I first read Bethany McLean’s business and finance journalism in the late 90s as Enron boomed like no one could believe then busted as only a few could understand. For me the beginning of the end of Enron was her article, “Is Enron Overpriced?” She’s written about the painful, sometimes catastrophic ways reality eventually overshadows spin and propaganda, so I can also trace the beginnings of the 2008 Financial Crisis to the kinds of policies and practices that crashed Enron.
“But for all the attention that’s lavished on Enron, the company remains largely impenetrable to outsiders, as even some of its admirers are quick to admit. Start with a pretty straightforward question: How exactly does Enron make its money? Details are hard to come by because Enron keeps many of the specifics confidential for what it terms “competitive reasons.” And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. “If you figure it out, let me know,” laughs credit analyst Todd Shipman at S&P. “Do you have a year?” asks Ralph Pellecchia, Fitch’s credit analyst, in response to the same question.
To skeptics, the lack of clarity raises a red flag about Enron’s pricey stock. Even owners of the stock aren’t uniformly sanguine. “I’m somewhat afraid of it,” admits one portfolio manager. And the inability to get behind the numbers combined with ever higher expectations for the company may increase the chance of a nasty surprise. “Enron is an earnings-at-risk story,” says Chris Wolfe, the equity market strategist at J.P. Morgan’s private bank, who despite his remark is an Enron fan. “If it doesn’t meet earnings, [the stock] could implode.””
“Is Enron Overpriced?” | Fortune | Bethany McLean | 03/05/2001
I re-read “Is Enron Overpriced” every now and then because McLean is a very fine writer with a clear, effortless voice and a flare for weaving facts into a compelling narrative. And because ours is a world in which many emperors wear no clothes but can convince us they’re robed in the finest silks. Also because there will always another Enron out there, lurking just beyond our unexamined assumptions and our greed.
That said, there will also be another Cassandra who’ll call bullshit on fraud and criminality but won’t be taken seriously at all.
“[D]escribing what Enron does isn’t easy, because what it does is mind-numbingly complex. CEO Jeff Skilling calls Enron a “logistics company” that ties together supply and demand for a given commodity and figures out the most cost-effective way to transport that commodity to its destination. Enron also uses derivatives, like swaps, options, and forwards, to create contracts for third parties and to hedge its exposure to credit risks and other variables. If you thought Enron was just an energy company, have a look at its SEC filings. In its 1999 annual report the company wrote that “the use of financial instruments by Enron’s businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates, and foreign exchange rates.””
McLean could’ve written this passage about Lehman Brothers in 2007, or the entire financial industry in 2008.
“In the end, it boils down to a question of faith. “Enron is no black box,” says Goldman’s Fleischer. “That’s like calling Michael Jordan a black box just because you don’t know what he’s going to score every quarter.” Then again, Jordan never had to promise to hit a certain number of shots in order to please investors.”
Or the White House now.
On this, the 10th anniversary of the 2008 Financial Crisis, anyone who’s read this far should read McLean’s entire article, too. Another crisis is coming. Any of us will want to be the one who can say “I knew it, and here’s why” at some bar or cocktail party. Or in a prison cell.
IMAGE SOURCE: Enron, Houston Texas