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This is a talk presented at the Texas Book Festival in Austin, Texas on Sunday, November 17, 2002 by Ross M. Miller, co-author of What Went Wrong at Enron and broadcast on C-SPAN's BookTV. The book is available at and a follow-up article to the book that appeared in Financial World, "Enron and the Banks," is available here.

Six Degrees of Enron


Ross M. Miller
Miller Risk Advisors


In the new economic world where Enron had its tentacles around virtually anyone and anything that mattered and many of those involved with the firm (at least those not under the watchful eyes of the Justice Department and the SEC) providing the “inside story” of Enron, I am proud of the fact that I had absolutely no links to the company prior to my stint as co-author of What Went Wrong at Enron. What I bring to the ever-expanding table of Enron authors is the perspective of someone who lived in the financial world to which Enron planned to dominate. By sheer coincidence as I started working on the book, I found that I shared some of the key formative experiences of the major characters in the Enron saga—Ken Lay, Jeff Skilling, and Andy Fastow—even though by the time they joined Enron I was off in a galaxy far, far away from them.

 Jeff Skilling made Enron’s aspirations clear at one of Enron’s many road shows when he boasted to the audience that Enron expected to “see GE in its rearview mirror.” Based on my nearly seven years at GE, the last two spent advising the senior management of GE Capital, this comment—in retrospect—is laughable. I worked in the two key areas in which Enron was gunning for Pinky & the Brain-like global domination—market design and risk management—both of which GE easily had an eight to ten year jump on Enron. Indeed, my recent book, Paving Wall Street: Experimental Economics and the Quest for the Perfect Market, covers these areas in some depth without a single mention of Enron. While my mentor, Vernon Smith, who wrote the foreword for Paving Wall Street shared the Nobel Prize in Economics that was announced last month, Enron ended up sharing the Ignobel Prize in Economics with WorldCom and its ilk. While I was at GE (and even afterwards as an investment manager and consultant) we never saw Enron in our rearview mirror simply because it was so far behind. In chess parlance, the folks at Enron were simply a bunch of patzers. (Which is not to say that Grandmaster Jack Welch has not eventually taken in by them as well as a partner in some of their sour deals and an investor in their special-purpose entities.)

My link to Ken Lay, is what brings me back to Texas today. I spent nearly two years in my first teaching job out of Harvard in the economics department at the University of Houston, which makes me something like a Texan twice-removed (though I don’t think Lyle Lovett would be convinced), a few years after Mr. Lay got his Ph.D. from that department and before he returned to Texas to run what would become Enron. (It is worth noting, if only for my own personal safety, that none of the three major characters at Enron was a native Texan.) The University of Houston economics department was notable for getting a jump on the Reagan Revolution of the 1980s; nonetheless, its faculty spanned the political spectrum. Its alums were a different matter; the few that I met (who tended to be entrepreneurs interested in giving the department money to promote the study of free enterprise) had a religious devotion to free markets that Ken Lay, with his own deep religious roots, shared.

 In What Went Wrong at Enron, I build on this insight into unbridled cowboy capitalism to show how Ken Lay helped create the culture at Enron that ultimately destroyed it. While many of Enron’s ventures into new markets for just about everything imaginable are rooted in the revolutionary ideas of one of the University of Chicago’s many Nobel Laureates in Economics, Ronald Coase, Ken Lay ignored Professor Coase equally important (and Nobelworthy) work on why non-market institutions, including families and corporations, exist as why they should be shielded from the discipline of the market. Aside from sanctioning the infamously toxic rank-and-yank personnel system, Ken Lay, unlike Jack Welch and other hands-on CEOs, failed to coordinate the actions of his underlings. At the same time that Rebecca Mark traipsed around the world in her stiletto heels on a shopping spree that would burden the company with overpriced assets, another Harvard Business School grad, Jeffrey Skilling, was trying to orchestrate an “asset lite” strategy modeled in part after his previous employer, McKinsey & Company. The hard cash that Skilling required to back up Enron’s foray into energy banking was being consumed by Mark’s relentless acquisition of hard assets that could take years to legitimately convert back into cash.

One thing that I found amazing from a Wall Street perspective is that so many companies enter into a banking relationship with Enron despite the fact that even with all its accounting manipulations it did not possess the liquid assets to back up its trades. An absolute requirement for any deal that I have ever been involved with was that every counterparty to the deal have at least a double-A credit rating. Enron managed to get by with at best a single-A rating and at times a triple-B rating. At this relatively low level of credit quality (just above so-called junk) history shows that the odds that Enron would be able to meet its obligations throughout the life of a twenty-year deal were rather slim. Indeed, Enron failed to beat the odds and folded well before twenty years had passed. Not only was Enron deficient when it came to the simple mathematics of risk, so were the companies, mainly utilities, that were willing to deal with it.

Burdened with cash-eating investments that were going sour faster than expected, it seemed clear to me that Jeff Skilling, regardless of how much he actually knew about Andy Fastow’s deals, was not having a good time during his brief stint as Enron’s CEO. My link with Jeff Skilling is that we were at Harvard at the same time, and although I have no specific recollection of him, we very likely crossed paths at Harvard Business School. I was in Harvard’s economics department at a time when two of the leading lights of the department, Michael Spence and Michael Porter, began to camp out at the business school. (Spence, who was the head of my thesis committee, went out to become Dean of Stanford Business School and win the Nobel Prize and Porter is regarded by many as the guru of management gurus.) I sat in on classes and worked on new cases at the Business School for much of the two years that I was writing on my thesis, which were also the two years that Skilling was there. The chilling amorality that people have associated with Skilling pervaded the business school campus and even the Wall Street Journal would write articles about the school’s bloodless approach to business strategy. (In passing, it is hard not to view Harvard honors graduate turned professional wrestling superstar Chris Nowinski as a kind of latter-day Jeff Skilling on steriods.) Furthermore, it appears that Jeff was absent on the day when they taught that it is unacceptable to mutter obscenities in response to analysts’ questions on conference calls.

Jeff Skilling, who went from a fast-track partnership at McKinsey to being Ken Lay’s golden boy, had an intellectual doppelganger within GE organization, Michael Carpenter, who had gotten his Harvard MBA several years earlier and joined GE from the Boston Consulting Group, arguably an even more prestigious consulting firm than McKinsey. Under Carpenter’s command, Kidder Peabody, the investment bank that Jack Welch bought on a fling, experienced its own accounting scandal, which led Jack to fire his golden boy—Jack says this was the hardest decision of his career—and sold Kidder to PaineWebber for stock that would in time become quite profitable. Miraculously, Mike Carpenter re-emerged as head of investment banking for Citigroup just in time to become embroiled in a string of new scandals (and have his biography expunged from the Citigroup web site), not the least of which had to do with Enron.

If Harvard Business School does anything well, it is to convince its graduates, especially those such as Skilling and Carpenter who were Baker Scholars, of their innate superiority. This supercharged confidence can easily become or be perceived as arrogance. Indeed, Enron under the influence of Jeffrey Skilling became guilty of what was known around GE as “drinking one’s own bathwater.” Enron’s notable big hires from outside the company—Sherron Watkins, Jeff McMahon, and, of course, Andy Fastow—did not come from financial giants, but rather from some of the market’s biggest losers. (If Nick Leeson, the rogue trader who sunk Barings, hadn’t been in a Singapore prison, perhaps Enron would have hired him.) While companies like GE for all their apparent arrogance actively look out to the world around them to find “best practices” and bring them in house, Jeff Skilling was truly an “inside man” at Enron. 

While both Ken Lay and Jeff Skilling may have been overzealous, they pretty much did everything by the book. Lay embraced the gospel of the free market and Skilling the gospel according to Harvard Business School circa 1979. In contrast, Andy Fastow is the most interesting of the three characters because he wrote not only wrote his own rule book, he got it past a bevy of gatekeepers that included lawyers, accountants, and investment bankers—and not just those of Enron, but those of its investment partners, which included GE and the biggest players on Wall Street. 

My personal connection with Andy Fastow is a bit more tenuous than the links to Lay and Skilling. My childhood home is at opposite end of Union County, New Jersey—now immortalized in the opening credits of The Sopranos—from where Andy grew up. What Went Wrong at Enron starts with a tale of trading cards taken straight from my formative days in New Jersey and from my direct experiences with one particular “dirty dealer” in baseball cards

However Andy misspent his New Jersey youth, he had moved on to special-purpose entities (SPEs), financial vehicles that have a multitude of legitimate uses and some more questionable uses as well. The example of an SPE that I give early on in the book—one used to finance the printing and marketing of a film, such as that Enron favorite Star Wars—is actually one that I worked on for a client. Indeed, I can probably boast being involved in even more SPEs than Andy Fastow. The difference is that every SPE-based deal that I worked on issued securities designed to end up in money-market funds or insurance-company investment portfolios and bore the seal of approval (for whatever it was worth) of the major rating agencies. Enron’s deals were hatched in the back alleys of Wall Street and escaped the scrutiny of anyone making an independent assessment of their risk. With Jeff Skilling claiming not to be an accountant and Enron’s accountants clearly out to lunch, many of the SPEs that have come to light so far (not to mention the side deals that accompanied them) were unimaginably absurd. While WorldCom simply employed the timeworn technique of reclassifying expenses, Andy Fastow’s machinations were creative along the lines of Steve Wozniak, the designer of the original Apple computer whose limited knowledge of computers allow him to do what others considered impossible. The problem is that unbounded creativity in computers can make you a fortune, while the same creativity in accounting and finance can land you in jail. 

As someone has kept a safe distance from Enron and its principal actors, I am struck by how if my own life had played out only a little bit differently that I too might now be facing a mountain of lawsuits and indictments rather than have the luxury of being a spectator to this whole fiasco. To me, the Enron story is so fascinating because Ken Lay, Jeff Skilling, and Andy Fastow are all—as Joseph Conrad put it—“one of us.” The financial world really does have all the seductive charm that Oliver Stone’s movie Wall Street so graphically portrays and it is easy to see how flawed, normal human beings could not only be slowly and completely corrupted, but also be so oblivious to the entire process. I have no doubt that the lead actors of this tragedy are convinced of their own innocence. Sadly, I doubt that anyone who has gone so far down the wrong road and taken so many others with them can ever find their way back.