It took 16 years to build a $65 Billion empire, then 24 days to portal7.info out how. Enron: The Smartest Guys in the Room. School of Business. The Smartest Guys in the Room PDF Summary by Bethany McLean & Peter Elkind give an The Amazing Rise and Scandalous Fall of Enron. Enron; The Smartest Guys in the Room - Free download as Word Doc .doc /. docx), PDF File .pdf), Text File .txt) or read online for free. Enron the smartest guys.
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This will be illustrated by examples drawn from the movie, “Enron: the Smartest Guys in the Room” and augmented with other accounts of Enron in the trade and . PDF | Publicity from recent scandals has generated increased discussion of the use of the film Enron: The Smartest Guys in the Room as an. The Smartest Guys in the Room. The Amazing Rise and Instead of stopping the fraud, Enron's board rubber-stamped management. • Enron made Andy.
In this book summary, we try to encapsulate all the events that contributed to the ultimate fall. Stay tuned! And Why? Are you the smartest guy out there? She is the author of several books and works as a columnist for Fortune. Peter Elkind is also a prominent author and highly-skilled reporter who is also a contributor for New York Times, Fortune, and other renowned journals. This energy trading company suddenly collapsed in , leaving pretty much everyone in shock and disbelief.
This tips may come in handy to you when you create your own company. As it turns out, Enron lost its grip on the market in a heartbeat.
Although they were shooting for the stars, the lack of planning, vision, and pure intentions lead them to the bottom of the corporate success-chain. To sum it up, Enron learned the hard way — that lying is wrong. Build up for what is to come 2. The one-way ticket to reaching the bottom 3. They preferred illusionary growth, before a steady and gradual enhancement.
The one-way ticket to reaching the bottom Ken Lay as the mastermind of the whole operation, was instigating an unethical behavior.
Promote and encourage integrity, not scamming When doing business, many managers put to the side the idea of working in accordance with some moral principles. Enron used pitfall traps to reach the sky and eventually ended up in one.
Like this summary? Click To Tweet McKinsey partners tend to be designers of ditches, not diggers of ditches. When it comes to executing their lofty theories, well, consultants lean toward leaving those messy realities to the companies themselves. Click To Tweet Figuring out whether a deal was worth doing was nothing if not an exercise in calculating risk: did the size of the potential return justify the risk of all the things that could go wrong?
The most interesting facet about the documentary was the in-depth character analysis of the executives in Enron. Jeff Skilling was a top graduate from Harvard University, in his infamous interview with Harvard representatives, Jeff skilling was asked, Are you smart? Jeff Skilling believed that the only purpose for a business is to make profits. He believed that for the company to make. So after a further analysis of his leader behavior it is easy to see that his leadership was extremely directive, and specifically Achievement-oriented in methodology.
Jeff Skillings directive and achievement-oriented leadership styles manifested itself in the corporations culture. Through this system Jeff Skilling was able to successfully integrate motivation within the employees.
This decision had both positive and negative consequences. The positive consequences of an achievement oriented employee base were high numbers and a guaranteed return on shareholder investment. The negative consequences were that there was absolutely no ethical guideline within the corporation, and no comradery.
In the documentary, there is a point where Jeff Skilling comes to the realization that his employees, also known as traders, would stomp over him if it came to making more money. This sheds light on the subordinates characteristics which came about as a result of Jeff Skilling system. Also, in path-goal theory the situation isnt perceived as the resultant of the effect. As an example, although the stock market was steadily declining during the early s, Enron expected numbers to increase even if that meant changing the numbers.
The executives of the corporation really set a precedent which would be followed by the traders. The best way to analyze their approach is to individually dissect the executives leadership style approach and how they impacted the organizations behavior.
The Style approach focuses on how leaders directly affect the organizations their subordinates leadership style. Up until this point the focus has primarily been on Jack Skilling, however, executives like Kenneth Lay, also had impacts on the corporate customs. Kenneth Lay,.
Kenneth Lays, achievement oriented behavior, led to him being involved directly with politicians. Kenneth Lays direct connection with the Bush administration led to him gaining an unfair advantage over public policy. Under leadership style the McGregor theories focused on two separate theories. One theory under McGregor theory is Theory X.
Under Theory X, the main motivator for people is extrinsic such as money, in complete contrast Theory Y focused that the motivator of people is intrinsic such as self-fulfillment. In Enron, the corporate atmosphere completely supported Theory X; this led to employees taking complete control of the corporation and not asking for any ethical guidelines to follow.
One example of an extrinsically motivated employee was Lou Pi. Lou Pi, the CEO for Energy Services within the corporations, was most extrinsically motivated executive within the corporation. In the early s Lou Pi made the corporation million dollars.
However, according to Forbes reporter, he was never in his office. After Lou Pi received his money he took his million dollar stock payout and moved to Colorado. Many people in the corporation felt that it was a short term career in which they would work countless hours and cash out by retiring at the age of The last approach that the executives were able to use successfully was the situational approach.
One thing which is admirable about the executives is their ability to change so rapidly to situations. For example, as stock prices for every corporation started to decrease in the early s the corporate leaders were able to still meet and even surpass the quota which was set. All these machinations were meant as temporary measures while Enron bet big on its next two major businesses.
Both of them, however, sustained massive losses. Enron could then sell directly to businesses and homes. In the few hotspots it could work in, Enron campaigned aggressively to recruit consumer households to sign up, promising lower utility costs. However, the local suppliers fought back, pulling their political strings and running ads against the big guy coming into town.
This was enticing — a big company spends millions a year for light, heating, and cooling. This new TCV became the working metric of the day.
Never mind the fact that TCV bore no relation to revenue or profits — it merely represented the cost of all the utility needs a customer had outsourced to EES. As usual, Enron deal makers were given bonuses on total TCV and the projected profitability of the deal which were wildly optimistic. Naturally a lot of bad deals were signed very quickly. Enron Broadband In , Internet stocks were overheated. Skilling promised such large returns to Wall Street that the division was strongly pressured to make deals happen.
The larger vision was that broadband might ultimately become a tradable commodity, like natural gas or oil. However, physical technicalities got in the way. In one sense, internet pipes were parallel pipes that never intersected. Enron promised that it was inventing new routing technology that would enable, but it never made it out of the lab.
This would turn bandwidth into a commodity that would cut into their control of markets.
Enron even began partnering with Blockbuster to build content streaming services. The reality of execution was difficult.
Streaming from the Internet to the TV required expensive special boxes. And incumbent DSL providers controlled access to the last mile and were tough in negotiations. The trials were tiny — households involved — and the ultimate real sales from this were laughable, in the dozens of dollars. Even though the failed deal should have been written down, Enron reasoned that it should actually be a gain — Enron would no longer have to share the proceeds!
Unfortunately, both bets were off the mark. Enron spent billions on unprofitable projects. This put Enron in an impossible position — having spent all that money and raised expectations, there was no room for failure. He also invited select Enron lieutenants and friends to participate — ultimately, they would get an x return. But they all stepped out of the way for their own reasons: Enron employees were worried about being berated by Fastow and having their ratings punished.
The board was comforted by assurances that all deals would be reviewed by the Chief Accounting Officer, and Fastow could be removed at any time. In reality, the CAO was a rubber stamp. LPs wanted access to Enron deals, and Fastow made clear that participation in his private fund was required to stay in his good graces.
Why would Enron do such bad deals? The deals were structured in a way that implied the fundamental belief that Enron stock would never fall. Meanwhile, the energy traders were making lots of money in the volatile markets. In the early inefficient markets, traders used fundamental research to make smart trades — like finding dam water levels to estimate future water prices or using weather to estimate fuel prices. Money came so easily they were bewildered. They made even more when they launched Enron Online — a virtual trading floor for energy futures.
Enron served as the marketmaker, representing both sides of the trades. This dramatically increased the capital requirements the danger will become apparent later. Its dominant position, as well as proprietary info on what outside traders were doing on their platform, allowed Enron to possibly manipulate markets to move prices in its favor.
The regulatory change: California opened electrical grids to competition in a market, where electricity had previously restricted it to certain providers with controlled costs.
Utilities had to sell off their generating facilities and download power on the open market. But the regulation was partial — price caps were instituted; rates to consumers were fixed; and utilities were precluded from longer-term agreements that might have allowed hedging and reduced spikes in prces.
The rules allowed market manipulation: Energy producers kept power plants off to spike prices. Electricity rates were tied to the price of natural gas, which Enron was also in a natural position to control. The utilities then had to hustle to find last-minute power at high prices. Enron submitted schedules reflecting illusory power demand.
Enron would sell power as reserves without actually having it. Ultimately utilities were forced to pay far more for power than they could collect from customers, who were still paying regulated rates. One incumbent went bankrupt. Vicious cycle: because of this instability, power producers began refusing to ship to California. Later the US Energy Secretary imposed a state of emergency, requiring marketers to sell to California.
Ultimately Enron lawyers told the traders to stop ethically gray trades. Their hubris in energy trading led them to launch trading ventures in a host of other commodities — steel, paper, lumber, metals, bandwidth. Skilling thought Enron could be the market maker for everything!
None of the others launched to much success. They continued taking progressively riskier positions, breaking the trading limits. As always, mark-to-market became a risk — they made their books look better through optimistic projections.
In , Enron took a large short position on electricity forecasting lower energy prices and less volatility due to the weakening economy and conservation. With typical Enron hubris, Mark thought water was easy and the incumbents were ancient. They would come in, make large deals, and figure out the details later. They also anticipated privatization of water supply, and a coming water crisis.
Immediately they ran into competition with the two global heavyweights — Vivendi and Suez — who competed aggressively for contracts to service municipalities. Azurix was also in money trouble — the Wessex deal had cost a lot, and Enron saddled Azurix with large debt. Now a public company, Mark stressed the appearance of making big deals to buttress their stock value. In the few deals that Azurix won, they vastly overbid, largely out of desperation to signal momentum. It became clear Azurix would never make money on that deal.
This later proved wrong. This is a testament to how powerfully its accounting distortions disguised the true nature of the problems brewing. Enron was paraded as a visionary company, building new businesses like Enron Online in the Internet era. To the public, Enron only ever expressed certainty of being a juggernaut.
Enron employees started drinking the kool-aid. Like this summary? Have too much to read? You'll love my new book summary product Shortform.
Even better, it helps you remember what you read, so you can make your life better. What's special about Shortform: The world's highest quality book summaries - comprehensive, concise, and everything you need to know Interactive exercises that teach you to apply what you've learned Discussion communities - get the best advice from other readers Get the world's best book summaries now Cracks Start to Appear As detailed in The Smartest Guys in the Room, by late , skepticism started mounting.
The dotcom bubble had fallen from its peak, and company fundamentals were being questioned.
Enron embarked on new schemes to lock in gains while avoiding booking losses. If the assets continued to decline in value, the Raptors would pay Enron, thus giving Enron a gain that would offset the loss. In reality, these transactions were grounded on Enron stock. This led to positive feedback loops: An increasing Enron stock price would allow further ability to keep losses from public view, which would in turn increase stock price.
However, if Enron shares fell, the Raptors would be less able to pay back Enron, which would cause further share cratering. By late , the assets in SPEs declined, and Enron needed its stock to continue climbing to cover losses. Because the stock price stalled, Enron would have to declare losses, which defeated the purpose of the vehicles. An emergency solution cross-collateralized the four Raptors, allowing healthy vehicles to support sick ones. There started to be mounting external and internal concern about the reality of the losses.
By spring , the dotcom bull market was over. Analysts were now questioning business plans and looking for fundamental cashflow and revenue. Momentum investors were selling instead of downloading. Stories ran about how energy companies used mark-to-market accountings, and no outsider knew the assumptions they used to book earnings.
Short sellers were gaining credibility and wielding larger sticks. The market had become too skeptical. Reasons: The pressures of maintaining a rosy public facade while dealing with internal turmoil ate at him.
For someone obsessed with the stock price, its decline represented a personal failure. He hated getting his hands dirty, and his job was now about fixing problems. Whalley quickly dug in and pressed for clear financials. Tidbit: Ken Lay himself was paying off creditors. The loans were then put into ill-fated investments. Here was the nightmare dominoes scenario — where all the intricately connected layers would fail because of their dependencies: If Enron missed earnings, its stock price would fall.
If its stock fell, its SPE deals would unwind since they were predicated on Enron stock prices rising , causing Enron to have to book massive debt on its balance sheet or issue new shares. Internal rumors began circulating about issues at Enron. Accountants looking into the SPE deals realized that the falling value of assets in the SPEs, along with the falling Enron stock price, were going to become difficult to pay off.
The Raptor deals became underwater by 9 figures, especially in the market hit after September This would be recorded as a simple equity reduction, rather than a restatement, which would admit mistakes and trigger SEC inquiries and lawsuits.
COO Whalley argued to take the hit and clean up. They felt Enron would recover after cleaning up. To make the accounting look more favorable, Enron wanted the correction as a nonrecurring charge. Since this was originally booked as operating profit, this was grossly inappropriate. On Oct 16 , Enron shared its third quarter report. It focused on 3 issues: negative operating cashflow, slow progress in asset sales, and more writeoffs involving Dabhol, Azurix, and broadband.
The next day, Whalley fired him. It had no operating cash. It desperately tried to make deals for cash — like opening up its books — but no one was willing to bite.
The last-ditch solution was to sell their pipelines, the only steady cash generator Enron had left. Through this turmoil, Arthur Andersen began realizing how bad their work with Enron would make them look. Andersen had previously paid fines for accounting fraud at Waste Management — it had a cease-and-desist from the SEC from misconduct. Banks refused to let it borrow the loans unsecured like before — now it demanded the only collateral remaining — the pipeline systems — and exclusive business with Enron for the next 18 months.
In early November, a possible savior came in a possible merger with smaller energy company Dynegy. For years, Enron took pot shots at Dynegy for being a tiny wannabe and threatened to steamroll it in every business line.
The Dynegy CEO now saw a chance to get even, inherit its valuable trading operations, and vault his company to leading position in energy trading.
The structure — Dynegy would download Enron at market price. In reality, this was undercapitalized from the start — Enron assumed that having ChevronTexaco onboard would be so reassuring its capital needs would shrink.