
Americans have worked environments that share these attributes and both
they and their companies are still with us. Take Robert Rubin and Jon
Corzine, for example. At the same time that Enron was up to its antics, I
had numerous business interactions with the top Wall Street firms,
including those associated with Vice Chairman Rubin and Senator Corzine,
and I must say that the air was thick with greed. It was impossible to
attend a meeting with Senator Corzine's underlings without some member of
the deal team uttering that time-honored Wall Street cliché: "Be
sure to count your fingers after you shake hands with them." And,
remember, this was not a bunch of sleazy Enron guys, but investment
bankers in custom-tailored Italian suits at Wall Street's "most
Of course, both Rubin's current firm and Corzine's
former firm have had their share of greed-induced troubles, some directly
related to Enron, but Ken Lay is the one currently on trial and neither or
them, despite their ties to the Democratic party, have yet to be indicted.
And, of course, all settlements involved Rubin and Corzine's companies had
made clear that neither of them admits to any wrongdoings.
As to the supposed hormonal excesses, Enron's behavior
strikes me as a tame version of what one might observe in your typical
Caltech professor, both before and after he has bagged his Nobel Prize.
Indeed, by Southern California standards, the Enron movie makes Skilling
and company come off as complete wimps. (Actually, Skilling himself is no
wimp, having basically broken every bone in his body—a
badge of honor for true risk-takers. As I will discuss in the third
installment, Jeff Skilling is a really impressive guy on many counts,
something the documentarians do not want the viewer to know.)
My old company, GE, was infamous for the Outward Bound
excursions that it inflicted on aspiring senior executives, but it has yet
to implode in a financial scandal. Possibly because of the strippers and
the "extreme behavior," I was repeatedly asked by the media back
in the early days of Enron whether GE was next in the scandal line. I said
"no way," and I was right. (The only significant thing I got
significantly wrong about Enron was to underestimate the degree of its
malfeasance in the California electricity crisis.)
Myth 2: Andy Fastow was nothing more than the fall
guy for Skilling and Lay.
Andy Fastow is what the crowd that I hung out with on
Wall Street would call "a piece of work." The deal structures
that he created were so dumb that they were brilliant. The Enron movie
portrays Fastow as a mere smirking dupe. They conveniently omit to mention
that he had no sense of boundaries as well as every indication of being a
full-fledged pathological liar. As Skilling and Lay's defense attorneys
recently pointed out to the jury, Fastow managed to involve both his wife
and two sons in the Enron affair, sending his wife to prison for a year in
Unquestionably, Fastow serves as a convenient scapegoat,
but the possibility exists that only he and those who worked for him
(including Sherron Watkins) were truly engaged in criminal activity. Given
the way juries can think, however, this is one possibility that I would
not bank on.
Myth 3: Sherron Watkins is the hero in the Enron
I must give Sherron Watkins credit for taking her
concerns about the Fastow crowd to Ken Lay, even if she did so anonymously
at first. Of course, the movie fails to mention that she already had been
fired once from Enron, had just rejoined the company, and therefore may
have had relatively little to lose. I have seen no evidence that she even
had a copy machine operator report to her and the title of "Vice
President" is essentially meaningless at a financially-oriented
company. Watkins encouraged Ken Lay to go to the SEC, but when he failed
to do so, she did not pick up the phone and call them herself. If she had
had the guts to do that one simple thing (and had lived to tell about it),
she might be a U.S. senator now rather than someone you call when you
cannot get Zig Ziglar to speak at your conference. (From what I have been
told by somewhat reliable sources, Enron board member Wendy Gramm did
indeed pick up the phone and call the SEC. Of course, since she is Phil
Gramm's wife, it would not do to make her the hero of the Enron story.)
Myth 4: Jeff Skilling and Enron's board of directors signed off on all
of Andy Fastow's deals.
This is essentially a direct quote from the Enron movie
and it is patently FALSE. As illustrated in the appendix to my book and as
mentioned in the Powers report, Jeff Skilling's signature was
conspicuously absent from the key signoff sheets on Fastow's deals.
Technically, these deals were never approved and should not have gone
forward, though for some as of yet unspecified reason they did go through.
Some of the later Fastow deals were never even submitted to the board of
directors for approval. As I outline in my book, Fastow's strategy was see
what he could sneak by in each deal and would become increasingly bolder
with each passing deal.
The impression that I get is that while Fastow and
Skilling may have been close at one time—Fastow is
said to have named his son "Jeff" after him—Skilling
may have started to figure out that his coworker was more than a little
psychotic and after becoming CEO made sure to distance himself from the
Myth 5: Enron's "smartest guys" veered into
idiotic ventures like trading weather.
The Enron movie has a good time poking fund at Enron for
thinking that it could "trade weather." While this may seem like
a bizarre thing to do to the typical American, derivative securities
related to weather are a big and growing business and Enron stands out as
the pioneer in this field. When I get to the facts about Enron next week,
we will see that not everything that Enron did can be spun as having
negative social consequences.
Myth 6: Enron benefited greatly from putting their
guy, George W. Bush, in office.
George W. Bush was the worst thing that ever happened to
Enron. All of the company's bad moves would have been minor setbacks if W
had pushed the Kyoto accords and promoted a global market for tradable
emission credits that Enron would likely have run. And, if W was so good
for Enron, why is his Justice Department working so hard to send as many
of their number off to jail as they can?
Myth 7: Mark-to-market accounting is evil.
The Enron movie has nothing good to say about
mark-to-market and omits to mention that FASB now requires its use under
most circumstances. What Enron did was not mark-to-market accounting, but
mark-to-model accounting, and they constructed their models to achieve
what they wanted to, all with the blessings of their accountants and
lawyers. This and other subtleties are both well over the heads of the
folks who made the Enron movie as well as its typical viewer.
Myth 8: Enron was the seventh largest company in the U.S.
So says Fortune, a main source for the Enron
movie. Fortune's methodology for determine their top 500 firms is
severely flawed, as has frequently been pointed out. Enron had a large
market capitalization, but then so did many other dotcom bubble stocks. It
had giant revenues, but that is because they counted as revenues both
sides of every deal that flowed through their trading desks. If FedEx were
set up so that they "bought" every package from the shipper and
then "sold" it to the recipient, then they would be even larger
than Enron. Enron was small enough that when it went down, its ripples
were largely isolated to the Houston area and then only briefly.
They are many more myths that surround Enron, but these
eight hit the high points. Next time, I will take a look at some
inconvenient facts about Enron.
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 www.millerrisk.com.