Review: The Smartest Guys in the Room

Title: The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
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This is a story of amazing arrogance, hubris and corruption. Enron was a poster child of capitalism. Voted the most innovative company in America for six years in a row, this company was a darling of Wall Street. For a long time, it could seemingly do no wrong. Year after year, the company announced steadily rising earnings which were rewarded by a steadily rising share price. Shareholders, many of whom were Enron employees, made millions.

The company played a major role in transforming a sleepy industry like natural gas into a more dynamic and innovative market. However, right from the beginning, the pressures that were later to lead people to engage in outright fraud were beginning to be felt. These pressures were initially contained. The company engaged in financial manipulations from the get go but these manipulations were not allowed to escalate. At a later stage, Enron became heavily dependent on financial irregularities in an effort to keep its share price up. Not that the company acted alone. Fraud on this massive a scale requires the tacit (and sometimes explicit) cooperation of other parties. Enron could get away with playing fast and loose on its balance sheet and income statement because its auditors signed off on those statements. Who were these gullible dupes? None other than the venerable firm of Arthur Anderson! Similarly, the analysts employed by many Wall Street firms played their part in hyping Enron's story. Even after they no longer believed that Enron was a good buy, they still kept hyping it to the larger public. What was the motive behind these deceitful acts? Fat consulting fees. Enron was one of the largest consumers of consultancy and underwriting services in the US and if companies did not play ball, they got locked out of these lucrative fees. We are talking tens of millions of dollars here.

The tale of Enron shows the corporate world at its worst. It shows people willing to do anything in order to make a quick buck. Enron's employees even acted against the long term best interests of their organization. This was highlighted by the California energy scandal. For a long time, Enron had argued in favor of deregulating the electricity market saying that the private sector would be more efficient and would result in lower electricity costs to businesses and consumers. California went the furthest in deregulating electricity. Enron's traders discovered that the spot price of electricity could be manipulated for increased revenues. The result? Rolling blackouts in California and massive profit for the firm. However, there was also a backlash against electricity deregulation that permanently foreclosed Enron's efforts to deregulate the national market. What happened to the traders who had manipulated the market and thereby doomed Enron's larger efforts? They got promoted. There is story after story of short term tactics being used at the expense of the long term. This manipulation even extended to the firm itself. Everyone from the chairman down treated Enron as their own piggy bank. No one considered controlling expenses until 2000 when the company had been in existence for almost 15 years.

All in all, The Smartest Guy in the Room is a cautionary tale of extraordinary greed, arrogance and hubris. A feeling that people working in Enron were masters of the universe; that they could do no wrong and an apparently unshakable belief that they could do whatever they liked without having to worry about a day of reckoning.

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