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The Smartest Guys in the Room
The Amazing Rise and Scandalous Fall of Enron
Bethany McLean
read on December 1, 2010

The most striking note to me about this biography of the Enron collapse is how so many brilliant people can have such a startlingly short sighted view with their management of the company. At every possible turn, Enron's managers decided to maximize short term accounting profits instead of long term cash flows. 

I understand management's need to meet/beat earnings expectations, and to some degree I'm sure earnings management is a consideration at all public companies. But Enron took it to such an extreme that the real story is how they got away internally for so long. And it isn't that they necessarily ever did anything illegal - just the sum of their actions and intentions were so fraudulent that they had to be convicted of something.

“People did not know the difference between mark to market earnings and cash” says a former trader. “No one ever talked to me about cash, says another. It wasn’t on our annual review or included in our targets. It had nothing to do with how we were measured for our bonus. It was nothing we were paid for, so who cares?” He adds, “I knew we had no cash and that our earnings were susceptible to manipulation. This is a game. I know that, everyone knows that. But it was a game we were winning!”

Frankly though, the book was relatively kind to a lot of the management. It didn't judge Skilling (CEO) or Lay (Founder/Chairman) too harshly. In fact, it left open the possibility that they were ignorant to the whole thing. It was clear that they shouldn't have been, but better to be ignorant than willfully fraudulent.

The most inspiring takeaway from the book is that it's such a shining example that everyone can still be wrong. The financial press loved Enron. Hardly anyone had anything negative to say about it. Hell, their bonds were investment grade just days before the bankruptcy. (Not sure if that's a fair measurement though, since bonds downgrades often are what send you straight to BK). Anyway, everyone thought everything was peachy, which I love. Just shows that markets really aren't that efficient, and that great opportunities are there for folks that do their homework.

Author Bio:

McLean grew up in Hibbing, Minnesota and received her BA in English and mathematics at Williams College in 1992. After college and prior to joining Fortune, she worked as an investment banking analyst for Goldman Sachs. McLean joined Vanity Fair as a contributing editor in 2008. She joined Slate as a contributor to the Moneybox column in 2010. McLean married Chris Wilford in 2000. They divorced in 2006. In May 2008, McLean married Sean Berkowitz, a partner with the law firm, Latham & Watkins. Berkowitz is the former Director of the Enron Task Force; they met through their mutual connection to that case. They currently reside in Chicago with their two young children.