Enron: The Smartest Guys in the Room Page #3

and spent one year in jail.

With his biggest moneymaker

now behind bars,

Ken Lay had a problem:

Who could he find

to make money for Enron?

Every year, every day,

every week you have to come up

with new ideas.

Ken Lay saw in Jeff Skilling

the guy who had the answer to

what the future of the natural

gas business was supposed to be.

Ken Lay is also a guy who

considers himself a visionary

and he liked other people

he thought of as visionaries.

He liked people with big ideas.

And Jeff Skilling was a person

with the biggest ideas of all.

Jeff Skilling's biggest

single idea was find

a new way to deliver energy.

Rather than be bound by the

physical flow of the pipeline,

Enron would become a kind of

stock market for natural gas.

It was a magical new idea:

Transform energy into

financial instruments

that could be traded

like stocks and bonds.

So that was the one good idea.

In 1992 using that good idea,

we became the largest buyer

and seller of natural gas

in North America.

Jeff was like the prophet.

He came in and said There's

a whole new world out there.

Forget about

this pipeline stuff,

you know the staid pipeline

in the ground and...

gas in and gas out.

We can recreate

this entire industry.

An attorney from

Vinson & Elkins,

Amanda Martin was one of

the first executives hired

by Jeff Skilling and became

part of his inner circle.

The excitement was palpable.

You cannot imagine how proud

we all were to be there.

And then, of course,

we had a leader who imbued us

with a sense of confidence that

if we were smart,

anything could be accomplished

And then the bottom line

we began to make money.

And that in and of itself,

was a re-affirmation

that this could be big.

Skilling saw the opportunity

to build an industry new

and to start a business

from scratch.

But he had

one specific condition

that had to be met

before he'd join Enron,

and it was that

he be allowed to use

a certain kind of accounting

known as mark-to-market.

Arthur Andersen signed off,

and the SEC approved it.

I remember walking in

and going 'What's going on? '

And Causey and everybody,

I mean every one was so excited

and then came the champagne

and We had got Mark-to-market

accounting treatment.

And I often think about how clear

my memory was about that event.

And that was

the beginning of a major cog

of the downfall

ultimately of Enron.

Mark-to-market

accounting allowed Enron

to book potential

future profits

on the very day

a deal was signed.

No matter how little cash

actually came in the door,

to the outside world,

Enron's profits could be...

whatever Enron said they were.

Very subjective.

And very...

it left it open to manipulation.

And they were saying

that we're going to sell

power out of this

power plant in ten years

for X dollars per kilowatt.

And there was no way

anybody could prove that

they could do it.

Well...

Hey Reg.

Good morning.

How are you?

Finally. Great.

Good to see you.

Jeff. Good to see you.

Todd, sit down.

We've been working

hard on this

and we've really pulled

out all the stops.

Look what we got.

Origination...

We did 20 million last year,

I think we can do 120 million

dollars this year.

Trading

we did 10 million last year

we think we can do

64 this year.

This is the key.

We're going to move from

mark-to-market accounting

to something

I call H, F, V

Hypothetical

Future Value accounting.

If we do that

we can add a kazillion dollars

to the bottom line.

Whoa! Jeff... alright!

That sounds fantastic.

Oh Jeff, thank you.

That's just supurb performance.

And you're going to go far,

my boy.

Probably President of

the company one day.

You think so?

I think!

He really believed that

the idea was everything.

And that when you came up

with an idea,

you should be able to book

the profits from that idea,

right away.

Because otherwise some lesser

man was taking the profits

from the idea

that some greater man

had come up with in the past.

When Jeff Skilling applied to

Harvard Business School,

the professor asked him

if he was smart.

He replied,

'I'm f***ing smart. '

One of his favorite books

was The Selfish Gene,

about the ways human nature

is steered by greed

and competition in the service

of passing on our genes.

At Enron.

Skilling wanted to set free

the basic instincts

of survival of the fittest.

Jeff had a very Darwinian

view of how the world worked.

He was famous for saying once

in Enron's early years,

that money was the only thing

that motivated people.

Skilling's notion of

how the world should work

really trickled down,

and affected everything

about how Enron did business.

He instituted the system

know as the PRC,

or Perfomance Review Committee.

It required that people be

graded from a one to a five.

And roughly ten percent of

people had to be a five.

And those people were

supposed to be fired.

Hence, this came to be know

as 'Rank and Yank. '

I, personally, am convinced

that the PRC process

is the most important process

that we conduct as a company.

I've never heard of

a company yet

that would be successful

terminating 15 percent

of their people every year...

just to satisfy the fact

that the other employees

had to vote on them.

And so when you're being

evaluated by that group,

you are getting direct

communication from Ken and me

about what the objectives

of the company are

and how you fit

with those objectives.

It was a brutal process.

The ability for

a 25 year old to go in

and to be reviewed

and to be superior...

and as a consequence get

a five million dollar bonus.

I don't think that's

repeated in many places

in corporate America.

Our culture is a tough culture.

It is a very aggressive culture.

At Enron,

no one was more aggressive

than the traders.

If I'm on the way to

my boss's office

talking about my compensation.

And if I step on somebody's

throat on the way

that doubles it?

Well, I'll stomp

on the guy's throat.

You know,

that that's how people were.

On the trading side

we got to be the biggest,

baddest house in town.

And by necessity,

if you wanted to be

in the market,

you had to deal with Enron.

Enron's traders were like the

super powerful high school

clique that even the principal

doesn't dare to reign in.

They had become

the major engine of

at least reported profits

at the company.

They took Jeff Skilling and

Ken Lay's belief in free markets

and turned it into an ideology.

But they pitch it almost

as a new economic religion.

Enron on-line will

change the markets

for many many commodities.

It is creating an open

transparent marketplace

that replaces the dark

blind system that existed.

It is real simple.

You turn on your computer

and it's right there.

That's our vision.

We're trying to

change the world.

I think Jeff Skilling

had a desperate

need to believe

that Enron was a success.

I think he identified

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