The Dollop with Dave Anthony and Gareth Reynolds - 239 - Enron

Episode Date: February 2, 2017

Comedians Dave Anthony and Gareth Reynolds examine Wall Street darling Enron. SOURCES TOUR DATES REDBUBBLE MERCH 

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podcast. Each week I, Dave Anthony, read a story from American history to my friend. Gareth Reynolds who has no idea what the topic is going to be about. Let's get to it! Alright, wow. Do you want to look who to do? I'll do one bottle. People say this is funny. Not Gary Gareth. Dave, okay. Someone or something is tickling people. Is it for fun? And this is not going to come to tickle you quite good. Okay. You are queen fakie of made-up town. All hail Queen Shit of Liesville! A bunch of religious virgins go to mingle. And do what? Fray? No! I can't eat. No! Missy done my friend. No! No! April 15th, 1942. Okay. Kenneth Lay was born in Tyrone, Missouri. Okay. Do you know what it is yet?

No. Interesting. Wait, Kenneth Lay? Uh-huh. Ken Lay. Ken Lay. Yeah, that name rings a bell. His family lived in a tiny farm town. Oh, now I know it. With outhouses and dirt roads. Okay. Wow. In the 40s? Yeah, he's raised a poor Missouri kid. Alright. I think Missouri still doesn't have dirt paved roads. Right. He had never lived in a house with indoor plumbing up until the age of 11, which is awesome. That's called live-in-large. They owned a feed store. That really is so gross. The way that that used to. Oh, an outhouse situation? I mean, I can't think of anything worse. Why not just not? Like, they would have looked at porta-potties and been like, luxury! Oh, porta-potty to

those people? Like, it's just heaven. Man! Oh, you're Ronald, too? So, the Lay family owned a feed store. Okay. Up until their delivery man crashed the truck and killed a load of chickens. Oh, my God. Got your chicken feed? Oh, no. That wiped out the family business. Oh, my God. Yep, just one truck killed all the chickens. Well, that's our life. That's over. Shame about that. We should do something else then. Well, that's everything over. So, his father had to go on the road as a traveling stove salesman. It is hard enough to get in the door without a thing that won't let you get in the door. Ma'am, if you could just come out to the door. Now, outside of my own home? Yes, it's on the lawn. It's enormous.

Yes, it's a stove. Oh, my God. It's hurting the grass, I think. Just a couple of points. It's self-cleaning. If you don't buy it, I'm gonna kill myself. Can you turn it on? No, it's not hooked up. Well, I don't want to. How am I supposed to cook on? I mean, what can you do? Yeah, if it's hooked up inside. It's not hooked up. I don't know how to get it out of here. I don't want it. I just need you to go ahead and buy that. Okay. You're good. Thank you, ma'am. Very good. Ken went on to the University of Missouri, where he became interested in economics. Sure. You can probably figure out why. Yeah, he was like anything. He graduated in 1965 and worked in Houston at Humble Oil. Interesting. Which

is now known as Exxon. Starting out as Humble Oil. So humble. That's the thing about Exxon. That's what comes to mind. Humble. I do. I am just, like I think I mentioned this before, but the way the oil companies advertise, it just infuriates you. Yeah, of course it does. We're the last ones who want polluted oceans. We make birds. Come on. We make sure to communicate. Yeah, they're really. BP slowly fucking everything up. So he took night classes to get his PhD while working there. He lists in the Navy in 1968 and worked at the Pentagon while teaching graduate students economics at George Washington University. Okay. In 1971, he was married and had two kids. Ken, quote, everyone knows that I personally have a very strict code of personal

conduct that I live by. This code is based on Christian values. Okay. So you can't deny that. Well, what do you mean? I can't deny that. You can't deny it. You just told me it. So I'm not going to deny it. I mean, I can't deny a lot of this stuff. I'm just hearing it. You can't. Don't deny it. I'm not. In October, 1972, President Nixon made Ken the deputy undersecretary of energy in the Interior Department. At 30 years old, Ken was a go-to man on energy policy during. Oh, I remember. Okay. 1973, when the country suffered electrical brownouts, natural gas shortages. What year? In 1973. Okay. And the Arab oil embargo. Naturally, Ken blamed regulation. Right. New York Times, quote, Mr. Lay said

regulation has kept natural gas prices far below the real value of gas in a free market, discouraging investment in petroleum development. The Nixon administration may press for deregulation of natural gas prices. There it is, right? Yeah. Right there. It's going to work out. That's it. Then Ken. That's when it started. Yeah, it's going to work out. It starts right there. It's going to be fine. We could change that moment. Then Ken reached out to the CEO of Florida Gas and told me he was thinking of going back into the private industry. Ken believed that real deregulation of the natural gas industry was coming, mostly because he was pushing it. Yeah. All the big names that recommended him for the job. It's like making

the weather and being a meteorologist. How are you so accurate? So all these big names recommended him. He's a shining star. He gets the job. By years then, Ken was a vice president. By 1976, he was president of the pipeline division at Florida Gas. And by 1979, president of the entire company. Okay. He owned a $300,000 house, joined the Winter Park Racquet Club, bought a beach condo on the Florida coast, and a ski condo in Utah. And by 1980, he was banging his secretary while still married, banging Linda, who he then made his second wife. So he was banging his secretary and then he turned the bang and do a marriage. Yeah. And divorced his other wife. Right. Right. And right now he's

making a shitload of money. Yeah. Okay. Things are good though. Yeah. This is fucking great. Then in June 1984, Ken Lay became chairman and CEO of Houston Natural Gas at the age of 42. Okay. So he set out expanding the business, buying pipelines in California and Florida in 1985. It's so weird that a guy who was working to de-regulate stuff in the government then went and just started buying up pipelines. Yeah. And what's weird is how that never stops now. That's all it is. I don't know what you're talking about. Yeah, you do. So he starts buying pipelines in California, Florida. And in 1985, his company merged with InterNorth and became the largest gas distribution system in the country, running from border to border

coast to coast. They needed a new name for the company, obviously, because they merged. And after four months of research, they settled on Enteron. We're so close. But then the Wall Street Journal reported that Enteron was a term for the digestive tract. Better. These names are so ridiculous. Yeah. The way that they like that they test market these dumb ass names. Four months. Yeah. Four months because you have a marketing team who's like, we've come up with it. A quadator. Think about it. Nobody will. It's perfect. And here it's a smiling ham. He's your mascot. What about a oil fucks people? No, no, we're going with it. Integra son. Okay. It's like carnage. What's our names? Carnage are insane. Carnage

are ridiculous. It's just they're nuts. The mercury scrotum is the worst. The board called an emergency meeting because they had to pick a new name and decided to go with Enteron. They had to repaint $75,000 cover 75,000 covers for the annual report that year. Oh, God. But in 1986, Enteron reported a loss of $14 million in its first year. That's not good. Right. Ken Lay made job cuts, froze pay for top executives and started selling off assets. So now he's selling the pipelines that he bought. By January of 1987, Enteron's credit rating was downrated to junk status. From an executive, quote, the company was in deep shit. Okay. So he's not pulling any punches. It seems like Ken may be not be good at running

a business, but Ken is doing well. Yeah. Yeah. But it seems like he might be like, might not be this job, but does that matter? See. Um, but there was Enteron oil. This is the flashy part of the business, right? The oil. Well, Enteron oil. So it's, it's the, they're energy. There's tons of different, you know, sub divisions, companies, but it's all energy. So Enteron oil is one of, one of the, it's the flashy part of the business. It's the oil trading division. Okay. Right. Oil trading speculation had taken off since the mid 1980s. Oil trading speculation is a future contract between a buyer and a seller. I know this is good. I had to go over this many times. Okay. So the buyer agrees to purchase a certain

amount of oil at a fixed price for the length of a contract. Okay. So, so basically you're you're saying I'm going to buy oil for whatever 20 for the next 10 years. Okay. Right. That's what we're doing. Right. So no matter which way the market fluctuates, if the oil, if the prices go up one person benefits and it's almost goes down though. And is that almost why they do it? It's almost like a gamble. I believe so. Well, and then traders bet on what the price of oil is when it's being delivered. So like seven years down the road, they're betting that it'll be more or less. I don't want to know this. You know, it's complicated bullshit. No, but I understand what you're saying. It works for some, some things, right?

But oil, it's not a great right thing. So, so but they're making tons of money. Right. That's the oil division. Yeah. Okay. The trading division, the head of Enron oil kept Dom Perignon and Caviar in the office refrigerator for afternoon toast. What a prick when they made a deal in 1985, they made 10 million in 1986, they made 28 million. Now that's when the business overall is losing. So they've the only fucking oil division is making the trading. Yeah, the speculators are the only thing making money at this point. Okay. Things got really going in 1989 when Congress passed the Natural Gas De-Control Act, which stated that first sales of natural gas were to be free of any price regulations. Okay. So now

they can just do whatever they want. I mean, kind of. Now this is the culmination of 30 years of them trying to push for deregulating the gas industry. They finally get it through. It required the complete restructuring of the inter interstate pipeline industry. So the whole industry has to change because of this. Okay. Fewer regulations are finally here. Right. Right. The next year, Enron formed Enron Finance and Kenley hired Jeff Skilling as CEO and chairman. So Skilling was a Harvard Business School graduate who came from a prestigious business consulting firm that valued brains and theory over experience. Right. Good. Good. I will say that's at least better than what we have a lot of the time now. Like you harken

back to when that was the shit option. Yeah. Now we want a smart guy with theories instead of someone with experience. Oh, what about this guy who I met at a party? Oh, fuck nuts Tommy. Yeah. He's great. Give him the job. Senator fuck nuts. I demand an answer. Good. So Skilling was called quote brilliant. The smartest person I've ever met. He said the natural gas business was quote appalling the screwiest business I'd ever seen in my life. All the rules were written in Washington. It was like Alice in Wonderland. Wow. It's so weird when you were saying that I was like it sounds like a mad hatter quote. Uh huh. Like I wonder if yeah. All right. I wonder if that actually was a mad hatter quote. I

don't know anything about that movie about rabbits. Keep going. And they love Jeff Skilling at Enron. One executive said quote he is a designer of ditches not a digger of ditches. What does that even that's a lead is a fucking shit. So he so he tells the people how to dig the ditch basically isn't there a better thing he designs the ditches how about the guy who tells the guy to tell the guys he's the guy who looks at the thing and says we could put a ditch here dig it dad dig another ditch. What a great idea. It was difficult to disagree with Skilling because he would elevate it to an intellectual disagreement and it was hard to outsmart him. You know the type. Another said quote anyone who disagreed

with him was dismissed as just not bright enough to get it. He was always right and not into being questioned. You know what that like when I when you say that what that just makes me think of is the attitude of Facebook that people have on Facebook. No Skilling is like early Facebook. Yeah. And just like really good at commenting really long shit where you're like you know I just give up I can't read all this shit and he's saying a lot of names I haven't heard of. Yeah. Jeff was known to yell just do it to just get it done instead of listening to people which is a good sign of a leader. Yeah. Yeah. And being a genius Jeff came up with the gas bank idea. So instead of paying gas producers over this 20 year contract

that we talked about right. Right. He decided they should give him cash up front and in return they'd get a long term supply of gas. So he so now they are now they are settling in on that price. So he's saying I want a contract that so it's almost just affirming the contract. Yeah. Basically putting your money where your mouth is now. Yeah. Instead of the end of the contract figuring out right now you're like I'll pay you this right now. Yeah. OK. So gas producers are happy. That's just kind of a put your balls on the table move. I think that's technically exactly what it is. OK. So gas the gas producers are excited to get that because it's money. It's like they have a partner in the business while they're

getting the gas right. Right. You get a long term contract. And so it works. Producers and customers were signing contracts. Natural gas then becomes a really popular fuel for utilities and they start building new gas fired plants around the country and the country becomes more reliant on natural gas. So it's all looking up. OK. What. We just Jeff skilling you know what. Huh. That's a really good example of hiring someone with a brain and theories over experience. Just trust me this guy's going to be good. He's going to come up with new ways to do things is going to blow your mind. So Jeff then figured these new natural gas contracts could be traded. So what. Like. The way oil future contracts are trade. It's

like he's combining poker. Well. Craps and blackjack. Yeah. So instead of actually owning natural gas reserves and pipelines and Ron would just own a bunch of contracts. So now they're not owning anything. They're owning console. He is there. Now the contracts are the value. Right. So they're buying this thing and then they're immediately selling it off and they've got the contract. So it's more the contractor that are making money from is what he's. OK. Doing here. So it creates another market outside of the one you have with the oil producer. Now you have a new guy. Yeah. Right. OK. So those contracts gave a control of natural gas. He saw this as reducing natural gas to its financial terms which is

always what you want to do with a product that people desperately need to survive. Right. Now natural gas trading was more complicated than other time other kinds of commodity trading. So there's a bunch of moving pieces with gas. Sure. Transportation contracts contracts guaranteeing price contracts which reserves space on pipelines. Different users had different needs. Power plants wanted long term supplies. Industrial users wanted short term in case of the economy went bad. Blah blah. Utilities want more gas in the winter. So there's all these different variables when it comes to gas. Right. So Jeff Skilling came up with an analogy so people could understand that the way his incredible brain was seeing gas. I

have a bad feeling. A natural gas contract is like a cow. A cow doesn't just have one kind of meat. Oh no. It has all different kinds of meat from sirloin to hamburgers and people are willing to pay different pieces. Different prices for different parts of the cow. In the same way you could divide a gas contract into many different parts and sell them to people of different needs. Does that make sense. It doesn't. No. Because it is gas is the same. But couldn't. But OK. I'm just. Yes. True. I'm just going to take issue with a bad analogy. OK. Because if you're saying that it's all like when you say a cow. Yeah. There are versatile things that come out of a cow. Yeah. It's not all

grilled meat. That's right. You could easily say you know you get someone who helps fertilize your crops. Someone who gives you milk. Someone who gives you the potential for cheese. You also then have meat on there. So those are the things you could talk about. Well but also. Yeah. But so you're you're saying there's even more variables like he has it. If he's going to say cow go with the other things that aren't just grilled meat. All right. So it worked. What were we talking about. It worked. So so he has now. So he's he's basically created a way to sell oil at different oil cow mount monster. The same kind of oil. It's not like a different kind of oil but he's selling oil at different prices in different

ways to different people. He's found it a way to cut it up. Right. But it's this is not all crude oil. This is like natural gas. Well other natural gas right. OK. An executive quote in the early days we were printing money. We saw things no one else could see mostly because it's not there. Yeah. We had the authority. We had the authority to do anything and everything we wanted to do. We thumbed our nose at any personal policies that the rest of Enron had. So so the rest of Enron is still working from a ethical reasonable standard and these guys are going hog fucking wild because Enron really is kind of the first example of the most important people in a place and nobody gave a shit about the consequence

kind of right. Like that was like it's like the perfect storm of a bunch of people with no ethics. Basically right. Another quote this was the most creative period at Enron. It fundamentally changed the industry. You know that that is really the problem with the way we handle the bad shit is that there's too much commentary on it. Like there's too much sort of thought on how was the action done. How did how. Now instead of talking about like the screwing you're like now walk us through the screwing. How exactly did they screw everybody. It's like it was a very interesting screwing Barbara. It was an amazing screw. What they did was they walked in the room and the American people were there. They were

willing to put up a fight. Their pants were ripped down and corporate America jammed it inside of them and it was really something to behold. This is great. So that's what happened last night with the Supreme Court like unveiling. I know what you're talking about. The media was just like well how did he do it. It's like you you did it you idiot. So one of the main ways they were printing money was by changing the way they did accounting. It feels like that. I mean I know that that now is a thing. But changing accounting is such that's an alternative effect. I feel like you should. Yeah it is. It feels it feels like you shouldn't accounting something you actually shouldn't change accounting. Yeah. It's like here's

what it is. Well hold on. So skilling want to use mark to market accounting. Now with normal accounting the revenues from a contract are reflected as they arrive. So we talked about sure by the by the contract straightforward as as the over the time the contract plays out you're you're taking money in and you're putting it on your books at that moment. Right. Right. Yes. It's accounting as it comes in. Yes accounting. Right. So but with market to market accounting that skilling want to use the Enron models would estimate fair value at the time that they make the contract and then that's what they would say. They would say over time it's going to be so instead of waiting for it to come in. Right. They're

now saying this is what it's going to be in nineteen eighty nine. We're going to make this much in nineteen ninety two. And then just saying that that's what they're going to make. So they're they're they're future evaluators. Basically that's exactly what they are. So they're basically saying what they thought it would be. Right. And that's that's market to market. But OK. So with stock with stocks it works like this. If an investor owns 10 shares of a stock purchased for four dollars per share and that stock now trades at six dollars per share mark to market value of their shares is equal to sixty dollars. So you're you're as it goes along if the price

is changing skilling says this is a way to do it because it reflects the true economic value for oil. But but so by using this accounting Enron has to estimate the price of gas for twenty years. I mean and then book it all at once as profits. So they so. Right. So instead of waiting total inflating. Oh it's nonsense. It's totally made up. It's it's completely made up instead of waiting for the profits to come in. They're just saying we're doing this contract and we're going to make this amount. Right. And who writes a contract at first and goes I'm going to lose money on this bad boy. Right. Nobody. So and nobody had ever really done this. Right. Like nobody's ever not for not for oil. Right. You do with

other things like stocks because that makes sense. Right. At the end of the day the stock is worth a certain amount. Right. But you also don't say what a stock is going to be worth in twenty years. But I think you can do that. But then I'm marked to mark marketing happens and other things but it's more stable. Right. Right. Yeah. So so Kenley and Enron's board approved the use of mark to marketing accounting. Right. Why wouldn't they. Right. And then Skilling persuaded the Securities and Exchange Commission the SEC to go for it. Of course. On January 30th 1992 the SEC told Enron that it would not object to the use of mark to market accounting beginning that year. Skilling celebrated with champagne

less than two weeks later. Enron sent the SEC a letter informing them that it had decided that the most appropriate period for using mark to market accounting was not 1992 but the year that it just ended 1991. Wait. So they're going to go back and just say they made a bunch of money they didn't make in 1991. How is that. But OK. So but how does that because no you're so they're sorry. I know this is just complicated in my brains very little. So they are they are now taking these future evaluations and they're saying that what they've just made isn't what they made because they haven't taken into account what the SEC just approved. Yeah basically. OK. So they're saying well we get to we get

to protect your money that this future money is OK. We're going to go back to the last year last year. Right. In January 1998 in January 1992 Enron announced it was supplying gas for a new power plant in upstate New York estimated at four billion worth over 20 years. Enron started booking profits even before the plant started operating. OK. England deregulated their deregulated their industry and Enron closed the deal to build a power plant there. 20 year contract profits were recorded immediately. In 1992 Skilling's division income had more than doubled to one hundred twenty two million dollars. But a fake. Well I mean or his personal income. No it's fake. No it's it's it's fake. It's fake. It was now the second biggest like

a restaurant doesn't open up and go. Wow we made a million dollars this year. Like what. No you haven't served a million. No but we made a million. No and actually last year we made a million five. We're millionaires. But Enron did not follow up on the second part of mark to market accounting. That's the big part. Valuing assets at the current market price as Wall Street would do at the end of a day of trading. Right. Or a company would do periodically a reality check. Right. Where you go OK this is actually how much we're making. Yeah we're actually on. We're going to make this much because it's based on accounting or lose this much. So they were just sticking with their initial call and

that was that. And there was no incentive for Enron executives to make reasonable calls about how a deal would play out. Smart. Skeeling explained his management philosophy quote all that matters is money. You. Hey what's your management philosophy. Make money. Make a bunch of it. Yeah I'm done with my quote. That's what I got. I finished my quote. Anyway that's the course. Yeah. He said with you buy loyalty with money quote this touchy feely stuff is as important as cash. See see that like right. I mean that's the problem is you like you know how do you argue with people who you like that. You're just like well what the fuck. Well that's that's a psychopath. Yeah but we the psychopaths run it. Yeah.

So quote this is from another trader. Jeff always believed pitting three people against each other would be the quickest way to assure the best ideas bubbled to the top. He wanted employees to fight. Jeff also came up with an every six months peer review system. Every employee from managing director down to secretary was reviewed. First there was feedback written feedback from bosses and colleagues. So everyone would write. Very culty. After that they would go to hotel where panels would debate and rank each employee while their photo was projected on a screen in front of the entire group. Oh my god. They're doing your hot or not for your work. So you're just sitting there and you're a secretary. Yeah. And there's a bunch

of guys and it's like Kathy. Well let's be honest. Kathy's performance has been dipping lately. I think she sucks. All right Andy. Yeah. Nobody really likes Kathy too much. Everyone making money was ranked high. Right. People would argue debate scream and shout sessions for executives sometimes ran from eight a.m. until after midnight. But it's a cult. That is that is a cult like that. That's what it that's what they like. Yes. The cult mentality of you're now a group. One leader makes the rules. If you don't like the rules get out. Nobody wants to get out for fear of what out does to you. Everyone is fighting creating a hierarchy. And yet what is insane feels fine because everybody's

doing it around and you can take someone down just on a whim with something like that. Yeah. And also had the best compensation packages because of their total bullshit accounting. Right. Banks would lend money based on an estimated project which was made up. Developers were taking home millions based on projects that hadn't even begun. So the company started kicking ass. I mean they're fucking kick ass. Well they're making money on Wall Street. Yeah. They're just kicking and saying ass is there. 387 million in 1993 453 million in 1994 520 million in 1995 and on stock price tripled because because executive pay is tied to stock options. The rising stock makes them all millionaires. Right. So Kenley was described

by a financial analyst in 1996 quote a profound thinker a great long term strategist who has been on the forefront of the natural gas industry for many years. He knew where this industry was going 10 years before it happened. Can we flog this reporter. That's because he deregulated it. Yeah. Like I mean everything he's saying is wrong. Yeah. They don't know that right now. I understand. But like yeah. I've got a great vision for the future. But the idea that people are looking at a guy who who set up the way an industry would run by deregulating it and then went to companies to take advantage of that deregulation is not a genius. He's a fucking asshole. It's fraud. Yeah. It's just an easy like congratulations. You figured

out how to game an easily gameable system. Yeah. So Ken on which is the problem when when when when ethics were a given. Right. You didn't need to worry about this stuff. And it is the snowball effect. It's the one guy who does it the one person who pushes it. You know even if they don't get it through the next guy knows that tactic and is going to keep pushing and pushing and pushing. Yeah. So Ken at this point owned a multi-million dollar condominium in the most exclusive section of Houston. A multi-million dollar vacation home in Galveston and won an Aspen. And he used the company's fleet of airplanes for his private use as did his kids. Enron employees called it the lay family taxi. Linda

lay used an Enron plane to visit her daughter in France. And another time an Enron jet was sent to Monaco to deliver their daughter her bed. What. What. I mean just zero rule. What. Like not even remotely trying to follow the rules like just fuck it all. What. That's it. Just. It's just insane. In December of 19. Did you want someone to go. Want to go. Watch the bed. I don't know. Yeah. Monaco. Whatever. In December. Like don't they have good. It's fucking Monaco. They have nice beds there. Get a bed there or get it delivered. It's Monaco. There's a place with nice beds. It's Monaco. Oh my God. In December of 1996 stealing became Enron's new president and chief operating officer. Ken lay would remain

chairman. The company was now generating 13 billion in annual revenues and made up fund cash employed 11,700 people and operated in 22 countries. But the stock price started to lag. And a financial analyst wrote about being concerned with the complexity of Enron's gains. So Skilling created Enron's risk assessment and control department because that's what Wall Street wanted. They wanted some sort of who's looking over stuff. Well don't worry. So we're looking over what we're doing. No we'll create an internal department that looks over the shit that you know what you're right. We just hired this guy. We got this. He's in charge of everything. His name is Jeff Skilling. So so there that department's supposed to

assess the economic financial credit and political risk in every Enron deal over five hundred thousand dollars. But again. Yeah. Again. I mean that's like a marriage in crisis. The husband being like I'll be the counselor. Quote and everyone was thrilled. A standard and poor's credit rating analysts said they relied on Enron's risk management ability. Quote you can't overemphasize how important that is. It's the underpinning to everything. It gives you a nice warm fuzzy feeling. Enron has such extraordinary risk management capabilities that we look at them differently. That is the credit rating analyst. Good. The drowning kids the lifeguard.

It's I thought that's weird because that's what happened during the housing crisis. So weird. So bubbles huh. Yeah. Sign with bubbles. It's total bullshit right. One executive called the department the assessment risk department quote a hurdle a speed bump. I treated them like dogs and they couldn't do anything about me. I told my guys to fuck them. And skilling believe that a company that worried too much about costs would discourage original thinking. Again. I mean you're like I don't have the words to fight the crazy thing you just said. What. Quote we are not the Walmart of the natural gas business. We are the Mercedes Benz of the natural gas.

No you're not. You're the Ross dress for less because you don't have anything. But there's also not better gas. There is no fucking Walmart. I know it's gas. Yeah. Jesus Christ. They haven't found the good area yet. We know where all the good spots are. It's like fishing. Not surprisingly expenses went through the roof. Quote people just did whatever they wanted. If you met your earnings target you'd get your bonus even if you spent twice your budget for expenses. Oh my God. So people are just spending fucking money left and right. Yeah. There were new flat panel computer monitors catered lunches and Enron purchased cell phones a fleet of

corporate jets limousines on constant call. They had their own concierge who would pick up busy employees dry cleaning water their houseplants and shop for anniversary presents or drive or fly a mattress to Monaco. Underskilling Enron stock price became an obsession so he's totally obsessed with the stock price. A sticker a stock ticker in the headquarters lobby offered a constant update of the price of shares when on the road he would call several times a day to check out how the stock was doing. Employees were constantly encouraged to buy Enron shares. On average each employee kept more than half of the 401 K retirement in Enron stock. There's there is amazing footage of him being

like bye bye bye. You know that's stuck. Skilling would arrive at Enron's quarterly and annual profit targets by just coming up with a number based on what Wall Street wanted. There was no going over the books or contracts. He would just make it up. He would call a stock analyst and ask them what earnings do you need to keep our stock price up. And then that's how he would come up. Oh that's crazy. That's what we're making. All right. Take care. Yeah we're that. What a brilliant mind. What a genius thinker. In general also Enron also relied heavily on Mark to Market accounting to help reach their earning goals. Originally Mark to Market was just for natural gas feature contracts

but by 1997 Enron had extended Mark to Market accounting to every single part of its business. Why wouldn't it. And now deal makers would go back to contracts some of them more than five years old to see if they could squeeze out a few million more in earnings. Oh my God. So they're just I mean they're digging up the bodies looking for buttons. So it would sometimes restructure a contract and sometimes they would just make up new numbers to make them seem more profitable. I mean what the hell. How is that like. Hey Larry I looked at that old contract. Yeah 110 million. Yeah 125. Oh good. We need money. Yeah. All right. There it is. All right. Cool. A small move in a long term contract could generate millions

in extra accounting profits. Enron also generated earnings through tax avoidance beginning in 1995 the company executed complex tax transactions that allowed Enron to keep 651 million in profits. Skilling at the tax department working like another profit center to help Enron hit earning targets by taking more and more tax savings. So the company the company's purpose is to seem like it makes money. So it's an imagination factor. Yeah it's totally an imagination factor. I mean I'm picturing like elves at this point and skilling Santa. The Enron accounting philosophy philosophy is philosophy was that financial rules were to be studied to find loopholes to exploit. One employee said quote say you have a dog

but you need to create a duck on the financial statements. Fortunately what there are specific accounting rules for what constitutes a duck yellow feet white covering orange beak so you take the dog and you paint its feet yellow and it's fair white and you paste an orange plastic beak on its nose and then you say to your accountants this is a duck. Don't you agree it's a duck in the account says yeah according to the rules this is a duck. Might be the scariest thing I've ever heard. Everybody knows that it's a dog. I mean picture that dog. Miserable dog. It's a fucked up dog. Everybody knows that it's a dog not a duck but that doesn't matter because you've met the rules for calling it a duck. Enron employed

the auditing firm Arthur Anderson to approve their books. They had offices at Enron which is not normal but they were doing so much business they had just had their guys there and suddenly the accountant geeks were invited to this big frat party which encouraged them to go along with everything because they wanted the party to keep going. Right they're getting concierge they're getting the fucking yeah no matter what crazy thing Enron did Arthur Anderson went along with it. One accountant quote when you look at a deal and you give the answer no and then they appeal to no and the answer ends up being yes you just wonder why are we even here. Yeah well because the duck dog is furious that's why we're here.

In March of 1998 36 year old Andy Faustow was named Enron's chief financial officer. He had been praised for his creativity vision persistence initiative and presentation skills and his innovative thinking on new deal structures. Translation shithead. He was quote definitely known as a suck ass. He named his son Jeff. I thought he's going to name his boy suck ass and the other one was suck ass. Right. Andy oversaw the formation of shell companies that they could use when Enron needed to show earnings and hide debt. So what they're like just now acquiring now they just have a bunch of companies offshore and if they want to swing money and they bring it in if they want to take it out they take it out. They are

and they are the family about to get evicted from the mansion and they're throwing Picasso's at the problem. And Wall Street thought this idea was great. A Lehman Brothers banker quote he has invented a groundbreaking strategy. He figured out how to hide money. Yeah yeah that's the problem. Enron operated hundreds of these offshore companies and all the deals made with them were named by Andy like Condor, Apache, Whitewing, Chuko, Raptors, Rawhide, Choctaw and Zephyrus. And suck ass. To do this Andy had to receive an exemption from Enron's code of ethics. That shouldn't be hard. They're next door. Which was granted. Yeah of course. Hey guys I know we got a code of ethics but I'm going to do shit that's

fucking bat shit crazy. Yeah okay is there any more caviar and champagne? Alright. J. Span Hatten and Citigroup were happy to do business with Enron. Andy ranked the bankers on how cooperative they were for example if they were willing to underwrite one billion in a very short time period when needed. So that again I mean that like again that's what we deal with so much now is the fear of like the idea is like well but if I don't be immoral someone else will be and they'll beat me to the immoral treasure. That's exactly right if we don't do this and someone else will so I got to do it. So now they're underwriting too fast to actually fucking look at anything and they're giving them money. Jeff Skilling

said quote I'm not particularly interested in the balance sheet it seemed to be doing well we always have money. Yeah that's a good thing for a CEO to say. It's a good thing for a CEO to say. Do you have money? On December 12th 2000 Senator Phil Graham of Texas after being lobbied by the Koch brothers and Enron attached a 262 page amendment to the Commodities Futures Modernization Act so long which was then attached to a spending bill that was signed to the law by President Clinton right before he left office. The Graham amendment received no public scrutiny or committee hearings. No one knew it was happening and it radically expanded energy deregulation. And that's the thing is like I think there we get the whole

plot of politics is that make them fight over the things that they don't agree with make them fight over those while Republican or Democrat either one either doesn't matter they're they're trying to make these deals they're they're willing to do these deals either side. Absolutely some worse than the others but still the cancer is within the the cancer is just within the system yeah system. So so it's this huge deregulation energy derivatives could now be traded by private unregulated exchanges this became known as dark oil speculation. It would later be revealed that Enron lobbyists and other companies lobbyists actually wrote the amendment. This was all skilling who had decided to get

Enron into the energy business. Enron could create an electricity trading business like it created a natural gas trading business. Skilling gave Wall Street analysts a tour of the new energy trading division at Enron. It was very busy with people buzzing all over but this was just for show. They had bought plasma screens and electronic ticker and furnished a giant empty room. Then they had secretaries and people from around the building come in and act busy that day. Man that it honestly like like you're like it's like it's like the game. It's like you're just gonna sit like someone's just gonna see a book on a bookshelf and be like oh I love this but it's just half of a book. It's like they put on

a play. Yeah. In January 2000 the New York Times wrote quote Enron has set up an online marketplace through which companies all over the world are now able to buy and sell natural gas electricity coal plastics pulp paper and oil and coming soon bandwidth bandwidth is a basic electronic pipe down which companies send their internet traffic. Yes. Enron was selling bandwidth quote a school with excess bandwidth capacity during the summer will be able to sell its surplus to accompanying with rising bandwidth demand. What deals that used to take months to close will take seconds. We were the first to do this sort of thing for trading natural gas says Ken lay but we think the bandwidth market will be the biggest

of all. Now I mean now they're just making up like there is no bandwidth. This isn't a thing. Yeah. No one's trading bandwidth. Nobody knows bandwidth. No they're he's a good buddy. I'll bring him over. Hey honey. Yeah. We got like 30 or 40 extra bandwidth this month. You want to sell it to the Joneses. Yeah of course. Let's sell the bandwidth. That's a thing. It turns out there was actually no market for bandwidth weird but they still made deals for their not real bandwidth business. Of course. Somebody's going to buy the stove on the lawn someday. You're telling me I can get extra bandwidth. Okay. So skilling then bought Portland General Electric because it was close to California. Enron then bought off

California politicians with lobbying. Jeff and Ken told them they could save a ton of money. The state passed a mishmash of compromises that partially deregulated the power market but not completely deregulated. And since this was such a stupid half deregulation, it opened the state up to being completely fucked by Enron which the company immediately started doing. The head of Enron's electricity trading division bought 2900 megawatts of power then scheduled them on a transmission line that could only carry 15 megawatts at a time. So making it right. It clogged it. The price is shot up which ended up costing California $7 million. This guy was immediately confronted about it about why he did this and he replied,

quote, we did it because we wanted to do it. It makes the eyes pop doesn't it? Okay. But uh what's uh pretty crazy right? You like fireworks? Do you? We'll blow the whole thing up if you want. When the California power agencies questioned him later, the trader said he was experimenting to find flaws in the state's new rules. Ken Lay publicly assured California that Enron was ethical. But when he got on the phone with the chairman of the California power authority, Lay said to him, quote, in the final analysis, it doesn't matter what you crazy people in California do because I got smart guys who can always figure out how to make money. The electricity trading schemes Enron came up with had names like Fatboy, Death Star, Get Shorty,

and Ricochet. Ricochet. They're all violent. Well the Fatboy is one of the nukes right? No this is yeah this is fucking horrible. I mean Death Star? Yeah well Death Star is obviously the most aggressive. Ricochet. They would ship power back and forth over state lines by selling out of state electricity price caps became lifted. So Enron could get around price restrictions, quote, our traders would be able to buy power for $250 in California and then we would sell it to Arizona for $1,200 and then resell it to California for five times that. I just like that's deregulation in a nutshell that's deregulation. Oh God. Enron traders would also purposely overbook a transmission line then create a situation where others needed the line to move electricity so

they could price gouge at will. Quote, we overbooked the line we had the rights on during a shortage or in a heat wave. That kills people. And those are the rolling blackouts right? Those are like what? Do you remember the summers? Yeah. I don't think I was out here for those but I remember the rolling like they'd call them rolling blackouts because a bunch of people would just lose power and they'd be like sorry it sucks. It's all we got. We got it wrong. Sorry it's we're overdoing it and that was what everyone was talking about. Everyone was talking about man we're using too much energy. Yeah. Yeah. Then Enron would be paid tens of million. Enron then get paid tens of million dollars to free up the congested line so the power could be sent somewhere. Because they

can fix it. Enron also had plants shut down to drive up the price of electricity. One Enron executive was recorded calling a Las Vegas power plant employee. Quote, we want you guys to get a little creative and come up with a reason to go down. Anything you want to do over there? Any cleaning or anything like that? And the worker responded, yeah okay. We're just coming down for some maintenance like a forced outage type thing. It's a good plan. Enron executive said, quote, I knew I could count on you. Oh my god. There were two days of rolling blackouts in June of 2000 which left more than 100,000 businesses and residential customers in dark for parts of two days. People were trapped in elevators, schools, local governments and small businesses had to

close and offices shut down costing millions of dollars in lost revenue. When questioned, Ken said, quote, every time there's a shortage, a little bit of a price spike, it's always collusion or conspiracy or something. I mean, it always makes people feel better that way. Oh god. It's you just, you like, yeah, you really have to just accept the idea that they're all lying. Yeah. Yeah. And once you do that, you can start to go, okay, I don't, they're all the same. They're all lying. And January 2001, Enron gave 100,000 to Bush's inauguration committee and lay himself gave $100,000. Kenny boy, that's what Bush called them, right? Yeah. Enron gave 310,000 to the Bush campaign and quote, Mr. Lay is a Bush transition advisor. Enron gave 6 million in political donations,

more than 250 members of Congress got contributions from Enron and 15 high ranking Bush administrations, Bush administration officials owned stock. California asked for help from the government. Well, that's going to be a problem they're investing. George W. Bush administration officials said California's problems were because of California had not deregulated completely and that it was not quote free market enough. So that that if you take probably if you take away one thing or at least like what because obviously I'm familiar with some of this. But what is really the headline is that deregulation is not good, which I already know. But now it's like, yeah, I mean, it's so obvious like the term deregulate. Yeah. So the Bush administration

also blame California's strict environmental standards, which limited the construction of new power, kill more birds. Oh, and Bush called Ken Lake, Kenny boy, Kenny boy, Vice President Vice President did Cheney publicly oppose price controls quote price caps are not a help. They take us in exactly the wrong direction. Ken got Bush to appoint a free market advocate as head of the Federal Energy Regulation Commission, who then resisted price controls for months while Enron fucked California in the ass. Don't you pine for the days when things went on the up and up like that? Nice normal. By June 2001, after the Bush administration finally implemented interstate power price caps, the crisis suddenly eased and power prices in the state fell. That's weird.

The Federal Energy Regulation Commission then forced energy companies to tune over email messages, phone logs and internal memos. The crisis cost the crisis costs the state of California over $40 billion and led to the recall of Governor Gray Davis, who was replaced by Arnold Schwarzenegger. Well, you know when you hear it back. When Arnold was confronted by a woman in a supermarket who asked, are you in bed with Ken Lay? Arnold responded, I certainly wasn't in bed with you. I certainly wasn't in bed with you, like he's in a fucking movie instead of talking to a human being. Yeah, but Enron wasn't doing. I was with my maid. We had the baby.

Sorry, got too real. But Enron wasn't doing so great either. The company debt was $3.9 billion, and that didn't jive with the whole Enron is super profitable story. Weird. And in February 2001, Fortune magazine published a story titled Is Enron Overpriced? The writer just asked a simple question. How does Enron make its money? And then she got on the phone and talked to Skilling, and he complained that she quote didn't get it and hung up on her. Oh, yes. Enron's PR department quickly called back and got her on a conference call. And on that call, Skilling insisted that Enron quote is very a simple model where logistics company, not a trading company, he then went on, quote, we are doing it purely right. People who raise questions are people who have not

gone through our business in detail. People who don't understand want to throw rocks at us. We have explicit answers, but people want to throw rocks at us. Anyone is just anyone who is successful, people would like to take them down based on ignorance. And then he hung up on her again. Wait, so she's like, well, obviously something shady. Right. What? So Enron's head of PR called her back and said she should meet with Andy Faustal, the head of finance. He's a real suck ass. You'll love him. And in that meeting, you know, he tried to bullshit her over and she asked about the shell companies that were being run. And he said he couldn't say he was running them because of confidentiality. And at the end of the meeting, when he was alone with her, he said, I don't care

what you say about the company, please just don't make me look bad. Skilling then had a conference call. So now it's all, you know, it's coming out. So Skilling then has to have a conference call with Wall Street analysts in April 17, 2001. And he said Enron's in great shape. One analyst asked why Enron was the only company that could not release a balance sheet along with its earning statements. And he kept pushing and pushing and pushing when he didn't need an answer. And finally Skilling responded, quote, Well, you're you. Well, thank you very much. We appreciate it, asshole. The call was being piped onto Enron's trading floor. And when Skilling called the analyst an asshole, the trading floor went crazy and burst into applause. Later, they gave Skilling a sign

that read ask why asshole. Yep. Where the robes and drink the Kool-Aid gang. But Wall Street was not happy as they believed a CEO should be able to handle tough questions. And these calls went on and Skilling would always say there was nothing wrong and the analysts couldn't get the answers. They started to lose faith and on stock started to fall. Their very hyped not real broadband business somehow failed. And California was blaming Enron for the energy crisis. While all this was going on, Ken Lee came into Skilling's office holding fabric swatches for decorating the new $45 million corporate jet he'd ordered. He asked which fabric they should use. Wow. On August 13th, Skilling announced he was leaving Enron. He had been cashing out his stock options for a year,

$33 million worth. Ken Lee had been doing the same, taking $78 million. People in the company and outside started to realize there was a problem. But still, Ken told Wall Street, quote, there are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues. I think I can honestly say that the company is probably in the strongest and best shape that it has probably ever been in. Now, excuse me while I get this helicopter full of money. He said he had done an internal investigation and everything was great and that there should be no second guessing the accounting. I'm cancer free. How do you know? I checked myself. I got a mirror out and looked. I looked. After 9-11, Enron's stock began plummeting. Ken told the

employees, quote, just like America is under attack by terrorism, I think we're under attack. By reality. He said they would turn around and that Andy had done nothing wrong. That's always a good sign. Andy did nothing wrong, by the way. We're under attack by terrorism. It's like terrorist attack. Andy didn't do anything. And Elzo Andy is innocent. In early October, some at Arthur Anderson's accounting firm realized that Enron would probably be investigated by the Fed soon. Once an investigation started, they would probably have to retain all documents. They would definitely have to retain all documents. So Enron document shedding, shredding began that weekend. By October 23rd, there was more than a ton of paper. A shredding truck had to be hired.

Sure. Who knew about those? We've been waiting for a phone call. If they're shredding trucks, something's wrong. 30,000 email messages and computer files were deleted. It stopped after Arthur Anderson's firm received a subpoena from the SEC. Linda Lake, Ken's wife, sold 500,000 shares of Enron stock 30 minutes before word went public. On December 2nd, at 2 in the morning, Enron's lawyers filed Chapter 11 bankruptcy, the largest case in the US. 4,000 people lost their jobs immediately and were given 30 minutes to vacate the building. 62% of the 15,000 employees' saving plans relied on Enron stock and were now worthless. Justice Department opens an criminal investigation. A high-ranking executive

named Cliff Baxter shot himself in his Mercedes. And Vice President Dick Cheney invoked executive privilege, refusing to disclose the six meetings he had had with Enron executives about how to handle energy policy. There was a Senate committee hearing. Ken Lee did not go because of the Fifth Amendment. Skilling came. A senator asked him, in your opinion, what happened to cause Enron's collapse? Well, I'll tell you, I appreciate the question. I am surprised that more people haven't asked it before. I believe this was a classic run on a bank. There is a problem. There is a problem that I believe is what a commoners call a systemic problem that is in our economy today that I think you all ought to be addressing. What happened is that in the old days, in the 1880s, when there was

a run on the bank, it was the bank that went under. That's what happened now. It's that all the banks can pull their money out of a company that is threatened. And if somebody walks to the, you know, claiming to be an accounting fraud, it's the same in the business world as walking into a crowded theater and screaming fire. Everybody runs for the exits. These are not big numbers in the grand scheme of Enron. If we had time, I think the company would have been fine. I left the company. I have no idea what was going on there where the problem was. He was asked, when he was asked about Enron's financial dealings, Skilling would answer, quote, I'm not an accountant over and over. And finally, Senator Barbara Boxer of California asked him what his education was,

and when he went to school, and Skilling said he had a master's degree from Harvard Business School, and then he laughed. Wow. Cool dude. It was pretty clear Skilling thought he was smarter than everyone else in Washington, and that he'd talk his way out of it. He still has no idea. He still is not saying anything. No, he's just really does a good job of like babbling. Yeah, he's just a bad mumbo jumbo. Arthur Aniston's indicted for obstruction of justice. 20,000 people lose their jobs there. 20,000 in Enron. Andy Fausto has charged 96 counts of fraud and blah, blah, blah, a bunch of stuff. He pleads guilty, gets 10 years with no parole if he testifies against Lay and Skilling. That's crazy. He has to repay 23 million. But he made it a lot. Yeah,

I mean, these guys all made a shit. They still think they made tons of money. Ken Lay and Jeff Skilling went on trial in January 2006. Andy testifies against them. Skilling has convicted of 19 counts since the 24 years Ken Lay six counts. After the convention, after the conviction, Ken Lay said, quote, we believe that God, in fact, is in control. And indeed, he does work all things for good for those who love the Lord. Three months later, he died of a heart attack. So God, a while to get the memo, there were lawsuits filed on behalf of the people. Most of them got like $500 or so. But these are these are I mean, and these are people whose complete livelihood life savings. Yeah, future plan. Yeah, they were so big that the Red Cross and Houston

had to cut their their, you know, expenditures by 25%. They were they wiped out the fucking Red Cross. Right. Right. When asked about Enron, Skilling like to say, quote, shit happens. Yeah. In January of 2013, the Department of Justice reached a deal and Skilling had 10 years cut from his sense. 40 million in restitution was paid to victims. He will be released between 2017 and 2019. Fostow still goes around speaking and gets a little bit of money, but sometimes he does it for free to spread the message of how fucked up things are. Quote, whatever you call it, managing or manipulation, it's still going on today. The question being asked by far too many companies is, is it allowed? Not? Is it right? It is possible to follow all the rules and still be misleading.

We have a word for this in America loophole. I was called Chief Financial Officer, but in reality, I was Chief Loophole Officer. A moderator at an event said the disturbing the disturbing thing is, is that much of what was done at Enron is being done in the financial centers of the world today. That kind of misplaced thinking could create even more economic havoc, if not addressed by policymakers and others in the financial community. Anyway, that was right before the housing crisis. Yeah. And it's still going on today. And now we have, we're going to have more deregulation, so it should be fine. You know, I mean, you really, you just don't know because you are like confounded by, yeah, I mean, it's the weirdest paradox where we live in a world where we are

aware for the most part that they are full of it, that they're fucking that they're totally full of it and pulling all kinds of shit. And what we try to do isn't enough. And they're able to hold us off and create political theater or whatever distraction. And we are so exhausted from it. And however, that might, the tide might be turning in that a little bit. But they are putting up a fight, obviously, to make it so that, you know, we have to, I mean, it's exhausting. And that's the idea. The idea is that you're supposed to tuck yourself out. And then you'll stop caring and they can keep going until until another like right now, 50% of people have like $200 in savings, 78% have like $800 in savings. So if another bubble breaks, there's no, there's nothing for

people to do. Yeah. But start breaking everything. Like, like you now you are now one big bubble away from total fucking just that's it. Yeah. And instead of putting the lid on the bubbles, we're putting the bubble wand in the bubbles, and we're drawing in a big breath. We're double bubbling. We're about to double bubble. We thank you guys. Thank you.