Stuff You Should Know - How Enron Fooled the World

Episode Date: January 10, 2023

Until the 2007, the largest single corporate bankruptcy was Enron, a $67 billion energy trading company. Its decline was breathtaking, and while it’s a fascinating story of corporate malfeasance and greed, it’s also about the lives of ruined workers.See omnystudio.com/listener for privacy information.

Welcome to Stuff You Should Know, a production of I Heart Radio. Hey and welcome to the podcast. I'm Josh and there's Chuck and Jerry's here and it's Stuff You Should Know. We mean it. You should know this stuff because this is serious corporate malfeasance that I think is probably not an American over the age of 20 walking around who doesn't know about this somehow some way to some degree. I know they teach about this stuff in business school. It's been written on extensively but I mean I didn't understand the ins and outs of it until I started researching this and it's quite shocking and that shocking thing that I'm talking about is the rise and fall of Enron, one of the greatest swindles

in corporate American history. Maybe in corporate history in the world. Definitely in corporate American history. For sure. I'm really glad you picked this because I didn't know all the ins and outs either because this is when I was a young, late 20s, early 30s something didn't have a care in the world. Sure. And I finally watched the smartest guys in the room today. Yeah, I saw it last night. Yeah, the documentary based on the book and we'll get to the authors and stuff. It was Peter Elkind and who was the co-author? Bethany McClain. Okay. I didn't know. I think she was the lead author even. Oh, okay. I knew she wrote the original articles in Forbes so she co-authored the book and she's in the

documentary as is Elkind and it really is worth the watch but just want to point out that this is an overview of the Enron scandal. It's pretty clear once you start poking around that this could be like a 10 part series. Yeah, for sure. And there probably is a podcast series out there that covered just Enron. So there's lots of sort of ins and outs that we won't be able to touch on but we can definitely give you the overview which was that Enron was a corporation. Originally it was a natural gas line pipeline operator but they quickly, why not quickly? They got out of that business almost entirely when certain people were hired and we'll sort of get to all this in a minute too. Certain people's right. When certain

people were hired that basically said, you know what? We shouldn't even be in the pipeline industry. We should invent almost a new kind of industry which is to use energy as financial instruments and we should become a trading company that trades natural gas and eventually paper pulp and electricity and you name it. We'll get into all the things that they sort of pivoted to but Enron started, I guess we should start at the beginning in 1985 when Houston Natural Gas Company merged with a company called Internorth and they combined to form this large energy corporation in Texas, mainly natural gas and the chief executive of HNG at the time was a man named Ken or Kenneth Lay who you might have heard of.

Yeah and if you haven't prepared to meet Ken Lay several times across this episode, from the outset I think Houston Natural Gas and Internorth were both profitable but I saw that neither one of the companies really benefited from the merger although it did expand their pipeline network. Really it just protected them from a hostile takeover but it was just a standard gas company, no big frills or anything like that. I think the first year it posted a $14 million loss. Put that in your hat and smoke it later with a pin in that the first year Enron was around in 1985 it posted a $14 million loss. Just remember that for later, okay?

Yeah, also something else you should put in your hat for later is the fact that Kenneth Lay, the gentleman I mentioned who was CEO of Houston Natural Gas was also very, very tight with the Bush family. Originally the elder Bush and later on George W. as governor of Texas, big donor to their causes politically and they ended up having a very sort of you scratch my back, I'll scratch yours kind of relationship. Yeah, I mean like I just started twirling around over and over again out of anger like multiple times throughout the documentary because they really go into some good details about that but the upshot of the whole thing is George H.W. and George W. Bush would not

probably have been able to help Enron out as much as they did had it not been for of course Ronald Reagan and the sweeping deregulations that occurred in starting in the 80s. There was just a spirit of deregulation which was this Ronald Reagan said and they quoted in the documentary government's not the solution to our problems, government is the problem and there was this idea that was really huge in the 80s that if you got government out of the way competition was going to drive innovation, was going to lower prices, was going to benefit society in myriad ways. That is not untrue. The problem is when you deregulate fully and just basically say we're checked out from now on until something really

bad happens, something bad always happens. That's the problem with deregulation in the 80s. Not that there's a problem with deregulation that it was done incorrectly like it seems to be every single time. Yeah. I mean Reagan is also in the documentary quoted as talking about the magic of the marketplace and we've talked about this over and over on the show and this is not an attack on conservatism but deregulation in the marketplace and letting the free market decide things is one of the core tenets of conservatism generally. What we've always hammered home here after years and you've said it in one way but I'll say it in another is it never takes into account

humans are the ones that are operating these systems. When you have money, lots and lots of money and you have humans operating systems, there are inevitably going to be greedy humans with so much hubris that they sell their souls to make money and that's what happens every single time yet lessons are still not learned that there are certain kinds of humans and they always seem to be the ones in charge here of these systems. They will take advantage of them to the detriment of the little guy and the little lady and that is the 100% what happened with Enron. Yeah and I don't know if it's always like they're not taking into account human greed.

I think most of the people who are powerful enough to deregulate federal energy regulations don't really care in a lot of cases. They know that they're going to make a boatload of money by the time the thing really kind of blows up sometime down the line. I think it could be either one but there was a big sea change in 1984, a big change to regulation. The Federal Energy Regulatory Commission said, hey, you can now buy and sell gas, natural gas from any seller anywhere in the United States. You don't have to just buy and sell within your state and that opened up an entirely new market and all of a sudden you can make a lot more money moving this stuff around. But like you said, they figured out at Enron,

you can make even more money by selling this stuff as commodities and trading on like futures and turning them into financial instruments, not actual just natural gas or oil or electricity but the concepts of them, the right to sell it or buy that sometime down the road. That changed absolutely everything. Yeah, and this is when things, when you get into finance like this, it's not that my eyeballs glaze over, it just becomes almost, and I say almost not real because it is kind of not real. It becomes a form of gambling in a way and that's very much what happened at Enron in a lot of ways and you'll kind of see here and there throughout the episode.

But they as a company, after that 84 decision, made a very faithful decision of their own in 1989, just a few years later, when they got a consulting firm on board, a McKinsey and company, in particular a consultant for that company named Jeffrey Skilling to create what they called a gas bank, which was basically like I said earlier, like, hey, why don't we just be an intermediary between buying and selling of gas? And it was going so well that two short years later, Skilling left there and went to work full time at Enron. Yeah, that's an ongoing theme. Oh, sure. And eventually working his way up to the CEO of that company.

Yes. So he was, but for the most part, he was the right-hand man, but essentially co-CEO with Ken Lay, who I think took him on as a protege. And Jeffrey Skilling was the one who said, let's set up this market. And he also transformed the company's culture. One of the things he came up with was the idea that every year they should review and rate every employee and the bottom 10% of employees should be fired. So every year he was planning on firing 10% of their workforce. So about 2,000 people every year. And the reason he was doing this is because he's saying we can do better. We can hire the best and the brightest. We'll replace those people with much better people. And then the ones who are doing really

well now will get moved to the back and will just constantly be improving on the people that we're hiring. It makes sense in a really Machiavellian kind of way, but it's also psychotic as well. Yeah. And the way I understood it from the documentary, it wasn't just like regular upper management reviews of the people that report to them, but it was all the employees rating one another like within their department. Isn't that right? Yeah. That's what I took it as too. So I mean, you don't have to like be a soothsayer to see where that heads when, and it certainly

creates competition if that's what they're all about with the sort of the charter of the company creating more competition by deregulating. They sort of did the same thing within the ranks and created a very, I mean, I've seen it described everywhere as just overly macho and testosterone fueled. It seems like the traders there were hired and kept on that were especially aggressive. And there are interviews in the documentary about some of these men who were traders that were like, you would cut the throat of the guy next to you on the trading floor, your fellow employee, if you felt like you could make a few extra bucks.

Yeah. And that was very much encouraged, not just by Jeffrey Skilling, but Ken Lay had a history of at the very least turning a blind eye, if not actively encouraging people to break the law, do immoral stuff that may or may not have been legal, all in the interest of maximizing profits. Like if you were making money and you got in trouble, you didn't get fired because you made money for the company. That's all that mattered was making money for the company. So in that sense, Jeffrey Skilling was a really great protege for Ken Lay, but he was like Ken Lay on steroids. And I get the impression Ken Lay is always, or back in the day, he

was a master at presenting this really laid back, almost detached persona. But if you watch the documentary and you read about him, you really get the impression that he knew exactly what outcome was 10 steps down the road by just nudging this thing over here, nudging that thing over there, all with plausible deniability. But at the same time, presiding over this incredibly complex, complicated, masterful machination that was all dedicated to the service of making money by whatever means possible. Yeah. And Lay, I mean, the reason the documentary is called the smartest guys in the room is because I think unequivocally, everyone would admit that Ken Lay and Jeffrey Skilling, and

we should introduce you to a younger recruit named Andrew Fastow, who is a key player eventually becoming the CFO and was up to all kinds of shenanigans. But these were brilliant guys with amazing ideas. And a lot of the ideas that they had for this company were really good and ahead of their time. But they had the notion that you should be able to trade and make money off of great ideas and not necessarily the results of those great ideas. Because time and time again, as you'll see, as we tell this story, these ideas were not making actual money, maybe because some of them were ahead of their time. But that didn't matter because they had ways, very creative ways to hide those debts and losses. And that's

the whole sort of fall of Enron is wrapped up in that statement. But these are all really, really smart guys. And they were really, really good at making money. And maybe we should take a break there. It's a nice little setup. All right. And we'll come back and talk a little bit more about their lobby to deregulate and then some of the early shenanigans right after this. Okay. So after about six years after that big deregulation from FERC that said you can buy gas and sell it wherever in the country that opened up a huge market, there was another

watershed deregulation that reversed an act that went back to 1935. The Public Utilities Holding Company Act, PUCA, love that one, that said if you are generating and selling electricity, you are a local utility and we're going to regulate you like you are providing the lifeblood of America because They are. Electrical utilities provide the lifeblood of America and have since long before 1935. And in 1990, they managed to get that reversed. And now all of a sudden, anybody could buy an electric utility and Enron definitely jumped on that.

Yeah, for sure. Their lobby was strong to put it mildly. They hired lobbyists to lobby different states and those states as no surprise ended up getting millions of dollars flowing back toward Enron. I think they hired lobbyists for at least 37 states. They also helped overturn a law in 1988 that said the military has to buy power from local utilities and they said, no, let's open that back up pretty soon. Enron got a $25 million contract for supplying electricity to Fort Hamilton in Brooklyn. And these are just, I mean, 25 million ends up being peanuts in the grand scheme, but these are just examples as they sort of ramped up to their schemes of how they deregulated or lobbied to get things deregulated such

that it was allowed to happen. Right. And one of the things, one of the schemes that got the attention of the entire country in 2000, 2001 was an electrical scheme in California. California had undergone its own electrical deregulation, power deregulation, but it had adopted this weird patchwork compromise law or set of laws that just had loopholes you could drive a truck through and that were just really created all sorts of legal gray areas. And so rather than just kind of like here, they're biting around the edges, seeing what they could do. Instead, the energy traders at Enron started figuring out how to move energy out of the state, wait for the state

to be like, hey, we need some energy and move it back at incredibly inflated prices. They would purposefully take electrical utilities that they owned offline to generate more demand, the spike in demand, and so they could raise prices again. And they actually basically crippled California. I think I saw that California had a couple dozen blackouts in six months after that deregulation, after Enron started coming in and messing with stuff, whereas the six months before deregulation, they'd had one blackout. So if you watch the documentary and you read some other sources about it, this was an entirely fabricated scarcity of electricity. There's plenty of it. Enron just figured out that they could kind of pull

this lever and that lever in charge way more by creating this fake scarcity. Yeah. And by pulling a lever, literally sometimes they called up a power company, a power plant, and said, pull the lever to the off position, and they have them on tape. They play this in the documentary. Well, they called one in Las Vegas and said, hey, man, can you take this thing offline for a few hours and just make something up? Because a rolling blackout meant big money. All of a sudden, California, again, was buying their own energy back at a higher rate and Governor Gray Davis at the time. And this is, you know, I'm not like giving some full-throated endorsement to any effectiveness of Gray Davis as a governor

because I really don't know. But he definitely was sort of left holding a bag and scratching his head. Like, what's going on here? Like, we've got plenty of energy. And it just, all through the documentary, people are saying like, this just isn't adding up in California. And some of those tapes that they play of these traders, like there was that natural wildfire that broke out that jeopardized one of the pipelines. And these guys are on, you know, on tape on the phone with each other saying, burn, baby, burn, because that's good for business if it knocks something offline. And it's, you know, making, laughing at like, you know, old grandmas like sweating in the summer heat because they can't get air conditioning.

Like the most vile, reprehensible kind of stuff in the name of making the almighty dollar that you could imagine. What's also interesting is they don't really go into detail about it, but it's, it appears to have also been a coup to get rid of Gray Davis and replace him with Arnold Schwarzenegger. Because Ken Lay held a meeting at the Peninsula Hotel in Los Angeles. And he invited Arnold Schwarzenegger. This was long before Arnold Schwarzenegger was known to have had like real political aspirations. He wasn't governor yet, wasn't running for governor over a problem that Enron created. It was like that level of, in addition to also just making billions

and billions of dollars by strangling the state, they also managed to replace the executive of the state as well to somebody who was much more friendly to them. Yeah. And get rid of in, of course, they didn't like knock them off or anything, but in California you can, you can ever recall it seems to come up every 12 years or so where Californians aren't happy with the governor. And so if recall vote passes, you can have a, have just an election out of nowhere and replace that governor. While this is going on, you know, Ken Lay stands on a stage and says, we're making money in spite of California, not because of California. So just lying through their teeth on stage to their shareholders and all,

you know, all these little schemes had little nicknames. The one where they got energy out of California just to make them buy it back was called Ricochet. There was one called Death Star and they're on tape like joking about like, hey, let's have a nice friendly name for this one, like Death Star. So they're just, they're playing games with people's livelihood essentially. And lives you can make a case as well. Yeah, for sure. So three of those traders pled guilty, Jeffrey Richter, John Forney and Timothy Belden were three of those traders who manipulated California's energy market, costing the state between 40 and $45 billion in retrospect of unnecessary

electrical prices and costs. All right. So Enron is doing great. They're making a lot of money. And we should point out that this is just, you know, Ricochet was just one little scheme. They had all sorts of schemes along the way to, well, we'll get to those. Between 96 though in 2001, like as far as the stock market world was concerned, Enron was a darling. Fortune named them, I think six year straight America's most innovative company every single year in a row. But what was going on behind the scenes is these ideas and these investments and schemes that they had, you know, some of them made money, but a lot of them didn't make any money at all. And they just became really, really good at

hiding that fact. Yes. That was the whole thing. Like they were very innovative. They were ahead of their time in a lot of ways. Like they got into building broadband high speed internet access in like 2000 or 2001, something like that. And this was, I looked it up. It wasn't until 2007 that half of all US internet users had broadband. So this was way ahead of its time. And then also they also got into the video on demand market. They tried to partner with Blockbuster. And these things were basically like the progenitor of Zoom and Netflix. But these guys were trying this in 2000, 2001. So it's visionary. The problem is they were ahead of their time. The infrastructure wasn't

there. I think the customer base even wasn't there. So there's stuff that they were doing wasn't making money, which is not bad in and of itself. What was bad was when they were covering it up and the schemes that they used to cover it up are so involved and complex, but also so fascinating that they would have the audacity to do this because there's no fudging it. There's no like, oh, this is kind of questionable. This was just fleecing all of their investors, all of their employees, fleecing the entire world. There was a handful of executives at Enron who were fleecing the entire world to the tune of tens and tens and tens of billions of dollars every year in revenue that apparently didn't actually

exist. Yeah. It's pretty clear that at a certain point they lost their way and that they weren't as concerned about being a company that made money. And the only thing that mattered was that as a corporation was that they kept their stock price high because that's where all the money was. They had, as long as they could keep that stock price high and keep shareholders, especially their employees, encouraging their employees to get paid in company stock, use every penny of your paycheck that you can to buy this company stock because in Enron stock was soaring. It was doing really, really well. And all the while, it was called

pump and dump. They would drive up the value of their stock and then the upper echelon, and you see this time and time again in the corporate world, the CEOs and the CFOs and the upper management are the one who then sell off their stock and walk away with some of them hundreds of millions of dollars. And some of the schemes that you talked about was they found ways to move debt around. We mentioned Fastile was one of their hires, and he was hired in I think his late 20s, early 30s and quickly rose up the ranks to the CFO. And he started a company called LSM, which stood for Leah, Jeffrey, and Matthew, which are named after his wife and kids sort of ironically. It was like such a sweet tribute

to them. And the only purpose of this company was to have all kinds of sort of little sub-companies that would absorb the debt and where they could move debt around from Enron to make it invisible to the shareholders. So they could prove on a balance sheet that you had this money coming in and the way of people investing in the company, but then you're hiding the losses, and so everyone thinks you're doing great. So the way that I saw it explained, Investopedia actually has a couple of really good articles about this that are just wonky enough to understand it, but also not so wonky that you're just like, I have no idea what I'm reading. And the way they put it was basically if Enron

had like a good example is they built a power station in India. That was a huge loss. It was just a generally bad idea. And they sunk billions and millions of dollars into this power station without realizing any money whatsoever. I think they abandoned it before it even came online. They would take this and sell it to one of these special purpose vehicles or special purpose entities, which was a tangentially related company that the company Enron was not on the hook to pay off its debts for, right? And they would take that and then that special purpose vehicle would go out and try to sell it, sell that terrible toxic asset. And they would use Enron stock as the collateral, right? And because

Enron stock was just through the roof, everybody was saying, sure, we'll give you a loan. Sure, we'll give you some money for that terrible idea of a power plant that you abandoned because you're backing it up with Enron stock. And as long as the time that that stock came due was far enough away, and as long as Enron stock kept going up, this house of cards could be held together. But that's not at all how it worked. The upshot of it is that they could take toxic assets, move them off of their books to these special purpose entities, and then they would take the money that these special purpose entities would go borrow against that toxic asset. And they would count that on their books as revenue. So they were hiding

debt, boosting their revenues to just ridiculous heights for stuff that just should not have been counted as revenue. Yeah. And just to be clear, they didn't invent the special purpose entity and an SPE is not some evil creation in and of itself. It's an entity that a lot of corporations and businesses use where it's just sort of like has a very narrow purpose in that they create this thing when they might use it to purchase an asset or to move an asset. So the company as a whole may not be on the hook. If anything goes wrong, it sort of mitigates risk. So it's not some evil purpose in and of itself, but they were manipulating these such and starting all of

these things under Fastile's guidance with his LSM sort of sub-corporation and eventually LSM too, I think, that they were making, I think they hit $90 in August of 2000, market cap of the whole company at $70 billion, which made it the seventh largest publicly traded company in the world at that point. Yeah. So that's a market cap of $70 billion. Remember, in 1985, it's first year, it posted losses of $14 million. Within 15 years, they posted revenue of $100 billion in sales in 15 years. That's what happened to that company when they brought Jeffrey Skilling on board. Jeffrey Skilling brought Andrew Fastile on board and people just started going nuts, making

money anyway they could. Yeah. The other thing we should mention too is another sort of slick trick is that Skilling's idea and they got approval, and I wasn't clear how or where this approval comes from, but to use something called Mark to Market Accounting, which is basically when you can rate the financial health of your company based on, not theorize, but just on future earnings basically and not necessarily what they're worth that day, so anticipated future value instead of its purchase costs. Did you get how that they were approved because it seemed like they were all super psyched that they got approval for Mark to Market Accounting?

Yeah. That would have been the SEC, the Securities Exchange Commission, who would have given that approval. Just like a special-purpose entity, Mark to Market Accounting is it's totally legitimate. It recognizes generally accepted accounting principle, but there's a lot of room for temptation to just basically say, this deal with Blockbuster, we haven't made a penny off of it, but we can cite the future earnings from it now that we booked this deal. I think it'll probably be worth a billion dollars, just a total guess. You're not supposed to do it like that. You're supposed to do it much more realistically and legitimately, but they had enough leeway that they were able to take Mark to Market Accounting and

use it to their benefit in that way. In doing that, they pumped up their revenues through the roof. The deal would just be ain't. They wouldn't have seen a penny from it and they would add it to their balance sheets as revenue. Yeah. It would become part of the ledger before a real penny was made. Exactly. Sometimes the pennies weren't made. If the pennies weren't made, don't forget those debts would be moved to a special-purpose entity, so they wouldn't have these toxic assets on their books, even though they very much owned or indebted for these toxic assets still.

Yeah. Like I said, these were brilliant people. They had all their bases covered, except for the fact that we all know that a house of cards will eventually fall. It's that hubris thing that just blinds people into thinking that it will always... When that kind of money is rolling in, I think it blinds certain people so much that they don't understand A, who it's hurting at the time, or they don't care, or they think it's always going to be rolling in like this, or they think, hey, I'm going to get mine now, because there were people in Enron. We'll talk about whistleblower that eventually came out and journalists who were poking around, but there were people that started looking at this company, the Darling

of Wall Street, and saying, something's not right here. Something's not adding up. You can't even explain how your cash flows through your business in a way that makes any kind of coherent sense. Anytime they were confronted with this, a skilling in his cronies, they would get very haughty about it and just be like, well, what do you mean we can't explain that? Sure we can. It's really easy. You just can't understand it. Yeah, you just can't understand it. Right.

It makes your blood boil. Let's take a break and then we'll come back and talk about the downfall. How about that? Yeah, the downfall. Okay, Chuck. One question that people might be asking is, how were these guys allowed to use this accounting and get away with it? Why were people even investing in buying shares of this company when it was just so fraudulent and just ridiculously fraudulent too, not even subtly fraudulent? The answer is, the company was such a Wall Street Darling that financial analysts would not understand what they were hearing on these earnings reports,

but would still give it a stamp of buy. The other thing that really, really helped was the banks, Wall Street banks were very much complicit in this as well. Then the thing that helped the most was Arthur Anderson, the venerable 80 plus year old accounting firm. The oldest one in the country. Yeah, that was a third party accountant to Enron. It was so cozy that they actually hired all of Enron's internal auditing staff, made them Arthur Anderson staff, and then opened a 150 person office for Enron in Enron's headquarters. An Arthur Anderson office in

Enron's headquarters made up of former Enron auditors. That's who was watching the show. Arthur Anderson had such a good reputation that because they were signing off on this, as the Wall Street analysts were saying, yeah, it's a buy, people were just like, I'm buying. I'm buying and it kept the stock prices going up and up and up because nobody was paying attention enough. Yeah. There was one person in the doc that said, that kind of crystallizes it, which was like, I'm paraphrasing, but he was talking about the fact that when this kind of stuff pops up in corporations, it's not like the Enrons are everywhere. There is all kinds

of malfeasance for sure in the corporate world, but he basically said somewhere along the way, it doesn't get this big because a legal team says you can't do this or your accountants say you can't do this or the bank say, we can't get involved in this. And Enron seemed to be one of those sort of unicorns where every person along the way just zipped their mouth shut, even though the numbers weren't adding up and was complicit in this. Right. There was a trader that was interviewed in the documentary who said like, it was ironic that Enron's slogan was ask why, like why does something happen like that? Why can't we do it that way? And that this trader said, I didn't ask myself why because

I didn't want to know. I suspected things were weird or awry and I just didn't want to know because it was my job. I was making tons of money and I think you could probably get that excuse out of just about anybody who was complicit in this larger small. But Arthur Anderson, that was the one that really, really helped things along. And as we'll see, they didn't manage to survive the scandal. Yeah, there were, oh man, that was that one part of the documentary where they were talking about fast styles, shell companies. And he was in a meeting that was secretly taped and they were basically like, well, wait a minute, it looks like you're on the buying and selling sides of these transactions. Right. And he

was like, yeah, basically, but I've always got L and J's interest at heart. And the whole time he's skimming money and they believe that Skilling and Lay knew that like, hey, I'm sure that fast style is skimming money off the top for himself. Right. Who cares? Because this guy's taking care of business for us. Exactly. And I think he skimmed about $35 million for himself. He stole from Emron and they looked the other way because the stuff he was doing was so unethical, so illegal that he basically earned it as far as they were concerned to have his hand in the cookie jar like that. So I think you kind of mentioned there were some people who were like, wait, what's going on here? One of the first people

was Bethany McClain, the journalist who ended up writing the smartest guys in the room. She's awesome. She is awesome. She started out writing a story for Fortune magazine back in March of 2001 titled, Is Enron Overpriced? And she was one of the first people to publicly say, how is Enron making its money? But she wasn't the first to hit on this. There's another guy named Jim Chanos of Kynacos, securities I think maybe. And I think he's in the documentary, but he started shorting Enron in 2000. Because he noticed very simply their cost of capital, so the cost of doing business, was more than their return on investment, which automatically means that they were not

a profitable company, which totally was contradicted by all of their earnings reports and filings. And he saw this and he said, this is not right and I'm going to start making money off of the future downfall of this company and made hundreds and hundreds of millions of dollars shorting Enron stock starting in 2000. Yeah. The whistleblower too was an executive main named Sharon Watkins. And she pops up a lot in the documentary, obviously is key to the story. She didn't whistleblow while this was all going on. It was sort of after the ship started sinking. But we'll talk a little bit about how that all happened and where she ended up. But what happened in August of 2021? Skilling had replaced Leigh,

a CEO in February of that year. And on August 14th, 2021, Skilling out of nowhere and he had just taken the reins a handful of months before. Skilling quits out of nowhere. He resigns. He cited personal reasons. And what was going on was the Titanic sprung a leak. And as they described in the documentary, he was one of the first rats to try and get off the sinking ship. Yeah. And it's like if you are a CEO of a huge company, you don't just leave like that. That is an enormous red flag. There's like a whole process and procedure for finding your replacement, grooming them, introducing them to the rest of the world. You don't just leave like that. And that was such a red flag that that whistleblower, what's her name? Sharon Watkins? Yeah.

She wrote an anonymous letter to Leigh basically saying, Hey, there's a lot of fishy stuff going on around here. And now that Skilling suddenly departed, everyone's going to start having questions in this whole house of cards is going to fall. And Leigh apparently didn't do much about it. And she came to Leigh later on and said, I'm the person who wrote that anonymous letter and I'm really concerned about this and ended up trying to keep it in the company. Because I think I get the impression that she thought it was something, especially now that Skilling was gone, that could be resolved internally. I think she really underestimated the extensiveness of the corruption. And yeah, at the company and thought it was a few people when really it was a large cadre of

people who all were complicit in this. And I get the impression that's why she didn't really blow the whistle publicly at that point. But apparently Ken Leigh, once he found out that it was Sharon Watkins, consulted legal counsel to figure out how to fire her legally. Yeah. The same day that Skilling resigned on August 14th, the broadband division that we talked about earlier reported $137 million loss analysts. And we should point out too, as far as the analysts go, they were always installing friendly analysts and only working with friendly analysts. But they finally got the clue. They dropped their ratings for the stock. The end came very, very swiftly for Enron. On October 12th, Arthur Andersen's... I mean,

you still remember all the shredding jokes on late night TV that ran for months and months. Arthur Andersen's legal counsel said, everybody shred everything. Destroy every file that you have on Enron. And in one day, they shredded literally one ton of paper. Yeah. And that was just one day. They apparently shredded around the clock from October 22nd to November 8th. And that was just one ton, one day. They shredded literal tons of documents. Just shred, shred, shred. If you were an executive at Andersen, you were probably working a late night shift shredding alongside everybody else. It was like that. And it was apparently at a time where you could legally do that and not be, you know, indicted for it.

But that was not a good look when it came out that Arthur Andersen was, the auditors of this company were shredding tons of documents. And the SEC got wind of this and they said that they're going to start investigating finally the special purpose entities that FASTAO had set up. And so Enron fired FASTAO that same day. And I think that was in November or late October of 2001. And right after that, on November 8th, Enron said, hey, everybody, do you remember all of our, all that money we said we made going back to 1997? We're going to need to restate our earnings. One of the first things they did was they reported a $618 million loss for Q3 of 2001. Q1, they posted a $406 million profit. Q2, a $404 million profit.

Q3, a $618 million loss. So they finally came clean. They finally said this accounting is off and this is how radically it's off. Yeah. I mean, that is, if a company is restating their earnings for that period of time at all, like mistakes can happen, but that's a real bad sign. They almost got a lifeline in, I guess late October of that year when they tried to merge with a company called Dynagy Incorporated. And that deal fell apart on November 28th. They backed out of the deal. Dynagy did. And then what is this? Four days later, on December 2nd, Enron filed for the largest Chapter 11 bankruptcy in U.S. history. Up to that time, $65.5 billion company filed for bankruptcy. That just did not happen.

If you had that kind of money, you could have a fire sale and sell off stuff for way less than you paid for it, but you could still survive. And that just goes to show you just how fraudulent this company was. They couldn't have a fire sale and make up that kind of debt that they owed. I think it was $72 billion, I think, in debt that they finally were found to have owed. And at the time it was the biggest, in 2008, we saw what big really was. Lehman Brothers, for example, had $639 billion in assets when it filed for bankruptcy and went under. But at the time, Enron was like eye-popping as far as bankruptcies went for corporations. Can you imagine the wave of relief that swept through Dynagy Incorporated? Yeah.

When Enron declared bankruptcy a few days later after they backed out. Yeah, that one just offhand conversation at the vending machine over a packet of checks mix saved Dynagy forever. This seems like a bad deal to me, crunch crunch. And Dynagy, by the way, went on to become Apple. The fallout from this, there are a lot of victims. 20,000 employees, 20,000 employees lost their job. And how long did they have to get out? What did you say in the documentary? Like a day. I think they had the day. I think it was less than that. I feel like it was hours or something. Basically, pack your S and get out of here, everybody. Yeah. And like literally this huge tall building has thousands of people just leaving all day with bankers boxes,

with their contents of their desk in it, like the ultimate movie trope. Every employee that had been told for years and years, hey, you got to invest everything you can in that 401k. Because Enron is, I mean, look at the stock where we're going places and that money will be safe there. They obviously lost almost everything. There was a, you know, the rank and file employees that was one in the documentary that said he had about close to $350,000 in stock that he ended up dumping for $1,200. Yeah. They froze the stock accounts of the rank and file while upper management was actively still cashing out. Yeah, that was a really scummy move. They, I'm sure, purposefully changed 401k providers in the midst of all this. And when you do that, there's a minimum 30 day

freeze as you transfer assets over. So these poor employees couldn't sell their shares, like you said, while the executives were making tens and tens of millions of dollars worth of option trades. Yeah. I mean, it's just mind boggling. That to me is probably the worst part of the whole thing. Well, and, you know, tie with that, their severance package averaged about $4,500 dollars for the average employees while management bonuses totaled more than $55 million. And that's just bonuses. That's not cashing out stocks. And Livia, who helped us put this together, great job on this article, pointed out something like other fallout, like you never even think about, which was Enron was a very big investor and donor in local nonprofits in Houston.

And all of a sudden, all that money is cut off. And like the Red Cross chapter had to cut its budget from $12 million to $9 million in one year, largely because the money dried up from Enron. So the fallout was far and wide. And that's not even mentioning, like we're talking about the employees who had stock in the company, like every other human being that had just stock in Enron that had nothing to do with it, lost all their money. Yeah. I mean, the stock price was at 90 at one point and it dropped down to, I think, 40 something cents in like a year, basically. So yeah, the employees in particular and the retirees who had already left and whose pension funds were just totally evaporated, meaning you're going to have to go get a job as a Walmart

greeter now because you can't afford anything. They are definitely the greatest victims of all this. I saw Ken Lee's lawyer afterward portray Ken Lee as the greatest victim of all of it, because he apparently lost a few hundred million dollars. And he didn't say it himself, but he definitely tried to say like, I lost so much money, there's no way I could have known what was going on. And that fell on deaf ears. And that same defense was used by Jeffrey Skilling too. I didn't know it was going on. And so what they tried to do was pin the whole thing on Andrew Fastow, who had been fired, who had skimmed 30 something million dollars himself, so had proven, demonstrated he was a criminal. They made it, they tried to play like he was a

rogue CFO that had done all of this under the very nose of Jeffrey Skilling and Ken Lee, and that they hadn't known. And the public Congress, the courts, juries, everybody said, you have to be kidding us. Yeah. And they were right. In the end, Fastow pleaded guilty to two counts of wire fraud and securities fraud. In return for being a witness against Skilling and Lee, I think, had a 10-year sentence for what was going to be a much larger sentence, ended up serving five years, and then got out into 2011 and started getting paid as a speaker to corporations about business ethics. To his credit, I guess, 20 years on, he came out officially and apologized for everything, seems to really have turned the corner and learned a lesson,

although he never knows what is going on in someone's heart from the outside. Arthur Anderson completely went away. The oldest accounting firm in the country never recovered, completely folded and went on a business. The Sarbanes-Oxley Act was enacted basically because of Enron in 2002, which was, and I remember years ago when we were working in our early days at How Stuff Works, there was a lot of like Sarbanes-Oxley talk. Do you remember that stuff? Yeah, because they came up with the Frank Dodd Act to basically undo or combat against future stuff from the 2008 financial crisis. This was the same thing, six years prior. Enron had such a huge effect that they passed a law that basically point for

point outlawed all the stuff that Enron had done. They did the same thing with the Dodd Frank actor they tried to. And of course, certain people will say Sarbanes-Oxley has no real teeth anymore because they're not even funding the oversight that they promised other people. The diehard, free marketers will say, that's actually too restrictive. We're not able to be competitive anymore because you've got all these rules now to make sure we're not defrauding people of billions of dollars. Right, yeah. You're making it hard to exploit people. Come on. So there was actually convictions. Like this is crazy. And one of the heartening things, Chuck, is if you watch like these congressional hearings on this, people from both sides of the aisle are grilling these

guys. Oh yeah. No one was apologizing to them for their, you know, their colleague from the other side of the aisle asking, you know, mean questions. Everyone was mad at these guys. The whole world hated Jeffrey Skilling and Ken Lay and Andrew Fastow. He was smug up there, man, answering those questions in the face of all that. He was still so smug about it. I looked up whether he ever apologized and I could not find it. I don't think Jeffrey Skilling ever apologized. I think he went throughout his entire time in prison basically saying like he was a victim, that this was unfair, but he was imprisoned. He was an executive that was in prison. That just does not happen lately. He was convicted of 19 counts, fraud, conspiracy, insider trading. He got 24 years in prison

and ended up serving 12, which is, I mean, yeah, that sucks, but it's still... 12 years is nothing to sneeze at. No, for sure. That's a long time to do in the clink. And then Ken Lay, he was convicted on 10 counts, but he wasn't able to be sentenced because he died of a heart attack six weeks after being convicted. And I think his conviction was vacated. Yeah. Skilling now is out and works at an oil and gas analytics startup. It seems that other people... I think, yeah, I mentioned that FASTA was on the speaker circuit. The whistleblower, Ms. Watkins, was named Times Person of the Year in 2002 and I believe is also now a paid speaker

and executive in residence at Texas State University. And then there was a matter of... Because I was like, Libby didn't get to it, but I was like, well, surely there was some sort of making it right for these people who lost all this money, right? And there were lawsuits that came out and settlements that came out. Different people ended up paying different things. I think it was a $7.2 billion settlement from Enron. I believe the banks were on the hook. I couldn't tell if the banks were on the hook for some of that or if it was a separate thing. I don't know. I saw that they squeezed a total of $20 billion out of Enron before they let it go. Okay. I don't know, but I did see the banks were definitely on the hook just for being complicit.

I don't know if that was in addition though, either. Yeah, I think... Yeah, it says right here that the bulk of the settlements, almost $7 billion of it, came from JP Morgan Chase, Citigroup, the Canadian Imperial Bank of Commerce, Lehman Brothers Chipped In, Bank of America Chipped In, the Big Five Auditing Firm, Arthur Anderson, of course, we talked about. They chipped in, I think, well, I don't see how they could have chipped in if they went out of business, but... I guess they chipped in before they went out of business. All right. So, if you hear this story, especially if you're used to us in our podcast, you might be like, well, guys, you didn't really get to the other side of the story. There is no other side of the

story. This is one of those rare stories that is basically black and white. It was just... There's no redemption. There's no explaining it away. There's no apologizing for it. It's just... It was just as wrong as it appears. So, that's why we didn't include the other side of the story in this one. Yeah. I don't think there's anyone out there who's going to bat for Enron. It's there's somebody. There's somebody and they will leave it on our Apple reviews. Right. They totally will. Enron didn't get a fair shake from these guys. Totally. Neither did Hitler or Satan. You got anything else? I got nothing else.

Well, I don't have anything else either. If you want to know more about Enron, go watch the smartest guys in the room. Definitely will leave you wanting more. And there's plenty to read about, including some great contemporary articles all over the internet. And since I said contemporary instead of contemporaneous, it's time for Listener Mail. This is a little wordy, but we don't often do shoutouts and tributes, but this is a really special one. So, we're doing it. Nice. Hey, guys. This is from Gavin, recent college graduate and history enthusiast.

And Gavin says, I've been listening since I was 15 over seven years now. My mom was the one who introduced me to the show and we've both been listeners ever since. I'm pretty sure she listens to every episode that you guys put out. My mom was also the person who imparted a thirst for knowledge and learning in me as a child. I've had great many teachers in my life and I'm very thankful for them, but my mom has always been my greatest encouragement and my role model as a student and as a person. Over the past four years in college and directly after I got really busy, I moved 12 hours from home and it meant I stopped listening to podcasts, including you guys.

I know. More importantly, I also lost touch with my mom. I didn't completely ghost or anything, but I still did not reach out to her nearly as much as I wanted to or needed to. But often when I eventually would, she would ask me if I listened to Stuff You Should Know recently and she'd have an episode to recommend because I think you'd really enjoy this one. Luckily, I now have a job where I'm having more flexible hours and over that time, I picked Stuff You Should Know back up, re-energized my love for knowledge and learned that my mom had given me years ago. All this to say, you guys mean a lot to me and my mother and I thank you for that. You've helped me stay connected to her in a way that I would

not have been able to do otherwise. I'd just like to take this chance to thank my mom. I know you're listening, mom. I know we'll talk about this episode later and thank you for encouraging me and understanding that I love you even when I'm not great at communicating it. Man. Boy, this one's really pulling at the heartstrings. Yeah. Every time I pick up a book or listen to a podcast or write a paper, I think of you, mom, and I know that I always will. I love you and this is the only way I know how to tell you properly. Man. Kevin, you can pick up the phone and say this stuff, my friend. He's back to you guys. You got a great show. I hope we have many more years of remaining learning and growing together. That lovely, lovely sentiment is from Gavin

in Fayetteville, Tennessee. That was amazing, Gavin. Hats off, Chuck. I totally get why you chose that shout out to be the one to break the rule. Yeah. It should have been along Mother's Day around Mother's Day. Well, we can replay it around Mother's Day first select. How about that? Instead, it's the Enron episode. Right. If you want to be like Gavin and just be a super great person, but not request a shout out, just be a super great person. We want to hear from you. Also, while I'm thinking of it, go check out our social feeds. They used to suck. Now they're great. Also, if you want to get in touch with us, like I said, you can hit us up via email at stuffpodcast.ihartradio.com. Stuff you should know is a production of I Heart Radio.

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