Summary points of a movie titled “Enron: The Smartest Guys in the Room“, describing the story

of the rise and fall of the biggest corporate bankruptcy and scandal in the US, the Enron.

Actors: Kenneth Lay (CEO, Enron Corp), Jeffrey Skilling (President and COO, Enron Corp),
Andrew Fastow (CFO, Enron Corp), Lou Pai (CEO, Enron Energy Services)

Enron Quick Facts:

 Used to be US’ 7th largest company

 Insider trading: company insiders dumping their personal holdings of Enron stocks before
the news leaked to the public. Skilling $66 million, Lay $300 million

Part 1: Kenny Boy – Ken Lay’s background

 From Missouri. Was a son of a baptist preacher

 PhD in Econs at University of Houston
 Crusade of deregulation, tirelessly lobbying Federal Government to impose deregulation
on energy industry.
 Established Enron in 1985
 Close to Bush famliy
 Valhalla Scandal: Louis Borget and Tim Mastroeni were rogue traders. Betting too much
on the movement of price of oil (probably using derivatives), winning much through
insider information. Channeling some profits to personal accounts, but not
fired/punished, instead being “released” to make more money for Enron. in 1987, they
were jailed.
Part 2: Man with Big Idea – Jeff Skilling

 Jeff had idea of a “stock market” of gas –> birth of Enron energy trading business
 Using mark-to-market accounting, suspiciously signed off by Arthur Andersen & SEC
 Establish PRC (performance review committee) system to evaluate employees, rank
them, and then fires anyone who fall in the lowest rank –> BRUTAL!

Part 3: Guys with Spikes – Lou Pai

 Skilling’s lieutenants: Lou Pai the Enron Energy Services CEO

 Lou Pai loves money & strippers. Lou sold his stocks & got $250 million, then quit EES
and moved to Colorado.

Part 4: Love me, Love me – US stock boom 1999

  Enron stocks rise, soaring, while profits stagnant and actually losing money
 Dabhol power plant in India –> built big power plant, but Indian people cannot afford.
the project was scrapped, Enron lost $1 billion, but was later concealed by the accrued
earnings thanks to the mark-to-market accounting.
 The real money comes from: merger with PGE (Portland General Electric)
 Starting to put employees’ 401(k) in Enron’s own stock

Part 5: Love for Sale

 All analysts loved Enron, except John Olson of Merrill Lynch. Then Olson was fired.
 Applied energy trading concept to bandwidth trading. Deal with Blockbuster to provide
videos on demand. This venture was a failure and Enron lost money, but again concealed
by the accounting tricks.

Part 6: Emperor has no clothes

 On March 2001, a Fortune reporter named Bethany McLean ask Jeff a simple question:
“how do Enron make money?”. But then Jeff was agitated and avoiding the question.
Then Fastow & team went to her to explain things about Enron’s financials, and then she
published the article anyway titled “Is Enron Overpriced?” to raise a point why Enron
was trading at 55 multiple.
Part 7: The Sorcerer’s Apprentice – Andrew Fastow

 Andy used “structured finance” to hide losses & debts, using SPVs. SPVs were used to
issue debt and deliver it to Enron as cashflow.
 Those SPVs: Raptors, LJM, Jedi, etc.
 LJM: Andy as general partner, while being Enron CFO –> ultimate conflict of interest.
Wll street banks invested in LJM.

Part 8: Useful Idiots – Wall street investment bankers relationships with Enron

 JPM, Merrill Lynch, Citigroup, etc invested in LJM, they also did trade with Enron.
Arthur Andersen and Vinson & Elkins (Enron’s lawyer) also participated.
 Merrill participated in cooking Enron’s books, by pretending to buy 3 Nigerian barges
from Enron and sell them back in 5 months –> in essence, this is a repo loan.

Part 9: Ask why, asshole – First crack on Enron’s ship

 Skilling said “asshole” to analyst asking why Enron didn’t produce a balance sheet.
 Keeping stock prices up + piling up lossess & debt then became unbearable
 EES lost $500 million –> Enron had to make up the numbers to conceal the loss.

Part 10: California – California scandal

 Rolling blackouts in California –> price of electricity rose

 Deregulations allow power grids and line to be owned by private company
 Tim Belden runs West Coast trading desk, and run several “strategies” to pump up prices.
One of the strategy was called the “Ricochet” strategy: exporting power out of California,
and bring them back in when prices soared.
 Those strategies made some money, but the real money was made by betting that prices
will go up. made $2 billion.
  Stanley Milgram’s experiment: disturbing result, in which 50% of subjects were willing
to hurt other people as long as there was a seemingly legitimate authority telling them to
do what they do.
 Stage of emergency was then established by Gray Davis (the California governor), so the
gov’t can seize the power plants and bring the powers back to California.
 Davis tried to impose price control (electricity price cap) in California, tried to lobby
Federal Govt to do that, but the Fed Gov’t didn’t budge. FERC (Federal Energy
Regulatory Commission) also did nothing.

Part 11: The Ship is Sinking – start of collapse

 Jeff Skilling announced his resignation on August 14th, 2001, the captain was leaving the
sinking ship.
 Enron stocks starting to fall

Part 12: Jeffrey has Left the Building – Insiders’ panic

 Sharon Watkins, a former subordinate of Andy Fastow, testified about the accounting
scandals and numbers that didn’t add up –> the start of unraveling of Andy Fastow’s
SPVs.
 SEC inquired Enron after an article published about the accounting irregularities.
 Arthur Andersen shredded files and evidence
 Andy Fastow was fired after Enron board found out that he made $45 million personally
from LJM.

Part 13: It was a Wonderful Life – the Bankruptcy

 On December 2nd, 2001, Enron declared bankruptcy. Employees were laid off.
 It was revealed that Skilling unload his stocks AND THEN telling employees to buy
Enron stocks on their 401(k).
 Insiders unloading their stocks before the stocks plummeting, while the frontliners cannot
access their 401(k) investments.
 Arthur Andersen collapsed.

Bankruptcy Facts:

 20,000 employees lost their jobs and medical insurance, they got $4,500 average
severance pay
  Top execs were paid bonuses totaling $55 million
 Employees lost $1.2 billion in retirement funds, and retirees lost $2 billion in pension
funds.
 Top execs cashed in $116 million of their stocks in 2001.

Bonus facts:

 Ken Lay was found guilty on May 2006, and could have faced 20-30 years in prison. He
died of a heart attack on July 5th, 2006.
 Jeff Skilling was found guilty on 2006, currently serving 14 years of original 24 years in
prison. Due to be released on 2017.
 Andrew Fastow was found guilty on September 2006 and served maximum 10 years of
jail time. He forfeited $23.8 million of family assets. He was released from prison on
December 2011.
 Lou Pai was not charged with any crime, he only forfeited $6 million due to him from
Enron’s insurance policy.