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Monday, June 25, 2007

The Smartest Guys In The Room

The Smartest Guys In The Room by Bethany McLean and Peter Elkind is about the rise and eventual decline of Enron. Where others have written about the excesses of those who ran Enron (Ken Lay, Jeff Skilling, Cliff Baxter, Andy Fastow, etc), McLean and Elkind focused on the business itself. How it got to be so huge, what it took to keep it at the top of the business ladder, and what, eventually, made it fall.

There is a lot of information dealing with trading, accounting, and different facets of what made up Enron overall (natural gas, broadband, oil, etc). I found the explanations for these technical areas to be quite easy to follow. I cannot say I understood everything about all the deals, and after a while there were so many subdivisions in Enron, it was impossible to keep them all straight. But I did understand the majority of it, and that was enough to allow me to understand the story as it progressed from one business deal to the next.

What I did not understand is why it took so long for Enron to get caught by anyone with oversight into their dealings. Arthur Anderson, their accountant, knew about the methods of accounting Enron used, and they also knew it did not accurately reflect what was going on with the business. Yet they allowed it to continue.

Stock market analysts should have been full of questions about how Enron managed to maintain such amazing growth quarter after quarter because it was their job to monitor company valuation and get it as close to accurate as possible. Instead, it became career suicide to question anything Enron did. As a result, analysts kept suspicions to themselves and bolstered Enron along through its quarterly reports to Wall Street.

The Board of Directors of Enron should have been questioning the ethics, legality, and common sense of some of their deals because they knew the structuring of these deals was keeping Enron's market numbers high. Instead they did nothing, and when it all came crashing down, they blamed others for their lack of oversight.

And then there was the Securities and Enchange Commission -- the group that is supposed to possess the ultimate oversight for business practices so that investors do not get burned by the investments they make. They too abdicated their responsibility.

The Smartest Guys In The Room made me angry. No one who was indicted for the fraudulent accounting practices from among Enron's staff was punished nearly enough for what they did to their investors. As a matter of fact, the highest ranking members among Enron executives got out with their money intact before the ultimate lowering of the boom on the whole business. While it's true there were fines and pay backs of huge sums of money, it still was not enough to restore retirement funds to those who believed what their employer told them about the soundness of Enron's business.

Enron is the moral tale of what happens when greed takes over common sense, but it's also the story of those who enable such behavior to occur. There's plenty of lessons to learn from the history of Enron, but I don't have any faith that what happened in this case won't happen again given the right atmosphere and the right people in charge.

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