"This is not a political documentary. It is a crime story. No matter what your politics, "Enron: The Smartest Guys in the Room" will make you mad. It tells the story of how Enron rose to become the seventh largest corporation in America with what was essentially a Ponzi scheme, and in its last days looted the retirement funds of its employees to buy a little more time."
There is a general impression that Enron was a good corporation that went bad. The movie argues that it was a con game almost from the start. It was "the best energy company in the world," according to its top executives Kenneth Lay and Jeffrey Skilling. At the time they made that claim, they must have known that the company was bankrupt, had been worthless for years, had inflated its profits and concealed its losses through bookkeeping practices so corrupt that the venerable Arthur Anderson accounting firm was destroyed in the aftermath.
The film shows how it happened. To keep its stock price climbing, Enron created good quarterly returns out of thin air. One accounting tactic was called "mark to market," which meant if Enron began a venture that might make $50 million 10 years from now, it could claim the $50 million as current income. In an astonishing in-house video made for employees, Skilling stars in a skit that satirizes "HFV" accounting, which he explains stands for "Hypothetical Future Value." Little did employees suspect that was more or less what the company was counting on.
Skilling and Lay were less than circumspect at times. When a New York market analyst questions Enron's profit and loss statements during a conference call, Skilling can't answer and calls him an "a-hole;" that causes bad buzz on the street. During a Q&A session with employees, Lay actually reads this question from the floor: "Are you on crack? If you are that might explain a lot of things. If you aren't, maybe you should be."
What did Enron buy and sell, actually? Electricity? Natural gas? It was hard to say. The corporation basically created a market in energy, gambled in it and manipulated it. It moved on into other futures markets, even seriously considering "trading weather." At one point, we learn, its gambling traders lost the entire company in bad trades, and covered their losses by hiding the news and producing phony profit reports that drove the share price even higher. In hindsight, Enron was a corporation devoted to maintaining a high share price at any cost. That was its real product.
The most shocking material in the film involves the fact that Enron cynically and knowingly created the phony California energy crisis. There was never a shortage of power in California. Using tape recordings of Enron traders on the phone with California power plants, the film chillingly overhears them asking plant managers to "get a little creative" in shutting down plants for "repairs." Between 30 percent and 50 percent of California's energy industry was shut down by Enron a great deal of the time, and up to 76 percent at one point, as the company drove the price of electricity higher by nine times.
The Rise and Fall of Enron: A Case Study in Corporate Fraud
Formed in 1985 by merging Houston Natural Gas and InterNorth, Enron Corporation evolved from a traditional pipeline utility into a global energy giant under Kenneth Lay and Jeffrey Skilling.
1. The Meteoric Rise (1985–2000)
Strategic Shift
In the early 1990s, Enron transitioned from transporting gas to trading it. Jeffrey Skilling pioneered the "Gas Bank," positioning Enron as an intermediary for energy, broadband, and derivatives.
Mark-to-Market (MTM) Accounting
A 1992 SEC ruling allowed Enron to use MTM accounting, enabling them to book projected future profits as current income immediately. This masked long-term project failures and inflated earnings.
Wall Street Success
By 2000, Fortune named Enron America's "Most Innovative Company." Its stock peaked at $90.56 in August 2000.
2. The Mechanics of the Fraud
To sustain its valuation, Enron used complex schemes to hide mounting debt and failed ventures.
Special Purpose Entities (SPEs): CFO Andrew Fastow established hundreds of shell companies (e.g., LJM, Raptor) to house Enron's "toxic" assets and debt.
Off-Balance Sheet Financing: These "independent" entities kept liabilities off Enron’s main financial statements, creating a false appearance of fiscal health.
"Rank and Yank" Culture: Skilling’s Performance Review System mandated firing the bottom 15–20% of staff annually. This cutthroat environment prioritized booking deals over ethics and silenced internal dissent.
3. The Collapse (2001)
The collapse was triggered by the dot-com bust and stabilizing energy prices.
August 14–15: CEO Jeffrey Skilling resigned; shortly after, VP Sherron Watkins warned Chairman Ken Lay that the company could "implode" due to accounting scandals.
October 16: Enron reported a $618 million quarterly loss and a $1.2 billion reduction in shareholder equity.
November: A bailout merger with Dynegy failed once Enron's actual debt levels were exposed.
December 2: Enron filed for Chapter 11 bankruptcy.
4. Aftermath and Legacy
Arthur Andersen: The "Big Five" accounting firm collapsed after being convicted of obstructing justice for destroying Enron documents.
Legal Consequences: Ken Lay was convicted of fraud but died before sentencing. Jeff Skilling served 12 years of a reduced 24-year sentence. Andrew Fastow served 6 years after cooperating with investigators.
Regulatory Reform: The scandal prompted the Sarbanes-Oxley Act of 2002, mandating stricter financial reporting and auditing for public companies.
Key Figure | Role | Fate |
|---|
Kenneth Lay | Founder/Chairman | Convicted; died 2006 |
Jeffrey Skilling | CEO | 12 years in prison |
Andrew Fastow | CFO | 6 years in prison |
Sherron Watkins | VP / Whistleblower | Time Person of the Year (2002) |
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