You're Wrong About - Enron

Episode Date: January 16, 2019

Mike tells Sarah how a "bad apples” explanation kept us from seeing the real scandal at the heart of America's largest corporate bankruptcy. Digressions include “Casino,” Thanksgiving economics and corruption catchphrases. Neither co-host truly understands how the stock market works.   Continue reading →Support us:Subscribe on PatreonDonate on PaypalBuy cute merchWhere to find us: Sarah's other show, Why Are Dads Mike's other show, Maintenance PhaseSupport the show

I would also submit that the All the Presidents Men movie, they're constantly leaning on women. They're like always getting most of their scoops from like receptionists and wives. Welcome to You're Wrong About, the show where we talk about the business scandals that you never understood the true human horror of because you were focused on the business parts but we help you see through the business parts and into the pure horror. Is that accurate? A little bit. We're gonna learn that people are sometimes not at the center of business scandals. Boom. Oh. I'm Michael Hobbs. I'm a reporter for The Huffington Post. My name is Sarah Marshall and I'm writer and residence of the Black Mountain Institute.

And today we're talking about Enron. Yes. Which I saw the documentary about Enron whenever it came out and I don't think I understood it at all. I remember being like that lady has a great blouse. I feel like that's how most people went through the Enron scandal was like it's something bad and the people are terrible but I don't know if a lot of us really understood the mechanics of how it actually worked. Let me actually try very hard to tell you and I'm gonna like misspeak and all kinds of hilarious ways I think if I try in some ways. I'll just make a series of buzzer sounds. Oh god. I really hardly know anything. Were they friends with Halliburton? No. There was something going on where some of the guys in the company

were creating like shell companies or LLCs or something. Okay. I remember that one of the more dramatic parts of the documentary that I therefore retain to some extent had to do with Enron causing the rolling blackouts that California was experiencing. Yes. Looking back I have no actual memory as far as I can tell. When you say stuff it's going to sound familiar but I have no way of saying like what did they do? What kind of crime was it? How did it leave people feeling defrauded? But what I remember is that like that the word Enron became it became a household word. Everyone knew that it was shorthand for like this really egregious corporate fuckery and then it seems like we didn't really do anything about that although maybe we did. It doesn't seem like it

based on what happens when I go outside and look around. Not too much spoilers but we keep having to remind ourselves that businesses can be bad. Right. We have the same epiphany over and over again that like oh wow we've given a lot of power over to these giant profit maximizing entities. Is this bad? And then we come to that realization that we have like a two-year period where we believe it for a while and then we all forget it again and I think Enron is the perfect example of that. All right so let's start at the beginning. I'm excited. Let's just it's going to be like a full godfather if not a full trilogy. As usual that was actually a very lucid overview of the story we're about to tell. Well I can say what happened emotionally. I just can't say what happened

actually comma the Sarah Marshall story. I mean that's more than I knew a couple of weeks ago. I think one of the things that I didn't know is just like how big of a company Enron was. Enron was the seventh biggest company in America at the time that it crashed. That's incredible. So I looked this up that the seventh biggest company in America now is GM. Oh. So if you imagine GM going along doing its thing and then in the space of 24 days it doesn't exist anymore. Oh my god that's like a corporate titanic. $60 billion disappeared from the US economy. Wow. I mean another thing that I cannot get over is that the last year the last full year that Enron was in operation they faked 96% of their income and 105% of their cash flow. That's too much percent.

So this was not someone forgot to cross some Ts. Someone didn't file paperwork on time. I mean this was basically a giant Ponzi scheme. And it's the seventh biggest company in America. Yeah. And so were they allegedly in the business of energy before all this emerged? Yeah. I mean what I think is the real story of Enron that I don't think has really been told is the transition of this company from a normal ass gas company to a criminal organization. So what's weird about Enron is Enron was founded in 1985 and it goes down in 2001. So the company only exists for 15 years and the first five, seven years of its existence it's just a normal gas company. It's a company that owns a bunch of pipelines. So it's essentially a middle man

between people that are producing natural gas you know Exxon or whoever and then it sells the natural gas to you know LA or Denver or whoever needs the natural gas. So like Macbeth that's in an important but boring job in a vast hierarchy. And so the whole thing like the way that natural gas pipelining worked at the time was it's all these long contracts. So you go to Exxon and you say okay we're going to buy natural gas for you know a million dollars a gallon and then you go to Denver or LA and you say okay we'll sell you natural gas for 1.2 million dollars a gallon. Like you buy a little here and you sell a little there and it's slightly more expensive when you sell it than when you buy it. And it's all in these long term contracts because everybody wants to lock in

a price right for natural gas for the next 10, 20 years whatever. So it's this really boring company where all of their cash flow is just this drip drip of invoices on these you know 150, 200, however many 10-year contracts they have. It's like oh well every month we get a little bit of money from that. There's no way for a co-dedicted maniac to get rich quick in a market like that. Yes the transition of this company is really all about the colonization of the entire US economy by the stock market. There's this guy called Jeffrey Skilling who ends up being the CEO of Enron but at the time is just a consultant for McKinsey and he goes to the CEO Ken Lay and he says you know you're never gonna have a rising stock price

with this business model. You can't be doing 10-year contracts. You can't be doing these slow burn types of business models. You need to have something bigger and sexier and more profitable. You're just not gonna work as a company if you don't do this. And so what happens is around the mid-80s a lot of states are deregulating their natural gas. Oh so like so many of our stories Ronald Reagan is one of the shadow villains pulling the strings in this one. Yes. Hooray. A lot of these markets you don't have to sign 10-year contracts anymore. You can actually sign one month contract or one day contract and all of a sudden these gas pipeline folks can start playing different cities and different producers against each other right that you can

basically put this up on the open market and like well Denver wants to pay $20 but LA wants to pay $25. So it's like the pipeline companies are like a girl who grew up in a very conservative household and it's like you can only hold hands with one boy at once. You've got to be serious and a good whatever we are and then she goes off to the big city and she's like I'm seeing Brian for breakfast at 9.30 and then I'm seeing Alexander at 11 and then I have roller skating with Ted. You know she's just like date crazy because she's suddenly free and she just wants to see the world through boys or through middlemen who will pay her a better contract fee. And yeah and this is I mean this is the entire insight that Jeff Skilling comes up with that Enron is essentially a monopoly

it owns more gas pipelines than anybody else and so it can squeeze the producers so that they pay more to get the gas into my pipelines and you can start squeezing the customers and say well to get it out of the pipelines I have to start charging you more. It's actually a pretty good business model. Well yeah that's that's how Joe Pesci's character always wins when he gambles in casino because when he loses he doesn't pay and when he wins he collects. It does seem like a very American thing to have your business model be like I'm going to be bigger than everyone else and it's like well yeah you can't really lose if you're a behemoth and you're crushing everyone around you but you don't have to be that smart to win that way like don't you want it to mean something

apparently not. Well apparently not no I mean one of the transformations that happened before all of the fraud is that in 1985 when Enron is created the vast majority of its contracts are these long-term contracts by 1990 before anybody starts lying about anything 75% of the sales are on these spot markets where it's like fluctuating prices and it's volatile and it's playing different players against each other that's the company's central insight is that we have to use the volatility of gas prices to make money because everybody wants to hedge against this volatility. That's interesting. Another thing that Enron does is they set up something called a gas bank where people can buy futures in gas prices so in the same way that you know corn prices fluctuate

and people will buy futures so that when the price of corn goes down you get a little extra money or if the price of corn goes up you get a little extra money. Enron essentially sets up a bank to do the same thing with natural gas basically an insurance policy if the price of gas goes too high or the price of gas goes too low but it works out really well for them because either way they're getting fees right they're getting a percentage of all of these deals and again they're a monopoly so they're the only people that have this giant gas bank set up. Does that make sense the whole futures thing? I had to look up like eight different youtube explainers to figure out what all this futures thing means. Let me try and explain back like my understanding of it they've essentially

just created another means of generating profit right where people who want to engage with like gas stocks can do so in a way that allows them to collect fairly easily but in order to do so they have to go through yet again Enron acting as a middleman but in this case for the futures that they're buying and so the fees that they pay on the futures regardless of what happens or how much payout they get go to Enron. Yeah exactly. So it's just another can't lose game. Yes. Living in Las Vegas has honestly really helped me to understand. It's like right all American businesses are essentially casinos QED. Yeah I mean the whole thing is like you want to be the dealer at the casino right you don't want to be the player sitting at the table

and that's essentially what Enron does and so there's actually if you look at the economics literature there's a lot of you're wrong about style academic articles of like well Enron was actually a really innovative company before all of the fraud came out so Enron did establish a bunch of things that are sort of still with us like this idea of a gas bank is still around. We did a lot of great paintings. Enron's entire business model was based on the deregulation without the deregulation Enron never could have done this. It's only because they were allowed to sell gas at prices that fluctuated that they were allowed to do this. And they found a way to bend government to their strengths. Yes. It's essentially amoral behavior. Yeah it's profit maximizing I mean this

is what companies do right they profit maximize and they want their stock to go up like that's what they do right it's not a defense of them it's an argument to regulate them really heavily. Well it's like say you have a cheetah and you're like look at my beautiful cheetah what a beautiful animal full of grace and speed and it's like yes it's also a big cat and it might claw you someday just because yeah put it in a cage yeah. What's interesting about Enron's sort of insight here is that because this gas bank thing is going so well they figure well why don't we expand into doing this for other things they have so much money that they can then establish themselves as a player in markets for electric power coal steel paper pulp they're buying and

selling water like they're getting water pipes they're just like hey let's do other stuff that you need pipes for yeah all they were doing throughout the 90s was establishing themselves in markets where they could be a monopoly at one point they buy up 18 000 miles of broadband cable boardwalk yeah essentially and this way they can go to Comcast and say we'll buy some of your capacity and then they go to Philadelphia and they say we'll sell you some of this capacity and the whole thing is just we are the bottleneck in between these two actors and so we're going to charge both of them yeah the thing that's really important for understanding Enron is the run-up to the fraud is the dot-com boom right I mean all of this happens before the dot-com bubble bursts

yeah while we're on the subject what was that well I mean we will get into this more later but essentially the idea is that the rules of business don't apply to the internet right that anything that's on the internet we think like oh you don't really need to make money and you don't need to have a bunch of employees that do stuff and you don't need to have a business model that makes sense you just need to be there and so Enron sets up something called Enron online where you can do all of this weird trading stuff and within two years it's the biggest e-commerce site in the world wow the real downfall of Enron begins or like the seeds are planted once the company you know they start diversifying into all of these other industries which they

don't really know that much about and they don't mostly have all that much physical capacity like they don't actually know how to run stuff in these other industries so Jeffrey Skilling the guy that's behind all of this what they say about him afterwards is that he's somebody who loves ideas but is totally uninterested in implementation so he's like oh let's let's expand into electric power and then someone's like well electric power is actually different in that you can't store it it's like a whole different industry than natural gas and much more difficult to sell futures on and he's like I don't want to hear about that let's expand into electric power yeah it's this tension between Ken Lay who's the CEO of the company who's like an old school oil guy like he's worked in

oil his whole life he's worked in physical infrastructure he's somebody who's very much just like an old school business dude and then there's Jeff Skilling who's like so enamored with his own ideas but so uninterested in how they're actually being implemented or any of the realities on the ground hmm sounds like me I know he's like the perfect millennial he's like every stereotype of millennials it's like you don't want to do the work you just want to talk to talk well based on what it was founded and run itself as a millennial so that's that's the first great millennial casualty slash villain and so Skilling eventually ends up basically winning this argument and he talks Ken Lay into selling off the company's actual physical stuff wow so because the trading

is so profitable Skilling essentially says look all of our money is coming from this trading the future is not in things old man and then he's skateboarded away I mean that's only a slight exaggeration in that somehow the company starts selling off all of its physical assets by the year 2000 the company is making three times more from trading than it is on the actual oil pipelines that it owns so the company basically is a financial services company by that point and an online company and this oil stuff is an afterthought it feels like there's a unifying feature here in some of the great meltdowns of recent history because it feels like the subprime mortgage crisis you know a non-existent commodity became much more lucrative than the

things that existed and so all this wild speculation took place that had no you know no real life correspondent to rein it in in any way oh totally I mean one of the statistics that's amazing is that in the second half of the 1990s Enron spent zero dollars on research and development good god it just completely gave up on being interested in oil 80 percent of its profits by 2000 came from businesses that didn't exist in 1988 so the company's really just taking this right turn to we are up in the clouds we're an information company we're big and weird and sexy and nobody really understands what we do anymore that's like exactly like me I'm big and weird and sexy and nobody really understands what I do anymore so my favorite little snapshot of where

Enron is and why everybody bought into this myth is I found a Houston Chronicle article from the year 2000 which is basically saying like look at this hometown company you know it's the biggest company in Houston the stadium is named after Enron everything's going really well they don't do anything as far as we can tell but that's not the point yeah and the and the entire article is basically looking back on it now is just a parade of red flags so it's saying one of the things that Kenley did that was really interesting was you know after they switched into all of these financial market stuff he took the innovative step of firing all of the managers who were older and knew anything about oil and hiring a bunch of 23 year old kids from business school it's like

what an innovative step and then it's got all of these examples of the new markets that the company is getting into and how innovative and cool the company is and then it caveats them with like they all failed so it's like the company is expanding into India what an interesting step well the company did actually lose three billion dollars on that deal and the power plant never opened but it's so innovative like the company tried to have a streaming service with blockbuster that also failed and the company had to write down 150 million dollars worth of debt but it's such an innovative idea like all of their examples of the company's innovations are failed ventures I feel like I guess as Americans we're very prone to falling prey

to stories about con men because we read the things that cause people to fail as the things that cause them to succeed oh totally yeah because we're so obsessed with like the unschooled unqualified rogue whatever who swoops in and knows more than all the old men and it's like you know there is a reason that people learn things yeah I mean it's really interesting in the enron story too in that all of the fraud and all of the weirdness was in plain sight I mean in the same way this houston chronicle reporter you're you're giving six examples of the company's innovation all of which failed and that doesn't make you think like hey maybe I should look into this a little bit more the information of the company's true nature is available it's right there in front of

you if you just know how to see it in a different frame like it's all about putting it into this narrative of innovation yeah whereas if you put it into a narrative of failure it's like well this failed in India and this failed in Thailand and this failed in the UK like you can find examples of a different narrative but even the failures got put into this narrative of success yeah and so I mean one of the things that's glaringly obvious is between 1985 and 1995 the company is running you know 13 percent above the standard and poor index like it's a reasonably good investment but it's not a blockbuster between 1996 and 2000 its revenue goes up 750 percent so its revenue goes from 13 billion to 100 billion a year and at this time every other energy company in the

country is showing growth of two or three percent a year right there's companies that do exactly the same thing as enron and they're like times are good we're growing by three percent and then enron is like oh we're growing by 750 percent and everyone's like wow that's innovative but nobody really like really sniffs around of like one company that doesn't do things all that differently from its competitors is 10 times more profitable than they are like we never want to believe that anyone is rigging the game right we always want to make it seem like the rules are fine everyone's on a level playing field and it's innovation that brought a company to these heights what if innovation is just a finance type person word for crime what if they say innovation they mean crime

so i'm gonna try now to get into the mechanics of how the fraud worked yes i feel like there's this thing where podcasts will sort of apologize and like oh we're gonna get into the weeds now like it's about to get really detailed but i think details really matter i love the weeds just throw that tennis ball and i'll go get it every time i yes i feel like the world takes place mostly in details and it's important to understand the details about things work and i'm not going to apologize for them because i got really interested in this and i think it's totally fascinating i agree with you and support you thank you continue so ordinarily like i said the way that you calculate your profits are just normal we had it

we sent out an invoice this month this much money came back you know you count your trickle of money that comes in and your trickle of money that goes out and that's how much money you made that year you guys plot along boringly running a business with real money yes normal ass accounting procedures what n-run does in 1992 is they change to something called mark to market accounting so this is something that the financial sector uses but no one outside of the financial sector had ever used before and it basically says once i go into a deal however much profit i think i'm going to earn on that deal i can book that as income now oh no it's essentially like me saying oh i just got a new job and for the rest of my life i'm going to earn you know 1.2 million dollars in salary

so i can put on my tinder profile that i made 1.2 million dollars this year it's also asking people to speculate about their earning potential i.e. the very core essence of their own ego if they work in this field which i feel like is something that wouldn't necessarily lead to but could certainly facilitate some light fraud exactly and also i mean financial sector companies that do this the logic behind it is you know if you buy a bunch of treasury bonds or something that's a really safe bet you're kind of guaranteed to get whatever it is 5% return back you're really guaranteed that return so it kind of makes sense for safe bets to book that as income i mean the financial sector also does all kinds of shenanigans with this but the logic is sound right whereas if you're

a company that's like going into business like n-run did with aol and blockbuster to deliver streaming video to people in 1996 i was watching streaming video in 1996 it took 40 minutes to load and upgrade citizens brigade sketch yeah like don't book that income jeff like just wait wait on that jeff like maybe hang on hold on loosely but don't let go you know there's three huge problems with switching to this kind of accounting that only become clear later on the first problem is that you know if i'm booking all of my income for my new job this year well then next year my income is zero right because i've already booked all the income that i'm making so to do this it's kind of like a ponzi scheme where if you've already booked all of the millions

of dollars you're gonna make from your partnership with aol and blockbuster last year well then this year you have to sign a bigger contract with someone else or else your income is going to go to zero and you must maintain your quality of life yes exactly you need to pay the pool boy and to do that basically it becomes this escalating thing where you have to keep booking new deals and new deals to keep your stock price going up because all of this depends on the stock price has to keep going up oh that's one thing the second thing is and this is the really obvious one a lot of the profits never come true right so they they book all of these profits from this power plant that they build in india but people in india can't afford the power that they're providing and no one

no american company has ever successfully run a power plant in india and so there's all kinds of problems there's huge human rights violations and this becomes a huge political thing there oh no so again it's like they're not actually earning money that they've already booked yeah if you stop lying the stock prices go down and then everyone loses money and everyone's upset well that's the thing i mean that's why this works for seven years and then in 24 days it doesn't work anymore it's literally like a fairy tale spell seven years of good luck and then you will all fall from your pedestals the the amount of money that they lost on the this stupid block buster aol deal it's 110 million dollars so that's not that much money to a company that's earning

a couple billion in revenue every year so yeah actually brekheimer movie's worth of money right so you can kind of write that off it's not that big of a deal you can kind of hide it but it's like if you have 110 million this year and then 200 million next year and then 300 million then like if it becomes this rolling snowball right because the scale of the fraud has to keep getting bigger and so when they get caught it has to be that much worse and that's essentially what happens that by the late 90s they have this deal to sell electricity to indiana to the state of indiana with it's worth 1.3 billion dollars but indiana hasn't deregulated its energy market yet so indiana's like hang on we don't want this we don't we don't want to do this goodbye and then everyone

is like well wait a minute we have 1.3 billion dollars of income on our books that is now zero was enteron brought down by the state of indiana no i mean there's like there's hundreds of these deals okay that would have been great though go on well so the third reason why mark to market accounting is a really bad idea is actually the most important one in that it doesn't generate any cash flow so in the same way if i tell you my income was 1.2 million dollars last year and then you look in my bank account and there's 18 dollars you'd be like mm something's a little weird here right yes and in the same way companies have to report their cash flow and how much cash they have on hand to wall street so if you're reporting billions in revenue and you have no cash flow

your stock price isn't going to go up because everyone's going to see that your stock is fake that all of your revenues could come crashing down because you have no actual money so the thing that enteron has to do and this is what motivates all of the fraud is they have to show cash flow they have to say we're earning whatever 10 billion in revenue and we brought in 1 billion in cash because that's the way that you know oh well this this has to be a real company it's not just speculative it's not a bubble because look how much cash they have and they have to do increasing shenanigans to bring in the cash so how do you fake cash flow what do they do this is where that savage fraud comes in most of this is done through this guy named Andy Fazdow who's the chief

financial officer and he's really the mastermind behind all this he comes up with all of these structures and it's complicated I read a million documents there's been a million congressional hearings about it and it is legitimately very complicated on purpose right like the reason why white collar scandals are always boring is because companies make them boring because they don't want you to understand it and they don't want regulators to be able to figure it out so it's mind numbingly boring but what it basically is it's like taking out a credit card to pay off your previous credit card and then taking out another credit card to pay off that credit card I mean that's essentially the model so they set up hundreds of shell companies they're all under

this thing called a special purpose entity which is a normal thing that companies do when Coca-Cola wants to invest in the Cambodian market it'll set up Coca-Cola Cambodia which is a legally separate entity it has legally separate investors it's like a company that you set up to do a project what the company does over and over again is they hide their debt in these shell companies so they say oh look we got a ten million dollar payment from Raptors Incorporated that's one of the companies that they have they make it look like oh Raptors is like this separate company and like it's kind of connected to us but it's not the same so our income from Raptors is like real income but actually Raptors is just a wing of the company that's being controlled by this Andy

Fazdow guy and they do a couple times where one shell company will buy another of their shell companies and then and Ron will count that and Ron will be like oh we sold our company to another company and we booked 20 million dollars in income but like it's just selling like you're selling one of your credit cards to another one of your credit cards so they have a fairly stagnant amount of money that they're just pushing around yeah okay and they're actively losing money I mean the real thing that starts bringing all of this down is that gas prices start to go down so their actual business like their normal ass business starts to lose money and doesn't bring in as much as it used to and this whole idea of having a gas bank and being a middleman and like trading futures

and all this stuff other companies aren't stupid so like Merrill Lynch opens a trading floor that trades futures of natural gas other energy companies are trading their own natural gas so pretty soon Enron isn't actually a monopoly in all of this trading stuff anymore so by the late 90s everyone else has kind of figured out Enron's secret sauce and is doing exactly the same thing so its actual businesses aren't making money anymore and this fraud is now rolling up to the point where there's just bigger debt and bigger debt and bigger debt and they have to do more drastic things to hide it one of the main ways that they hide the money is they make loans look like income so they'll get like a three billion dollar loan like some massive sum from you

know Goldman Sachs but then they'll do it in a way that like they use the loan to buy treasury bonds and then they sell them back and then they loan themselves like this weird opaque shit that nobody can ever figure out you know it's like going to the Cayman Islands and then it's going to another shell company I mean they basically bounce this three billion around 50 times and then give it back to themselves where they're like oh hey we made three billion dollars like that's the whole model is to get all of these loans and make them look like revenues it's pretty unsophisticated when you describe it that way yes yeah and of course at the center of this this Andy Fazdo guy is skimming money off the top oh yeah right that he's like paying himself a bonus of five million

dollars to sell one shell company to another shell company and there's no money there's no real money there right somehow he is able to pull out five million dollars for himself probably because it's only five million dollars because they're committing fraud you know on the scale of the billions so no one's going to notice five million dollars in actual money go missing and also like a rising stock price is a hell of a drug if the stock price is rising everybody's getting richer every employee is paid in stock options and encouraged to own stock options right they're being told constantly to put their 401k all into Enron stock and so it's like okay Fazdo's got his hand in the cookie jar but whatever I made 80 million dollars last year so like if he's skimming five like whatever

I'm probably skimming a couple here and there my stock price is going like that paper's over a lot well and also I'm sure everyone at this level knows that the company essentially is a fraud machine and so if someone is you know skimming all of these ill-gotten gains like who cares yeah that's pretty low stakes compared to everything else that's happening I mean another way that the company is getting income is basically just like shitty ass business practices so this is where the California thing comes in I mean the thing that I cannot get over so in 2000 and 2001 California has six days of rolling blackouts and they're constantly having these problems so California's power plants are capable of producing 45 gigawatts Californians on any given day

need about 28 gigawatts so there was never a power shortage there was never close to a power shortage but because Enron owned all of the wires that transfer electricity not just throughout California but across the entire west coast Enron would like take power capacity from California and sell it to Arizona and then once there was a shortage in California it would then sell it back to California for five times more what we didn't know this until 2002 2003 like we knew California had this huge power crisis but we didn't know how created and how fake it was like it was a conspiracy theory for a long time like Enron is manipulating the supply and then we got all the discovery files from Enron in 2002 and it was like oh yeah the conspiracy theory is true like it is Bible fact

like the company was doing this so what it basically was is California generates its own electricity and it sells its own electricity to itself and it has like standard prices it's all regulated blah blah blah but because you can't store electricity so whenever Californians use more energy you have to generate that energy right now so if California's energy use goes over this 45 gigawatts California then has to buy energy on the open market which is much more expensive and it's basically you you pay whatever someone is selling energy for right it's just supply and demand stuff how does energy work Michael how does our whole modern world exist I'm this is also mind blowing I mean me too I I didn't know any of this stuff two weeks ago like where do you where do you

get it from if you can't save it and store it are you just like hey Wyoming we need some energy do you got any yeah wow I mean there's a million middlemen in this whole process right at the end of the day it's like LA will call up Wyoming and be like hey we're a little short on energy do you guys mind rerouting some to us and Wisconsin is like well we're having a light day today so yeah no problem you just confuse Wyoming and Wisconsin but I still love you are those not the same I thought those one has more cowboys so basically what Enron starts doing is they will lie to California and be like wow Californians are sure using a lot of energy today I don't think we're gonna have enough by the way we can sell you some energy to fill in the gap right because they are the producer of

the energy and the pipeline of the energy and your source of information you can see how that would create the potential for some shenanigans such as these I'm telling you there's a problem and then I'm telling you that if you pay me I can fix the problem so it's exactly like the scammers who call you and instead of trying to sell you antivirus software like oh my god your iCloud has been compromised yeah give us money right now and California apparently doesn't have systems to actually double check so they're like wow thanks Enron you really saved our lives and then Enron skateboards away with its bag of cash sideways baseball cap so all of these documents come out later where Enron calls it the death star strategy there's all these great names right it's like the

fat boy strategy there's something called megawatt laundering you know if they were calling it the death star strategy you have to think about the kind of self image that they had at this time like the death star strategy is apparently there's only one wire or one set of wires that take energy from northern california to southern california it's this huge bottleneck and Enron owns it uh-huh so Enron deliberately congested that one bottleneck and would say like oh sorry you guys can't you can't buy energy from southern california today i guess you'll have to buy it from out of state so even though the power plants in california were producing enough energy Enron pretended that the entire southern half of the state was off limits and so northern california has to buy it from

wisconsin or has to buy it from arizona or whatever at up to five times the price and that's how these brownouts happen yeah and so that's how the brownouts happen is there just isn't enough power that because they've rerouted it somewhere else or they've created this phantom congestion on the line oh boy you know once you know how it literally happens you're way more pissed off you know people got trapped in elevators for hours they did this during a summer when it was a hundred degrees and so people couldn't use their air conditioners another the most cynical thing is that while all of this happening brownouts crisis whatever Enron starts going to companies and they say you know because the state's power supply is so inconsistent we're

gonna sell you bespoke energy so they go to like Cisco systems and they're like you're a computer company we know you need reliable energy we're gonna sell you our energy directly so that you don't have to go through the state regulators right because they have essentially torched a neighborhood and then gone to the one surviving trateria and been like oh be kind of a shame if this restaurant burned down too why don't we sell you arson protection yeah this is from one of the academic articles i read so during the height of the crisis Enron signed more than one billion dollars in long-term energy deals with companies such as compact computer starwood hotels rich products corporation and prudential insurance so you can also see that at this point they're

really maximizing every possible avenue for profit yeah you can see how little foresight they have at this point because this is all this is high risk behavior one of these chickens is going to come home to roost but like they're so focused on covering their ass because they have so much money in the hole that it just it feels like no stone is left unturned although what's actually super dark is that it's not clear the traders the energy traders actually knew how much of enron was fraudulent so they might have just been doing this to be profit maximizing i mean it's not clear that they had the same sense of panic that say jeff skilling and ken lay did a lot of the rank and file were just assholes right they're like my bosses are telling me to

destroy people's lives i mean one of the forgotten things in all this is that like three or four other energy companies were doing the same thing what yeah this is not something that enron was entrepreneurial about we know that enron was doing it because we had the discovery files because the company was under trial right that all this stuff became public but there's like three other energy companies that are supplying energy to california at this time and also run power lines and they're making a shitload of money too we just don't know because nobody's done a criminal trial against them because it's just basic profiteering it's not really illegal it's just morally catastrophic and so one of the things i think is actually really interesting about this is reading all of the

law review articles and the investigations and the criminal stuff this thing is nowhere in there wow the california thing isn't even a blip it's all about defrauding the investors it's all about you know faking the financial statements the fact that california's energy costs went up eight fold for people oh my god and the state went from spending seven billion on energy to 27 billion on energy like it caused a budget shortage like they had to cut funding from universities in california because of this none of that shows up in any of the criminal indictments of enron because it's just companies be companying like that's it it's very interesting what constitutes a white color crime essentially because it does feel like there's a lot of manifestly immoral stuff

that's just fine yeah that's the story of a lot of corporate malfeasance and especially enron that the worst shit isn't technically a crime so the last thing i want to say before we get to the downfall is the role of arthur anderson do you remember this company no you know the auditing firms the big four auditing firms deloitte price waterhouse cooper's kpmg i don't know the i don't even really know what auditing is if i'm going to be completely honest with you i feel like this is useful in that most of us don't know this shit but basically i mean the the entire purpose of auditing firms every company that's publicly listed has to have all of its accounts investigated essentially so an auditor they go in they look at all your excel spreadsheets and they say okay

well coca cola you say that you sold a million cans of coke last year okay where were they who sold them who bought them where are the receipts where did the money go which accounts is it in what did you like just basic health of the corporation do you have cash flow what was your revenue this year do you have hundreds of shell corporations exactly so you know as soon as the enron scandal breaks the question is you were being audited every year so how did like professional independent investigators not notice this and so one of the quotes that comes out later is enron robbed the bank arthur anderson provided the getaway car enron wouldn't have been able to do any of this shit if arthur anderson's giant accounting firm hadn't signed off on every single

years of revenues right like you're booking 1.3 billion from this weird shit in indiana okay you got this loan but you're booking it as revenue sure seems fine to us okay so enron is doing all of these fraudulent things and all of these unethical things some of which are illegal and some of which are not what actually ends up being the thing that people notice like how do they get caught so there's two whistleblowers within enron oh boy when you hear whistleblower you want it to be this like erin brokabitch great story of crusading internal voices and fixing the company from within and they're both just the worst stories like they're totally anticlimactic the way that we learn about the whistleblowers is through all this discovery right the 10 billion or whatever

enron emails get put into the public record and then people start looking through them and they're like holy shit there were internal voices that tried to stop all of this and so the first potential whistleblower that comes out of all these documents is this guy named jordan mince who's a tax attorney he is working for andrew fazdow he's looking at all of these special purpose entities these shell companies and he sees some sort of accounting irregularities and then the whole story culminates in him noticing that jeff skilling has not signed some of the documents that are establishing the shell companies and then he sends a memo to jeff skilling saying hey we need your signature on this and jeff skilling never writes back and that's it that's like the closest thing to a whistleblower

we have it's like some tax lawyer who's just like we're missing your signature that's not a whistleblower no that's like you you like see a whistle over there and you're like oh hey a whistle back to my lunch there's also a woman named Sharon Watkins who Pamela Calloff one of our favorite writers wrote a profile of couple years after this happened where she hung out with Sharon Watkins for the day hers is a little bit more dramatic she was an accountant she got hired again by this Andrew Fazdow guy the guy who's running all the shell companies she essentially sits down with an excel spreadsheet and it's like immediately obvious to her that it's a giant fucking scam she looks at some of these shell companies and she's like these companies have

hundreds of millions of dollars in debt and we own these companies so we're liable for this debt but we're telling our investors that we're not could it be that the emperor has no clothes on at all she wrote an anonymous memo to Kenley like you should know about this this is a giant scam and then Kenley hires a law firm she's like yep it was me i'm pretty concerned about this and then this law firm they're like oh this is really troubling like we're gonna look into this we're gonna do all the paperwork we're gonna go through the excel spreadsheet and then like a month later they get back to her and they're like we don't see any problem here and she's like okay and that's it that's the whole story i'm just thinking about like what is it like to work for

Enron and this is like your workplace and your community and maybe most of the people you know work there and even if you figure out what what they're doing you're like well it's working and everyone else is fooled like how real can my thing be i mean i think it's a it's a nice corrective to the whistleblower myth that the whistleblower narrative that you know she looks into this what she says later is she's like i found you know one company with a bunch of debt on its books i had no idea of the scale of the scam i didn't know there were hundreds of shell companies i didn't know there was billions of dollars that was being faked i found this one thing like a little thread i pulled on a little bit someone with more authority than me right

lawyers who said that they had investigated this came back to me and said and looks fine to us and so it's like well i guess i must have been mistaken like i must have been misreading the excel spreadsheet and she did what you can expect of an employee in a hierarchy that demands loyalty and you know knowing one's place she pushed it a little bit nothing really happened she moved on like this is what we train workers to do in this environment yeah but the real downfall of the company begins in march of 2001 so by december of 2001 the company doesn't exist anymore march of 2001 is when for the first time there's an article that starts to ask questions about how is enron making its money the writer is bethanie mclean who's a 30 year old fortune writer the headline of the

article is is enron overpriced and it's like i read it it's like the cutest article it's basically just like how does enron make its money and she keeps calling around and like no one will tell her oh that's so great so i mean the the i think it's the second paragraph of the article she says start with a pretty straightforward question how exactly does enron make its money details are hard to come by because enron keeps many of the specifics confidential for what it terms competitive reasons even quantitatively minded wall streeters who scrutinize the company for a living think so if you figure it out let me know laughs credit analyst todd shipman at s and p like even the people that are telling you to buy the company stock don't know how it makes money like they do have a

credit analyst laughing it's like oh we really are this is a situation the sentence of this article that i love the most she says as for the details about how it makes money enron says that's proprietary information sort of like coca-cola's secret formula it's not this is how the company makes money like it shouldn't it shouldn't be that hard the three executives from the company take a corporate jet to new york and have a three hour long meeting with her where they try to break down what the company does and you can just imagine like she kind of says this later that like she's a 30 year old woman these are all dude oil executives in their forties and they're like now darlin i know you can't understand what we do like this whole it's like this super condescending

thing essentially a switch back and forth between you wouldn't understand and it's a secret like ever the wall of good old boy that's the beginning of people being like yeah how does this company make money like this is a little bit weird so i have to add bethany mclean to the mural i'm planning of all of our of our heroic not whistleblowers even because that's sort of a specific term because like people who notice things just like basic question askers people who go hey yes so then the dogs really start sniffing around in august 2001 four months after the article comes out jeffree skilling resigns he skateboards away for the last time yeah and he says that he wants to spend more time with his family which means you've been caught with your hand

in the cookie jar which is like awoo got like this is the month when the company reads its highest ever stock price people in that situation do not resign to like help their kids do their seventh grade homework yes but like joe patching casino he's skipping town to try and evade the people who want to whack a minicorn field and then in october the company then announces oh um we actually lost money this quarter for like the first time in i think it was four years that they're losing money for a quarter and then two weeks after that they announce that they are restating their financial statements for 1997 through 2000 and they're just like oh by the way over the last four years we actually earned 500 million dollars less than we said we did we're sorry what why did

they do that well because they had to the theory now is that jeff skilling knew that it was all gonna come crashing down that there was a level of deception that they couldn't maintain that now that people were asking questions you know even on calls like investors were like oh this doesn't add up to us like if the junkies start asking questions here in trouble is a pusher and then also in october of that year the sec announces that they've begun an inquiry into potential conflict of interest between the company and these shell companies how seriously do people take an sec investigation they're so rare actually that people take them pretty seriously like you have to really fuck up to get the sec investigating you really and between the ceo resigning the

restatement that we actually made hella money less than we said we did selling off a bunch of assets and the sec opening an investigation for chickens come home to roost all of a sudden and then you look up and you're like that's a lot of chickens i mean what's totally amazing is october 5th the stock is at 90 dollars and then by december the stock is at 75 cents oh my god by the way like we've talked about how big enron is in terms of monies or fake monies but how many people are working for enron how many people you know have converted some or all of their 401ks into enron stock a lot dude so the way that happens is the whole time the stock is plummeting they're updating their online system whatever they're like sorry our website is down so employees

can't sell their own stock oh god so all these poor you know hr people and receptionists and even people on the trading floor that didn't know about the scale of this had no way of pulling their money out of the company and of course we find out later that all the top executives are pulling out like you know tens of millions of dollars in stock at this time because they see the writing on the wall of course and the people who clean the toilets are the ones who get fucked totally i mean you know this whole time they're saying oh it's just a blip it's not that big of a deal this plane will write itself and resume course and not plow into that field the executives are trying to get the stock price back up pulling out their own money while telling their employees

to keep the investments in and then they just say um you have half an hour to pack up your things oh my god they just come in one morning and by 9 30 you have to get all your stuff and bounce like that's it it ended up being 4 000 lost jobs 15 000 employees and former employees that had enron stock as part of their retirement plan 15 000 people is like a flourishing midwestern town yeah that is a lot of human beings and there's this super infuriating footage of ken lay like the week that all of this is happening where he's at a news conference and he's talking about you know my net worth has gone from hundreds of millions to tens of millions and my liquid net worth is less than a million dollars i bet he had to sell some of his wine i bet his wife sadly

took off her earrings yeah i mean the guy owns like six houses like it's hard to have any sympathy well super rich people are people who've been able to buy their way out of the human condition artificially for whoever knows how long and now they're human again and they're like oh no this is terrible and it's like yes we know and then of course i mean what's interesting looking back on this is nobody knows any of this at the time like all this stuff about fraud all this stuff about faking the books nobody knew the extent of all this so one of the first things that happens is the fbi assigns a task force which is run by robert moeller this is like a weird little fun fact it's seen as an example of a very good investigation you know it takes a couple years they aggressively

get people to flip so andrew fazed out the guy that was running all the shell corporations they threatened to charge his wife with tax evasion interesting as leverage to get him to flip it works he then agrees to testify against skilling and lay you attack people through their loved ones that's a great strong arm tactic it works so well for organized crime of all stripes yeah and you know his wife ends up doing one year of time because she knew about the tax evasion that he was doing wow so fazed out ends up doing 10 years because he gets a shorter sentence for agreeing to testify skilling gets 24 years but he somehow rich people justice technicality something something he gets the sentence reduced to 10 years and i think he's getting out this year

i think that people who commit financial crimes like that should have to live a life of service among the poor and be like janitors on charity hospitals or something like that like they should have to live in the world that they created yeah and he he's done a couple interviews from jail and he says that he was a patsy and it was fazed out was like yeah mastermind behind it all but like everyone's a patsy ken lay actually gets he never gets sentenced he gets convicted but before his sentencing hearing he dies he dies of a heart attack at his like chateau in aspen colorado which just shows you like his net worth like kenneth lay was fine so he was going to do 45 years so this is really significant time yeah it's surprising these are racketeering numbers yeah

i mean this is the last time we did this i mean one of the things that's really sad about this is that you know white color crime prosecutions are way down yeah tell me about white color crime prosecutions generally i mean one of the things that happens and one of the things i didn't mention is this is fall of 2001 what happened in fall of 2001 september 11th yes yes so one of the things that happens is this is basically the last fbi major investigation of white color crime because they all shift over to doing terrorism after this oh when the cat is away the mice will play yeah i mean enron is kind of it's like the last gasp of a way of prosecuting white color crime that we just don't do anymore but then i mean what's amazing is you know 16 people go to jail for all this

enron stuff a really interesting thing is arthur anderson this auditing company that's supposed to be the independent auditor but was signing off on these super fraudulent statements gets driven out of business so 85 000 employees lost their jobs oh my god which is way more than enron i mean it's a huge deal and what's interesting and totally forgotten about all this is eventually the supreme court actually overturns the conviction and says it was the instructions to the jury were wrong whatever but arthur anderson's reputation is so damaged by that point and all of their executives have already moved on that the company just never comes up again like i really think the extent to which americans generally are attached to corporations is interesting like do we love them

like do we love coca-cola do we want coca-cola to be happy clearly i guess so the biggest misopportunity of the aftermath of enron is the narrative that forms is about fraud it's essentially a bad apples story and as we've discussed on this show many times the bad apples explanation is usually not the complete story i think we've discussed that on this show pretty much every every episode yeah and so what's what happens is congress passes a series of laws in response to enron so they want to prevent another enron from happening again so they pass sarbanus oxley and what's really interesting about this law and about the approach to this generally is that it's all about protecting investors so this is the reason why the california chicainery doesn't

end up in any of the indictments because investors didn't lose any money oh god no basically this is seen as a problem of enron executives defrauding investors uh-huh so this is from one of the law review articles i actually interviewed the author of this because i was so curious about how all this worked but he says the task facing government in the wake of scandals like enron was to restore confidence in the markets and that was the guiding principle of all of the response to enron was that we have to make it safe to invest again sarbanus oxley includes things like there's an independent accounting board and when you have an auditor the auditor has to rotate every six months so that he doesn't get too involved in your business or something i mean

there's there's these little things that make it easier for independent outsiders to figure out what's really going on in the company right so that if you're trying to lie it is harder to lie to your investors and one of the super fucked up things is that after all of this years later the employees of enron sue they sue for two billion dollars all of their wealth that was wiped out of their accounts so these are people that lost their entire retirement savings they get 85 million ends up working out to about three thousand dollars a person oh my god meanwhile investors also sue the company and they get seven billion uh-huh so employees get 85 million shareholders get seven billion so that is who we are making whole after this entire process well yeah because

it's not about justice it's about preserving the myth of the economy yes right because here comes along this thing that's like hello guess what the infrastructure of our lives is crooked and full of all these weaknesses and incredibly vulnerable to the random and self-fulfilling egos of a few dicks and in order to i guess perpetuate itself which a lot of people seem to find completely necessary we have to administer quote unquote justice in a way that makes the whole situation feel stable again right but doesn't alter it in any way like doesn't change any of the things that led to this being possible right yeah i mean one of the articles on serbanus oxley kind of like lessons learned from enron that i found talks about how a lot of these provisions in

serbanus oxley have never been used no one has ever been prosecuted under them and a lot of the law just requires disclosure so it's like if you're gonna use the same auditor you know whatever 50 years in a row you have to disclose it to your investors like it's all just like make it easier for investors to decide whether this is a healthy investment or not one of the senators that ends up voting against it points out that there's no protection for whistle blowers so it's still in a lot of states legal to retaliate against whistle blowers so there's nothing in there that really makes it easier for this sort of thing to come to light it's like oh you just have to tell your investors that you're doing shady stuff well it's also legal to fire

people for their weight so why not whistleblowing this is america trial a lot it's a previous episode yeah but then so you know again it's not necessarily that the fraud explanation or the original explanation is wrong it's just that it's incomplete we learned the wrong lessons again and i think the way to think about this is enron really isn't about a couple people doing illegal things it's about hundreds of people doing legal things that's the best way to interpret this that it's not about abnormal practices it's about normal practices so one of the things that happens is in these congressional hearings because there's all these investigations that happen enron the former head of the sec arthur levitt comes and testifies and he says this is going to be a long

quote but i love this guy enron's collapse did not occur in a vacuum its backdrop is obsessive zeal by too many american corporations to project greater earnings from year to year when i was at the sec i referred to this as a culture of gamesmanship a gamesmanship that says it's okay to bend the rules tweak the numbers and let obvious and important discrepancies slide and this is the great untold story of the 1990s that wrongdoing became normal that one of the things that this law professor that i interviewed john coffey one of the things that he mentions is throughout the 1990s all of wall street the entire wall street culture becomes organized around making it safe for businesses to report higher quarterly earnings and they get more and more extreme in allowing companies to bend the

rules to get their stock price up so one of the things remember how i mentioned that enron had to restate its earnings yeah when a company has to restate its earnings from a couple years ago it basically means it's lying right like you're saying you earned a bunch of money a couple years ago to get your stock price up and now you're saying oops that was not true right like how do you honestly overlook 500 million dollars worth of losses you're fucking lying it's like it's a measure of how much corporations are lying it's not in your other pants no yes and one of the things this guy notes is that in 1990 about like 49 companies a year said oh whoops we had to restate our earnings by the end of the decade 150 companies were restating their earnings every year oh good

bullshitting your revenues became standard practices so the article that he wrote about enron is called it's the gatekeepers stupid and essentially what really happened was a total degradation of the checks and balances that are supposed to keep companies from committing fraud nearly every institution on wall street that is supposed to stop companies from doing this ended up enabling them good god and one of the things that is totally overlooked in all of this is the extent to which the investment banks city bank jp morgan etc didn't just know about what enron was doing they encouraged enron to do it so one of the things that comes out in the senate hearings about enron is that jp morgan was helping enron set up these shell corporations and was charging

extra to make them difficult for regulators to find what it was charging a premium to make them even more illegal because jp morgan understood that what enron was doing was making it more profitable for them yeah some of the shell corporations are actually opened in the name of chase manhattan bank city group these companies are essentially planting the idea with enron that this is how it should do it so all of these loans that i mentioned of making loans look like income this was the bank's idea this was something that the banks came up with to help enron and so one of the articles that comes out about this in 2005 points out that 70 percent of the company's profits throughout the 1990s were from contracts with banks and it was basically a

puppet of the banks they pumped eight billion dollars into this company throughout the 90s so as early as 1993 enron was insolvent wow enron had way more debt than revenues it never would have made it through the 90s if it wasn't for the big banks putting up all of this money to make it easier to fake their revenue and because all of these big banks and these big corporations are all leaning on each other they know that if one falls they'll all fall with it yeah so they all have to keep each other up exactly and so this is actually much less about jeff skilling being entrepreneurial than it is about the investment banks being entrepreneurial right we make more money when enron goes up so let's manipulate the stock of enron so that we make more money

another thing that's amazing is when you look at the auditors right these independent investigators that are supposed to be certifying enron's revenues every year the thing that this law professor points out is that there's no evidence that any other auditing firm would have behaved any differently there's no evidence that arthur anderson was particularly corrupt it's just they got there first right and what's really happened is you know the auditing business this thing of investigating companies financial statements isn't particularly profitable so kind of like the grocery stores on thanksgiving will get you into the store with like a cheap turkey and then they'll get you on you know the gravy and the potatoes and all the fixings they get you on gravy

auditing firms will get you in the door with the audit which is not that profitable but then get a ton of money from you for consulting fees so what this does is it creates an incentive where the auditors can't tell you that you're doing anything wrong the way that it's supposed to work is if you're doing shenanigans your auditor is like fuck you know we're not going to certify this but if the auditor says that now they're jeopardizing all of their consultancy contracts and then they'll lose money and then how can they possibly jeopardize that god it's all so obvious so basically all of these auditing firms are competing with each other to lowball companies on how much it costs for their auditing services and then they're highballing on everything else

that they're doing that they're actually making money on like when you fly spirit airlines and you have to pay 19 dollars for water exactly they upgrade you to death yeah what you want to do as an auditor is make what the company's already doing acceptable and that's exactly what Arthur Anderson did I mean this isn't a problem with Arthur Anderson this is a problem with the auditing industry do you feel like the civil rights that that literally should have been routed to the you know the people who tend to show up as criminal defendants you know poor people who committed really tiny pointless crimes out of necessity you know like check fraud that like the megawatt of doubt and due process in the eyes of the law that was supposed to go to them

got routed to a corporation because they bought it yes because like when poor people do things to survive we're like oh it's a crime it becomes a crime a poor person did it it's a crime and we never take the tack of like oh like if people need to engage in this behavior in order to survive maybe we shouldn't punish them as if they're a violent danger to society right or like hold them awaiting arraignment for months and months or or what have you there's no benefit of the doubt the whip only cracks harder but if a corporation doesn't we're like oh is that what you need to do yes one of the things that came out after enron was that ken lay was really good friends with george w bush and he was a you know guest of honor at the inauguration and there's like

these private dinners that he had there's a lot of smoke there like it looks bad but what's actually much worse is all of the legal changes that happened throughout the 1990s to make it essentially impossible to prosecute individual bankers for anything that's going on so this law professor that I interviewed was also pointing out like the rico statue you know how they got al Capone they limited the rico statue so that it wouldn't cover securities fraud anymore the statute of limitations have been shortened they redefined the supreme court redefined the term aiding and abetting so that it was harder to prosecute bankers they've made it harder to do class actions but just like redefining things strengthening things weakening things all of which made it so much

harder to actually put these guys in jail or notice what they're doing and that they're redefining conspiracy charges in very specific ways yes so that they do not apply to white collar crime I mean a huge thing that I'm obsessed with is the liability standards so to hold a CEO liable for criminal activity in his or her company you have to prove that they were willful right that they knew about it and that they didn't give a shit basically whereas liability I mean I have a friend who rented a house to a couple college students who ended up using it to cook meth like they were cooking meth in the garage and he did two years in jail what yes because it's like oh you should have known but then when it comes to CEOs it's not that he should have known it's that he

did know and he didn't care which is a really hard standard to prove yes it wouldn't actually surprise me all that much if Kenley didn't know how deep all of this stuff went but I don't care he should still go to jail like yeah you are sitting at the head of a criminal organization that is completely fake and ruins the life savings of four thousand people like yeah you should go to jail I don't I don't actually care if you knew about it and for every person who knew exactly what was being done and how this illusion of profit was being generated I'm sure there were 10 or 20 or 50 people who looked at this and were like you know some kind of black magic has to be going on back there for this to be going on yeah and we're deriving benefit from

what will be someone else's pain if we think about it but we won't like we're just gonna look away we're just gonna choose to look away like that's also really what enables so many of these schemes yeah another thing that I cannot get over is this whole thing about mark to market accounting the thing that plants the seeds for this entire explosion the sec approved it the company had to apply to the sec in 1992 to use this form of accounting and the sec said it was fine also with the california thing and ron never could have been able to do this unless it owned a couple of the power producers in california because it could take them offline and then say oh there's no power buy more power from me that was something they needed a waiver to anti-monopoly statutes

to do and the sec was like yeah sounds good to us so again another one of these checks and balances the sec is supposed to stop companies from doing this but the sec has essentially just become a stage in your career in the financial sector like the way that it works is you work at maryllynch for a couple years you get bored you go work for the sec for three or four years and then you go back to maryllynch so this is at every level about the fact that when society is run by too few too powerful people or entities it's like the corporations all become friends the corporations are friends with the regulatory bodies who are supposed to be imposing some sort of system of ethics and then the people who are responsible for cracking down on the people in the jobs that they

want in five years aren't going to do that because they want those jobs and this is what's so important about why we learn the wrong lessons from enron is that it was essentially how people had betrayed insiders it wasn't about the culture of insiders themselves and this is all planting the seeds for the financial crisis everything that happened in the financial crisis enron was a little sample platter of right all of these conflicts of interest all of the gross little tentacles stretching across government and private sector it's all there another guy that i interviewed for this episode named gavin banky who wrote a book called risk and ruin about enron he pointed out that enron was seen afterwards as an example of the process working this was a bad actor

they got nailed and were fine so one of the things that alan greenspan said because he also testified in front of congress for this he also said regulation would be one of the worst things to do because everything went fine in enron and so there's no lessons to learn we're in this new thing it's the information economy the business cycle is over because we have all this new information now so investors have all the information they need so we're never going to have a crash again and we also think that if things are going well if people are making money it must be because the decisions we're making at that moment are the right decisions when really it seems like what people make money off of on the stock market more than anything are these casino and enron type

situations where it's like the thing you have to do to fly close to the sun is the thing that's going to melt your wings of wax and defraud all of your workers and leave you marginally put out yes there was never any larger examination of what led to enron it was just these bad guys told a bunch of lies and then we all moved on right so the last thing i want to read is from one of these congressional committees this is one of the senators that had been in all the hearings and this is in sort of the summary report he says the evidence shows some us financial institutions in public companies have been misusing structured finance originally designed to lower financing costs and spread investment risk to carry out sham transactions that have no legitimate business

purpose and mislead investors analysts and regulators about companies activities tax obligations and true financial condition so he's basically saying the whole thing is rotten like uh-huh everything is bad everybody's full of shit conflict of interest is inherent to the sector and then they just didn't do anything isn't it funny how like there's this concept within the american rite of the elite and the idea of like the elite are like the few people who run everything and they're controlling our lives and it's terrible but somehow the idea of the elite that the actual elite is pushing is that the elite are uh people who read too much and really it's it's like no there's an elite there's an alumna whatever it's just like the

few hundred people who have all the money and pull all the strings and whose corporations and entities and regulatory bodies are all friends with each other and decide who gets justice and who doesn't yeah and that's all it is it's just that all the money is friends with all the other money yes and also you know i'm super allergic to anything that sounds like a conspiracy theory which is why i always want to read quotes from these reports to show people that like i'm not making this up this is real stuff but this is why i don't think that quote-unquote corporate greed is the lens through which to look at this it's just everyone doing what you would expect them to do if i got paid more for overlooking some things in an audit i'm probably gonna do that

i'm not greedy necessarily it's just most people want to keep their jobs and most people tell themselves stories as ways of justifying how they keep their jobs most people also are living in a society where there are extremely high incentives for keeping your job because you know that if you lose your job you could be bankrupted by cancer yeah tomorrow so it's very much like the way that organized crime also operates in terms of it's like look we will sweeten the deal for you to go along with us we will protect you we will give you a cut if you don't go with us we will interpret that as you making life harder for us and we will we will fuck up your life and also to go out with the fake note of optimism similar to yours last week mine was real i don't do fake i don't fake

optimism you can do a fake one if you want well one of the things that has stuck with me from i used to work in an anti-corruption organization and one of our guiding principles was that corruption isn't a crime of passion it's a crime of calculation right that if you only earn $30 a month as a cop like well of course you're gonna take bribes when you pull people over for speeding because you're calculating the benefits of that at way the risk everything we're talking about with enron was a crime of calculation from the auditors to the bankers to jeff skilling they were making calculations about what was going to be better for them and the optimistic thing about that is that you can change the calculations i don't think that jeff skilling is a corrupt person i think

that he was inside of a company that made it much more lucrative to commit fraud than not committing fraud and so when you change the incentives for people like auditors and sec people and wall street analysts and mid-level people that may or may not be whistleblowers when you change their incentives you can get a different outcome the problem is the erosion of incentives over the last 20 25 years where the calculation has now tipped where wrongdoing makes more sense but we can make wrongdoing make less sense we can change the incentives back as far as national projects go that seems like a pretty worthwhile one yeah let's do that yeah i'm gonna get started all right good i'll make you i'll make you at the place