Sympathetic Stupid

Friday, August 05, 2005

Enron: The Smartest Guys In The Room

Another piece of MIFF. This one reminded me a lot of Outfoxed: Rupert Murdoch's War On Journalism. Slick production values, commentary on the corporate system, scary implications.

OK, so the basic Enron story is that they started out selling natural gas. Then they hired a pretty clever guy with big ideas, who helped them to realise that they could sell gas futures.

[Future: an agreement to buy or sell something at a given date for a given price. So instead of just selling the gas you mine this year, you can get money for next year's gas as well. If the price of gas goes down before you have to actually deliver the gas, you're ahead (because you would have got less otherwise). But it gets a lot more complicated than this.]

Not satisfied with this simple financial concept, this guy also got them to use mark-to-market accounting rules.

[Mark-to-market says that assets are valued at what you'd get if you sold them. All well and good. There are problems if there's no real market. What value would I get if I sold my soul? No idea. Let's call it $100m. Now I'm worth $100m. If there's no market, you need a model of what you'd probably get. But it gets a lot more complicated than this.]

They started buying and selling gas futures and started making money. Then they branched out, into power futures, into bandwidth futures, into (wait for it) weather futures. The traders became the heart of Enron; they were actually making the (fabricated) money. All the while, their accounting was becoming more and more complex. And, apparently, more and more dodgy.

And the corporate culture was rapidly reaching a lowest common denominator. They had this great process where they fired (I think) 5% of their employees every year. It was systematic. Performance evaluations would be done by peers and bosses, and those in the bottom five percent were out. I reckon this probably fixed some particular values in the heart of the company; like winning is everything.

And eventually, as everyone knows, it all fell apart. Suddenly someone realised there was very little money coming in, the share price dropped from $76 to 40c and the company filed for bankruptcy. Indictments all round. Of course the top brass cashed in their stock at the top; why not? And of course the retirement funds of all the employees completely disappeared, because it was all invested in Enron stock.

That's what happened.

The most interesting part of the movie for mine was during the California power crisis. California was having blackouts, the price of power was going up, Enron was making money. If the traders knew the price was going to go up, they could profit from it. So they started to engineer power shortages by shutting down power stations.

What they didn't seem to realise or care about was that the price of power going up hurt everyone, but of course hurt most those who could least afford it. There were recordings played in the film of Enron traders discussing the power shortages. Hoping for earthquakes, for tidal waves. These guys just didn't care. Why not?

Corporate culture? From the top down, the place was built on being smarter than everybody else. And the whole point of economics and finance, where numbers are king, is to dehumanize goods and services. Because they hired smart kids, they mainly hired nerds. Nerds aren't known for their social skills. Does that also mean they have less empathy than the average bear? Certainly, they were cool now, and would do anything they could to stay cool. We heard recordings about them being hoping to retire at 30.

It gives me a decidedly pessimistic view of human nature, just like Outfoxed did. Maybe worse, cause I can understand a few people being sociopaths willing to do anything to get ahead, but how do you end up with an enormous company full of them? Natural selection, I suppose, the periodic firings refined the workforce so they all thought alike: 'How can I get ahead?' And the management had convinced them that what's good for Enron is good for you. The stock price was posted in the elevators!

Maybe, as Maynard said, 'The only way to fix it is to flush it all away'.