“The Smartest Guys in the Room” tells the story of energy trader Enron – once a symbol of Wall Street innovation – and its sudden collapse from lofty heights. A gripping story of financial deceit is told in this book, which sheds light on Enron’s corporate culture and how it sank.
You may be wondering if you should read the book. This book review will tell you what important lessons you can learn from this book so you can decide if it is worth your time.
At the end of this book review, I’ll also tell you the best way to get rich by reading and writing.
Without further ado, let’s get started.
The Smartest Guys in the Room Book Summary
Lesson 1: Even though they knew Enron was trying to cover up its debts, analysts still gave the company high marks.
Given what you now know about Enron, Thomas Kuhn’s description of Enron executives as “like whiz kids – golden boys who could do no wrong” may seem odd. Kuhn was president of the Edison Electric Institute. Skilling and Lay have been compared favorably to Bill Gates of Microsoft and Steve Jobs of Apple.
Enron’s performance was believed by analysts. For example, at Enron’s annual analyst meeting in January 2000, Skilling and other executives analyzed the performance of each business unit.
Tell me about some of the most exciting things that happened during that meeting.
Skilling estimated the new company’s valuation at $29 billion, and Enron executives claimed it would be the “world’s largest provider of premium broadband services.”
In response, 200 analysts at their trading desks clamored to invest in Enron, and the room exploded. In one day, the stock price rose 26%. Enron basked in a sea of praise, and no analyst dared ask any tough questions.
Analysts may not have known what lay behind Enron’s shiny facade, but a surprising number of others did.
Investors and industry experts knew, for example, that the company’s reported profits were far below its actual revenues. In mid-1999, JP Morgan analyst Kyle Rudden noted that “ENE [Enron’s stock symbol] is not a cash story… Enron is able to structure contracts to generate revenue.”
On the other hand, analysts had more information. Enron had a lot of off-balance sheet debt (debt that is not reported on a company’s balance sheet), but that was rarely mentioned in the reports.
Lesson 2: In 2000, Enron’s financial situation caused a stir due to some strange business transactions.
On December 13, 2000, Skilling was at the helm of Enron; Ken Lay had just been named the company’s new CEO. Business Week praised his performance and ranked him the second-best CEO in the United States, surpassed only by Microsoft’s Steve Ballmer. After just three months, Mr. Skilling was already an integral part of the team.
Despite Skilling’s claims to the contrary, skepticism about Enron’s success persisted. The Wall Street Journal’s Texas Journal published an article on Sept. 20, 2000, about how energy traders like Enron used mark-to-market accounting to book profits before the money was actually in the account.
Jim Chanos, an influential hedge fund manager, found the story fascinating. He exposed the fact that Enron was actually losing money despite claims of rising profits. The article, titled “Is Enron Overpriced?” was published in Fortune in March 2001 and included his skepticism of the company.
The article pointed out that investors had become increasingly wary of Enron because of the company’s lack of cash flow and rising debt.
Skepticism increased even further after Skilling’s unexpected departure as CEO.
The company announced his resignation on August 14, 2001, and Ken Lay was named his successor. Skilling told shareholders, “There is nothing to announce, the company is in excellent shape…this is a very personal decision.”
This was a very unusual action. What could cause a CEO to resign after only six months on the job? An unexpected resignation like Skilling’s would only fuel rumors of problems at Enron.
Lesson 3: Due to its enormous debts, Enron was forced to file for bankruptcy.
Sherron Watkins, a longtime Enron employee, emailed company founder Ken Lay the day after Skilling’s resignation, saying, “I am afraid we are going to implode in a wave of accounting scandals.”
An Enron executive said, “Ken thought Enron’s problems could be fixed by doing what Enron did right,” but Lay seemed unconcerned. Despite Lay’s best efforts, Enron’s massive debt and falling stock price would inevitably lead to the company’s demise.
Some of the deals Enron made to raise money included provisions that would have forced the company to immediately repay billions of dollars in debt if the company’s stock price or credit rating fell below a certain level.
By the time the media exposed Enron’s financial mismanagement, the company’s stock price had already fallen below the threshold for such deals and its credit rating had been downgraded to junk status.
In August 2000, Enron’s stock was worth $90 per share, its all-time high. By October 2001, it had fallen to less than $20 per share.
Unless two or three billion dollars were raised quickly, the company faced closure by its creditors. But even that was out of the question because Enron had exhausted its available credit.
Only by merging with another Houston-based energy trader, Dynegy, could Enron avoid bankruptcy. Both financial market participants and Dynegy executives had second thoughts about the deal after realizing that it would have far-reaching consequences.
After the deal failed and they had no other choice, Enron filed for bankruptcy on December 2, 2001.
Lesson 4: Three former Enron executives, Ken Lay, Jeffrey Skilling, and Andrew Fastow, were recently sentenced to long prison terms for fraud.
After Enron’s collapse, all of them, including the board, denied any responsibility. In 2003, however, federal prosecutors issued a series of indictments, and the facade quickly collapsed. Of the 33 people indicted, 25 were former Enron executives.
Below is what happened to the four most important individuals, Lay, Skilling, Fastow and Mark:
In 2004, Fastow pleaded guilty to all charges. As part of his sentence, O’Neill admitted that he and other high-level Enron executives had engaged in fraudulent manipulation of Enron’s publicly reported financial results. Six years later, in 2011, he was finally released. By concealing Enron’s true financial condition, we hoped to artificially inflate the stock price and fraudulently keep the company’s credit rating stable.
Ken Lay was found guilty on all ten counts, including conspiracy, making false statements, and fraud, but he died before serving a single day in prison. Before his sentence was determined, he suffered a heart attack outside Aspen, Colorado, on July 5, 2006, and died.
In 2004, Skilling was indicted on 35 counts of conspiracy, fraud and insider trading. Despite his protestations that he had no knowledge of the company’s poor financial condition, he was found guilty on 19 counts by a jury in 2006 and subsequently sentenced to more than 24 years in prison and fined $45 million.
What do you think, Rebecca Mark?
In August 2000, before the scandal broke, she resigned from Enron with a huge $82.5 million windfall from selling her Enron stock at the company’s peak. As far as we know, Mark was never charged with anything.
The Smartest Guys in the Room Book Review
The Smartest Guys in the Room is a great book I’d like to recommend to anyone who is interested in business and finance. If you spend some time digesting the ideas, it might make a positive impact on your life.
The book exposes the Enron financial fraud. From this case study, you can get some advice on how to avoid choosing the wrong stocks. To artificially inflate its stock price, energy giant Enron used fraudulent business practices, such as a series of accounting scams and a toxic business culture. As a result of its fraudulent practices, the company ultimately failed, leading to the largest bankruptcy case in U.S. history and numerous indictments.
Jeff Skilling’s whole world revolved around Enron’s stock price. He treated his company’s stock price like a report card, calling several times a day even when he was out of the office.
As important as it is to keep an eye on your company’s finances, Skilling’s obsession was the spark that ignited criminal impulses and ultimately got Enron into trouble. Remember that a rapid rise in stock prices is usually followed by an even more rapid decline.
It is better to strive for a gradual but steady expansion of the company than to maintain a high stock price.
About the Author
Bethany McLean of Fortune published the article “Is Enron Overpriced?” in March 2001. ” making her the first journalist from a national publication to openly question what was happening at Enron. McLean writes a column for Reuters and is also a contributor to Vanity Fair.
The Death Shift and Client 9: The Rise and Fall of Eliot Spitzer are books by journalist Peter Elkind. He has written for The New York Times and The Washington Post and is now the executive editor of Fortune.
Buy The Book: The Smartest Guys in the Room
If you want to buy the book The Smartest Guys in the Room, you can get it from the following links:
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