The Dumbest Guys In The Room

Enron: The Smartest Guys in the Room

This almost 2hr Documentary delves into the biggest collapse in corporate History. A detailed description is unnecessary as most people are familiar with the story. To sum up what went wrong at Enron in a nutshell I would say Greed - massive amounts of it. Not only inside Enron itself but half the investment banking community that supported Enron's back door deals. The 3 masterminds at the centre of the Enron scam, Ken Lay, Jeff Skilling and Andy Fastow, created an alternative reality where corporate laws such as conflict of interest didn't exist. Blinded by their own success at deception they deceived themselves into believing their constructed reality was real - for anyone who participated in the dotcom boom you'll know what I mean.

From an investment point of view what is amazing is that amongst all these so-called smart guys none of them knew how to run a profitable business. Thus they ran an unprofitable and illegal one that was presented as both legal and profitable through market manipuation and some very creative accounting. The passive acceptance by the investment banking community of Enron's supposed 'amazing results' was astounding. The way Enron generated their profits was referred to as a Black box as none of the Wall street analysts could understand it and thus took the company's word as gospel. The same reasoning is employed by those who believe in magic. Incidentally the only analyst who had the audacity to doubt Enron's presented results was fired by Merril Lynch. Benjamin Graham's famous words "Wall Street people learn nothing and forget everything" has never rung truer.

In the context of the Australian market mention of the word 'Black Box' brings to mind Macquarie Bank. Analysts have never really understood how Macquarie get their results and have come to accept that Macquarie can decide what their results will be each period. That's not to say that Macquarie Bank is another Enron. Far from it, Macquarie has been one of the most successful stocks on the ASX over the last 15 years. The lesson here is that if you don't really understand how a business makes its money then you would be well advised to steer clear.