Citation Needed - Enron [True Crime Special]

Episode Date: October 2, 2019

Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded in 1985 as a merger between Houston Natural Gas and InterNorth, both relatively small regional companies. Before its bankruptcy on December 3, 2001, Enron employed approximately 29,000 staff and was a major electricity, natural gas, communications and pulp and paper company, with claimed revenues of nearly $101 billion during 2000.[1] Fortune named Enron "America's Most Innovative Company" for six consecutive years. --- Our theme song was written and performed by Anna Bosnick. If you’d like to support the show on a per episode basis, you can find our Patreon page here.  Be sure to check our website for more details.

And so I said I didn't punch your baby. I tried to punch you and you used a baby as a human shield You are the bad guy here. Wow, and how's your respond to that? Oh the usual get out of my maternity ward bull shit Leave a bull. I'm telling you dude. You're gonna regret it. Oh, Hush you big baby. Seriously? you don't know. Hey, what you doing? Oh, God, dammit, Elyse. I put some clothes on, man. Hey, guys. See? Is that, is that, is that smell? Oh, yo.

Gentlemen, which it was, this is industrial machine lube, finest quality commercially available. I had to get a license for this. Why? Why? Yeah, see, I told you they were gonna say exactly why. They would say why. Because of today's episode, Cecil, it's about Enron. He's wrote this great essay with twists and turns, but I feel like the only way that our

listeners are gonna like, you know, get it? Like, really get it? Is if we give them the experience of Enron. What now? So you're gonna fuck each and the experience of Enron. What now? So you're gonna... Fuck each and every one of our listeners. That's right now, I'm a fuck of a fucking soul. I'm so hard, they're gonna listen to this episode afterwards

and be like, man, I get it. Cause like, this is how hard Eli fucked me, you know? And as someone who's been on a fuck tour, I'm telling you, you don't know what you're in for. I told you that, it's not gonna be like, which thing. You've been on a what now? A what? It's from the other show.

They were a song, it made a bunch of promises. And now I've been trying to deal with it. Eli, Eli. I'm sorry, we'll pin in that. You cannot fuck all our listeners, so they'll get Heath's episode about, and you. I think I actually can fuck our listeners, thank you.

You know, counterpoint, it's just like six people. Yeah. episode about any you. I think I actually can fuck our listeners. Thank you. You know, counterpoint, it's just like six people. Yeah. Yeah. Whatever. Okay, on second thought, what a hell not. Anyway, it is your weirdly greased up body too, so you can do whatever you want with it.

Nice. Hello and welcome to Citation Needed! The podcast where we choose a subject, read a single article about it on Wikipedia and pretend we're experts because this is the internet and that's how it works now. I'm knowing I'm going to be leading the conspiracy but I can't shred all these documents alone. First up, the only two guys on the cast that can reach the top of the wood chipper, Heath and Cecil. Tom hates that clown outside the studio.

You know, you must be mistalled to enter the glory hole. He gets pissed. Yeah, you put that there and I don't think. Short IRS agents are furious over this one simple trick. That's all it takes. Alright, and also joining us of course are two men who won't stop asking me why we can't just hide the incriminating evidence in Eli's ass, Tom and Eli. I mean really the only reason we can't

is that Eli just won't stop asking us to. I think it's a matter of principle now. I just want to prove that I am not a sphincter missile's record, okay? That's important to me. All people don't know what I mean when I say. All right, so before we get into the story of this scam, I'd like to encourage people

to pay money for something that's already free. Remember, we couldn't make this show without the generous support of our patrons. Or more accurately, we just wouldn't. We'd still be able to. We just wouldn't. Yeah, we wouldn't. And if you'd like to learn how to join their ranks,

be sure to stick around to the end of the show. And with that out of the way, Eli, tell us what person-placed thing comes up with a phenomenon or event while we be talking about today. We'll be talking about the Enron scandal. Uh-uh. And if you were set this article by our legal counsel in response to a number of your financial

strategy suggestions, are you ready to tell us this sorted tale? Let's do it. All right, so what was the Enron scandal? All right. The Enron scandal is the story of the meteoric rise and catastrophic downfall of the Enron corporation, a Houston-based energy company that mostly ignored the supplying of energy thing and focused instead on giant scams to inflate its stock price, which eventually led to, at the time, the largest corporate bankruptcy in

American history in 2001. It's a story of love, lust, unbridled capitalism, and a multi-billion dollar lesson about what happens when we let America become a verb. And the story actually became a book and a movie called The smartest guys in the room. To be clear, these rooms were all in Houston, Texas. So it kind of trash. Oh, yeah. No.

Oh, voyager stupid. Yeah, Keith, nothing's more assimilating than bankruptcy proceedings. Open wide audience. Here it comes. And Ron was founded as a natural gas operation in 1985. And over the next 16 years, and Ron managed to lie, cheat, and steal its way into absurd amounts of profit, but not really. It was mostly in the form of its rising stock price. Then in 2001, the lying, cheating, and stealing

was revealed, the stock value evaporated, all that fake profit stopped existing, and the company went bankrupt, leaving tens of thousands of employees and shareholders with empty retirement accounts. The stock was worth about $90 a share at its peak, and it dropped down to 26 cents a share when they went bankrupt. Two losses were about $74 billion. Yeah, at 26 cents a share was basically worth 15 shrewt bucks. It was, but it's not right. You know, Heath, you're saying all this is if this weren't an actual viable investing start. This is a feature of the system, not a bar.

That's true. Yeah. Well, okay, so point, I killed on this one. I bought when it was 26 cents. So I lost so much less than those wall street. I cast their soap. I still pissed at it. And if there's anyone I know who shorted Enron successfully, it's Tom for sure. So yeah, he used to work there.

So the Enron story begins with a giant deregulation of the natural gas market in the early 80s. As these stories so often do. Absolutely correct. And that's when a guy named Kenneth Lee Lay decided to get into the business partially because of the newly relaxed laws, but mostly based on his name being Kenneth Lee Lay, which is kind of what you have to do. And he will be the Elmer Fud of this story in every single way. And that includes looking exactly like Elmer Fud of this story in every single way. And that includes looking exactly like Elmer Fud.

He told me this. He told me this. I expect this guy to be like, kill, come on. Kill, kill, kill. Kill. They're trying to stop me. Just sticks his fingers into the barrel of the SEC. You know, see so there was actually an-ron musical in like 2010, 2012.

It came out and like closed after three weeks, but that would have been the perfect, perfect number. I'm not gonna use that. So, yeah, Kenlay decides that there's major profit potential in natural gas. And his secret insight is to use the business model of, we know fucking rules because that's a really good in fact this will be the visionary business philosophy behind

just about everything Enron does in the rest of the story. Okay, all right. Well, someone here is taking a rather dim view of unfettered free market capitalists. Socialists! Socialists! That's not what socialists means, look it up. So, it's socialists! Can't take my guns away from me. Socialists, socialists, who wants to take your guns, you heard it here for a different thing. The point is, they don't adopt that we know fucking rules philosophy right away.

At first, N-Run actually made logical sense. They started out in 1985 as a natural gas pipeline company, in which they would transport a physical thing from a seller to a buyer and get paid for doing that. Pretty simple. But the giant deregulation meant that every idiot in Texas was trying to sell just loose handfuls of gas wherever they could. Huge oversupply led to a big drop in the price of natural gas. And Enron ended up losing millions between 1985 and 1987 because of the drop in price.

Yeah, spoiler, not a great sign that the story of the smartest guys in the room begins with them losing money on gasoline That is a biting critique Eli, but except these guys knew the difference between natural gas and gasoline Question just because I already know what is The difference between Okay Just so you know when you put natural gas in your car it fucks up Yeah, and it gets mad. She says I have to roll down the window In 1987 and run teamed up with the McKinsey Consulting firm to figure out a new strategy.

They just lost millions for a couple years, and they need a new strategy. And the guy who got put on their project from McKinsey was Jeff Skilling. He is the absolute worst. Yes, he is. He started out in the business world as a rich kid who took a bunch of his family money as a teenager

and lost it all in the stock market. And then he took a bunch more of his family money and lost it all in the stock market. I keep doing this. And using that resume, you got hired by the country's top consulting firm to give business advice to other major colleagues. Yeah, they also hired Bill Cosby to do their workplace sexual harassment trainings at the same time.

Kind of a debacle. No, I don't, who fucking does this? I have a teenager. He hasn't mastered the art of making a sandwich without getting peanut butter on the oven door. Who gives a kid a stock market money? How's anyone think that's gonna work out? Like I'm trying to find a tiny violin to play a sad song,

but I haunt it and spent the money buying Uber stocks. Yes. Hey, Tom, I'm gonna fuck up the rest of your evening and the most of your tomorrow, that wasn't peanut butter, bro. Oh, I'm buying a new house. I don't feel like that change is his opinion. New house. So, one feel like that change is his opinion, new house.

So, one other detail about Jeff Skilling, his favorite book in the world is The Selfish Gene by Richard Dawkins, which Skilling seems to think is a book about how to manage a business, you know, just like those lucky libertarian DNA strands of evolutionary biology. That is not what the book is about. No, no. Or is that how evolution works? None of them. But regardless, that guy, Jeff Skilling,

was in charge of advising Enron, and he eventually becomes their CEO. Yeah, so Skilling's major piece of of advising Enron, and he eventually becomes their CEO. Yes, so Skillings' major piece of advice for Enron was to pivot from their focus on supplying natural gas, and instead adopt a business model called Insider Trading, which is exactly what they did. They stopped treating the gas like merely a physical product, and they turned it into a tradable commodity as part of a futures contract That's an agreement to buy or sell a certain amount of gas at a certain date for an agreed upon price

And if the market changes before that date, which it does one of the two parties makes a profit and the other one got fucked now Technically, that's not insider trading. That's not the technical legal definition, but it is a trading operation and it would use inside information about the exact buying and selling practices of gas producers and gas consumers and match them up like a middleman.

And also, they trade futures contracts using that inside information. So lots of insider the word and lots of trading, the word but not technically insider trading because that's illegal. Also I should add, they're eventually gonna do a whole bunch of very much illegal insider trading.

The only little thing too, yeah. This is a stock market version of, just the tip, just for a second baby, that's all. Right, but the recipient in this case is like 9,000 people in Texas. It's a big tip. It's a very big tip. It was not confined to Texas,

that's how big it was. Yeah. Okay, so here's the idea. We're gonna be the guys who supply the thing and then also bet on the amount of the supply of that thing, but we supply the thing Right, yes, thank God. So we control the supply and then we bet on how much that thing will cost Exactly. Yes. Yeah. That seems illegal. Well, you would think so, but no, not quite yet. Almost there though. Is it at least, I mean, at least it seems unethical.

Oh, very unethical, yeah, but I don't. All right, I'm a in general, yeah, really. And speaking of illegal trading, when I said eventually, they'd do that, I actually meant right now in the story, absolutely right now, also later too, even more, but starting right now. We're still in 1987, and this is when Enron realized that two executives in charge of their oil trading office were

embezzling money to their personal offshore accounts, and they were also keeping fake accounting books to hide enormous losses and make it look like they had steady profits. But rather than fire these guys, Ken Lay was like, wow, two sets of books, hide and losses, fucking perfect, note to self, in Bezler, guys, genius, business strategy for later, got it. This is like walking in a guy fucking your wife and taking notes on the positioning. Yes, that's what I'm saying. I just, I love that they got this idea when they caught these guys,

but still didn't see the potential downside, right? Nope. Oh, no, they saw the potential upside. Yeah, yeah. And when is personal offshore accounts like an upstanding thing a person does? Like when is that a thing that like, why are we an upstanding person?

You got a personal offshore account. Like nobody fucking does that. That's not sneaky. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, It's your 10th birthday, so grandma set up an offshore account for you. I'm trying to help the economy of Panama. Yeah, so these embezzlers, they keep their jobs and can lay actually increases their trading limits at this point. And later that year, the same two guys take their yoked up limits and end up losing a billion dollars on a stupid trade. Jesus. The company managed to reduce the loss down to about 200 million using a giant bluffing scam of the entire oil market, but it's still a disaster.

And only then were the guys fired and eventually convicted of several felonies. And the lesson that Enron learned from this giant debacle was, do the exact same thing on a much bigger scale over the next 14 years. Seriously, I'm not exaggerating. The stories are almost identical just on a bigger scale. The smartest guys in the room will learn nothing ever. Okay. Well, to be fair, the title doesn't mention how stupid everyone else in the room will learn nothing ever. Okay, well, to be fair, the title doesn't mention how stupid everyone else in the room was. So, all five of us are

the smartest guys in the room we're in. And that's an easy superlative to manipulate. Moving ahead now to 1990. And that's when Jeff Skilling, the guy who thinks Richard Dawkins and I'm Rand are basically the same person. He gets hired by Enron to run their training operation. And Skilling only agreed to the job on the condition that Enron would switch over their accounting technique from the standard, you know, count the money in versus count the money out thing to not that. There's apparently another one.

And Ken Lay was like, yeah, subtraction is bullshit. I never liked it. Nope. We're just what we're doing. No more minus buttons on the fucking calculator. That's why we hired this guy. He's a mathematical outside. I'm not And outside box.

And skilling was like, yeah, that's, no, that's not what I'm suggesting. Kenley was like, no more, minuson, look at me, no more minuson. So that's what they did. And Ron basically started counting profit that didn't exist yet as profit right now. That's what that new accounting

technique is. And that actually is what skilling was suggesting, not the minus thing thing, but just accounting profit that doesn't exist. It's profit right now. That's what he said, and that's what they did. Well, you see, y'all, these chickens are going to hatch. Mayswell go ahead and count them now. This is the buddy who got into selling drugs so he could have free drugs if the American had a license. Are we not supposed to do that? Is that a bad reason to get into selling drugs? What's a good reason?

I got so many free drugs for that. Yeah, I'm sorry, I'm sorry, I get a reason. So this new system is something called Mark to Market Accounting. And it actually does make sense for certain companies in certain fields, but not, and Ron. The basic idea is that when you sign a deal

to buy a new profit center, a new asset, in Mark to market accounting, you're allowed to put down all the future earnings from that as immediate profit. Okay, I'm wondering what businesses does that work for? It's a great question. That'll be 12, 15. All right, here you go.

Thank you. Hey, quick question. You think you're ever gonna come back here and buy more cereal later, like, ever in your life? Oh yeah, I probably want to run out of this cereal. Nice. Well, what are you riding down there? Nothing.

Great ride, Zone. Yeah, so y'all might be wondering, how would it end-run calculate future earnings that haven't happened yet? Again, great question. I bet it's conservatively. Yeah. Well, let's see how they do it. So, quick example, they'd buy a power plant and they'd be like, one, $1,000,000.

I made a spreadsheet. It says, we're going to make exactly $1,000,000 over the next 20 years and they'd report a profit of one trillion on that deal. I love this. And they'd do the same of one Gillian on that deal. I love this. And they do the same thing with all their deals like that. And then Wall Street would hear about these fucking geniuses who made literally Gillian's that quarter and on stock price would go crazy.

Okay, but here's the thing with Mark to market accounting when you're dealing with energy prices. If literally anything about the future was different than the spreadsheet, the company would actually lose a bunch of money and that stock price would be based on nothing if they predicted the price wrong. And as it turned out, the future happened a bunch to end right.

Yeah, future's low. Okay, Jim, so we're gonna go ahead and calculate your bonus. Now, I think we said you were at 2.75% of the profit against your operations. So. I'm sorry, wait, what are you doing? Oh, and I see, I'm calculating your bonus.

Now, hang on a minute. I'm sorry, you realize that's a magic eight ball, right? Like, you're calculating my bonus with a child's toy. Oh, well, I could go ahead and use this weager board I got over here. That's also a child's toy. I'm still pretty accurate. Nope, not even a little bit.

That's not what the boys in our counting department say. Okay, so what does day of eight ball say? I better not tell you right now. I'm getting fucked, ain't I? Without a doubt. I think even put tell you right now. I'm getting fucked, ain't I? Without a doubt. Why don't you even put your getting fucked on the Magic 8 ball? That's for children.

I have this one custom. That's the only thing it says. It's just 12, you're getting fucked. Yeah, that's it. How did you guys propose to your wives? That's okay. Yeah, so that would. How did you guys propose to your wives? That's okay. Yes, so that would be the fucking past.

I want to take back the whole hot air balloon. Should I ask you to marry me? It is decidedly so. You're granted a false match. Is it on the ground? Nope, ate the dice, ate the little thing in there. You can't, a sick, because the water is not food. Scrimmage, prank call, doesn't count. So just kidding. Yeah, Enron was getting fucked by the imprecise nature

of the time dimension dimension and they started looking for ways to hide their losses because if they reported those losses, their stock price would plummet. And they ran the company like a wasp cult with everybody in the company getting paid with their own stock way too much. Again, America was all the way a verb at this point. Another angle that Enron started taking in the early 90s was to look for profit in deregulated

international markets. This mostly involved buying power plants and making deals to sell the energy, which might have worked if they focused on actually making money across that tricky time dimension that we discussed earlier. But Enron's compensation scheme was structured pretty much exactly like Mark to Mark at accounting. IE stupid. They'd pay giant bonuses to their execs at the time of making a new deal with no regard for long-term profit of that actual deal. Wow.

Man, that is stupid. I am glad no other companies do that. That is really good. It's really good that everybody learned. Here's one of the worst examples of their international projects. And Ron bought a power plant in the bowl, India. And please don't say there was an electric leak

that killed 30 hundred people. Because I know that that kind of, kind of better kind of was. Kind of better kind of worse. So they bought this power plant and they cut a deal with the Indian government to sell electricity at an obnoxiously high price. So they write a giant bonus check to their deal maker. But then the people of India were like, nope, that's stupid.

Shut it the fuck down. So Enron never made any money, but Enron's executives, they just keep flying around the world, making deals like that to get more bonus checks. And if anyone questioned this super dumb policy, can lay it would be like, no, minus and get out of my fucking office,

what did I say? And Jeff's killing would be like, no, it's, you keep saying that the minus thing is nonsense, but still get out. It was still doing that. Hey boss, hey boss, I made a deal. Great, here's a giant bucket of money. We're right.

Wait, wait, should we make sure it was, you know, a good deal? No, the new bonus structure's based on making the deal. We're big picture guys, the accounting nerds will polish that all up. Do you even know what the deal was? No, but he said, I made a deal. So that means he gets money.

We simple folk, here's, I'm trying to complicate everything. Okay, well then, I guess, I also made a deal. You did excellent work, I did. Give me another money bucket. I love this business. What? Money bucket. Give me a money bucket.

I gotta say, all the times I've ever heard Tom call for a money bucket from Dave, that was the most appropriate. Give me a little bit. Yeah, it was the moment. Yeah, so throughout this time, there was one guy acting as the voice of reason within Enron. Their COO was a guy named Richard Kinder, and he was an advocate of using pretty much all

the buttons on the calculator. Sadly, he mostly got ignored, but he managed to keep the company going despite all these fuck-ups throughout the early 90s. And in 1996, Kenley was supposed to retire and go into politics, and Kinder was supposed to get promoted to CEO. But when Kenley looked into a job at the Treasury Department, the Clinton administration, they were like, all right, do any math problem. And that didn't work out and he laughed in the space.

So he stayed at Enron, and he fired Kinder for being a nerd. Side note, Kinder went on to start his own energy company that's been going strong ever since, and it's worth about $46 billion right now. Or approximately 120 billion more than that. Ah, yeah. Another bonus, Richard Kinder,

doesn't deserve to be eaten by wild dogs, so there's many bad folks. All right, so far we've just been here in the generic story of every American company, but this one eventually gets caught. So we're gonna savor that pending and come upence for a minute and take a break for a little apropos of nothing. [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUT OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUTRO MUSIC PLAYING [♪ OUT I'm gonna fit. Oh no, my pension! Uh, excuse me, you wanted to see me, sir?

Yes, kindergarten in here. We need to talk. Uh, what about... Kinder, look, I like you. I do not like you. You're a straight shooter with the non-istart. I hope you die. But here at End Round, we're in the business of making money.

And you seem like you're in the business of making problems. I can literally see the management book you read that out of on your desk. It's open. And now look, I don't think the lateral integration would be useful at this time. Nonsense. So I'm gonna have to let you go, but I want you to know there are no hard feelings. I'm gonna send you to jail. And you will always be a part of the Enron family if not the Enron company. I've kept notes all of this and I'll make sure the world knows the truth. I said again, what's up?

I said pleasure to work with you, sir. You too, Kinder. I farted in your coffee. Good guy. And we're back when we last left off. Enron would gladly pay us Tuesday for a hearing over the day, and they just took, and this perfectly gruntled employee who knew all about the scam, and they disgruntled him.

So Heath, tell us about those glorious consequences, rich white people once kind of faced. No. Almost. So, the COO, and very clearly the last remaining smart guy in the room just got fired and Jeff's killing weasels his way into the job. And this is when everything started really going off the rails. And until now they were mostly just stupid people with accounting tricks, but skilling turned the operation into a full white-collar war crime. The higher focus became Enron's short-term stock price, and they had

they literally had price monitors on the wall in every room of their offices. And in order to keep hitting their goals and keep the price moving up, skilling set up a risk management department that did the exact opposite of those words. The point is it gave the appearance of a responsible company, but the risk team was just people getting paid to shut the fuck up and say yes, that's all they're doing. That's a noble and age old profession. The oldest in fact, and age old. Yeah. And eventually,

Enron hired one of the world's leading accounting firms, Arthur Anderson, to be a giant version of this, shut the fuck up and say yes, department, which is exactly what Arthur Anderson did until they collapsed along with Enron. Okay, I didn't realize we were leading towards Arthur Anderson.

Now I want to apologize to any sex workers for that comparison. Thank you. Yes. Another major contributor that reinforced their terrible business practices was the internal peer review system. Everyone would get graded by people in other departments and your grades would have big consequences for your compensation. So the crazy stupid deal makers could get the risk people demoted if they did their job too hard. Good.

At some point, how would you rate your audit on a scale from zero to one? That's what that's that happened. Yes, that happened. And at some point, skilling was just like rereading the selfish gene. He's like, all right, well, according to Richard Dawkins, we should rank everyone in the company once a year

and fire the bottom 15%. That's how DNA works. So everyone was splitting their time between trading oil at this point and also of course trying to murder each other like the goddamn hunger games because that's not necessarily the set up. So, one other major philosophy of Jeff Skilling that came into play was something he called his guys with spikes theory.

Basically, he was convinced, yeah, this is the dumbest, oh my god. We all had this guy it's the worst he's the literal worst so basically he's convinced that the best people to hire are just crazy good at one particular thing and it's fine if they're woefully inept at

literally everything else so many had a subvant hiring policy uh... yes Literally everything else so it had a savant hiring policy. Yes, you guys try to make jokes, but yes, that's it's what happens So you know guys with spikes imagine like their radial skill graph it would have one giant spike along with a bunch of tiny scores for stuff like patience and cooperation and humanity patience and cooperation and humanity, you know,

subtraction. So, they ended up with a management team of sociopathic tiefling half demons from D&D, rolled a 20 on one thing and zero's on everything else. Oh, he, you can't roll zeros. They had a D4, Jesus, get your shit together, man. No, no, no, the D20 just evaporated. They got one penny, they got one, sorry, not even just,

no more D20. We're pretty lenient on this show about things like fact checking and Scandinavian geography, but if you're gonna make nerd references, you better get them the fuck right, sir. That's right, that's right. So, apologize to everybody. reference is you better get him the fuck right that's right that's right so everybody so

that uh that brings us to the ultimate sociopathic tiefling half demon Andrew fastow in 1998 thanks to his giant spike in the shell company fraud attribute that currently exists in their version of the Indies. He gets promoted to CFO and his job is basically to come up with scams that cover up the huge losses from all the terrible deals that Enron's been making. And that would keep the stock price high and make Enron look like it was profitable and allow them to get big investment loans to pay for new terrible projects.

And this all works. We now know that Enron was worth something in the probably negative hundreds of millions at this point, but she's a successful. Right, it's a great deal. She's a successful guy. She's a successful guy. She's a successful guy.

She's a successful guy. She's a successful guy. Right, it's a great deal. She's a successful guy. Right, it's a great deal. Right, it's a great deal. Right, it's a great deal. Right, it's a great deal. Right, it's a great deal. Right, it's a great deal. JP Morgan Chase and City Group and Merrill Lynch, who gave Enron enormous loans over the next few years. I'm glad nothing like this could ever happen with tangible assets like all of the houses

in the entire country. So, oh, no kidding. Also, that's going to happen again. So, this will all happen. Yeah, yeah, yeah. Dude, we're recording this eight days before it goes on. It probably has. Yeah, yeah, actually. Dude, we're recording this eight days before it goes on. It probably has, at this point. Can I short my house?

How do I short my house? You can sell it by one in Jersey. Yeah. Sell it. Before we get into the details of Fast O's giant scam, I wanna talk about one of these terrible new projects they came up with. And this is one of my favorite parts of the story

because this project, it has a little piece of a really smart idea, but otherwise, it's tragically stupid and a giant failure, which actually makes it their best idea, as far as I can tell, in the history of Enron. So in 1999, Enron decided to basically invent Netflix for video on demand. So they start something called Enron Broadband, because the word Broadband in any company name is worth a fortune in 1999.

And again, they're idiots. So they think Netflix is basically the same as oil pipelines, except for movies, but it's the same thing otherwise. So instead of inventing Netflix, like Netflix is, they spend billions of dollars setting up their own proprietary data pipelines that didn't connect with any other communication lines.

Like physical pipelines? No, the physical pipelines, yes. No, it's only physical things. We need to make some paths so we can get everything from one part of the town to the other for what? No, you got to think of tranche to put the information in. They don't want trenches. You can't make fun of this. You can't satirize what happens in this morning. They did that. And this is the best part of this whole thing.

They team up with goddamn blockbuster. Yup. Well, I never go anywhere. That's, well, the entire industry of telephone companies and internet service providers was like, no, we're not, we're not partnering up with an oil company and blockbuster, not happening. Did you guys already spend billions on physical pipelines?

That was dumb. No. So it went nowhere and they lost billions, but not according to their accounting books Somebody just like said this broadband idea out loud in the meeting for the very first time and Enron immediately booked itself a profit of 110 million dollars right there. I say oh, what is All right, I mean say what you will, but at least the meetings at End Run were fun, right? Okay, gentlemen, letter-y.

Okay, just spitballing here. Let me see, um, savoury toaster strudel. Four million dollars. That means a $20,000 bonus for you. Excellent work, Johnson Johnson. Of a flamingo food For stop drilling when you hit oil man 14 million dollars and how million that for you Excuse me. Sorry is this room two 12?

Eight million dollars you get half half that shows. Oh, no, I'm not in this meeting. I just asked all right now You get 14 haha half that's yours. No, I'm not in this meeting, I just asked for the rule number. You get 14, half. Woo! Okay, awesome. We should all die in jail. We won't. And Ron, obviously, shouldn't the bed on almost everything they do, but they were actually making money

with one major piece of their operation, and that was the energy trading department. This included using all that inside information for, you know, normal outsider trading, like we talked about before. But eventually, it also included their very own trading platform called Enron Online. But unlike a standard online exchange, like we have now, where buyers and sellers trade with each other. Enron was either the buyer or the seller for every single transaction. And they obviously had the data for every single participant.

So basically, it was online poker where every table is you versus Enron, and Enron is also the dealer. That's what makes it. is you versus Enron and Enron is also the dealer. Don't make sense. And also, you know, Enron could sell a bunch of kings at a different table and make your king into a three. It's not just this terrible, terrible for everybody except Enron. Audience, this is what you should think of when an asshole politician says people love their insurance company.

This is exactly what you should think. Or anytime the word deregulation is used without reference to a particular regulation. Yes. Yes. Yes. So the trading operation is doing great, but literally everything else was failing miserably. So the trading department had to make even more money than they were to help cover up all these holes. And that led to their giant scam of the California electricity market. And of course, as usual, that all began with a big government deregulation of that market that led to a bunch of crazy price swings in California electricity prices.

And Nron found a bunch of ways to manipulate this, the worst of which was something called megawatt laundering. What? Yep. So Enron would send electricity out of California and into a neighboring state, like into Nevada. And then they'd bribe California power plants into turning themselves off to spike up the price. By the way, this happened at least once during a series of rolling blackouts in California. So the price was already big and it became enormous. And then after that happened,

after they'd get that power plant to shut down, and Ron would bring the electricity back from Nevada at a giant profit. And Nevada was like, it's not my electricity, I'm just holding it for a friend. What? Yes. Again, yes.

The answer is always yes. And when asked about this scam during a 2001 episode of Frontline, Jeff Skilling said, exact quote, we're the good guys. We're on the side of angels. What? End quote. Hey, angel of death is an angel. Yeah, it's an angel of Satan's an angel.

Yeah, yeah. It's a clarify. We're on the side of angels. Just not loss angel. Oh, I don't know a whole lot about electricity, but it doesn't seem like something you should like be able to shut in your closet and then pretend like your room is clean.

I don't know if it's just ice, right? It's like that. It's sweet, but under the rug. It's just like, I don't know where it went. It's just, you have electricity in your mouth. No, no. You have to tell me if you have it in your mouth. I don't know.

I see a lightning bolt sticking out. I feel like that's electricity. No. Yeah. So, and Ron was making millions at the expense of California and really at the expense of the entire world economy, but they were also losing billions. And that brings us back to Andrew Fastow. Again, his job as CFO was to hide all the enormous losses because there was no minus and allowed. We can talk about the details of Fastow scam for hours, for days, but I'll just give you the basic idea. He set up a series of side companies that were technically not Enron, but were very clearly run by him and by Enron.

And these companies would buy up all the projects that were losing money from Enron and keep them off the Enron balance sheet. And just for the record, that's all technically legal. It just isn't allowed. They were allowed to do this technically. Oh man, if only these guys had been black teenagers with less than a gram of crack cocaine, we could have stopped all this. Yeah.

And by the way, less than a gram of crack in this instance means skittles. We're like, No, no, no, no, no, no. It's less than a gram too. Ah, yeah. So here's how he worked it. He'd get the shell companies going.

And then other versions that weren't just buying up shitty stuff from Enron, other versions would provide Enron with giant loans, but they'd pass the money between a few of the shell companies first, and then eventually to Enron. And this meant that Enron didn't have to list the loan money as a debt,

and they could pretend it was regular income. Enron would eventually have to pay this back though. And since they didn't have any real cash flow, they'd get another fake loan thing with a new shell company. So basically they were getting new credit cards to pay their old credit cards. Here's the thing though, it's actually even worse than that.

They'd create, basically they'd create a new credit card using their own stock as collateral. So, if their stock price ever dropped, the whole thing would blow up, which it did in 2001. So, better analogy, it's like, it's like cutting your credit card in half over and over to create new credit cards. And then selling a different worthless piece of that card to activate the newest card over and over and over. Okay, it's actually not really like that. What I just described would be way less destructive and stupid than what I actually did, but it's kind of, you kind of get the idea. Sure. Yeah, they've somehow gone from shrewt bucks

to Stanley Nichols. I's it. And wow. I love the idea of using my debt as collateral for more debt. Because obviously, like, if I don't pay you, then you can pay my debt. That's just, yeah. That's great. That's great. You cannot lose. What, what, yeah.

Yeah. Again, all these shenanigans, the one with the loans, too. It was all technically legal sort of, but yet technically legal. Unless of course, you lied to investors about it. And since that was really the entire point of the whole thing. And Ron obviously lied to investors about it. And not just like idiot billionaires with family money getting tricked, or just people buying their stock,

they fooled high-level investment bankers. And apparently these meetings with those people were exactly as absurd as they sound. A-Mr. Fastow. Thanks so much for meeting with us. Oh, no problem at all, no problem. Yeah, so just a couple of questions. I'm looking at your balance sheet here.

And you have a business partner called Shell Company A. Yeah, they make C-shells? C-shells. The naturally occurring ocean. Yep, trash. Yep, yep, yep. Yes. Okay.

So where does Shell Company A get its money? Oh, they got some really sweet deals going with Shell Company B. Cool. Well, and where does Shell Company B get its money? Ah-ha, yeah, I thought you asked a sweet deals with Shell Company. See, cool.

Right. And where did, okay, you know what, we don't have time for this. Here's $500 million for your DVD slingshot project. Just don't fuck it up, okay? We won't, and we fucked it up. Sorry, what? I said, have you heard of this new company called Shell Company D?

D? I thought you were gonna say D. D. What did they do? DVD slingshot. D. What do they do? DVD slingshot. Yeah, so moments later, after this very real meeting that we just described, the giant web of debt got revealed in the news, and almost immediately, and Ron was bankrupt.

Once they got exposed, it led to a big investigation, and the prosecution of several high level executives, including Ken Lay and Jeff Skilling and Andrew Fastow. But not before these people tried to sell a bunch of their remaining stock. Yeah. This includes Ken Lay's wife on Ken Lay's behalf, who sold 500,000 shares about 10 minutes before the news broke that and Ron was hiding this enormous debt. Okay, all right, be a little kinder to her.

She's just trying to be good, help the family, be a good lay. So, so, I don't want to do this whole thing. The US government decided that maybe we should have a few laws to prevent this kind of thing in the future. And this included something called the Sarbonus Oxley Act that got signed into law in July of 2002. It basically said, no doing N-Ron stuff.

You're going to fuck up the whole economy, no N Ron stuff. And that's when Lehman Brothers jumped up on the table in the middle of the Senate floor, took a giant shit on that table, grabbed the Sarbonus Oxley Act, wiped their ass with it, and spent the next six years N Ronning the fuck out of the US economy,

until they took over as, by far, the biggest bankruptcy in history in 2008. We learn nothing ever. See, there's your tagline, the smartest guys in the room, we learn nothing. Yeah. Yep. Yep. All right. So he, if you had to summarize what you learned in one sentence, what would that sentence be? Uh, the invisible hand of the market needs to get me-tude right before the way. All right, sure, are you ready to face a quiz from our panel? Let's do it. All right, Keith.

Um, Enron subsidiary blockbuster produced a sequel to the smartest guys in the room. What was the plot and title of this film? A, all the people who lost everything in Enron's Docker invited to the CEO's house for dinner and they murder and eat him. And not in that order, it's called Thanks Killing. B. I didn't get that one too.

I didn't, I had to hear it out loud. Thanks Killing's an amazing movie everybody, by the way. Like the original and the one Cecil's talking about now. No, it's not. B, the whole wacky crew does the same thing again, this time in Japan and at the end they all commit ritual suicide or Ration Ron See a film where the leaders of the company are given a one hour head start and then hunted by futuristic Gladiators and and running man or D.

A film where the board members wind up penniless on the street and have to eat cat food from a can for the rest of their lives inside or trading places. Wow. This is all fantastic. I'm gonna say, ee-ee all of the above, as long as there's a soundtrack piece called, Isn't It, Enronic? Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha Sounds bad and it was, but it also doesn't matter at all. Not even a little bit, why not? A, a sizable portion of the US population

is absolutely sure energy comes from an infinite supply of mashed up underground dinosaurs. That's really, it's like one word off, they're close. Being a sizable portion of the US population is absolutely sure that if they are gazelle-intensive about it and sell all their furniture, they'll be able to turn a $12 an hour job into a million dollars in less than 40 years. It's a great day for Amsy restaurants right there. Yeah, so you can have an entire GOP reference right there.

Yep. And in $12 an hour, we'll take you 40 years to make a million dollars if you don't spend any of it. And see, a sizable portion of the. population is absolutely sure that the Sarbanes oxley act probably has something to do with livestock I'm gonna have to go with be the entire scam of the Republican party absolutely Republican party. Absolutely. Heath, some people have pointed out, they also are very heavily featured in Tom's question that since what Enron did was legal, it was actually the US government

that was at fault, not the board members. What else do these people believe reject this premise? Take, go ahead. Eric Garner deserved to die. Oh, Jesus. He kneeling during the national anthem is treason what defines ones inherent goodness is how quickly they'll give you a shirt they are wearing on their back

or d all of the above now the title of the book makes sense all right uh... once again I'm going with secret answer, e, it absolutely was the US government's fault too. Like it's clearly the people at Enron, but also definitely US government's fault. It's the faults of deregulation in general, very much so also on top of the people involved

at Enron. In correct, the answer is d. No secret answer. It was D. So unfortunately I'm supposed to announce right now that Eli's correct about that being incorrect. So, uh, yeah, stop me. Look at that.

You're the winner now for reasons unrelated to your question. Yeah. I'm going to choose Cecil to be the SAS. Of course you are. Oh, alright. Well, for Tom Eli Cecil and Heath, I'm no thank any for hanging out with us today. We'll be back next week and by then Cecil will be an expert on something else, Price, Science, and Nerdy, which is fine.

That's good. It's no new Coke, but it's fine. Between now and then, you can hear more of us on other podcasts and shit. And if you'd like to help keep this show going, you can make a per episode donation at patreon.com slash citation pond or leave help keep this show going, you can make a per episode donation at patreon.com, slash citation pod, or leave us a five-star review everywhere you can. And if you'd like to get in touch with us,

check out past episodes, connect with us on social media, or check out the show notes, be sure to check citation pod.com. [♪ OUTRO MUSIC PLAYING [♪ Yeah, spoiler. Not a great sign that the story of the smartest guys in the room begins with them losing money on gasoline. That is a biting critique Eli, but except these guys knew the difference between natural gas and gasoline. That's a chair counter.

Yeah, question just because I already know what is the difference between okay Just so you know when you put natural gas in your car it fucks up Yeah, and it gets mad. She says I have to roll down the window So that's one difference. He's got a whole to cow up up against the thing it takes forever to fill up natural gases when you plant a gas seed in your gas tank And you wait for it to grow that's what natural gas is Organic gas Yeah Free range

� gas Close these three dinosaur zan topec. You like, what was that amazing pun one more time? Yeah, do it one more time. I was giving Cecil a clean cut. I was just giving my good friend Cecil a clean cut. He could insert my great monsoon topec joke anywhere he wanted. Just try to avoid the overtime.

I will, I will place it directly in the bin. Yeah, exactly where you want it. Yeah, the Codigrim Florida will fit perfectly there. So you got a whole shift after it collects everything in front. Don't feel bad, Eli. I haven't been on cognitive dissonance in three years. I've just been out of the mouth. Clean.

We'll just do a nice number of monsanto pecking like auto-tune. That'll be like a whole long, outtake. That's hilarious. That's the funniest thing. nice number, Monsanto Packing, like auto tune, that'll be like a whole long, now take. Monsanto, that's hilarious, he, that's the funniest thing. Thank you. It's amazing. Such a good pun. So in 1987, you're good at punself.

So.