Movie Review: Enron: The Smartest Guys In the Room. A Documentary Film.
How Enron And The Governmental Institutions Designed To Prevent Frauds Like Enron Betrayed America.
Betrayal By Enron
This film received almost unanimous critical approval from ninety-six critics. Yet, on opening weekend April 22, 2005 it only earned approximately. $76000.00. Apparently the owners of multiplexes are only willing to exhibit films like Dumb and Dumber where they think the most profit lies despite the financial success of Farenheit 9/11 and Super Size Me both documentaries. This film documents, mostly with news reel footage, interviews and voice overs the last years of Enron when it went from a 65 billion dollar company to bankruptcy. Of course the 65 billion was a paper- stock market valuation bestowed by Wall Street. The truth was that the balance sheets were fraudulent. False profits were created by Jeff Skilling’s “mark to market” accounting. This allowed the company to book as present profits future hypothetical earnings on deals the company had made. Jeff Skilling, CEO, and other corporate executives would estimate these nonexistent future earnings and post them as present earnings. For example the L.A. Times reported on June 13, 2001,” In reporting record financial results for the first quarter of this year, Enron said it posted a 281% increase in revenue to $50.1 billion and a 20% increase in net income to $406 million.” The company was actually bankrupt and had been for a long time.
Andy Fastow, CFO, was an expert at getting non-profitable deals off the books and into “independent” partnerships sold by the major Wall Street Brokerage houses to their clients. The profitability of these partnerships was guaranteed by Enron stock. As long as Enron stock was appreciating it could meet its obligations. Ken Lay was the mastermind of this fraud who brought Skilling and Fastow into the company. The picture doesn’t point out that there were many eminent people on the board of directors, including at least one business professor from Stanford who stood by and said nothing while this massive fraud on the public and their own lower level employees was perpetrated. Lay in a PBS interview before the demise of the company said he believed regulation of energy had cost the energy providers about $300 billion. This wasn’t in the film for some reason but it indicates his thinking.
How The West Was Defrauded
The film touches on how Ken Lay engineered deregulation of energy markets by donating hundreds of millions of dollars to politicians on both sides of the aisle. He all but controlled The Federal Energy Regulatory Commission (FERC) which stood by and did nothing when Enron took control of energy supplies in the Western United States and was able create an artificial shortage and raise the price of energy in California so the State lost almost $30 Billion dollars to Enron. FERC is still in existence. Both President Clinton and Bush said they were powerless to intervene.
When the stock market began to decline in 2001 the Enron employees who had purchased company stock for their retirement through 401 K plans were restricted from selling that stock. At the same time senior executives like Lay, Skilling and Fastow (Lay around $300 million overall, Skilling around 100 million and Fastow around 60 million) exercised stock options on the stock they had manipulated and then in the case of Skilling and Lay they retired or distanced them selves from the company. Meanwhile a lineman from Portland Gas And Electric watched the Enron stock in his 401 K plan go from over $400,000.00 to $1200.00 when he was allowed to sell. People like Enron accountant, Sherron Watkins, noticed that the company had no positive cash flow from its day-to-day operations in fact there was a huge negative cash flow. Lay was told of this fact but chose to deny its relevance.
Lay and Fastow could not meet company obligations like retiring the “independent” partnerships because they they could no longer pump up the stock with fraudulent accounting and the whole house of cards fell. Skilling at this time had retired after previously exercising massive stock options when the stock was still viable to spend “more time with his family.”
Betrayal By The Politicians And The Bureaucrats.
Enron and a lot of other companies like Tyco, Global Crossing, Qwest, Worldcom , forced other companies like Shell and El Paso Gas to overstated their assets to increase their stock price to prevent themselves from being brought out by companies that had a fraudulently inflated their stock price like Enron.
The picture is well done and documents the massive fraud perpetrated by Enron and its executives. However it only touches on how Enron manipulated Washington and the state governments to deregulate energy while keeping in place those government regulations that protect utility companies.
Mark to market and outside partnerships didn’t develop with Lay, Fastow and Skilling. They were approved by the Security and Exchange Commission to be applicable in particular cases where they made sound accounting sense.
Also The Financial Accounting and Standards Board (FASB) had received SEC approval of such transactions in rare cases where they applied. Enron executives and others applied them and other illegal methods, like overstating the book value of the company, without restraint so they could pump and dump their stock options.
Congress in the 1990’s passed legislation to protect corporate advisors like Enron’s law firm Vinson and Elkins and their accountants Arthur Anderson from shareholders suits and, in particular class action suits, for questionable advice not rising to the level of fraud. These are the same class action remedies that hold crooks in check that President Bush has curtailed by limiting such suits. The Washington Post reported that: “The Class Action Fairness Act is designed to funnel most such lawsuits from state courts to the federal system — a procedural change that could have substantive implications, because federal courts traditionally have been less sympathetic to class-action cases waged by plaintiffs claiming they have been victimized by fraud or negligence by corporations.” Bush and Congress have set the stage for the next great fraud on the public including consumers, stockholders, borrowers, mortgagors and credit card users.
The film exposes the Enron executives for the frauds and cheats they were but it does not expose the facilitators in our federal and state governments who fail to protect the public they are elected or hired to represent. None of his elected or appointed representatives protected the PG&E lineman who lost his $400,000 retirement nest egg.
While this documentary was worth seeing it was old news and didn’t deal with the root causes of why a massive fraud like Enron was possible in the first place. Because the facilitators of the fraud sleep snugly at night be ready for the next major fraud, which will probably be in the credit area since that seems to be driving the economy now, and Bush and Congress have loosened the laws and the liabilities governing corporate activities in this area.