Twenty-five years ago the chairman of a large Philadelphia bank volunteered
some advice to a newspaper editor fretting about his ability to assess a complex
"If you can't understand it, they are probably stealing," he suggested
with a boyish grin. It turned out that they were.
The spectacular rise and even more spectacular fall of Enron Corp. reminds
me of the banker's advice.
A half-dozen books have been published about Enron's collapse, but Conspiracy
of Fools, Kurt Eichenwald's richly detailed narrative, is likely to be a landmark
record - not just of what went wrong at Enron, but of how American business
went crazy during the 1990s, when it seemed that everyone had a shot at becoming
a billionaire in the New Economy.
Nobody understood just how Enron's earnings and stock price kept growing as
the company evolved from an obscure Houston pipeline company to the nation's
seventh largest corporation with 21,000 employees and global interests in electricity,
water and telecommunications.
When reporters or analysts asked too many questions, they were dismissed with
the stinging rebuke: "It's the new economy, stupid." Actually, as
Eichenwald documents in excruciating detail, it was the old con, stupid.
Eichenwald, a business reporter for The New York Times, tells the story like
a thriller, vividly re-creating scene after scene in which Enron's leaders manipulate
the numbers to keep the company's stock price high in the face of an seemingly
endless succession of bad business deals.
Eichenwald is almost certain to face questions about how he was able to tell
the Enron tale with such verisimilitude - more than 700 pages richly filled
with quotes and detailed portraits of countless scenes from the Enron boardroom
to barrooms to bedrooms.
In a 40-page section of "Notes and Sources," the author concedes
that the dialogue may not be perfect but argues that it is the "best recollection
of these events and conversations by participants, and more accurately reflects
reality than mere paraphrase would."
Should we believe that Eichenwald has fairly re-created all of these vivid
scenes? I think we should. A two-time winner of the George Polk Award for excellence
in journalism and a finalist for the 2000 Pulitzer Prize, Eichenwald has never
been accused of making things up. His notes in the book are meticulous - a virtual
page-by-page listing of sources of documentary evidence and reconstructed conversations.
Sources include Eichenwald interviews, records of FBI interviews, lawyers' notes,
e-mails, executive date-books, and a wide array of corporate and other documents.
It appears likely that some who shared the stories Eichenwald uses were attempting
to cast themselves in a favorable light. But, by the closing chapter, there
are few heroes visible on this ship of fools.
Billions of dollars were lost by investors in Enron stock, billions more by
California consumers - victims of the company's manipulation to create an electricity
supply crisis there - and billions more by Enron's own employees, who lost their
pensions and their jobs as the company went down.
And who was at fault? The answer, this reader concludes, is almost everyone
at the top.
Andy Fastow, the company's larcenous chief financial officer, clearly played
a starring role, wheeling and dealing through a series of private partnerships
to artificially inflate Enron's assets and earnings while funneling millions
in profits to himself and members of his family.
Jeffrey Skilling, the company's president, gave the green light to Fastow's
partnerships, and to ill-considered agreements cooked up by subordinates to
buy enterprises around the world with little or no understanding of the potential
risks to Enron.
And Ken Lay, the company's chairman, received compensation totaling more than
$40 million a year while claiming ignorance when substantial questions were
raised about Enron's operations and finances. When securities analysts or auditors
identified apparent irregularities at Enron, Lay or other Enron executives complained
to their bosses and had them removed.
(Arthur Anderson & Co., the company's auditor, failed in the aftermath
of the Enron train wreck, after its agreement to cover up widespread financial
irregularities at the company was revealed.)
By the end, the company had $30 billion in debt and virtually no cash flow.
Fastow, who stole $30 million from the company in various partnership frauds,
pleaded guilty in January 2004. He received a 10-year jail term and agreed to
give up $23.8 million in assets.
He is expected to be a star witness for the government when Lay and Skilling
face trials next January. Each is charged with more than three dozen counts
of insider trading, fraud and lying on Enron financial statements.
Beyond the greed and arrogance of Enron's managers, Eichenwald's Enron chronicle
portrays their blind stupidity as well.Given the level of mismanagement and
waste that permeated the company, the eventual collapse and discovery of misdeeds
was inevitable.Yet, Enron's leaders went forward with little appreciation of
the approaching disaster. The question was always, "How can we fix the
next quarterly earnings report?"
Eichenwald's relentless Enron narrative and reports on other recent major corporate
failures - from WorldCom to Tyco, Adelphia and Global Crossing - invite some
important conclusions about the state of corporate America.
At a time when executive compensation is at record high levels, corporate leaders
cannot be depended upon to consider the interests of their customers, their
employees or society as a whole.
The government and private regulatory mechanisms put in place to protect investors
and the public from corporate malfeasance cannot be relied on to protect the
public in the face of determined fraud.
And, finally, all of us are so vulnerable to the lure of easy wealth that we
are willing to ignore inconvenient questions about corporate behavior along
In the end, as investors came to recognize the epidemic of greed and corporate
wrongdoing at the heart of Enron and other corporate failures, they fled the
Eichenwald sums up the resulting train wreck: "Trillions of dollars in
stock value vanished, translating into untold numbers of second jobs, postponed
retirements, lost homes, suspended educations and shattered dreams."
Enron's fall from grace, he says, is the story of "a country torn between
its worship of fast money and its zeal for truth, between greed and high-mindedness,
between Wall Street and Main Street. Ultimately it is the story of the untold
damage wreaked by a nation's folly - a folly that, in time, we are all but certain
to see again."
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