Enron?s Best-Sellers

By Rick Jurgens In the mid-1990s, representatives of a then-little-known company called Enron came to California and helped persuade regulators and elected officials to launch the state?s path-breaking experiment in electricity deregulation. Then the 2000-01 energy crisis shook California with rolling blackouts, soaring power costs, and the landmark Pacific Gas & Electric bankruptcy. Enron followed, also collapsing into bankruptcy. Somewhere in the history of Enron, many lessons for California are waiting to be found. Enron led the charge toward deregulation in California and around the nation. The company aimed?with some success?to make itself the stock exchange for energy trading and rang up billions of dollars in California trading profits during the crisis. And, thanks in no small part to chair Ken Lay?s strong backing of George W. Bush, Enron also wielded considerable political clout in debates over national energy policy and influenced appointments to the Federal Energy Regulatory Commission, where Californians sought relief from skyrocketing power bills. Three fine books by journalists dissect the corpse of Enron without offering much insight into what went wrong here. Still, they?re worth reading for the lessons they teach about hubris, greed, and the dangers of a corrupted corporate culture fueled with billions of dollars from investors and lenders. New York Times reporter Kurt Eichenwald?s "Conspiracy of Fools," now in its fourth week on that newspaper?s best-seller list, offers a lively read and an encyclopedic reference with which to follow future trials of top Enron executives. Two books completed during the summer of 2003 also deliver. "24 Days," by Wall Street Journal staffers Rebecca Smith and John Emshwiller, provides an interesting and frank look behind the curtain at the workings of the nation?s most influential business publication. And "The Smartest Guys in the Room," by Fortune magazine reporters Bethany McLean and Peter Elkind, does the best job of breaking down the Enron phenomenon into understandable elements and supplying useful context. These books offer a thorough cataloguing of Enron?s foibles and felonies. The scandal led to legislation and rules to prevent others from mimicking its accounting and financial shenanigans. There have even been a few perp walks and prosecutions of wrongdoers. By comparison, California has made little headway in the four years since its energy crisis. Sure, we kicked out Gray Davis, but Arnold Schwarzenegger has paid little attention to energy issues. There is still no popular consensus about the wisdom of introducing competition into the regulated electricity industry. And, while even those who disagree bitterly about deregulation can sometimes agree that moving decisively toward competition or back toward regulation would be better than sitting in limbo, that?s where we remain. The current cobbled-together hybrid system, composed of rejuvenated utilities, weakened merchant generators, and a frequently changing cast of regulators, eerily recalls the compromises that paved the way to our first disaster. These authors aren?t particularly interested in Enron?s roots in the energy industry or its role in the California crisis. According to these accounts, Enron?s leaders viewed California as an opportunity?but one of many. Although California was a key but lonely profit center as Enron teetered toward collapse, top executives blinded by arrogance and greed and a perpetual quest for the next big deal shrugged off the state?s problems as little more than a public-relations headache. Two California behemoths appear only as supporting actors. CalPERS, operator of the state?s public employees pension system, profited from investments in two of the special-purpose entities that Enron established to move debt off its balance sheets. San Ramon?based ChevronTexaco bankrolled the ill-fated attempt to bail out Enron by Dynegy, a Houston-based energy trader. These books instead use Enron as a case study of the irrational exuberance that inflated?and then burst?a series of investment bubbles during the late 1990s. With the benefit of more reporting time and the chance to include later events, Eichenwald?s "Fools" has produced the best read. Traveling along a time line from Enron?s creation to its collapse, each chapter comprises a few dozen episodes, often just a few paragraphs, rarely more than a page or two. The overall effect is a little like eating a bag of M&M candies. Each segment is punchy and contains detail and drama, so that you don?t want to stop. The reporting is impressive. Eichenwald provides a comprehensive summary of when, how, and where Enron fell, and who and what did the crucial deeds. He describes how a mid-level Enron analyst wrote a memo warning of the perils posed by its mounting debt and ineffective hedging arrangements, then walked out the door when he was ignored. He documents the jolting resignation of chief executive officer Jeffrey Skilling only six months after taking the top job, and Skilling?s attempt to resume his old job as the company teetered toward collapse. So searing is Eichenwald?s portrayal that it is hard to imagine that anyone ever feared Enron. Delusions of grandeur and the trappings of power left Skilling and Lay, the two chief executives, detached from reality. Andrew Fastow, chief financial officer, who has been sentenced to 10 years in prison, emerges as principal villain, a tyrant wrapped up in his greedy schemes and surrounded by a large supporting cast of scoundrels and moral waverers. Eichenwald dismisses some story lines that shaped popular perceptions of the Enron affair. The letters of whistleblower Sherron Watkins alerting Lay to accounting deceptions seem less altruistic in light of Watkins?s subsequent letter demanding a promotion as her reward. Citing the opinions of economists, he judges Enron traders? well-documented and indelicately labeled ?Fat Boy? and ?Dark Star? market manipulations as only secondary causes of the crisis. Eichenwald attributes Enron?s collapse to flawed business decisions, mounting debt, and dependence on accounting fraud, but his kernels of insight are scattered randomly throughout the melodrama. For my money, "Smartest Guys in the Room" remains the most useful book for those seeking to make sense of the Enron debacle and draw lessons for the future. It lays out the 1993 oil-trading scandal at an Enron subsidiary that foreshadowed many of its parent?s eventually fatal flaws, including lax executive oversight with too little curiosity about the source and substance of profits. It describes Enron?s disastrous investments in overseas power plants and water systems and its poorly thought-out broadband venture. It describes, with less drama but more coherence than Eichenwald, how Enron?s incentive system and corporate culture rewarded growth and dismissed concerns about risk. While Fastow emerges from Eichenwald?s tale as a villain whose greedy schemes undermined Enron?s financial soundness, "Smartest Guys" more convincingly presents him as the product of the poisoned atmosphere of an out-of-control company. It parcels out more of the blame to the selfish and incompetent executives who oversaw clunky businesses that Enron?s financial chicanery aimed to hide. "Smartest Guys" also includes a clear and concise summary of how Enron profited from the California crisis, primarily by going long in a market where prices rose sharply; secondarily?but much more notoriously?through the gaming strategies of its roughly 100 West Coast traders. The story of Enron has become a sort of Watergate for the business press. It has inspired business reporters and showcased the reporting, writing, and analytical skills of some of the field?s best talents. But the Enron story has also exposed the shortcomings of business journalism. Enron?s flaws were overlooked for too long by the leading publications. Basic accounting and financial warning signs were missed by many reporters. Those who discovered them saw their stories buried in back pages or regional editions, and got little encouragement to dig deeper. Those lessons are most sharply presented in ?24 Days,? which should be a textbook for journalists who aspire to cover business and finance. Smith?s recounting of her conversation with the widow of Cliff Baxter, a former Enron executive who committed suicide as the scandal and investigation came toward him, starkly reveals why reporting requires thick skin and humility. The tale also reveals the lack of resources, competitive pressures, enticements, and intimidations that must be navigated by even the most expert and experienced reporters at the nation?s premier business daily. "24 Days" also contrasts the views and approaches of Emshwiller and Smith, candidly revealing how they unearthed some clues and missed others on their way to discovering how accounting tricks and fraud hid Enron?s mounting debt. Their journey?from covering Enron as a routine workaday story to seeing in it every journalist?s brass ring, the Really Big Story?provides the road map for their 400-page book. At one point Smith, describing her slog through an internal Enron document spelling out one of its achingly complex financial machinations, says that the company ?had become a kind of corporate genome project that could require years to fully map.? That observation could be applied to the whole Enron phenomenon. As for California?s current system, which backers describe as a hybrid of regulation and competition, I fear that only the next crisis will prove that we have once again created not a Michael Jordan but a Frankenstein. ?Rick Jurgens covers energy for the Contra Costa Times.

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Enron?s Best-Sellers

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