The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Once, the company sent an analyst to pose as a porta-potty salesman. His task was to figure out how long a plant was supposed to be under construction so the traders could learn when it might start producing power. Enron sent analysts to meetings of the Washington State’s electric commission, where policy makers talked about the level of water in v

For Skilling himself, says a former aide, “the stock price was his report card.” When it rose, he was exultant; when it dropped, he was glum. Whenever he was on the road, Skilling would call several times a day just to check on how the stock was performing. Lots of corporate executives were fixated on their companies’ stock price during the bull ma

The Enron trading desk, Skilling added, always had a matched book—meaning that every short position precisely offset every long position—and made its trading money merely on the commissions, not on speculative risk. Right up until the end, Skilling and his lieutenants stuck to that line, long after it had become demonstrably false.

The 1982 book In Search of Excellence, perhaps the best-selling management tome of all time, was written by two McKinsey partners.

For the analysts, there was a final reason they needed to keep their buy ratings on Enron: the ugliest and most powerful reason of all. There was simply too much investment-banking business at stake not to have a screaming buy on the stock. In an earlier age, Wall Street research and investment banking had been separated by a so-called Chinese Wall

According to a document prepared by RAC, in the first six months of 2000, the traders committed 64 “limit violations . . . where no tangible action was taken to adjust commercial personnel views regarding the importance of a risk management framework and risk control environment.” In other words, Enron’s traders were violating the trading limits fr

Enron also relied heavily on mark-to-market accounting to help it reach its earnings goals. Originally, mark-to-market had been used only in the accounting of natural gas futures contracts—that, after all, is what the Securities and Exchange Commission had agreed to back in 1991. Over the years, Enron had quietly extended the practice. It marked-to

no company can prosper over the long term if every employee is a free agent, motivated solely by greed, no matter how smart he is. No company can function if it only hires brilliant MBAs—and sets them against each other. There is a reason companies value team players, just as there’s a reason that people who get along with others tend to do well in

Thanks in part to those conflicts of interest and lack of competition that Senator Shelby had talked about, along with a good helping of old-fashioned greed, the credit rating agencies had assigned AAA ratings (even safer than Enron’s rating) to billions of dollars of mortgage-backed securities that should have been labeled “junk.” If “tricking an