Conspiracy of Fools

The pile shrinks further:

Kurt Eichenwald (2005), Conspiracy of Fools: A True Story (New York: Broadway: 0767911792).

It's interesting. Eichenwald writes a huge book--800 pages--and at the end of it a casual reader has no understanding of why Enron went bankrupt. Enron reported $11 billion of stockholders' equity as of the end of 2000. It made an additional $2 billion or so during the Great Raid on California in early 2001. Yet by September of 2001 it had $30 billion in debt, $10 billion of which was coming due in the next year, and no net cash flow.

Andy Fastow and his friends didn't take that much via their Raptor and LJM vehicles: $250 million tops. Andy Fastow and company didn't lose all that much by using Raptor, LJM, and other vehicles to place bets on Enron stock on behalf of Enron--$1.25 billion, max. There's still some $11.5 billion of reported stockholders' equity that went missing.

Enron used what it claimed was "mark to market" accounting. Each time a contract was completed, the contract was valued as if it were a liquid security, and the value imputed in that as if process was booked as revenue. This meant that a negotiator desperate to reach a deal could (a) give away the store to the counterparty, and still (b) make assumptions in his "mark to market" valuation that made the deal look really profitable.

Now at least the first generation of Enroners were not profoundly stupid fools: they had people in charge of reviewing and monitoring the contracts made--experts in figuring out what the contract would be worth if it were a liquid security. People like Vince Kaminski, who one day, Eichenwald reports, got a call from Enron President Jeff Skilling:

"There have been some complaints, Vince, that you're not helping people do transactions," Skilling said. "Instead, you are spending all your time acting like cops." A pause. "We don't need cops, Vince."

Skilling's predecessor as President of Enron, Richard Kinder, quit Enron in 1996 when the board of directors refused to anoint him as CEO-heir-apparent. He went out and founded Kinder Morgan, buying up Enron's pipeline operations in 1997 Today Kinder Morgan is a profitable energy transportation and distribution company with a current market value of roughly $25 billion--of which $2.4 billion is Kinder's. You can bet that Richard Kinder very much believes that his company needs "cops."

Nevertheless, $11.5 billion in reported stockholders' equity gone? That's a lot of money to lose because you are allowing your traders and executives to assign optimistic valuations to their own deals.