The Smartest Guys in the Room is a gripping narrative of Enron that was once hailed as the smartest company on earth, a company that symbolised the virtues of entrepreneurship and free market. The company that could do no wrong finally turned out to be a big scam that was fuelled by greed, arrogance and brilliant people feeding on their own success and ending up smoking their own pipe. It raised serious corporate governance issues most of which still remain unanswered.
This one is an absolute stunner. It is better than any fast, action packed thriller. Being from the Konkan belt, the area where Enron’s most controversial Dabhol plant is located, I had a special interest in the book and it did not disappoint at all. The Smartest Guys in the Room tells the story of the incredibly fast rise of Enron and even faster demise. It’s a story that has many attributes common to other stories like Lehman Brothers, LTCM or Bear Sterns but Enron is also different for the sheer bravado, audacity and recklessness of some of the main players. Also it involved a purposefully spun yarn of incredible lies – a fraud of giant magnitude.
Mclean and Elkind have done a splendid job. It’s a book written with painstaking efforts and research and it shows in their detailed chronicling of Enron saga. Enron stormed its way to the top of energy companies by changing the way the business was done. It created the market for trading energy just like any other commodity and became the most dominant player of it. Under the stewardship of COO Jeff Skilling it assembled a team of brilliant but vicious traders who were adept at exploiting the inefficiencies of the market thereby raking in millions. But while changing the industry Enron was also changing itself beyond recognition.
I think the story of Enron is the story of a culture gone horribly wrong both inside and outside the company. While creating a company heavily dependent on trading that gave eye popping profits in a shorter span instead of traditional asset heavy projects that took years to generate profit, Enron openly embraced the traders’ culture with its cut throat competition. The money was flowing freely and most of the top brass was raking in obscene amounts. With that came the opulence, scant disregard for cost control and unnecessarily heavy emphasis on deal making. The monetary rewards were tied to the big revenue numbers and it did not matter whether the project succeeded or not. Also it did not matter even if you actually spent more than your revenue as long as you met your revenue target.
Skilling’s obsession with the market and viewing Enron’s stock price as the ultimate measure of success also fuelled this short term quarter to quarter outlook and with that came the financial shenanigans – clever, complex structures created to take the debt off Enron’s balance sheet and prop up its earnings. A lie begets a lie and this manoeuvring continued, first implicitly, walking a tight rope of accounting jugglery. But soon with a CFO like Andrew Fastow in the driver’s seat who clearly took the motto “Greed is Good” to heart (though Fastow always thought otherwise), Enron crossed the line. In blatant disregard of his fiduciary duty, Fastow formed special purpose entities that dealt with Enron to take its troublesome loss making projects off its books thereby making millions for him. But all of this was soon to end. With the bursting of tech bubble and after 9/11 market tanked and along with it Enron’s stock price. The triggers that were built in the structures were activated creating liabilities far greater than Enron’s net worth. With a gigantic off balance sheet debt and left without any meaningful cash generating asset, Enron had to file for the biggest bankruptcy in history.
I highly recommend this book. It is filled with fascinating characters and is an exciting ride for those who devour mystery and drama. There is so much more to be talked about this book that I think I will have to write another post about it.
Thank you for reading. I appreciate your time.
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