Enron: The Smartest Guys in the Room Page #6

Enron into cyberspace.

We're now in

the process of seeing

if we can create

a bandwidth trading market.

Enron is using its

knowledge of trading gas

to barter other forms of

energy even space

on the information superhighway

called bandwidth.

Ken Rice has worked at Enron

for twenty years.

Enron has found a way to

stay ahead of the curve.

From 7 PM to 7 AM

we're paying for bandwith that

we are not using. Why?

Why?

One of our themes around here

is to always be asking why.

Why something's

done a certain way

or why it's not done

a different way.

There's our market.

Why can't we sell the

bandwidth to other companies?

Make it a commodity

like a pork belly

Just last week Enron

captivated Wall Street

with its bold move

into broadband,

teaming up with Blockbuster to

deliver movies on demand.

It was like being

at a religious cult meeting.

People started jumping up

from their seats,

with their cell phones

and their Blackberrys,

running out to the halls

to call their bosses.

One analyst summed up

his recommendation

to investors in one word

Wow! Enron's stock soared

34 percent in two days.

And you can tell from

the response of the stock market

that they like the strategy.

It makes sense.

They announced that they had

developed the technology.

It would be in test markets

by the end of the year.

And the technology works.

The quality is great

and the customers like this,

so we've made a lot of progress.

The truth was that Enron

was just struggling

with the technology

for video on demand.

The technology didn't work

and the deal with

Blockbuster soon collapsed.

But with the magic of

mark-to-market Enron

used future projections to book

$53 million in earnings

on a deal that

didn't make a penny.

By the end of the year 2000,

Enron was running

out of ways to make

the broadband business

look successful.

They'd tried every trick

in the bag to try to create

the illusion of a business

where there was none,

and the people who were working

there were getting

increasingly desperate.

The executives started

selling their stock.

By Enron's collapse,

Ken Rice had sold 53 million.

Ken Lay had sold 300 million.

Cliff Baxter 35 million.

Jeff Skilling 200 million.

As the fraud is perpetuated,

all the various lies

and artifices

begin to convince

the ringmaster,

if you will, himself

that it's thi

own bizarre reality.

That in fact,

the fraud is the reality.

The perception is the reality.

As long as you can keep

the perception going on,

it really isn't fraud.

You spoke about

bandwidth trading,

what about weather

options or futures?

How is that market developing?

Yeah, we have

a market in weather.

When Enron announced its

latest plan to trade weather,

people wondered whether

it was good science

or science fiction.

Do the weather guys

get punished here

if the weather is wrong?

I mean they predict wrong?

I don't know, do you have any

whip marks on your back there?

Well, it's unfortunate.

That's a good call.

Jeff, as time went on,

had a harder time

admitting things were wrong.

And I have to believe that,

you know, when the lights

went out at night,

he knew what was coming.

I would liken it

to the Titanic,

when you've got

a captain who's saying,

'maintain full speed'

and they bump into

a couple of icebergs,

and then they still

keep full speed going.

The captain of this ship,

Enron,

he ignored

all the warning signs.

And there were plenty of them.

And the captain

of the ship was?

Kenneth Lay

It was one of the bloodiest

days in Wall Street history.

Shares plummeted

thirty one percent.

High tech stocks led

Friday's fierce sell-off

This is really

a great wake-up call.

Millions of nervous

investors following

the huge drop on Friday.

The Dow Jones

Enron was especially

a big deal by the end

of the year 2000

because by then,

most Internet companies had

already begun to fall,

and everybody on Wall Street was

looking for the next big thing.

And here you had Enron,

which appeared to be

this shining star

of a new-economy company.

Its stock price went up

90 percent in the year 2000,

and had gone up over 50 percent

the year before that.

It was an it' stock

on Wall Street

one of those companies

that can seemingly do no wrong.

We were the poster child

for the new economy.

We had this culture

that had a lot of focus on

reminding us how good we were.

And as that culture emerged,

then we get to Fortune

magazine telling us

we were the most innovative

corporation in America.

Then we really began to

feel good about ourselves.

Well, you all did it again.

Enron was just

recently chosen, again,

for the sixth year in a row

in the

most-admired-company survey

by Fortune magazine as the most

innovative company in America.

Well deserved. Well deserved.

The sales pitch

still sounded good.

But one investor saw something

in Enron's numbers

that the stock

analysts had missed.

By and large,

the analysts admitted to us,

in person, 'it's a black box.

You have to take it on faith.

'Who knows where

the earnings come from?

They just pop out.

And all we know is,

they're always good. '

And I kept pointing out, well,

yeah, isn't that

the whole point of...

if the black box is

there to fool you,

the numbers are always

going to be good,

until they're not.

I'm not a beat reporter,

so I would have had no reason

to look at Enron.

But Jim Chanos mentioned to me

that I should take a closer

look at Enron's

financial statements.

And it wasn't clear from Enron's

financial statements that

there was fraud here.

But what was clear is that

something didn't add up.

In March 2001, Bethany Mclean,

a reporter

with Fortune magazine,

first raised questions about

Enron's financial condition.

She asked a simple question

in the article that no one

could seem to answer,

'how exactly does

Enron make its money? '

You got very upset with her,

didn't you?

I very specifically remember

the telephone conversation

that I had with...

the Fortune reporter.

She called up and started

asking some very,

very specific questions about

accounting treatment on things.

I am not an accountant.

And I could not answer them.

He became really,

really agitated.

He said that people who

raise questions like this

were just trying to throw

rocks at the company.

And that I was not ethical

because I hadn't done

enough homework.

And if I had done

enough homework,

I would understand how off-base

my questions were.

Mr. Skilling, it appears as

if you were trying to

bully someone

who was asking very basic

questions about Enron.

I said... said to her

I have got six minutes left

before I have to be

in a meeting.

And I can't get

into the details.

And I'm not an accountant. '

And she said,

'well, that's fine.

We're going to do

the article anyway. '

And I said, 'if you do that,

I personally think

that's unethical. '

And then the next day...

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