Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (original 2003; edition 2003)

I will be thinking about this book for a long time! What is it really about, anyway? What is truly wonderful is... the authors tell us, and I suspect they're right, that pretty much none of the folks involved in this massive fraud, none of them felt they were doing anything wrong.

One of the most chilling statements by the authors... this book came out around 2003. The authors wondered whether accounting and finance would be more transparent or whether the next bull market would be build on similar illusions. Ach, the real estate bubble sure looked a lot like Enron. How can something worthless get painted up to look valuable and then sold.

This is really the interesting puzzle. Is illusion really a polar opposite of reality? Is it more like illusion has its own sort of reality. There are layers and layers of reality. Hmm, I have been learning about photoshop and its layers of pixel transformation. Yeah, accounting is really like photoshop. The image is a kind of reality. What does it mean for a picture to be accurate? Yeah, photoshop and ebay. How much of ebay selling is driven by photoshop?

It's really sad to think, how much of our economy and society has been spun around by the creation of layers and layers of illusion, where folks have totally lost track of any underlying reality? OK, that is a nice puzzle. Our analytical powers have grown just as tremendously. We can analyze any phenomenon and discover layers of layers of construction to the point where any sort of logical stopping point is lost. We can build up layers and we can dig through layers. It becomes a big abstract game.

That was a theme through part of this book, the purity of the trading ethic. Everything is an abstract game. Of course this is hideously destructive. But the puzzle is, how so? If reality isn't some stopping point, some top-most illusion that cannot be painted over, or some bottom-most layer that resists all analysis, if the layers are infinitely extendable in either direction, then where is the reality?

Maybe all the layers are real, maybe the reality is just that interplay of levels. No layer cancels out the reality of any other layer. If one layer can cancel the reality of another, the whole structure devolves into accelerating gaming. But if layers instead enhance each other's reality... if it is *all* real, all worthy of cherishing...

It is a curious business, all the strategies we use to isolate and purify and protect what is really worth caring about, and to discard and deny reality to what is not worth caring about. The Smartest Guys sure draws a vivid picture of one such strategy and where it led. ( )

The Smartest Guys in the Room is a thoroughly researched account of the rise and fall of Enron, one of the largest business failures in the history of corporate America. McLean and Elkind provide an incredibly detailed history of the company from its early beginnings to the eventual collapse and resulting horrendous impact on employees, pension plan participants and the vast array of stockholders who lost billions of dollars. While the book clearly describes the complex financial structures and lack of managerial competence, it could be somewhat confusing to a reader with limited knowledge of accounting and finance principles. The real meat of the book, the story that really compels you to keep reading, is the focus on the main characters involved in this saga - Lay, Skilling, Pai, Rice, Mark, the numerous finance and accounting staff who played key roles, the company's board of directors, and last but not least, Andy Fastow, the Chief Financial Officer of the company. The book presents most of the individuals in a fairly balanced light (i.e., they all played roles in running the company into the ground), however the authors really cast Fastow as the arch villain. This is probably the case, given the amount of personal financial gain he manufactured through his financial and accounting strategies, however, it is clear that many people smelled the rotting fish, but did nothing about it because they too also achieved spectacular wealth. No one wanted to shut down the gravy train. The rampant greed, coupled with the loose to non-existent ethical barometer that permeated the company, made the company's demise seem inevitable. A well-written book in the vein of Barbarians at the Gate and Den of Thieves. ( )

Readable account of this canary-in-the-coalmine scandal (though there were plenty of other canaries) about a company that slowly rotted from the beginning while using accounting tricks to make it seem like it was in good shape. The corporate culture of excess was a huge contributor, since people got to spend money on themselves any way they wanted as long as they could “book” results. Another important part was the company’s transition away from building actual things to trading—financial companies in which individuals get performance bonuses, I now think, are inherently parasites; paying for performance, especially paying huge sums for performance, is the best possible way to get accounting fraud. What’s really striking is how relatively small the amounts started compared to the payouts now common on Wall Street: when you get $100,000 for your job, but see someone close to you pulling in $1.5 million, you start to think “how do I get in on that?” and the answer is usually “cook the books.” Enron took it to extremes in every direction, as the book recounts, with pretty readable explanations of the special purpose vehicles used to hide Enron’s losses.

Something I hadn’t picked up last time I read about this: a big part of the immediate bad decisions that combined with the fraud to drive Enron down was its big investment in video-on-demand, which it thought it could make financially rewarding very quickly. But the content owners in Hollywood wouldn’t cut good deals! Quelle surprise.

As I was finishing this book, I was reading the big investor complaint against Bank of America, and one of the amazing things in the complaint was that by 2006 Countrywide’s CEO was internally admitting that they did a terrible job with option ARMs (also known as pick-a-pay, where you were negatively amortizing if you paid the minimum, and most people did), and complaining that the business wasn’t as good for them as it was for World Savings, which supposedly had much higher underwriting standards and did a better job of controlling eligibility. Yeah, not so much (World Savings also turned into a financial nightmare under the weight of its bad mortgages). Mozilo didn’t understand that its competition had also, driven by the selling imperative, made exactly the same unsustainable decisions. Basically, Enron didn’t teach anyone in positions of power anything, because they were willing to step on anyone if they got paid big. Without the huge disproportion in compensation between those on the top and those on the bottom, the incentive to subvert controls would have been much smaller; bring back the 90% top rate! ( )

In light of recent corporate meltdowns, Enron's greed may now seem small potatoes. This is still a worthwhile read because it explains so well how several industries are supposed to work--natural gas, electricity sales in California, broadband--and how Enron did an end-run. I can't say I thoroughly understood how accounting firms work with such big companies, but I'm sure I understood more than I'll ever comprehend about sub-prime mortgage casinos.

An excellent text for students and business journalists wondering, "How can I explain something so complicated?" ( )

brilliant re-telling of a tale of corporate greed ( )