The Smartest Guys in the Room: the amazing rise and scandalous fall of Enron was the defining book on the Enron scandal. Written by Fortune Magazine journalists Bethany McLean and Peter Elkind, the book captured all the events that led up to the demise of the energy trading giant.
First published in 2003, the authors ended their narrative with Enron’s filing of the largest bankruptcy case in US history at the time, which happened on December 3, 2001 – a decade ago this month.
Financial News spoke to Elkind and McLean about how the story of Enron is still relevant today, and what has changed since the events of 2001.
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Financial News: What went so wrong with Enron and why was it such a captivating story?
Bethany McLean: "Before Enron I think people were a bit more naive about the way things worked and I think Enron pulled the curtain back on unsavoury practices that turned out to be a lot more widespread.
"It’s weird that people still care. Enron is small even in comparison to other financial scandals that happened after it, like WorldCom. Then we had 2008 and now it seems almost quaint.”
Peter Elkind: “All of Wall Street viewed Enron as a place run by wizards for a very long time, and its stock price reflected that. It was revealed to be a house of cards.
“Ultimately you need to blame leadership and corporate culture. If ever there is a need for an example that corporate culture matters, it is Enron. The management took Enron in a dangerous and ultimately illegal direction. They transformed it from what was once upon-a-time a very boring pipeline company.”
FN: What has changed since Enron?
PE: “The short answer is not enough. Incredibly, after Enron, and after the financial crisis, we’re still having a huge debate about whether business can regulate itself. It should be clear by now that it can’t be left to regulate itself and that’s a dangerous thing for the rest of us. MF Global most recently made that point.”
“Investors should now think that if something doesn’t add up, and if a company can't or won’t explain itself, you should run the other direction. Enron was a 'trust me' story. You had advisers telling you to buy stock when they didn’t really understand how Enron made their money.”
FN: Has anything improved?
PE: “There have been some changes from the days when Wall Street research was tied directly to investment banking. Analysts never used to put a ‘sell’ on a client's stock, even when privately they were disparaging about that stock in that company.
“Now we have analysts saying that the emperor has no clothes more frequently, although not enough, and they’re still not sceptical enough.”
FN: Has tightened regulation, such as the Sarbanes-Oxley Act, done enough to prevent future Enron-style collapses?
BM: "I’m somewhat of a sceptic on the ability of regulators to fix things. We had Sarbanes-Oxley and now we have Dodd-Frank. The financial crisis happened after Sarbanes-Oxley was passed in 2002, and it wasn’t that many years later that the financial crisis came. If it had really fixed things then we wouldn’t have had a financial crisis."
PE: “It made some major steps forward in the sense of making executives more accountable personally for how accounting is done. It also reduced the ability of executives to say, ‘the accountants and lawyers said it’s OK, so I’m not responsible’”.
FN: Are regulators tough enough now to prevent and deal with wrongdoing?
PE: “The regulators are terribly underfunded. We need to keep them up to speed with the latest technology and financial wizardry. Financial technology and wizardry is ahead of the regulators in some ways, and that’s a problem.
“We shouldn’t think it’s a mistake to slow down the financial world a little bit in terms of its wheeling and dealing. Increasing capital requirements is a major step, much more can be done on that front, [as] that safety net protects everyone.
“Ultimately what drove Enron though, and caused the crisis at Enron, was hubris and human failings, not the mechanical failures of a regulatory system. Greed remains an eternal human weakness.”
FN: Does the Occupy Wall Street movement show how Enron is still relevant today?
PE: “The Occupy Wall Street movement is the venting of justifiable rage at all the problems that the financial wizards have created for our economy, both for the US and on a global basis.
“It’s a rage that’s felt across this country, and that puts enormous pressure, appropriately, on prosecutors to make people who committed crimes suffer.
“Enron had people going to jail for real time, people at the top. By contrast, with the sub-prime mortgage crisis, virtually no one has gone to prison. The Enron executives were hit pretty hard as far as white collar crime goes. We haven’t seen that this time around.”
http://www.efinancialnews.com/story/2011-12-08/interview-bethany-mclean-peter-elkind-smartest-guys-in-the-room
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