Enron, every mention
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tap a year for its mentions
every year anyone David Rosenthal 204Ben Gilbert 153Packy McCormick 3
Verbatim, from the transcripts: the passages where Enron comes up
Holiday Special 2022 · Acquired
- ▶ 18:13 Ben Gilbert Indirectly draw as many parallels as we can.
- ▶ 18:34 David Rosenthal
- ▶ 40:03 Ben Gilbert Enron kind of talked about it.
- ▶ 40:13 Ben Gilbert On the Enron one, I neglected to point out that there is a company today called Enron Oil and Gas that's like an eighty billion dollar company publicly traded as EOG.
- ▶ 40:37 Ben Gilbert And I think EOG is sort of their upstream business that spun off, but it is a publicly traded company that still bears the Enron name.
- ▶ 1:01:38 David Rosenthal And so thus, the subsequent episodes, Benchmark, Enron.
- ▶ 1:01:49 Ben Gilbert And then Enron now is charting to look pretty similar to Amazon.
- ▶ 1:20:37 David Rosenthal Is it an Enron or a NVIDIA?
- ▶ 1:20:41 David Rosenthal I suspect, without having done any research, I suspect more of an Enron.
Enron · Acquired
- ▶ 1:23 Ben Gilbert Today, we tell the story of Enron.
- ▶ 1:26 Ben Gilbert It was the seventh biggest company in America by market cap.
- ▶ 1:30 Ben Gilbert It was heralded as the pioneer of a new business model during a new technology era.
- ▶ 1:42 Ben Gilbert It had the Houston Astros baseball stadium, Enron Field, bearing its name.
- ▶ 1:47 Ben Gilbert It was even named Fortune Magazine's most innovative company six years in a row.
- ▶ 1:53 David Rosenthal Including in 2001, the year it went bankrupt.
- ▶ 1:57 Ben Gilbert Less than a year after its stock hit an all-time high, Enron filed for the largest bankruptcy in American history to that point.
- ▶ 2:27 Ben Gilbert The biggest difference really is that somehow Enron managed to do it all as a public company in plain daylight the entire time and with much bigger dollar amounts.
- ▶ 3:00 David Rosenthal You guys should do Enron.
- ▶ 6:09 David Rosenthal Oh, I've got a fun little thing that I'll bring up right at the end of the episode about investing in Enron that blew my mind when I learned this.
- ▶ 6:27 David Rosenthal This is gonna be fun because this is such history now, Enron, and, um, there are many really good books out there.
- ▶ 6:46 David Rosenthal It is a very, very well researched history of Enron, and I thought a good place to start is right at the end of the prologue of Conspiracy of Fools.
- ▶ 6:57 David Rosenthal Kurt Eichenwald writes this, and I just thought it was so perfect to frame the Enron story and the FTX story today.
- ▶ 7:48 Ben Gilbert After trying to consume an insane amount of Enron stuff over the last couple weeks, the thing that occurs to me is this is something that can only occur to this height in a bull market, where there's so much capital saturating so many…
- ▶ 8:44 Ben Gilbert And where did Enron come from?
- ▶ 8:46 David Rosenthal Where did Enron come from?
- ▶ 17:25 David Rosenthal This is not the last time we're gonna hear something to this effect in people's personal lives in the Enron story.
- ▶ 25:59 Ben Gilbert So this is sort of the first example of someone in Enron land getting the better part of an economic deal, even though on the other side of the deal there's a real hard asset
- ▶ 26:45 David Rosenthal No Enron.
- ▶ 32:48 David Rosenthal A few years later, Paul Rand would design the Enron logo.
- ▶ 33:06 David Rosenthal Like, you think the IBM logo, or if you know the Next logo, you know, Steve Jobs is Next, like, at the Enron logo.
- ▶ 33:24 David Rosenthal Enron would be the last logo he designed before he died.
- ▶ 33:36 David Rosenthal They want to name it Enteron.
- ▶ 34:00 David Rosenthal Enteron.
- ▶ 34:49 David Rosenthal and we shorten it to Enron?
- ▶ 35:03 David Rosenthal Enron, future looking, you know, it's his baby.
- ▶ 35:51 David Rosenthal So, two traders at the new Enron, who are actually based in New York, they start embezzling money from the company.
- ▶ 36:18 David Rosenthal So the company picks up on this.
- ▶ 36:22 David Rosenthal And, uh, you know, everybody recommends the company's auditors at Arthur Anderson, you know, recommended the board.
- ▶ 36:33 David Rosenthal They recommend that Lay and the company should fire these guys.
- ▶ 36:36 David Rosenthal Obviously, they're stealing from the company, they're falsifying trades, and Lay's like, well, you know, these guys, it's really bad.
- ▶ 36:53 David Rosenthal You know, they've really made a lot of money for the firm.
- ▶ 37:34 David Rosenthal One B, that's a B, a billion dollars, this is in the late eighties, of trading losses, which that would be enough to bring down the whole firm.
- ▶ 37:44 Ben Gilbert Well, and you gotta think, the enterprise value of the combined company, I don't have it in front of me, but you had a, I don't know, five-ish billion dollar company by a two and a half-ish billion dollar company, and so, you know, whole…
- ▶ 38:02 David Rosenthal This time, Lei does fire them, and fortunately for Young and Ron and for Lei, but unfortunately for the rest of the world, this happens early enough in the quarter that the trading floor is able to dig out enough of these losses that they…
- ▶ 38:25 David Rosenthal So the company miraculously survives.
- ▶ 39:54 David Rosenthal For this very thing, the new finance and trading operations of Enron.
- ▶ 40:11 David Rosenthal What if Enron goes one step further from Lay's kind of original innovation of creating a spot market for energy,
- ▶ 40:20 David Rosenthal And rather than just being sort of the facilitator of the market, being the pipeline in the middle, what if Enron started acting even more like an investment bank in this industry?
- ▶ 40:32 David Rosenthal And the phrase that he uses for this idea is Enron becoming a, quote, bank for gas.
- ▶ 40:53 David Rosenthal But rather than Enron then being the customer for what's going to come out of those wells, they repackage everything here.
- ▶ 42:08 Ben Gilbert Early legitimate use case for this is imagine you are a local utility who's trying to provide natural gas to your town and, you know, you've been using this great spot market that Enron stood up to figure out, you know, what's the price…
- ▶ 42:47 Ben Gilbert So that's like a super legitimate use case of one of these futures contracts that they could trade using Enron.
- ▶ 42:56 David Rosenthal So, Enron does it.
- ▶ 43:07 David Rosenthal Uh, Skilling and Enron invent it and pioneer it.
- ▶ 44:46 David Rosenthal And as part of financing that, Enron is gonna lock up the rights to then securitize the future production out of your assets.
- ▶ 45:43 David Rosenthal So, 1990, now we're a couple years into the Lay Enron era, and Lay and the vice chairman of the company, a guy named Rich Kinder, who later would leave Enron before all the dirt hits the fan and start Kinder Morgan.
- ▶ 46:19 David Rosenthal They think this is a big idea and this is the future of Enron.
- ▶ 46:21 David Rosenthal They work on convincing Skilling to leave McKinsey and come over and join Enron as the full-time CEO of this new gas bank that they're going to call the Enron Finance Division.
- ▶ 47:24 Ben Gilbert It was that Jeff Skilling insisted that in order to join Enron and start this new division, Ken Lay and the board had to agree to use mark-to-market accounting.
- ▶ 47:59 Ben Gilbert About joining the company.
- ▶ 48:11 David Rosenthal It ends up taking a while for Enron to be able to implement this that we'll get into, but go for it.
- ▶ 49:38 Ben Gilbert But it is worth pointing out that Enron, when they did adopt this, became the very first non-financial company to use this method.
- ▶ 50:31 David Rosenthal Skilling, I guess, after this lay his body on the tracks moment in the delivery room at the hospital, he comes in, he joins Enron, running the new Enron finance division, where he's CEO of the division.
- ▶ 50:41 David Rosenthal He gets a big equity stake in the company tied to the performance of his division.
- ▶ 50:55 David Rosenthal He starts building out big trading floors in the Enron office in Houston, you know, wants to have this be just like Wall Street, you know, here in Houston.
- ▶ 51:14 David Rosenthal From the outside what this guy actually did at Enron, but this guy named Lou Pie, who already was at Enron, but this guy.
- ▶ 51:36 David Rosenthal So Lou, like I said, nobody could ever actually figure out from the outside what he does at Enron.
- ▶ 52:50 Ben Gilbert That's the type of people that they're hiring to make money both for Enron and for themselves.
- ▶ 53:12 David Rosenthal He ends up leaving Enron well before the fall, and he sells his stock to finance the divorce for a quarter billion dollars.
- ▶ 53:38 Ben Gilbert Other than a few people who go on to, like, build real value after this by creating real businesses, he's the one who economically benefited the most of any of the Enron people.
- ▶ 54:21 David Rosenthal When Skilling is recruiting him to come in and run structured finance at Enron, he talks with him, he hears about his experience, and he's like,
- ▶ 55:14 David Rosenthal The primary thing that they're doing is they're packaging up these financing deals that Enron had started doing for the producers, for the drillers.
- ▶ 55:31 David Rosenthal They don't really want those assets on the Enron books, and so they devise this scheme that they become acquainted with through Arthur Anderson, through the accountants and auditors, of using special purpose entities to package up these…
- ▶ 56:59 Ben Gilbert Until Sarbanes-Oxley passed in 2002, because of this scandal, and some other scandals, but largely because of Enron, we just existed in a system where all of this was exploitable and just waiting for someone who
- ▶ 57:29 Ben Gilbert Imagine these things are like hugely loss making, but you're trying to go tell equity investors, people who own the Enron stock, how great your company is.
- ▶ 57:43 David Rosenthal Enron doesn't care about the quality of the assets or projects that it's investing in with these producers.
- ▶ 57:55 David Rosenthal Enron doesn't actually care if they're well run or they're going to make money or the valuations make sense.
- ▶ 58:12 Ben Gilbert I'm Enron.
- ▶ 58:13 Ben Gilbert I make a crap investment in your oil production project, and I say, I want you to exclusively trade the financial derivatives around all the natural gas flowing out of your production facility through Enron, and you say, okay, and I say,…
- ▶ 58:53 Ben Gilbert and I can agree that this deal that we're signing is a ludicrously valuable deal for me and Ron.
- ▶ 59:55 David Rosenthal Despite Skilling apparently laying himself on the tracks about this being non-negotiable about coming in, it wasn't like Enron could just say and Skilling could just say,
- ▶ 1:01:12 Ben Gilbert This is the only instance where you have someone who is complicit in allowing Enron to run the playbook that they did who doesn't have a conflict of interest.
- ▶ 1:01:49 David Rosenthal It's not just that Enron is a big audit client for them.
- ▶ 1:02:29 David Rosenthal Enron became Anderson's biggest client in the world.
- ▶ 1:02:32 David Rosenthal They were making fifty million dollars a year from Enron, half of which was audit and tax fees and half of which was consulting fees.
- ▶ 1:02:41 David Rosenthal At any point in time, Enron could just, maybe it'd be hard for them to switch their auditors, but they could switch their consultants at the drop of a hat.
- ▶ 1:02:59 David Rosenthal Okay, so miraculously for the evil guys at Enron, this gets through the SEC.
- ▶ 1:03:04 David Rosenthal Now, we've explained a little bit thus far about how good mark-to-market accounting can be for Enron.
- ▶ 1:03:36 David Rosenthal and then I and Ron will recognize as revenue today my projected cash flows based on this Excel spreadsheet for the next 20 years.
- ▶ 1:05:11 David Rosenthal Okay, so that's part one of why market to market accounting is just this bonanza for Enron.
- ▶ 1:05:24 David Rosenthal And they're offloading, they're selling, quote unquote selling, these assets that Enron doesn't really want on his books.
- ▶ 1:05:35 David Rosenthal Because those are also transactions, Enron now gets to book those essentially phony sales as revenue.
- ▶ 1:08:09 David Rosenthal Enron's incentivized to pump the numbers to book more revenue, even though they're paying for the deals.
- ▶ 1:09:23 David Rosenthal To over a hundred billion in the year 2000, and every year during that period from 96 through 2001, the company would go bankrupt at the end of 2001.
- ▶ 1:09:53 David Rosenthal So, um, back to the mid nineties on the back of all of these huge wins, this transformation of the company, Skilling gets promoted from just being head of the Enron finance division to president and COO of the entire company.
- ▶ 1:10:26 David Rosenthal He goes from being like a jack-of-all-trades, kind of like mid-level executive in the finance division, to the CFO of the entire company.
- ▶ 1:11:28 Ben Gilbert Everybody who ever bought Enron stock saw it going up, so they wanted to continue to see it going up.
- ▶ 1:11:34 Ben Gilbert These deals, you know, Enron's flying around doing deals.
- ▶ 1:12:00 David Rosenthal So what does Enron do?
- ▶ 1:13:06 David Rosenthal But Enron Books,
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