For this episode, Taylor got to read the book behind her favorite documentary of all time - 2005's "The Smartest Guys in the Room" - That's right, liars and grifters, we're stuffing money in offshore accounts and shredding the paperwork - we're talking Enron!!! From the meteoric rise of "The World's Leading Company" (whatever that means!) to stock prices tumbling and eventually jail time, this is such an interesting and multi-layered story!
Sources -
Movie - https://en.wikipedia.org/wiki/Enron:_The_Smartest_Guys_in_the_Room
Book - https://en.wikipedia.org/wiki/The_Smartest_Guys_in_the_Room_(book)
For this episode, Taylor got to read the book behind her favorite documentary of all time - 2005's "The Smartest Guys in the Room" - That's right, liars and grifters, we're stuffing money in offshore accounts and shredding the paperwork - we're talking Enron!!!
From the meteoric rise of "The World's Leading Company" (whatever that means!) to stock prices tumbling and eventually jail time, this is such an interesting and multi-layered story!
Hi Friends! Our transcripts aren't perfect, but I wanted to make sure you had something - if you'd like an edited transcript, I'd be happy to prioritize one for you - please email doomedtofailpod@gmail.com - Thanks! - Taylor
Taylor: How are your organs doing after quitting smoking
>> Taylor: In the matter of the people of State of California vs. Orenthal James Simpson, case number BA097. And so, my fellow Americans, ask not what your country can do for you, ask what you can do for your country.
>> Farz: And we are back. Taylor, how are your organs doing?
>> Taylor: They're good. I think I was really impressed with my liver whenever I get my blood done. So other than that, I'm pretty good.
>> Farz: We're happy for your liver, your lungs, your heart, the whole thing.
>> Taylor: My lungs are good. I do. I do remember when I quit smoking, I did cough up gross stuff, and I was like, you have to be doing this.
>> Farz: I know, I know. I very rarely have, like, heavy. Well, at this point, not anymore, but, like, when I had, like, heavy smoking days or weeks or probably not even a whole week, but, like, the after effect was noticeable. So, yeah, it's a real thing.
>> Taylor: It's too bad. It's awesome. It makes it cool.
>> Farz: It does make you cool.
>> Taylor: What are you supposed to do?
>> Farz: What are you gonna do?
>> Taylor: Hi, everyone. I'm Taylor. If I make it to 80, I'm gonna start talking again. Welcome to Doomed to Fail. We are a podcast. We bring you history's greatest disasters, epic failures, twice a week. And I'm joined by Fars.
>> Farz: The next generation is gonna be coughing up, like, sugar dust from all the vape that they're taking in right now, Honestly.
My children are watching a new show on Netflix called who Was
>> Taylor: Well, I wanna tell you, I'm gonna. I'm glad that we took a break between our episodes because my children are watching this new show on Netflix. Great. And I wanted to recommend it to you, even though it's for children. It is called the who Was show, and it is, like, drunk history for kids. It's narrated by H. John Benjamin, the guy who does, like, Bob's Rickers and Archer. And it's great. Each episode has, like, two historical characters together. The first one is Gandhi and Benjamin Franklin. And they're just, like, young teens playing these characters and that. They're really funny, and it's really good, and you learn a lot. So.
>> Farz: It does look very cute.
>> Taylor: It's super cute. They've already watched, like, several times. They did Amelia Earhart, Marie Antoinette. We've done. They did Marie Curie, Harry Houdini.
>> Farz: I see Ben Franklin.
>> Taylor: Bruce Lee. Like, it's so cute.
>> Farz: Nice.
>> Taylor: Yeah.
>> Farz: They are definitely your children.
>> Taylor: Yeah, I know. They've been watching it, like, over and over again, and it's so cute. But, yeah, I recommend it. It is fun. I've been enjoying it.
>> Farz: Sweet. Well, good for them. They're enjoying Themselves.
Did you hear about this whole Mexican ship running into the Brooklyn Bridge
Did you hear about this whole Mexican ship running into the Brooklyn Bridge?
>> Taylor: I literally just saw a thing of that.
>> Farz: I don't totally know what that means, how people were killed. They probably. It wasn't anybody on the bridge.
>> Taylor: I would assume there are people on the bridge always. You can walk over the Brooklyn Bridge.
>> Farz: I know, but like, would it. Would a ship hitting it kill you?
>> Taylor: I mean, I think if you. I think if you're walking around the second story. Because I was definitely on it one time when there was a car crash right below me and I had to call 91 1.
>> Farz: Oh, wow. Okay.
>> Taylor: But I do. I don't know, I just saw a video of it. I love it down there. I used to see. Be able to see the Brooklyn Bridge from my apartment and we got married underneath it. So.
>> Farz: Yeah, it was fun. Well, not the story, but the story. Yeah, exactly.
>> Taylor: Through hospitals, organs, I don't know. Cool. That's wild.
Do you have a favorite documentary force? I. I'm a huge documentary guy
Let me find my stuff. Okay. I wanted to do some classic big stories and so I wanted to tell the story that is behind my favorite documentary of all time. Do you have a favorite documentary force?
>> Farz: I. I think I have a few favorite documentaries. Anything that is animal related on Netflix with David Attenborough is definitely up there. My pet octopus was pretty good. I'm a huge documentary guy. So actually it's a. I was literally just diving into like Auschwitz. Documentaries that are very fascinating, but like. Yeah, so I'm all over the map.
>> Taylor: So actually, so this, my favorite documentary is not about animals, it's about people. But I did write because was from 2005 and it was nominated for the Academy Award and I wrote it. Lost to March of the G****** Penguins.
>> Farz: Which is a documentary.
>> Taylor: No, I know, I'm just.
>> Farz: Oh, I would have voted.
>> Taylor: You would prefer March of the Penguins.
>> Farz: Have you seen March of the Penguins? It is like a thrilling drama.
>> Taylor: I'm a little bit like, they should move.
>> Farz: So angry right now if their.
>> Taylor: Life is so hard. It might feel so bad for you. Penguin move. It's not my problem. You live in this s***** neighborhood.
>> Farz: It's very interesting where your empathy comes through. It is like. It is deep. It is a deep reservoir of empathy that is hyper micro targeted.
>> Taylor: And there's a reason penguins aren't in charge of the world. Because they can't even figure out how to move into their s***** neighborhood.
>> Farz: Well, again, agree to disagree. This will be the agree to disagree week.
>> Taylor: I like Happy Feet, the cartoon. Anyway, my favorite documentary is the Smartest Guys in the Room. And I also read the book oh, my God.
>> Farz: That is. That I should have said that because that is a fantastic.
>> Taylor: So good. I watched it.
>> Farz: So good.
>> Taylor: Crazy. Yeah.
>> Farz: So good.
>> Taylor: Yeah, I absolutely love it. So we're going to talk about Ken Lay, Jeff Skilling, Andy Fastow, and the fall of Enron and. Yeah, no, I also read the book and I've been meaning to read this book, so I'm very excited that I read the book as well. Smartest Guys in the room by Bethany McLean, who's a Fortune, a journalist from Fortune magazine, and Peter Elkind. So it's great. Watch the movie. I think I bought it on Amazon prime years ago and I've watched it several times since then, but it's worth however much money they're charging for it.
>> Farz: It's usually free if you have any of the streaming services except Netflix, but, like, if you do, like, Hulu or Peacock or like, it's. Or if you just go on YouTube and look for it, it's probably on there for free.
>> Taylor: Yeah.
>> Farz: Which is like, a shame because they deserve to make a lot of money every time. You know, it was so well done.
>> Taylor: I think the first time I watched it, I was like. It was one of those movies where like, all of a sudden I was sitting in front of the tv, I was like, how to get here? You know? But I was like, I want to know more about. This is so interesting.
>> Farz: So I kind of might agree with you that that could have been a better one to win than March of the Penguins. I disagree with your Penguin philosophy of life, but I agree with the outcome of your Penguin philosophy of life.
>> Taylor: We got there.
>> Farz: There we go.
A lot of people have an aversion to accounting because it's complicated
>> Taylor: So a little bit of background before we talk about what Enron was and what happened. We've talked before about how I worked at a hedge fund during the 2008 financial crisis and how I have my MBA, so I should know more about all of this. But. But accounting is. Was definitely the hardest class for me in MBA school, and I think it is for a lot of people as well. I think that's either. Cause it's true that accounting is very complicated and can be, like, made into different things. And you can see things differently depending on the kind of accounting you're doing, things like that. And also, a lot of people haven't even tried accounting and they have the aversion to it. So they're like, oh, no. Let's say accountants do it. You know.
>> Farz: I personally think that it is a tool or a weapon, depending on who's using it and what you're trying to do. It can tell whatever story you want it to tell and the recipient can hear whatever story they want to hear.
>> Taylor: That's exactly right. That's exactly. So the example they do, they gave in the smartest guys in the room book is like, so you have a, you have a chicken and the accountant's job is to make it into a duck. So the accountant says like, okay, well what does a duck need? It needs to have like flippers and a duck bill. So they just like put flippers and a duck bill on the chicken. And they say it's a duck. And you say, well, it's clearly a chicken wearing a duck costume. And they say, no, no, no, no. The definition of a duck is the duck bill and the flippers. So it's a duck. Yeah, you know, yeah. So, so anyway, so there's a lot of accountant accounting things that were used for bad in this. And then a little bit just like what you do at a hedge fund, what you do when you're like an analyst of the stock market. So I, when I, when I was head at the hedge fund, I was a research assistant for anywhere from like two to four dudes and sometimes as a women people and they were the analysts at the hedge fund. And each of them had a specialization. So someone specialized in like energy, someone in healthcare, someone like technology or something different. And they knew a ton about that market and like, who are the players in it. Every company that's publicly traded, they release a quarterly and yearly reports. They're called the 10K and a 10Q. And the 10Q is like dozens of pages of like where all of their stuff is their balance sheet, their projections they think is going to happen. So when I worked, I would print out 10 Qs all the time people. So they say, put together a packet for me on this company. So the packet would be like, I'm going to print these couple reports from the company themselves. These. And I'd get, and I would email all of the banks that emailed Lehman Brothers because they're still there, Lehman, Bear Stearns, Merrill lynch, and say, can you give me like your stuff on this company? Then I put all together, print it and like give it to my boss. And they would read it and then make decisions.
>> Farz: Great. Can you tell me what they did?
>> Taylor: That's that, that's what they did.
>> Farz: Where does the money come from?
>> Taylor: So here's. Okay, so a little bit.
>> Farz: So sorry, this is more about you, you and your hedge fund experience than about Enron. I know what Enron did.
>> Taylor: I'm asking no, no, I know so. I think so the way where the money comes from then is so then they. They say we have all of these funny. I know all the financial information. I know about this company. I know what they are projecting to happen in the future. I know what mistakes they've corrected from their past. I have all this information. Then they go to meetings with people at those banks, like at Merrill Lynch. There's a guy who's the healthcare guy. He knows more than the healthcare guy. The hedge fund, he knows so much, and he's going to give advice and he's going to say, you should buy this stock. So if you take that advice from that person, you pay that person for their advice. So these banks, even like the small. They're like not just Merrill, but like other big, smaller companies. They'd be like advisement firms. They would want us to get their research in front of our analysts because if our analysts use their research to make a decision to buy on something, then we owe them a percentage. So like a fee.
>> Farz: So you, you're the one with the mba. So you tell me if this is an accurate perception or recounting what you're saying. It's basically you are trying to find the right fortune teller and then pay them for their fortune.
>> Taylor: Yes.
>> Farz: Okay.
>> Taylor: And you're hoping that the fortune teller has done a lot of research. You know, that they have like stolen your wallet and looked through it and they know your last name and they don't. Like, they're not just like out of nowhere. But. Yes. Yeah, that's it. That they would do that. And then the job of the hedge fund is to continue to grow. So people like very rich people with their money into a hedge fund because they are taking bets, making and doing things that aren't just like putting your money into the vanguard, whatever, you know, it's just. So it's like you're supposed to have more information to make really good decisions with your money. If you have enough money to put into a hedge fund, which means you already started with like a million dollars, if at the very least got it, okay, Europe. And the fee that you pay is for all of those fortune tellers to talk to better fortune tellers, to talk to better fortune tellers to understand what's going to happen next.
>> Farz: Great. Sounds. Doesn't sound risky at all.
>> Taylor: So, I mean, so then they would. Oh, it was also. So not just the company. So they would do that. And then also companies will have an earnings call where the CEO will get on a call with investors will ask them questions and they'll talk about, you know, what, what it is. And then investors can vot vote on things, things like that. Like if you have like a Robinhood account and you have like four stocks or if you have stock somewhere, you might sometimes get invited to an investor call to like do a vote. Usually you don't if you're just like a regular person with a couple shares.
The whole concept of putting all your money in stock to me today sounds insane
But if you're someone who has like a 10% holding in something, you're definitely going to go to those calls and you're definitely going to attend those meetings.
>> Farz: Yep.
>> Taylor: There are other organizations that are like government controlled that are. That their job is to put like a credit rating on things. Like there's a, there's also like individual credit rating companies that say like, is this stock safe to buy anyway? Things like that. So there should be a lot of checks and balances before you make like big decisions. Especially if you have your money in like a hedge fund or you're giving it to someone to invest for you.
>> Farz: Right. That's the idea anyways.
>> Taylor: That's the idea.
>> Farz: So which I will say like now with the, you know, increased usage of ETFs and that being like an investment vehicle, like it's a much safer in better play. The whole concept of putting all your money in the stock to me today sounds insane.
>> Taylor: Totally. It's high risk, but it's high reward if it works.
>> Farz: Exactly, exactly.
>> Taylor: Yeah. So in this story, everyone is going to blame everyone else. The CEO has signed off on this. The accountant signed off, the CFO said yes, the business kept going and there's a lot of people being like, well, how can things go bad if I have so many nice things? You know, like there's no way things are bad. Things look really good. That's what a lot of people thought.
>> Farz: It's like the story of the US economy.
>> Taylor: I mean, it's a server. Yes. In today, in 2025, there is an Enron. They had a. There was an Enron crypto coin that like, what up and down in like one day. I don't, I couldn't figure out who owned it. It was like on Wikipedia in a weird section. So I don't want to harp on that, but that existed. And then Enron also came back as a company, but the CEO was the guy who. Same guy who owns Birds Aren't Real. So I think he just got the name Enron back. Anyway, it's gone. Whatever.
Enron started trading natural gas in the 80s and 90s
So Enron is a huge energy company that ends up spectacularly failing in 2002, but it started in the 80s and 90s and we'll talk about it in. Yeah, start there. So what did Enron do exactly? This is like I asked ChatGPT, I was like, tell me. Like, I'm four. Like, I just can't. Like there's just. It's very. It's complicated. Also, like a lot of times they didn't know what they were doing.
>> Farz: Well, not in the beginning, though. In the beginning it was a very simple binary thing.
>> Taylor: But later.
>> Farz: Yeah, later on. Yeah.
>> Taylor: So it's an energy company. Energy is changing. In the 80s and 90s, natural gas is actually starting to be a thing. Natural gas used to just be something that was burned off when you were drilling for oil. There was no way to move it great distances. And then in the 80s and 90s there started to be. And so because they were able to move it like a commodity, it becomes something that you can trade. You know what they really wanted to do? What? Ken Lay, who's our CEO and founder of Enron, who I'll talk about more, he wanted to deregulate the market on natural gas and energy to be able to set the prices. And he had all these grand ideas of putting energy across the entire world with big power plants, natural gas pipelines, and he and Enron would help control that market. And a lot of their big bets were in that line for that thing. So it started off with just natural gas trading as well. So, like you have gas to sell, someone who wants to buy it and Rodin would be the middleman. So you would be like, I have all of this natural gas, you know, someone else wants to buy it. And Ron will say, I will figure out how to get the gas to this person. And you pay me a fee to be able to do that.
>> Farz: Well, I didn't. They own the pipeline network.
>> Taylor: Later they will. But first they were just, they were just the traders. Later they're going to build. And when they build the infrastructure, that's also part of the problem. You should maintain infrastructure.
>> Farz: Right, right.
>> Taylor: You know, that makes everything harder. They also, later they'll do stuff with electricity, broadband Internet, the weather, and create their own Internet portal for trading energy that no one had ever done before. We'll talk about that later. So the problem of course, is in the accounting. Do you remember the type of accounting that Enron used?
>> Farz: Mark to market accounting?
>> Taylor: Mark to market accounting. Correct. Which means I'll talk about it more later. I think as well, you put your earnings, all potential, et cetera, et cetera, as revenue Right now. So If I signed $100 million deal with you for the next 10 years today I get $100 million. I don't get that get it. But I get it right that I got it. So yes. So Mark, to market you are booking your all your potential earnings as revenue right now. So that creates a whole bunch of problems because you don't know how much money you're actually going to realize. Usually when you book a $10,100,000,000 contract for 10 years, you're going to divide that money up between the years and your projections and then you're have to report on what you actually got later as well. Financial firms can use Mark to market accounting and a lot of them do because it, it forces them in those cases to rebalance their sheet every time. Like very, very often because the market keeps changing, which totally makes sense, you know, because if like my 300, if my $100 million deal is my 100 million $1 stocks and then the stocks go up to a dollar 50, then I get to rebalance, you know.
>> Farz: Yep.
>> Taylor: So also like you have to keep making deals because you're not going to get the revenue from your deal that you booked today for the next 10 years. You have to keep booking deals in order to make your balance sheet grow. So there's that. And so that's a problem as well. So it kind of becomes like, you know, a scheme where you just like continue to do that and you don't actually count for what actually you're bringing in. They also would put revenue as recurring, which is like different. But also Enron would do in, in as they did this. So not only would they say I'm making $100 million today, it's like I'm making $100 million every year. And you're like, that's blatantly not true. So how did it happen? Who did it? Key players. First off, the founder, CEO and chairman of Enron was Ken Lay. He was like a former farmer, a poor guy wanting to like make it in business. You know, he got his PhD in economics, is super, super smart. Everyone in this story is smart. Like no one's dumb. They know what they're doing.
>> Farz: You know, it's worse because it's so intentional.
>> Taylor: Exactly, exactly. So he loved the idea of deregulation. One of the markets at the prices for things he lobbied in D.C. especially during the 70s, during the energy crisis. The Bushes loved him, especially H.W. bush, like really like they were like really good friends. There's like clips in the movie from, like, a Christmas card that he, like, sent him, like, a video Christmas card from President Bush. They, like, spent a lot of time together. He was doing a lot politically. He thought he was going to be Treasury Secretary. That was really one of Ken lay's goals. But he ended up working in business instead. Also. He spent a lot of his time also running various nonprofits and things like that. That his. That his, like, family did. Like, the Lay Family foundation did a lot of, like, a lot of stuff. A lot of this is in Houston.
Ken Lay helped negotiate a merger between two energy companies
He was. So he was a CEO. He didn't really, like, do the business stuff. He wanted to be more of, like, a figurehead guy. So he would, like, go to all the meetings and, like, you know, get. Take people out for, like, the fantasy dinners. His family used the private jets so much that sometimes, like, Enron executives couldn't get to meetings because, like, Kenley's kids would be using the private jet.
>> Farz: So I remember my. The. My going off the memory here was that I walked away from hearing the whole story of, like, he was kind of like a. He wasn't intentional in the fraud aspect. He was just willfully blind because he was like, everything's working. Everybody loves me. Everybody's giving me awards. Like, why is this bad? Like, everything's good.
>> Taylor: Like, I think I'll. I don't know when I'm gonna say it, but, like, King Charles and you saw Prince Charles had dinner at Ken lay's house.
>> Farz: Seriously?
>> Taylor: Yeah, because they were trying to build, like, a big energy plant in England. So, like, he's. Yeah, he's loving that aspect of it. Absolutely. If you see him, he's like. He's an old man. It's, like, balding, you know?
>> Farz: Like, he seems like a pleasant old. Like, he doesn't seem like an evil mastermind. The one you're gonna get him as. Yeah, the evil one.
>> Taylor: They describe him as a little Elmer Fudd looking, which I think is true.
>> Farz: Yes, I can see that. I think that's a Texas thing probably, too. But yes.
>> Taylor: So he, like, also, like, when they were used, like, the. The jet thing was just, like, a little bit of an inkling where, like, they shouldn't be doing that. They also used his sister's travel agency to, like, book all the flights, so she got a percentage of things, too. So it was a little stuff that's, like, kind of gross. But, like, so they. They ended up having, like, the board made them do, like, an open bid for new travel agencies and his sister's travel agency one. Anyway, even though her rates were higher. Like stuff like. That's gross. Yeah, like, you know that's happening. He in 1980, so he was doing really well. He had in 1980 at a $300,000 house which is in today's money, it's a billion dollars. It's not, but I don't know, but probably a lot more. It's close. He was married. He ended up marrying his secretary and he eventually his wives would like have Christmas together. Like everyone got along eventually because there was like a lot of money involved. He like didn't want to like you just said he didn't want to hear the bad news and didn't want to tell anybody bad news. So he would kind of like run away from those conversations and like wasn't. You wouldn't tell him anything because he didn't want to hear it anyway. He wanted to like enjoy like the lifestyle that was happening. He ended up starting Enron and being at Enron because he helped negotiate a merger between a company from Omaha called Inner north and then Houston Natural Gas. So he merged them together. He got $3 million out of the deal and that new company would become Enron. So they moved everybody who wanted to. People were p***** from Omaha to Houston and then they had their business base in Houston which is like a huge energy. Energy place. Anyway.
>> Farz: Yeah.
>> Taylor: He. In the. It's mid-1980s, there's some deregulation happening. People are starting to do more energy contracts. There's like a lot of opportunity here. So he has his new company. Originally they hire a marketing firm to name it and they name it Enteron and they printed a bunch of business cards. But I guess Enteron is also another word for the digestive tract. And people started think, thinking, sort of making fun of them. So they had to change it to Enron.
>> Farz: That's a little sad, but that's how we got here.
>> Taylor: So it was expensive and stupid, but they had to do that. Enron will come from that company. It's actually in a lot of debt when they first started because it's like a merger of two kind of not doing well companies. But eventually Enron will have 20,000 employees. The year 2000, which is the year before his bankruptcy, it reported $101 billion in revenue. And it's safe to say that like most people that work there just did their jobs and like didn't know that there was stuff going on.
>> Farz: Do you, you, you might get this later. Do you know what that would you say?
>> Taylor: 100, 101 billion. I'll tell you they do, they do like kind of flip their earnings and you're like, oh, no, it's not, it's not revenue, it's loss pretty much.
Mark: A lot of people worked at Enron and didn't know
>> Farz: Is that really what it was? Like, they had no, like, nothing.
>> Taylor: Yeah, wait, I think I have it at the very end. But yeah, I think they had like some amount of money that they had posted revenue for 2000 and they had to flip it and they actually was a loss. It was like a very close number. Yeah. So a lot of people, I think worked there and didn't know and like, it ruined their lives, you know, Like I, when I worked at NYU in the business school, this woman, I can't remember her name. So I was trying to find her on LinkedIn. I couldn't find her, but I was like, oh, what you do before this? And she was like one of the, like vice deans of the business school and she was. Oh, I worked at Enron, you know, like, like, not only did, you know, whatever she did there, she probably did like a fine job. You know, plenty of people just like did their jobs and didn't understand this massive fraud was happening. A lot of them did and took advantage of the situation. But 20,000 people, like, not all of them knew. So I'm sure you remember the pictures of like the people leaving and crying and holding the boxes full of their stuff, you know?
>> Farz: Yeah, I think like some of these were like line workers. Like, they were like, they're like, I just get my car and go to this place. They tell me to go and do my job and I come home like, yeah, they weren't making high level decisions.
>> Taylor: Yeah. So Kenny. So Kenny Boy. Kenny Boy is the nickname that Ken's wife gave him and that also George Bush, Carlton. So Kenny White needs to get people to work with him. He's going to find a few people who are instrumental in the rise and fall. But in the beginnings, like I said, it's bleak. There's a huge loss, they're moving the offices, they have to turn it around. And one of the people that he picks right away is Jeff Skilling. I think that, I think that Andy Fastow is the actual criminal, but Jeff Skilling is someone who thinks he's smarter than everybody else and so the rules don't apply to him.
>> Farz: I would say Andy Fastow was the, he was the brute who took care of the things that Jeff Skilling told them to do.
>> Taylor: And. But Skilling would like. Yes. Yeah, agree.
>> Farz: I think, I don't know. You were close. You're close.
>> Taylor: We'll get close. We'll talk more about them in detail. So Jeff Skilling was the president, COO and later the CEO for a little bit of Enron. He was hired by Lay to make money. Like that's just like, he was like a money making guy. He came from Pittsburgh, he went to Southern Methodist University to get away from like the industrial east while in high school. He worked really, really hard and he got, he made like a good amount of money and he lost it all in the stock market while he was like 15. So he like liked doing these big high risk things like always. He loved doing that. When he went to college he did the same thing. He got a job, made a bunch of money and lost it all in the stock market. He applied to Harvard for his mba. And this is the, the famous story that the interview wasn't going really well and the interviewer was like, Jeff, are you smart? And he goes, I'm f****** smart. I remember that, you know. So he went to Harvard, obviously. But when he was hired at Enron, he hadn't worked in energy and he hadn't run a company before. He was considered just like a really smart guy who was like a revolutionary. So they were just excited.
>> Farz: What was he hired as again?
>> Taylor: The President and coo.
>> Farz: Got it.
>> Taylor: Yeah. So a few things about Jeff, he insisted on Mark to market accounting. He wouldn't join them if they didn't do it. So a little bit more about it again is like you book earnings when they come, when they come in. So a little more about it. That means that like it's immediate, you immediately claim the present value of all expected future profits as current income. So you could book earnings upfront for deals that might last 10 to 20.
>> Farz: Years or that might not happen at all.
>> Taylor: Exactly, exactly. So you counter it as current even if there's no cash received yet. And so because of that, like I said, so it was an income tomorrow, income today situation where like you can't, you have to keep making new deals because you already booked all that revenue. Like you, you can't spread it out over a certain amount of time.
>> Farz: It's worth pointing out that like the nature of corporations at this point was the stock prices always had to be rising.
>> Taylor: Yeah.
>> Farz: And if you do Mark to market accounting and you book 10 years worth of, I guess, revenue bookings, I don't know what you'd even call it in this case, all fake money. Anyways, if you book it now, then you have to get the two more of those deals to show increase in growth again. You're talking about, like, $100 million deals. There's only so many of those in the world to obtain.
>> Taylor: Yes. So you have to, like, you create them, but they're not good deals, and then they don't happen.
Jeff Bezos' culture at McKinsey was really savage, he says
>> Farz: Yeah, yeah.
>> Taylor: So that's that. Like I said, financial firms can use it because they need to rebalance every quarter. But. But the. But I was the first non financial firm to use it, and they had to get permission from the SEC in 1992 to be able to do it. They had to, like, ask to be able to do it. So there's a document in the documentary Smartest Guys in the Room. There's a sketch where they show, like, a little video that they made with, like, Skilling and one of the accountants where he's like, I have a new idea. It's called hfv, Hypothetical Future Value. And they were, like, joking about it because, like, it was like he was pretending to use an accounting system that was, like, even more corrupt than when he was using. And everybody was laughing about it. And sometimes when they start building big things like infrastructure, the problem is going to be like, I. Or they're going to make it even worse. So like they say, okay, I booked this $100 million deal to build this power plant in India. It is. It didn't work. It didn't happen. We started to do it. So I'm going to sell the pieces. I have a little bit of infrastructure. I have some like this, this and this. I'm going to sell it. I'm going to sell that all for $10 million. That should be like. That should be that $90 million loss. But instead they counted that $10 million as more revenue, you know, and you're like, but you never got $100 million. Like, you never. And you spent all this money anyway. So, like, it just, like, didn't. It just wasn't gonna make any sense. And this is something that, like the bad deal situation. I feel like I've seen that at places where I've been like. Like, I've worked at places where the sales team got paid after the deal closed, and it didn't matter if it went through or not. You know, like, the deal closed, but they failed in onboarding. And it never. They never used it, but the salesperson still got paid. And they had to change that because it was like, they're signing bad deals and the onboarding team is getting screwed. And because they're not meeting their goals when their goals were impossible.
>> Farz: There's a hundred different examples of this Mentality, the short term gain for the long term credibility and reputational loss in the industry. And yeah, it's disgusting, but yeah.
>> Taylor: So other things about Jeff, the culture that he brought was really savage. Like they, he did a thing where you had to rate your peers every six months on a one to five rating scale, one being the best. And then he would fire 15% of the company every six months. And the VPs would spend like weeks in a room together having to grade every single person in their department and then they had to come up with a unanimous grade and then do the firing. And that's just like. Besides the fact that that is weirder for morale, it also is really expensive. Like it costs so much more money to hire someone than it does just to continue to work with someone, you know.
>> Farz: Yeah, this is, this also is like the Microsoft model that the guy after Bill Gates, I forgot his name, but he put into effect. And it's like it goes back to like my mentality towards like the business schools of America of like fostering the worst aspects of humanity to work towards capitalist ends. And it's like you don't have to like there's a different way to do things and it's one that makes people not feel horrible every day a thousand percent.
>> Taylor: And like they, they said, you know, one thing they said was like MBAs would come in from Harvard all green and happy and in six months they'd be a*******.
>> Farz: Like that sounds shocking whatsoever.
>> Taylor: I forgot to write this down. But Skilling also worked at McKinsey before this. So like that's also a culture of like we're the smartest people here, you know, and they like consult but their consulting is like, you know, a 19 year old gives, gives you some advice. Yeah, you're supposed to give them $7 million. So yeah, there's that. He also had like nine midlife crisis crises when he started working at Enron. He was like kind of chubby, regular like middle aged guy. Eventually started to he. I wrote obviously not something weird like Jeff Bezos, but still a lot of working out like, but like, you know, like they do. And he also would have an affair with someone at work and get a divorce at one time. He does try to save his marriage. He works for half pay, half time. But then. But he doesn't get to save his marriage. But he does marry another Enron employee later. He also wanted to do like very manly trips and there are some women in this story but like it's obviously still a very male dominated world and like When I worked at places, I knew people who would go on business trips and hire escorts. And you knew that they did that and you just didn't say anything about it.
>> Farz: You know, feels like a New York story.
>> Taylor: Yeah, maybe, but it, like, makes, obviously makes, like, women uncomfortable being in those places.
>> Farz: You know, that's what I'm getting. Like, the whole, the, the, the business school mentality of, like, it doesn't have to be that way.
>> Taylor: Yes.
>> Farz: It can be healthy. It can be normal. People could feel good about themselves. Like, it doesn't have to be gross.
>> Taylor: Yeah.
>> Farz: I will say no. I, I have told multiple people I won't hire an MBA because of that. But now that I know you have an MBA from. I will take that back.
>> Taylor: Thank you. I appreciate that. But I mean, it's different. It's different. You know, mine's different. If I went to Harvard, an mba, Like, I've. I get it. Like, some, I get some stereotypes are real. I get it. I think we've talked about this before. So they would do things like go on motorbike trips, you know, and like, do, like, adventure, daring things.
Skilling would sit in Houston bars when things were going poorly
And later, Skilling would be. When he was starting to get depressed, when things were going poorly, he would sit in Houston bars and chain smoke and drink white wine. And one bartender.
>> Farz: Sounds fun.
>> Taylor: I know one bartender later called, who was interviewed, was like, oh, I didn't know he was, you know, a multimillionaire. I just thought he was quiet, Jeff. And I'm like, that's stupid. You're a dumb bartender. That's a dumb. But, but fine. And when people ask Skilling what Enron does, he says, it's a cool company. Which is like.
>> Farz: Which is, which is a key example of. They didn't do anything.
>> Taylor: Yeah, exactly. He didn't, like, it's cool. Promise. And like, if you went there, you'd be like, this is cool. You know?
>> Farz: Do you, do you. I didn't read the book, so I don't know this. I only know what the documentary said. Do you think that he always knew it was bullshit?
>> Taylor: I think he thought that it was going to be okay.
>> Farz: Somehow the markets would feel him and the vibe check would happen and. Yeah, okay.
>> Taylor: Yeah, I think, I think he thought that, that, that's the thing. He thought like, you know, we can keep doing this. It's going, it's going. Let's keep going.
The documentary starts With Cliff Baxter. He was the head of M and A
So there's some other people. As Enron transitions from being a typical energy company to an energy trading business, which is what is going to come. The documentary starts With Cliff Baxter. He was the head of M and A and he dies by suicide. He's like the, really the only. I guess maybe other people did as well who are like other employees. But like he's one of the most most famous ones. And he shot himself in his. In like the middle of the night. He just had, had like a hard. He was kind of manic depressive. Like knew that this was about hit the fan. And guess where he was born.
>> Farz: Germany.
>> Taylor: Amity Eval.
>> Farz: No way.
>> Taylor: Yeah.
>> Farz: Hometown boy.
>> Taylor: Yeah. So it's Cliff Baxter. There's Rich Kinder. He was trying to help get things back together. Sort of in the middle of this, he wanted to be CEO. But then Skilling is going to be named CEO in the mid-90s and Rich kinder will leave. He's the person that they say could have saved them because he was someone who could have turned it around and knew that their accounting was bad. And he like could have changed it. But Lei was like, no, we're still going in our direction. And so they let, they let him go. And then Rich kinder started Kinder Morgan, which is a huge investment firm. And he's just like one of the richest people in the world.
>> Farz: Good for him.
>> Taylor: Congratulations. There's Amanda Martin. She's a lawyer. She's part of Skilling's inner circle. One fun thing that she did is she saw that she was being paid $75,000 less than the men doing her. Plus they were getting bonuses she wasn't getting. And she brought it up. And the next day they gave her like a $350,000 check and changed it.
>> Farz: Jesus.
>> Taylor: I know. So good for her. She ended up like, there's a couple like personal like affairs and stuff. She had an affair with another high up named Ken Rice. Doesn't like super matter, but she, and, but she's in the documentary so she's like talking about it like past tense. She doesn't seem to be in jail or anything. In the beginning it's like nobody can touch us. We're working constantly. We're super excited. You know, we're on top of everything. We're printing money. Like everyone's just like super stoked. And then they hire Andy Fastow, who I think is like the biggest actual like did criminal things like touch criminal buttons, you know, 100%. So he was the chief financial officer. He, he was married to a woman named Lee. She's from a really rich Houston family called the Weingarten family. So he's like, they kind of keep up Their thing of philanthropy, they're like, they want to be like the richest people in Houston. people didn't really like him. Just kind of a jerk, kind of didn't like love hanging around him. he would like yell at people if they didn't do what he wanted. Things like that. And his idea is to move the money around so if you like move the money to different companies, it's not your debt anymore, you know, things like that. So he would create a bunch of special purpose entities, he called them things like LJM1, LJM2, there's some raptor vehicles that he worked on. And basically he would send the debt to other companies so he wouldn't have to report on it. So he would say like, oh, I'm working at LJM three hours a week. It's like a subsidiary of Enron. But he was spending most of his time there trying to figure out how to get like profits into there and split it off as an entirely different company. And he did this in a bunch of different ways. He ended up, you know, he got so much money from this, he ended up like paying himself like tens of millions of dollars like during all of this like movement money thing. And he. So that like manipulated the earnings which made people want to buy it more, which made the stock price go up.
>> Farz: Well, it also rebalanced the balance sheet because.
>> Taylor: Exactly. So then, and then you then the.
>> Farz: Debt to that guy. I don't have this debt.
>> Taylor: Yeah, yeah, exactly. Later, when Bethany McLean interviews him for an article in Fortune magazine to interviews Enron people, everyone will leave and Andy Fasto will come back in the room and say, I don't care what you said about Enron, just don't say anything bad about me.
>> Farz: What a piece of s***.
>> Taylor: Just f***** up. It's not all his fault, but like a lot of the straight up fraud is his fault. So those are the main people, the actual business again, like they're, they're an energy business. One of the first big scandals that they had, which was like years before the rest of it was a scandal at Valhalla and Enron Oil. So Valhalla is a suburb of New York and there was like a tiny office in Valhalla, New York and their job was to trade, trade energy. And they were trading it in like a new way. It wasn't traded like a commodity before. So like you don't have to actually ever have the oil, you can trade it without ever having it. So like if I say like I'm going to buy 100 barrels of oil from you at this set price, then I can sell those 100 barrels at that price to someone else, and you can buy all those different things. You don't actually ever have to touch oil.
>> Farz: It becomes a financial services company and not an oil company.
>> Taylor: Yeah. So. And they were the people that were actually making the money. So on, like a call with the board, Skilling will say, you know, keep making us millions. Like, you keep making money, you keep doing it.
Enron executives were betting way over the percentages they're supposed to bet
But a lot of the ways they were doing it is by betting, like, way outside of any zone that should be comfortable. They were supposed to stay at a certain percentage and, like, not gonna go crazy and make these, like, really big, big trades. But they were. And there was no oversight. So for a long time, they won. And they were just, like, give themselves money and they didn't care. Like, Ken Lay knew that they had. They would, like, you know, give each other, you know, $100,000 bonuses all the time. But they're making, you know, $100 million. Who cares?
>> Farz: Yeah.
>> Taylor: You know, so they let. They let that happen. Some. They moved some of the money to a bank account in the Cayman Islands that was not on the books, which is not good. If you have to do that, like, that's bad. And again, like, Lay would say that he didn't know they were doing this, but they were betting way over the percentages they're supposed to bet. And it was all uphill until it wasn't. And so they were hiding what wasn't working in these other accounts in the Cayman Islands and continuing to do what they were doing with the idea that the market's always going to go back up. Like, we just got to keep gambling. We got to keep going, you know, got to keep doing it. Eventually, they will get caught. Some of them are going to go to jail for it. And all in all, Edvard Oil lost $140 million. So it was like, a lot of ups and a lot of downs. One big down.
>> Farz: Yeah, big, big downs.
>> Taylor: So after that, it seems like in retrospect, you'd be like, oh, maybe these guys need to, like, work on their s*** a little bit more before we invest in them. But that was like, not what was happening. Enron kept growing. There's a guy that ran Enron Energy Services named Lupi. He built the trading desk. And his job, I know his job was to sell energy services to industrial end users. So basically just sell energy. But he really, in the office, everyone was excited about it. And they did have the ability to actually deliver gas places because they were an energy company, but also most of it was just like, betting. They worked with a auditing firm called Bankers Trust, which is like, still like a financial services firm that exists. And Bankers Trust was like, this isn't what we think it is. And they left in the middle of the night and they deleted all of their files to do with Enron. And they never talked to them again. And Lou Pilot came into Skilling's office and was like, they're gone on. Like, they just left because they were like, this is too weird. Yeah. So he had a big office that he was never at, and then, you know, it's out of them. He loved going to exotic dance places.
>> Farz: Dude, this guy lived the life. He, like. Did he marry a stripper? He, like, walked with like $50 million. Married stripper, stripped.
>> Taylor: More than that. He ended up leaving his life for his girlfriend. Yep. For his girlfriend. He cashed out eventually. They. He got. He got this. The exact answer. Pregnant and then divorced his wife and then married her. And then all this is kind of happening. He's not really even work during the day, you know, and he's like a legend. He'd be like, he's never in his office. Like, where is he? What does he do? And finally Skilling was like, you can't. You have. You have to leave. Like, you're. You're. You're never here or whatever. And he was like, cool. He cashed out with Lupi, made $250 million selling his shares, and he became the largest landowner in Colorado.
>> Farz: This guy won.
>> Taylor: He won.
>> Farz: Brilliant.
>> Taylor: And so whatever. But never loose said Skilling was like, we're doing great selling. Would believe it. He tell the investors. Stock would go up. Like, that was it. This one was start to go up.
Enron had a huge deal in California for energy, and California deregulated
So a couple other things that they tried to do to like, actually make money. Like when they. And continue to make money. There's a huge international arm of Enron run by Rebecca. Mark Skilling and Rebecca did not get along. They, like, really didn't like each other. She would travel 300 days a year all around the world. And she had kids. She would like, barely see her children. And she would buy power plants and build power plants, like all over the world and try to like, make deals. So she'd be like, we're gonna build a power plant in Germany. Supply you with this much energy of this much money. Like, fix that price and then we can, like be your energy supplier, for example. Never. It never really was successful for a bunch of reasons. Like, the infrastructure is a huge one. Like, you have to build things. You have to hire maintenance people. You have to hire in some of these places, like trying to build a power plant in the middle of the jungle. You have to hire, like, armed guards, you know, like, it's not safe to be in those places. Also, there's governments involved, and the governments want to regulate their energy, like the. Especially in the developing countries. And also the people can't afford to pay those prices once they have it up anyway, you know, So a lot of it. A lot of it didn't work. There was that. That deal that told you about in the UK with John Wing, who was someone else who worked with Mark, and that's when Charles had dinner at Leigh's house to work on that, which it didn't work out, but that's interesting. It's also California. They had a huge deal in California for energy, and California had deregulated their energy. So Enron would bet on the weather. Like, they would be like, okay, we know they're going to need more air conditioning because it's hot, so we're going to raise the price because of demand. And then they would also do things like talk to energy people in California and start rolling blackouts to change the demand. And it was, like, not illegal, but no one had ever done it. And then when they did it, they were like, oh, you shouldn't do that. And they're like, okay, now that you say, I shouldn't do it, I won't do it, you know, but they did it anyway. So the governor, Jerry Brown, was like, how are they able to do this? And then, like, eventually, like, they were. They were able to, like, I don't know. I can't. I don't really understand how it, like, worked out in California. But Skilling did make a speech where he made a terrible joke when he said, what's the difference between the Titanic and California?
>> Farz: The lights were on the Titanic when it went under.
>> Taylor: Yeah. Terrible. And, like, people died. You know, you can't turn AC off in the summer just to, like, raise the price of energy so that you make more money.
>> Farz: If I recall correctly, what this had to do with was the fact that you can never store surplus energy.
>> Taylor: Yes.
>> Farz: So states would route energy, and Enron served as the central focal point on where they should route energy to. So they were making bets on, we can increase the price per unit in California based on the weather or the time of day, whatever it was, let's route energy out of California so they can't have it. They can't have It. So it'll increase. Increase demand, and then we'll have limited supply and then.
>> Taylor: Yeah, yeah, yeah. Thank you. That's helpful. Yeah. So they did that, which is terrible. They also. Okay, this, I think, is freaking crazy. So they had a deal. One thing that Skilling wanted to do next was to sell broadband Internet and to, like, sell Internet, like, you sell, like, your phone lines, which is, like, essentially what we have now. But they didn't have that then, you know, so they had a deal with Blockbuster. They almost invented Netflix.
>> Farz: Okay, I know. I remember this. When you were saying. You said something earlier, it reminded me of the Blockbuster story because they almost had locked this in.
>> Taylor: Like, it was like the technology wasn't there yet. Like, that. That's like. It's like the last mile problem. Like, you can get it all the way to the town, but getting to everyone's individual house, like, that's hard. And like, Blockbuster didn't have the technology. They didn't have it yet, but they made a deal. Blockbuster to, like, make content, and they were gonna sell movies for $5 a piece. Or you could rent the movies, $5 each, book on your TV. But it was like science fiction could be.
>> Farz: And running and chilling now.
>> Taylor: Exactly. Isn't it crazy? I just. I can't believe it. Almost imagine Netflix. They didn't, but they, like, booked that deal, and then it totally fell through, obviously. But when Skilling announced it, he. In an investor call in 1988, it was like, brand f****** new. Everybody's like, that sounds amazing. Because Netflix started with the mail. They couldn't do. The stocks soared 34% in. In two days after they made that call, because they were so excited about it, but, like, nothing ever happened to it. But still wild. Oh. They also tried to do corporate electricity to sell electricity to, like, big corporations. So they had a deal with, like, the USC schools and some, like, big sports teams to do their energy in the stadiums for a certain amount of time.
Enron switched from manufacturing to services. This kind of reminds me of the tariff situation
But that didn't. But that was hard to maintain because they had to. They had to pay for, like. Like, the maintenance men and the electricians, and they had to, like, have a customer service wing to be like, you know, the lights aren't working in Chase Stadium. What do we do? You know? And they couldn't. And that was, like, harder to do.
>> Farz: This kind of reminds me a little bit about the whole tariff situation a little bit, because. Because the US Made such a huge switch from manufacturing to services. And then if you're confused and you're like, well, I'm a services company. But I'll just do the manual part too as an afterthought. Say, well, you're going to fail at both because.
>> Taylor: Yeah, you don't know how to do that.
>> Farz: Your DNA is flipped.
>> Taylor: Yeah, totally. So they. Oh, there's also Enron Online, which was like the. They built a website to trade energy.
>> Farz: This was their big. This is their biggest.
>> Taylor: Yeah. Which I think is, I mean. Well, I feel like it was glossed over in the film. I feel like I learned more about it in the book. But like it was obviously a conflict of interest because, like they are an energy company, but you could only trade energy companies on their own platform.
>> Farz: Yep.
>> Taylor: It's interesting. So I feel like Skilling, this is like his smart part is he's like, there's so much opportunity here, what can we do with it? You know, And a lot of it's stuff that like is true now that there are like private places to trade things and Netflix and Hulu and all those things. But then it wasn't. But he's like, look at this opportunity.
>> Farz: So that wasn't public. There wasn't a public thing, I don't think. I think as a consumer you could just logged in to do.
>> Taylor: No, but like, but like companies could, which is like the first.
>> Farz: Right, right.
>> Taylor: So also during all time, Fast has all of his like little companies all over the place. So all this stuff is going on and then meanwhile the big guys are selling their stock all the time. Like Ken Lay is making huge sales and like breaking in billions of dollars all the time. And he says it's like to diversify his portfolio and whatever, but like, you know, suspicious. The high of Enron stock, It'll be at $90.75 we the highest it ever gets. And by October 2021 is going to be $0.26 per share. So these people who are cashing out early are making a ton of money. There's a video also in the documentary that I'm sure you've seen where like they're at like a staff meeting and they, they ask the head of HR if they should invest their entire 401ks in all Enron. And she's like, yes, absolutely. And like smiling and laughing.
>> Farz: Yeah, not good.
>> Taylor: It's gross. Also for the broadband stuff, like they're, they were like, oh, it's going to happen, you know, don't worry. So at one point they had investors come to Enron to talk about the broadband. Also reminded me, one time my boss went to an investor meeting at McDonald's and she was like, they gave us McDonald's. I was like, girl, what do you think was gonna happen? She was like, I don't. I don't know. I thought there was something nicer.
>> Farz: It'd be so fun. I would love to go to a meeting. And it's like, I don't.
>> Taylor: I thought that was funny. But they had investors come to Enron, and they told everyone just to, like, go to the floor where the broadband team is going to work and set up your station and just work here during the day. So, like, one woman, like, later testified that they had her, like, bring her pictures of her kids in a plant, and she just, like, spent all day on the phone with her family members just pretending to work. And then so the people went in and they're like, oh, my God, there's, like, thousand people on this floor. This is so exciting. This broadband thing is going so great. And then when they left, everybody went back to their other offices because they weren't actually working on it.
>> Farz: It's like, a really good analogy for their accounting practices.
>> Taylor: Yeah, exactly. they also have this, like, silly thing where their. Their tagline was the world's leading energy company. And then they were like, we have a new tagline. Do you remember what it is?
>> Farz: Oh, man, I can't.
>> Taylor: It's going from the world's leading energy company to the world's leading company. Business, business, business. Charts, charts, charts. Like, so. But obviously, like, things are falling apart. They're losing a lot of international deals. The broadband doesn't work. Jeff moves to CEO, and you're probably like, why isn't anyone doing anything? Like, who is supposed to be checking, like, what they're doing? So at this point, Jeff, who knows what's going on, puts together a group called the Risk Assessment and Control Group, the rac, but people. And so he did a couple things that are like, okay, you can't fly a corporate jet around the world every day for a billion dollars. Like, you have to do something a little bit less flashy. So a little bit of that, but it doesn't really matter. Like, all that cost cutting doesn't really matter. He would also, like, like, be like, oh, we'll. We'll bring down, like this. Like, besides the. Like, the half every half year, firing 15% of the people. He would also move people around so much that sometimes every night, they would have a crew in there moving people's desks around because he'd be like, okay, well, this apartment isn't working, so let's move their staff to Another department. And then just like the accounting be like, oh, this apartment just grew. You know, you're like, kinda. But also you just like moved people who don't know what they're doing to a different department.
Arthur Anderson is one of the world's largest accounting firms
And they're like, People would be like, what do you do here? And they'd be like, I don't know, I just moved here.
>> Farz: It's like a stupid person pretending that they're smart. Everybody clapping and saying, that was so smart.
>> Taylor: It's. Yeah, it's a little bit of both. Yeah. They also obviously have an accountant. They have an accounting firm called Arthur Anderson. So this is the. It's like a firm based in Chicago, been around forever, made by a man named Arthur Anderson, like 100 years ago. And their people worked not just for Enron, but they worked in Enron. They were like Arthur Andersen people, but their offices were at Enron. Like, they spent all their time there. They got their lunch from them. Like, they were just. They were there and they're the people who should have seen everything, but they let it slide. And it's like a bunch of people making decisions. Some people would be like, oh, I thought, Jeff, we could say we could do this. I thought we could do this. It's that complicated. Making the chicken into a duck thing. Like, their job is to find those loopholes. So in 2001, Arthur Andersen is one of the world's largest companies. It is one of the big five accounting firms. There's Deloitte, Ernst & Young, KPMG Price, Warhouse Coopers, and Arthur Anderson. Arthur Andersen, they are going to be gone by the end of 2002. They're not going to survive the Enron scandal. They are the people who do the shredding. That's like the famous shredding of stuff. So before they were subpoenaed, when you could see the stock was falling, everything was happening. They again took that loophole. Like, you can't shred documents after you've been subpoenaed. We're going to be subpoenaed at 6 in the morning. Get every shredder in Houston to the office. That's what they did.
>> Farz: Which tells. So at first, you know, it's funny, when you started the whole Arthur Anderson thing, I was like, there's a normalization of things that can happen. And it's like the frog in the pot boiling, you know, where you don't know until it's too late, that it is too late. But then they also did the shredding, which means. Yeah, saw what was they Must have put the pieces together before the indictment, obviously.
>> Taylor: Obviously. But, like, yeah, we have a friend whose job is to. She works technically for the US Postal Service, but her job is to take shredded documents to put them back together like a puzzle.
>> Farz: I would say. I'm glad somebody does that job. I'm glad I don't have to do that job.
>> Taylor: So, okay, when does stuff start to happen? Everyone. It's kind of weird, but they still. Earnings are still going up. You know, their stock price is still going up. Like, when does it start to get weird? People start to figure it out. On 17th, 2001, there's an earnings call with Skilling. He's the CEO and a analyst from Merrill lynch asks him why he can't see the balance sheets. He says, every other publicly traded company has a balance sheets in their quarterly report. Like, where are yours? And he's like, I can get them for you. Just like, whatever. Don't have them. And Skilling calls him an.
>> Farz: Yeah, I remember this one on the.
>> Taylor: On, like, the live public call. People are like, oh, my God, don't do that. But he never really took it back. And he was like, you know, which.
>> Farz: Like, everybody, like, it's weird to think, like, why that became such a big deal. And the more I learn about this. That world, the more I learned that, like, complete and utter transparency is a prerequisite for, like, the market working, even if you don't like the outcomes. And the fact that a CEO would call somebody an a****** for asking. Think the most obvious thing. It's, it's. It's like, it'll be like if Tim Cook were to go online one day and be like, cell phones suck. Like, we shouldn't use them anymore and we should all just, like, use carrier pages.
>> Taylor: Like, you know what?
>> Farz: We gotta really dig into Apple. Like, this is like one of those things where we. Now we have to look into this. It's so plain and obvious.
>> Taylor: Yeah. Something's wrong.
>> Farz: Right, Right. Either the mental faculty is falling or something.
>> Taylor: Yeah. And that. And that was really a big part of it. So people were still writing articles about how much. How well they were doing. And then Bethany McLean, who's our author of our book, is writes an article for Fortune magazine called how does Enron. How exactly does Enron make money? And she didn't like making the accusations. She's just like, what exactly is going on? You know? And then people start to kind of look into it.
The person who probably first crossed the line was Andy Fastow
The person who probably first crossed the line was Andy Fastow, because he was moving his money like Literally moving money in and out of companies to hide it and, like, hide the debt. And it is now like the 2000s. Beginning of 2011, the.com bubble bursts. The market is no longer a bull market. Like, things are not going well for a lot of people. It's. They also blame 911 for some of the things, like people's distrust in the market, but you're like, that's not making sense. Skilling leaves in August of 2001. And he just says, like, for personal reasons, but he's just kind of burnt out. Also kind of doesn't care. He, like, doesn't want to do it anymore. He just, like, wants to leave. So he leaves in August. And then a woman named Sharon Watkins, she's the first whistleblower. She sends an internal memo to Ken Lay being, like she said in the, in the memo, she says, quote, the company could implode in a wave of accounting scandals. She's like, what is this? And, like. And talks to him about it. Ken will say he didn't get the memo and, like, didn't talk to her about it. But, like, she's. She testifies in front of Congress that that's what happened. On October 16, 2001, Enron announced its first quarterly loss in over four years. And, like, that's crazy to continue to be growing and growing and growing and growing. Like, that's suspicious. If nothing else, the way that they were growing so, so, so, so much so they were kind of admitting that some of their balance sheets, you know, were not what they expected to be. It made the. It made the Equity go down 1.2 billion and the. So the stock dropped even further. And then the SEC was like, well, this is weird, you know, that things were, like, going so well for so long and now they're not. What is going on? And they launched another investigation, which is when they started to do the shredding. And October 22, 24, 2001, they revised their financial statement. Okay, so this is the thing from before. They revised their financial statements from 1997 to 2000, acknowledging accounting errors that had kept the debt off the balance sheet. So they erased 613 million of past earnings and added $620 million in debt.
>> Farz: So insane.
>> Taylor: Yeah.
>> Farz: You know what's funny is I, when I said earlier about radical transparency, I wholeheartedly believe in that. And I think that if you have a mess up on your books from the previous year or previous two years, you should absolutely, as soon as, you know, disclose to everybody that that happened. Yeah, but in this situation if you have, like, what is it, 10 years? Yeah, yeah, just go with it at that point.
>> Taylor: Like, totally be, like, make. I mean, I'm sure, like, I'm sure there were so many times when, like, Skilling and Faster, like, made other people feel stupid, you know, because another part of it is, like, accounting is really confusing. People either it is, or people, like, think that it is. They don't even try and all those things. So they'll just be like, I don't know, maybe this guy gets it. You know what I mean? Like, did you ever watch Better Off Ted? Have I ever talked about that? It's. It's two seasons. It got canceled during the first Raiders strike a long time ago. But it's real cute. It's about a company called Viridian Dynamics. And it's like, you know, just like this. They just, like, they don't really know what they do. They have, like, scientists who kind of do, like, hilariously evil stuff. Like, they make, like, fake meat and, like, I don't know. It's cute, but there's a whole episode about a project called Jabberwocky, but no one remembers who's supposed to do it, and no one knows what it is. So they do a presentation about it, and they're like, it's faster than a cheetah. It's gonna change everything. Blah, blah, blah. And then they give it to, like, the R D department. It's just like a folder with nothing in it. And they're like, let's send this to the Japan team. Send to Japan. And a guy in Japan is like, do you guys get it? And they're like, yeah, don't you get it? He's like, I saw that be more than one page. And he's like, but I get it. They're like, yeah, yeah, we all get it. You know, like, yeah, just go with it. You go with it. You don't want to be the guy who's like, also.
>> Farz: You go with it because, like, this business is paying for your mortgage. It's paying for your kids college. It's made some of y' all millionaires. Like, why would you ever try to mess that up?
>> Taylor: Yeah, absolutely.
SEC announces a formal investigation into Enron on October 24, 2001
Such a good question. So that's happening October 24, 2001. The SEC announced a formal investigation. And then this is when, you know, the stock totally tanks. They fire vast out on October 24th. Finally, and in early November, it. You know, people would. Didn't want to give them any money, obviously. Like, they couldn't actually get any real loans, like, real Money to try to kind of try to fix it. Basically, they were like, you guys failed at being a company that like, takes care of their books and the stock kept you to fall. By Nov. 9, Enron tried to merge with a place called Dyna G, which was like, really weird because Dynaji was like a small group that was across the street from them. They like, would get made fun of by Enron guys being bullies to them all the. And then they're like, why don't you buy us? And they. The. That deal was 8 to $10 per share. But it got worse. In the end of November, the credit agencies downgraded it to a junk status. So it was a junk bond. Like, they didn't recommend anybody buys it, buy it, and they didn't have any money to get out of it. Dynagy decided to say no, and the stock went under a dollar. So also, like, all those people who they told to invest in trial 401k into Enron stock have no money anymore.
>> Farz: Yeah.
>> Taylor: And they never were recouped from their money. Like, a lot of those people just lost everything. And that's like, you know, 20,000 people.
>> Farz: And. And like, I think like, this was like the turning point in American history around. Like, you stay with one company, you believe them, you do your thing with them. So, like, a lot of these who were there for like 15 years, totally, you know, so.
>> Taylor: Yeah, yeah. On December 2, 2001, Enron Fire filed for Chapter 11 bankruptcy. And it was the largest or the largest corpor failures in history. You know, like I said, it went from $90 to 26 cents a share. Share. Shareholders lost an estimated $74 billion in value as it totally collapsed. So people got in trouble, obviously. And it ended up being the US Department of Justice formed an Enron task force and they interviewed and charged almost two dozen Enron executives and associates with where they were convicted of crimes from fraud, conspiracy to insider trading. Ken Lay was convicted in May 2006 on six counts of conspiracy and fraud related to deceiving the public, and on four counts of bank fraud. He was going to be in prison for decades, but he died of a heart attack before he was put into prison.
>> Farz: I see him.
>> Taylor: Yeah, he didn't have to go. Jeffrey Skilling was convicted in 2006 on multiple counts of securities fraud, conspiracy, insider trading and making false statements. He was sentenced to 24 years in prison, which was reduced to 14 years after appeal and then dropped further. He also forfeited $42 million that went to compensate some of the victims. He served 12 years and was released in 2019.
>> Farz: Yeah.
>> Taylor: Andy Fastow pled guilty in 2004 of two counts of conspiracy, securities fraud and wires fraud. He had admitted to contacting the schemes to hide the debt and inflate profits while enriching himself, which is like criminal, criminal s*** because he testified against others, because he's a jerk. He was sentenced to 10 years, but ended up with five because of the cooperation. And he was released in 2011. Other executives went to prison. Richard Causey served five and a half years. Ben Gilson, five. Michael Cooper, three. Mark Koenig was headed best of relations, served 18 months. Liu Pai was not charged with any wrongdoing. And he just got away. This, My other notes say here, I got $270 million. So Lupi wins.
>> Farz: I'm proud of you guys.
>> Taylor: And then Arthur Anderson was indicted for obstruction of justice, and a jury found them guilty of destroying audit documents. And that was actually overturned by the Supreme Court in 2005. But it didn't matter. No one would want them to be their accountant anymore. They lost most of his clients and business, and it ceased business in 2002. It had been around for 89 years.
>> Farz: No, that's a. That's the whole. The whole story is super, super interesting and is a great example of moral hazard around simply buying into the ethos that is in. In the culture around someone.
Several things remind me of the story of General Electric GE
It reminds me. You remind me a lot in this conversation. I was looking it up right now. So if anybody's interested in like corporate failure stuff or like how this all ends up happening, think. Several things remind me of the story of General Electric GE around how GE went from being like a maker of things to a financial services company in large part because of their pension fund. And you also touched on 9 11, which is really interesting because four days before 9 11, Jack Welch, the probably the first celebrity CEO in the world, he was a CEO of GE. He had stepped down and Jeffrey Emmelt took over as CEO of GE. And then 911 happened. And I don't know if people know this, but GE makes, made a ton of money off creating and selling jet engines. And then nobody was ordering jets because nobody was flying and the fleet was already huge. And so anyways, long story short, Freakonomics episode 452 is called Jeff Emmel knows he let you down. And it's them interviewing him about the sell off of GE and the decline. And it is such a similar story where, I mean, they didn't go under, obviously, but like, it's a great story about how you get distracted, you get diversified, you think you're really big and you try to be really big, but you don't skill the right ways. And like it's. It's this story minus the transparent obvious fraud of Andy Fastow moving debt around. So anyways that's out there. It's a super interesting story.
>> Taylor: That's interesting. Listen to it. Also forgot to mention there are some new laws since this happened. There's one called Enron's law, which is the Sarbanes Oxley act of 2002, which means that someone there is now a public company accounting oversight board that audits the auditors.
>> Farz: Yeah, yeah.
>> Taylor: You gotta, you gotta be doing a good job. You can't self regulate if you are the auditor. And then just. There's also stronger auditor rules and then also increased penalties for shredding documents and deleting files and destroying computers and. And all of those kind of fun things that people were doing.
>> Farz: Yeah. One thing that also came from that. I forgot what the name of it was. Master of Lies, I think with Robert De Niro playing Madoff. Jack Madoff.
>> Taylor: Bernie Madoff.
>> Farz: Bernie Madoff. Yeah. Sorry. He. They also kind of referenced the fact that the regulators are never as smart as the perpetrators because if they were as smart as the perpetrators it would become the perpetrators because the money is so enticing on the other side.
>> Taylor: That sucks. But that's totally true.
>> Farz: So. Yeah, it's a weird. It's a weird conundrum.
>> Taylor: Yeah.
>> Farz: Any who.
>> Taylor: But yeah, please watch Smart Skies in the room. It is so good.
>> Farz: Yeah. I might actually.
>> Taylor: It has like such amazingly every like chapter in the movie, like every new scene that they bring up like a really fun song of the time also, you know, they play like the Red Hot Chili Peppers. California.
>> Farz: Yeah.
>> Taylor: It's so good.
>> Farz: That's when the, the brownouts were happening.
>> Taylor: Yeah, it's just wonderful. You'll watch it and be like everything's a conspiracy. It's crazy. And then you'll watch it again. It's just great.
>> Farz: And they. And they brought up the recall election that got Arnold elected and yeah, it's a, it's a whole we web that they weave. I love that one. That's very fun. Awesome. Thanks for sharing, Taylor.
>> Taylor: You're welcome. Thanks for spending so much time with me. I feel like we did. We talked for a long time today. Two long ones.
>> Farz: Yeah, but they were good ones. I think.
>> Taylor: I think so too.
>> Farz: Hopefully you, the audience will agree that they're good ones. And if they were good ones. Go ahead and subscribe us. Subscribe your family members, your loved ones, your children, if they have iPhones and. And also write to us at doom to failpod Gmail.com. find us on the socials that Taylor manages exceptionally well at. Doom to Fell Pod. Tick tock, Insta Facebook.
>> Taylor: That's it. Yeah. Also, wait, I lost it. I was gonna tell you. Oh, guess what episode number this is.200. It's 199.
>> Farz: No way.
>> Taylor: Yeah. That's not fun.
Next episode is me and I have another big one that I need to get
>> Farz: Well, we're almost there.
>> Taylor: So we almost made it. Next episode is me and I have another big one that I'm excited about doing that I need to get. I need to get to. You should see me. I was listening to this book at 2.75 speed this morning at chess club and other parents were like, what are you doing? I was like, I have to learn about Enron. I have to finish learning about Enro. Thank you. Happy Tuesday. I'm going to go by Mary. Like, it was so fun.
>> Farz: There's something so interesting about, like, when humans do things as a conglomerate and I don't know, for some reason, because, like, we can't escape our failings of being shady, corrupt. Like, it's so fascinating when, like, it happens in a very grand way because it's always explosive. It's never like a flame going out. It's like a explosion going off and so anyways, yeah, thanks for sharing. Hope it'll be a fun one next week too, for both of us. I think so.
>> Taylor: Yeah. Cool. Well, thank you. Have a good evening.
>> Farz: Do we have an email?
>> Taylor: Oh, no. Email us if you want to. I'll answer.
>> Farz: We. We will answer and read it if you want or you don't. So. Okay, awesome.
>> Taylor: Oh, that'd be fun.
>> Farz: Yeah, listen, or mail right to us. We'll read it. Or if you tell us not to, we'll paraphrase.
You did one about rollercoaster accidents and it is episode 90
>> Taylor: Oh, wait, I do have something. I texted you. I'm so sorry, everyone. My cousin texted me. She's a teacher in Ohio and she went to the. Was it called King's Landing?
>> Farz: Yeah, King. King Island. Kings Island.
>> Taylor: Kings island, which you talked about in. Oh, my God. Episode forever ago.
>> Farz: I don't know which episode that was.
>> Taylor: Because I'm gonna look it up because we. You did one about rollercoaster accidents and it is episode 90. No, I'm sorry, episode 69 was click in Buckle up, Rol. Accidents. And you mention in Kings island, there was a time in the 70s where a high school party. Right. If I remember a dude was drunk and he tried to climb out of this little Eiffel Tower. He was trying to climb it or whatever and he fell. And she sent me a picture of the Eiffel Tower because it still exists and her students dropped eggs off of it this weekend.
>> Farz: Fun fact, he didn't fall. He got impaled by the elevator. The lift that went up and caught his body as he was trying to cross between separate beams.
>> Taylor: Games.
>> Farz: It's a gruesome story. Go listen to that one.
>> Taylor: It's a good one. That's a good one. So yeah, listen to that one. Thank you for sending that in. That's real fun and so funny that like, you were like, they should have taken that down.
>> Farz: They should definitely should have taken that down.
>> Taylor: Close it off and then we're back there. So you know what? It is cool.
>> Farz: Sweet. Well, thanks. We'll go ahead and cut it off there.