Three and a half years after the dazzling self-immolation of Enron, former CEOs Ken Lay and Jeff Skilling are still waiting for their criminal trial to begin. Therefore, technically speaking, we don't yet know if they are guilty of the charges of conspiracy and fraud that have been brought against them.
Which is not to say we don't know anything. Enough books have been published about what went down at Enron to warrant their own publishing imprint. Lay, Skilling and all the rest of Enron's hapless gang of latter-day robber barons are practically household names by now, and we've all got our pet theories about their complicity in one of the biggest business disasters of all time.
We know that, for example, for a couple of guys who were supposed to be really, really smart, Lay and Skilling were astoundingly bad at their jobs. It takes a not inconsiderable level of incompetence to destroy a company the size of Enron -- at its height in 2000, the seventh-largest corporation in the United States, with 19,000 employees and reported revenues of $100.8 billion.
We also know that Andrew Fastow, the man hand-picked by Skilling to be Enron's chief financial officer, was a major-league scammer, a man who managed to pocket some $60 million while setting up deals between Enron and special partnerships that he ran. For his sins, Fastow has been sentenced to 10 years on counts of conspiracy to commit wire and securities fraud.
And we have a pretty good idea, although this is still disputed in some quarters, that combining deregulation with lack of oversight in the realm of complex financial "instruments" is kind of goofy. As recently as 15 years ago it would have been much more difficult for a company to pull off the kind of smoke-and-mirrors shenanigans that Enron specialized in. But a combination of relaxed controls, set in motion by both Republican and Democratic administrations, along with the development of dramatically more complicated "risk management" financial tools, created new possibilities for mayhem.
But for all that we know, we still haven't a clue as to whether Lay or Skilling will go to jail, and that's a pretty big piece of the puzzle to be missing. Because without the resolution of their fates, it's impossible to get closure on what the story of Enron means. Was this just a case of Texas-size venality in which one really bad apple -- Fastow -- ran amok while no one else minded the store? Or is it something more complex? Ken Lay was feted in the White House and considered a leading apostle of deregulatory dogma. Jeff Skilling was supposed to be one of the most brilliant businessmen of his generation, a man who left smashed paradigms in his wake wherever he traveled. It is tempting to argue that for them to fail so utterly is an indictment, not just of their management skills, but of their ideology.
Of course, there's always the possibility that Lay and Skilling get off scot-free, having nailed Fastow as their fall guy. But it's for such cases that we have books like "Conspiracy of Fools: A True Story," a 742-page tome from New York Times reporter Kurt Eichenwald that is the latest entry in the Enron publishing sweepstakes. The judgment of a court of law is one thing. The judgment of history is another, and Eichenwald's account will be part of that deliberation. "Conspiracy of Fools" is a big Enron book. Out of all the Enron books so far, including the one that currently holds pride of place, Bethany McLean and Peter Elkind's "The Smartest Guys in the Room," "Conspiracy of Fools" appears to be based upon the most painstaking research, the most interviews, the most poring over legal filings and transcripts and scheduling calendars.
There's a lot to like about "Conspiracy of Fools." It has an encyclopedic sense of completeness -- as a reader, you feel every bit of evidence has been weighed, every stone turned over, every effort made to find out what really happened. Yet, even given all the attention to detail, the book is an easy, page-turning read. Eichenwald structures his narrative as a scene-by-scene cinematic thriller. Readers are placed directly inside the company's boardrooms, listening in on cellphone conversations, watching as executives hit the reply button on their e-mail programs. The last several hundred pages, a minute-by-minute account of an imploding company, is a riveting slice of business journalism that bursts with chaos, adrenaline and despair.
But Eichenwald makes choices in "Conspiracy of Fools" that can be questioned. The words "A True Story" are emblazoned on the cover, but the book is written like a novel. Virtually every page includes reconstructed dialogue, provided to the author by participants of the conversations involved, but often the source is unattributed, despite 40 pages of footnotes, since, as Eichenwald notes, nearly everyone who agreed to be interviewed did so on the condition that their names not be used. These are not verbatim quotes. There is no reason to disbelieve their essential truth -- and Eichenwald notes that he did not reconstruct any dialogue that has any of the principals saying anything "incriminating" -- but in conjunction with the bold title claim, the technique seems a bit iffy.
More important, for all the time the reader spends lurking in the hallways and conference rooms of Enron, one finishes the book feeling a little confused as to how the company's story fits into the larger narratives of high finance, the energy industry and political battles over deregulation. What does it all mean? Was Enron a stand-alone rogue, or merely the most out-of-control player in a world gone mad? That question is never answered; it is never even asked.
And as for the question that may or may not be decided in a court of law next January: Were Lay and Skilling guilty of more than just being fools? If we are to believe Eichenwald, Ken Lay is basically a good guy who trusted the wrong people, and who didn't really know what was going on at his own company while he was busy hobnobbing with George W. and other political leaders. Jeff Skilling comes off as a bit more diabolical, and more than a tad unstable. He is clearly morally responsible for Fastow's sins, and, more than anyone else, responsible for creating an anything-goes atmosphere at Enron. But is he legally complicit in Fastow's crimes? It is impossible to say from the record presented in "Conspiracy of Fools." Eichenwald even presents Skilling's abrupt departure from his CEO position, just a few months before all hell broke loose, exactly according to Skilling's own explanation: He wanted to spend more time with his family, and he was perturbed by a declining stock price.
By the end, only one conclusion is really clear: Andrew Fastow, "the really shitty CFO," is the man who destroyed Enron.
But was it really that simple?
On the very first page of "Conspiracy of Fools" we are placed directly inside the head of Ken Lay. He's driving to work on the day that he is finally forced to fire Andrew Fastow. He's frustrated by the negative coverage Enron has been getting from the Wall Street Journal. Eichenwald tells us what Lay is thinking: "They just don't understand."
Later that day we get a direct description of Lay, during a conversation with Fastow, who wants to negotiate his severance deal immediately: "Lay almost recoiled in disgust."
We are not told, however, the source of that description. But given that there are only two people in the room for the conversation, the choices are limited. It has to be Fastow, or Lay, or someone close to Lay who recounts the scene to Eichenwald secondhand.
Chances are, it's not Fastow. Most of the scenes involving Fastow do not appear to be told from his point of view, unless he has a habit of describing himself as "oozing with contempt." In this case, it's got to be Lay, or someone in Lay's camp.
But could anything be more predictable in the wake of the disasters that hit Enron that the knives would be out for Andrew Fastow? Doesn't Lay have an incentive to make him look as bad as possible? Doesn't Skilling? In a story as filled with accusations of misconduct, criminality and incompetence as Enron's, we have a responsibility to investigate the agenda of each person who makes a particular charge. But if we don't know the source, then how are we to make an informed appraisal?
There is little question that Fastow was the prime architect of the "structured finance" deals and famous "special purpose entities" that allowed Enron to move debt and badly performing assets off its balance sheet and pump up its earnings statements. His guilt is undeniable, and if even 10 percent of the things his co-workers say about him, on or off the record, are true, then he was also a pretty lousy person.
"Conspiracy of Fools" is an indispensable addition to the Enron bookshelf if only because it gives the most detailed description yet of how Fastow went about his schemes, how he navigated his way through the day-to-day flow of office politics. Again and again, we see how he duped his colleagues and foiled his critics. There's a paradoxical duality at play: We are told, on the one hand, that he was an incompetent manager, that he didn't appear to know all that much about Enron's businesses or some of the more complicated aspects of high finance, and yet he is the mastermind of an incredibly complex accounting scheme involving state-of-the-art risk-management strategies that boggle the comprehension of even the most experienced financial analysts and reporters.
But Fastow is also an easy, and safe, target to pin all the blame on. After all, it's already been established, in a court of law, that he is a criminal.
The oddest thing about "Conspiracy of Fools" is how Skilling and Lay come off. Let's postulate, for argument's sake, that Eichenwald has it all absolutely correct, that he has nailed the story. If so, we are presented with the picture of a CEO, Ken Lay, who for years and years basically did not know what was going on at his own company. This was a man who at one time was offered the CEO job at AT&T and, near the end of his tenure at Enron, was negotiating for a position at the leveraged buyout giant KK&R. He is publicly perceived to be one of the most successful CEOs in the country -- a confidant of presidents and an advisor on federal energy policy. He stood right at the heart of the Texas energy-and-politics vortex that not only runs the United States, but dominates the entire world! And yet, judging by the record in "Conspiracy of Fools," he didn't do all that much. He's a genial, devout good old boy from Missouri who has a great poker face but isn't what you'd call a details guy. His own employees are described as disheartened when Skilling, Lay's successor as CEO, quits unexpectedly and forces Lay to return. They are worried that he no longer has what it takes to run Enron, that the company has "passed him by."
If he's guilty of anything, then, it seems he's guilty of just not being a very good CEO, something that could well work in his favor during his trial. He just didn't know what was going on, just as WorldCom's Bernie Ebbers claims to have no clue about what his own CFO, Scott Sullivan, was up to. You've got to love American CEOs -- compensated more for their labor than just about any other beings on the planet, yet somehow not responsible when it all falls apart. (On Tuesday, Ebbers was found guilty on all nine counts involving WorldCom's accoutning fraud.)
But what about Skilling? If there's one thing that everyone seems to agree on about Skilling, it is that he is brilliant, the smartest of the smart guys, the man who conjures whole new trading markets out of thin air, who invents new businesses, who transformed Enron from a pipeline company that actually moved gas back and forth from place to place, into a high-flying derivatives trader that operated at the cutting edge of newfangled high finance. Fastow, we are told again and again, via the reconstructed quotes of his sniping co-workers, didn't really understand what he was doing. But not Skilling. The more complex, the better!
So how did someone so smart not realize that the deals his protégé was setting up were inherently flawed?
That is one of the central questions in the mystery of Enron. In August 2001, Jeff Skilling resigned as CEO, just months after taking over the job from Lay. Less than six months later, Enron declared bankruptcy. Did Skilling know the house of cards was about to fall apart? Was he abandoning a sinking ship?
His position is adamant: He had no idea. He first cited personal reasons for his departure, and then, in an interview with a WSJ reporter, attributed the stress of a falling stock price as a primary reason.
Eichenwald, again, presents this at face value: Skilling was burned out, wanted to spend more time with his family, was bummed that he couldn't get the stock price to go up, and skedaddled. He was as surprised as anyone when the whole thing went up in smoke.
Except that he's the one guy who should have been most aware of how dangerous a falling stock price was to Enron.
Why did Enron crash? How did a company almost universally perceived as one of the best run, most innovative, most profitable operations in the world collapse so suddenly? It's a question that has almost as many answers as there are books about Enron.
From a journalistic standpoint, one of the most impressive aspects of the story is the role the press played. If there's any lesson to be taken from the story of Enron, it's to never underestimate the power of negative stories in Fortune and the Wall Street Journal. Financial markets get spooked easily, and once the media turned against Enron, the company was effectively doomed.
But even the best reporters can't bring down a Fortune 50 company without help. And the most popular answer explaining Enron's demise is that it wasn't actually making money -- that it was all a sham, that a combination of flawed accounting schemes and outright fraud covered up for the fact that the company made a series of very bad business decisions over the years, and eventually all the mistakes caught up with it. Enron spent billions purchasing and building power plants all over the world that never earned out. It made an ambitious foray into the water business that proved to be a financial disaster. It had no internal controls on expenses -- or even any clear idea of how much it was spending, or how much it owed, on a given day.
From this perspective, Enron's collapse was inevitable -- the only mystery is how long it managed to pull the wool over everyone's eyes.
But there is an opposing view. At least one account of the business disasters of the turn of the century, Frank Partnoy's brilliant "Infectious Greed," argues that Enron's energy derivatives business, its buying, selling and trading of complex contracts to deliver electricity and natural gas, was hugely profitable. In Partnoy's view, Enron was the victim of a Wall Street panic, abetted by terrible leadership. If the company's managers had actually known how profitable their core business was, he argues, they could have avoided bankruptcy.
Partnoy's take is intriguing, but moot. And no matter how profitable Enron's derivatives business was, Enron's love for such complex financial instruments also played a huge role in its downfall. Which is why Jeff Skilling's concern about the stock price seems, in retrospect, so damning.
A derivative is a contract whose value is tied to another asset. Derivatives include options and future contracts -- commitments to buy a certain commodity at a certain time at a certain price -- and they get only more complicated from there. Enron was a major derivatives player. It traded energy derivatives, derivatives based on the weather, derivatives meant to insure against bankruptcy. In fact, by the time of its collapse, Enron was no longer a pipeline company, or even really an energy production company. It was primarily a derivatives trader.
But Enron didn't just trade derivatives with other companies. It engaged in such dealing with its own self. The "special purpose entities" that Fastow set up were basically derivatives deals. Enron would set up a partnership to buy Enron assets, and then it would loan that partnership the money to buy those assets, in some cases guaranteeing the loan with Enron's own stock. So if the value of the asset -- a power plant, an Internet bandwidth provider, etc. -- fell, Enron would make up the difference with its own stock. The variety of ways in which these deals were structured was endless -- a tribute to Fastow's creative imagination -- but the bottom line was often the same. As long as Enron stock price continued to rise, everything would be fine. But if Enron's stock price fell, the whole scheme would fall apart. Enron would be on the hook.
It seems inconceivable that Skilling did not know this. Perhaps he was unaware, as he maintains, of how much Fastow stood to profit from the deals he was setting up. And maybe we can give him the benefit of the doubt that he didn't know the full extent of the structure of some of the more questionable partnerships. In any event, it's likely that he considered Fastow's deals perfectly legal. As Eichenwald notes, he stressed, again and again, that he had done nothing "wrong." But it seems baffling that someone as smart as Skilling, someone who had personally been the leader in the transformation of Enron from a pipeline company to a derivatives trader, did not understand that the deals his golden boy was setting up would threaten disaster if Enron's stock price plummeted, or even worse, if its credit rating was downgraded.
Was his decision to abandon ship criminal behavior or just cowardice? Depends on the perspective. The employees who lost their jobs and the investors who lost their shirts may have one point of view. Derivatives traders at other companies busily doing exactly the same thing as Enron might have another. But the most perplexing aspect of "Conspiracy of Fools" is that at the end of the story, we really don't know what to think. Eichenwald is a master of telling us what happened, day by day. But he avoids interpretation. He eschews the larger context. We get no clue as what he thinks it all means.
That is unfortunate. The story of Enron is a golden opportunity to explore fundamental questions about how government, financial markets and corporations work together. Taken with the rest of the scandals that plagued the turn of the century, Enron offers a way into assessing what role government should play in regulating new markets, and what risks we face in the future as market dealings become even more complex than they already are.
Enron wasn't the only company to explode in scandal half a decade ago. But by isolating Enron's story without referring to larger trends in finance or markets or policy, Eichenwald makes it hard to draw any conclusions from what happened.
In the wake of those financial scandals, one major piece of legislation was passed, the Sarbanes-Oxley Act, which tightens financial reporting guidelines, increases the independence and responsibility of directors, and is theoretically aimed at preventing future Enrons. But already, there is strong pressure from the business community to weaken the requirements of Sarbanes-Oxley. Compliance is too expensive -- a cry that is heard everywhere from Fortune 500 companies to tiny nonprofits. Will Sarbanes-Oxley be just a bump in the road as we proceed to ever more deregulated markets? Are bigger and better Enrons to come, or are we all smarter now?
Eichenwald's retelling of the story is riveting, but it's a story that has already been told many times. The bigger question -- what does it all mean -- remains unaddressed. It's an opportunity missed.
Editor's note: This story has been corrected since its original publication.