I’m finally catching up on my long backlog of Netflix, and watched Enron: The Smartest Guys in the Room last night. Essential viewing.

Trust Us

To the layperson, the collapse of Enron was a confusing mix of back-door deals and swirling spreadsheet numbers. The average person couldn’t possibly understand all the intricacies. While that may be true, what I didn’t realize before I saw this documentary is that many of the execs that were cooking the books didn’t really understand it all either. That’s what was so train-wreck fascinating about the story. Here was a bunch of guys (and, for the most part, they were “guys” orchestrating it all at the highest levels. Sorry, Guys.) who were trying to find ways to increase the company’s stock price – as the stock price, of course, was their “true” indicator of success. So, they found clever and highly unethical ways of hiding their losses by having these dummy companies buy off their debt, thereby infusing the company with booked cash flow and shifting the debt onto some other poor company that will soon go under (by design).

But when they were faced with the simple question of “How does Enron make money?”, none of the executives – or anyone else, for that matter – could explain it. So they would dismiss the questioner by saying the corporate equivalent of “it’s so complicated, and we’re so smart, that you wouldn’t understand. Just trust us. We know what we’re doing.” Then they would lavish gifts, bonuses, and more lucrative business contracts onto those who supported Enron, and ruin the reputations of those who asked too many questions. In reality, they couldn’t really explain (and didn’t really know) how the company made its money.

Accomplice Liability – With a Little Help from Their Friends

This is where the chain of complicity starts. The accountants, lawyers, analysts, financial reporters, investment banks – everyone in the business looked at the books or the contracts or the economic indicators, scratched their heads, shrugged their shoulders, then rubber stamped their approvals in order to keep Enron’s business and continue getting the perks they were accustomed to, whatever form those perks took. No one asked questions, delved further, investigated more deeply to see how solvent the company really was.

Even the financial analysts, whose third-party, supposedly-impartial research of the company’s business dealings, couldn’t explain how Enron worked and they didn’t seem to care. It was just one big, rich Love Fest. Not good.

Question Authority

The first rule of investing is “Never put your money into something that you don’t understand.” The lesson of this story for investors is this – just because someone has a Phd, MBA, CEO, CFO after their name does not mean that they are smarter than you and that they know what they are doing. If they cannot explain to you in very simple terms how they make money and what their business model is, run away.

That was essentially the problem with those who lost everything in Enron, especially the employees. From the very start, they were encouraged to pour all of their 401K money into Enron stock – and with stock prices going up, up, up to a high of $90+ a share, who wouldn’t? But if you don’t know how your own company makes its money, then it’s a good sign that you won’t know when to cut your losses before it’s too late.

Oh, there are so many juicy layers to that Enron story, I can’t possibly hit them all here. The corporate culture, the greed, the lies, the downward spiral, the tapes, the weird corporate skits. I’ll leave the California energy crisis rant for another day. Just put this movie on your list. You just can’t make this crap up.