The story of Enron's meteoric rise and stunning fall is a cautionary tale of ambition unchecked by ethics. This saga of greed and deception features larger-than-life characters trapped in a real-life morality play.
Let’s examine these players, one by one.
The Founder
Our protagonist is Kenneth Lay, a lad of humble origins. Born in 1942 in rural Arkansas, young Kenneth grew up without indoor plumbing. But the Lay family's fortunes turned when they moved to Missouri. All three Lay children attended the local state university at little cost. There, Kenneth met economics professor Pinkney Walker, who became his mentor.
After getting his Ph.D., Lay landed a job at Exxon's predecessor, Humble Oil. His mentor, Walker, then secured him a Pentagon procurement role. A gig at the Federal Power Commission followed. The well-connected Lay soon caught President Nixon's eye, who made him undersecretary of the Interior.
As luck would have it, Lay's time in Washington coincided with the deregulation of public utilities. Sensing an opening, he dove into the private sector - first in Florida, then Texas. In 1984, Lay engineered a merger, creating Enron. An outside consultant suggested the name "Enteron," which sounded too much like a part of the digestive system. The Wall Street Journal also mocked the name, which was shortened to Enron.
Lay envisioned Enron dominating the newly deregulated natural gas industry. But he also nurtured fatal flaws: a hunger for status, reluctance to rein in subordinates, and moral blindness. Even as Enron expanded globally, Lay spent more time among Manhattan and D.C. elites. Despite earning over $100 million in 2001, lavish spending left Lay heavily indebted.
The Architect
While Lay provided the vision, Jeffrey Skilling served as the architect. After studying engineering at SMU, Skilling realized his true love was making money. At Harvard Business School and McKinsey Consulting, he honed his analytical skills. In 1990, Enron successfully wooed him from McKinsey.
Skilling saw untapped potential in Enron's pipelines. Rather than simply book revenue as it arrived, he adopted aggressive "mark-to-market" accounting. This allowed Enron to record income from long-term contracts immediately. Shockingly, the SEC approved this approach in 1992.
Mark-to-market was a license to print money. Enron could book speculative future earnings today, borrow against them, and then generate more paper profits. This house of cards made Enron seem like a juggernaut.
FORTUNE called Enron “the most innovative company in corporate America.” That's what for six years running, from 1995 through 2000.
It was an "extraordinary" and "unique" business, concluded a respected Goldman Sachs analyst in early 2001.
The Accountant
To conceal mounting debts, Skilling enlisted rising star Andrew Fastow. Fastow created thousands of opaque special-purpose entities like Chewco and Raptor. These entities secretly channeled money from shareholders and employees to Enron execs.
But Enron's ruse couldn't last indefinitely. Hedge fund manager James Chanos detected cracks in their polished facade. While others accepted Enron's too-good-to-be-true story, Chanos identified red flags. By shorting Enron stock, he profited handsomely as the truth emerged.
Rank-and-file employees were devastated. Urged to overload retirement funds with Enron shares, workers saw life savings vanish. But execs like Skilling sold prefabricated shares before the collapse. The human toll was the bitter end of years of accounting tricks.
Hubris and Downfall
Meanwhile, Enron executives were stunningly out of touch.
In 2001, while Enron was collapsing under massive fraud, Ken Lay buttonholed the next CEO Jeff Skilling. He wanted Skilling's opinion on carpet and seat upholstery samples for the new $50 million Gulfstream V.
As Enron spiraled toward bankruptcy, Ken Lay's wife Linda demanded the company buy her a new $30,000 gold, diamond, and emerald Harry Winston watch.
Why?
To "lift her spirits.”
In the finale, justice caught up with Enron's band of brigands. Skilling and Fastow went to prison for over a decade each. Lay died of a heart attack before sentencing. The tragedy of Enron reminds us that unrestrained ambition and greed sow the seeds of destruction. The "smartest guys" proved not so smart after all.
The Moral of the Story
Beyond the personalities, Enron's boom and bust traces to systemic regulatory failure. An obscure 1990 SEC decision allowed "mark-to-market" accounting. This allowed companies to book speculative future profits today. This fateful rule opened the door to mass financial manipulation.
Enron aggressively exploited mark-to-market. But they weren't alone. Other firms like Tyco and WorldCom embraced fake earnings. This epidemic of accounting sleight-of-hand contributed to the tech bubble. The SEC utterly failed in its duty as a watchdog.
Even more shocking, the revolving door between government and business fostered cozy ties. Enron's principal auditor, Arthur Andersen, faced glaring conflicts of interest. But the SEC turned a blind eye, never questioning Enron's dubious finances. It took an outsider like Chanos to spot the rot.
The Enron debacle holds critical lessons. Ambition and greed make a toxic cocktail without ethics. But the true villain is the system that enabled Enron's malfeasance. Regulatory agencies failed in their role as public guardians. Until that changes, expect more corporate criminals flying private jets onto the next financial disaster.
Above all, the Enron saga reveals that unrestrained greed inevitably leads to ruin. If unchecked by ethics, the brightest minds on Wall Street will engineer ever more clever schemes to exploit loopholes.
The Prosecution
Here's what's curious.
None of Enron's leaders thought they were doing anything wrong.
When questioned about Enron's web of deceptions in 2001, CFO Andy Fastow indignantly told reporters:
"I was never unethical; maybe I pushed the limits for structuring deals, but I never misled Enron or investors."
Indeed, in the five years that followed - as government investigators devoted countless hours to unraveling the Enron riddle - many experts felt that a case against the two former CEOs wasn't winnable.
The accounting issues were just too complicated. The tactic that the prosecutors ultimately used, to great success, was to make the case about lies.
As prosecutor Sean Berkowitz- my Harvard Law School classmate- told the jury in his closing argument
"These men did not try to put the company into bankruptcy. They felt if they could just hold on, if they could just lie a little bit longer and get to the next quarter and the next quarter and the next year, everything would be fine.... They figured the market wouldn't understand. They were arrogant, and they decided what the market heard and what the market didn't hear."