How far would you go to be part of a group? What would you do to fit in? Would you commit crimes to get ahead, and encourage others around you to do so too?
In one way or another, senior staff at Enron were actively involved, or complicit in crimes. In this episode, we analyse the Enron story through the lense of the Emperor's new clothes by Hans Christian Andersen, and Psychological studies into the phenomenon of conformity.
Thank you for listening, if you enjoyed it- please leave a review, share with your network and help us spread the word.
How far would you go to be part of a group? What would you do to fit in? Would you commit crimes to get ahead, and encourage others around you to do so too?
In one way or another, senior staff at Enron were actively involved, or complicit in crimes. In this episode, we analyse the Enron story through the lense of the Emperor's new clothes by Hans Christian Andersen, and Psychological studies into the phenomenon of conformity.
Thank you for listening, if you enjoyed it- please leave a review, share with your network and help us spread the word.
The emperor’s new Enron
Introduction
Hi I'm Rumbie. Welcome to “there's a book for that”, a podcast in which I, a bookworm, talk about different books I have read and apply lessons or themes from those books to social issues.
After last week’s difficult episode, I thought we might talk about something more neutral with a two for one special, (although I will always talk about more than a single book, for information and facts, only one will form the basis of the show) with a fairytale by Hans Christian Andersen, “The Emperor’s new clothes”, and “The Smartest Guys in the room” by Bethany Maclean and Peter Elkind. You may be wondering what those two have in common, and the simple answer is, “conformity, and crime”. Using this fairytale, and the book on Enron, once an illustrious energy company, I will discuss the role of conformity in ruining reputations, businesses, and lives.
The story of Enron has captured popular imagination since it’s downfall in 2001, with numerous pop culture references and a not terrible movie on YouTube. I first developed an interest in white collar crime while working as a young researcher at Chambers and Partners, an organisation that ranks the best lawyers and law firms in the world. I had to speak to lawyers and find out what they were working on, talk to their clients and then rank them according to their practise area. One of my practice areas for the USA guide was white collar crime in New Jersey and I ended up talking to a lawyer who was representing Solomon Dwek, then accused of bank fraud in New Jersey.
Honestly, I had no idea about the subject, but after researching the topic for a month, I was hooked, and decided to continue my research. I basically just followed the white rabbit into a big hole, watching random YouTube videos about Charles Ponzi, Bernie Madoff, and other white-collar criminals, reading articles about a guy who crashed a huge bank in Singapore at which the then Queen of England banked her huge colonial riches. Nobody was safe from white collar criminals. I discovered the podcast “American Greed” watched “The Big Short” and more recently obviously encountered Billy and his ill-fated festival, the Tinder Swindler and of course the collapses of SVB, Credit Suisse and FTX, which have given us all pause for thought, even if the banks did not collapse due to “crimes”, but rather fallouts from a lax regulatory system.
I developed a real interest in finance and economics because one thing that I wanted to understand the mechanisms of the crimes, and whether the businesses could actually have worked. I am still convinced I could have made Fyre Fest work. I also found the name white collar crime fascinating with its hints at refined crime not those blue collar, manual labourers who commit regular “violent crimes”. Instead with white collar crimes, we are confronted with the best of society somehow turning out to be wicked and duplicitous and everyone is surprised that people who spend money like fish drink water don’t actually have all that wealth. We are so primed by social conditioning to trust these well turned out people in expensive cars, wearing expensive clothes and they take advantage of it every time, more fool us.
So, as I began to look more deeply into it I began to see a trend. Most white-collar criminals are heavily dependent on strong networks and communities especially in the early days, when the scheme and its potential benefits are spread solely by word of mouth. This is especially true in the case of “sole traders” like Charles Ponzi or Billy McFarland who start something on their own as opposed to what we're going to be talking about today which is a huge company full of criminals. But even then, they also still rely on their network being able to fend for them, being able to vouch for them, recommend smart young talents who can be indoctrinated into the business and be willing to follow them wherever they may lead. In fact, in a lot of cases of white-collar crime, nothing would be possible without people willing to trust completely, and support someone or something even against evidence that they should not, even those whose literal job is to know better and ask tough questions. Who would have thought that building and working in rooms full of paid sycophants can have negative repercussions? I am sure you are as shocked as I am.
So, lets’ start with a little background. From the introduction to “the smartest guys in the room”, we learn that,
QUOTE “The tale of Enron is a story of human weakness of hubris and greed and the rampant self-delusion of ambition run amok of a grey grand experiment in the deregulated world of a business model that didn't work and of smart people who believe that their next gamble would cover their last disaster and who couldn't admit they were wrong.” END QUOTE
The book was written in 2003 following the implosion of Enron in 2001 so pretty quickly after the collapse of Enron. The writers interviewed a lot of people and found out what things were like for people who were working there. They then put it together in this is fun book. I would recommend it as a read because I really enjoy reading the book for the same reason that I enjoyed watching the Wolf of Wall Street. These are horrible people having a good time and when you look at what they're doing you think to yourself wow crime really does pay. I think it’s important to have that perspective, and realise that without sufficient regulations, most people committing white collar crimes, i.e., people with good lawyers and accountants get away with most things, most of the time, and they have a rollicking good time. There is no remorse.
When you see what people were doing in the 80s and 90s you understand why nobody has money now because a lot of people really did fun, dumb things with other people's money when crime was paying. One thing about white collar criminals is that they know how to party which they do because it's somebody else’s money that they are spending, and honestly, for the top 10% of executives, life at Enron was amazing. But how did we get there?
Background and Context
So, the short and simple explanation for what went wrong at Enron is imagine that you have the idea to build a big, beautiful hotel out of Lego. You are Ken Lay, CEO of Enron. You have this idea of this hotel, but you don't have enough money to make it as big and beautiful as you would like. So, you go to the stock market, you got outside, you talk to your friends and neighbours, whatever you have in your little village where you've decided to build this hotel. And you say, can we all go to the Lego store together and we all buy bricks? And we'll all be shareholders- that is, we will all own bricks in the hotel. And every time that somebody comes to stay at the hotel, we split the money according to how many bricks you have, how many bricks you own. Right. And that's perfect if you're building things right. What Enron did was say that their bricks were made of gold, so they were very valuable, but actually their bricks were made of wood, and the hotel was built by the sea. They then did lots of weird accounting tricks to try and hide this, so they could charge people for gold, while buying wood, and paying themselves the difference. So, by the end the wood had rotted through but from the bottom, Lbut nobody could see because the hotel looks still looked beautiful right till the end. But inside it was rotten through, and the building collapsed devaluing the logo bricks which everyone thought were gold and leaving them with virtually nothing. That's the short version. You can Fast forward about 5 minutes while I do the long version and talk about special purpose vehicles and whatnot.
*******
So, Enron was an energy company formed in 1986 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. After the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston Natural Gas, became Enron's CEO and chair. Lay quickly rebranded Enron into an energy trader and supplier. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, to head the new corporation. By 1992, the company had become the largest natural gas provider in North America, which is why their collapse a mere decade later was such a huge deal.
The Journal of Accountancy, a group of people who were shamed by the sycophantic antics of the auditors, Arthur Andersen who basically lost all credibility and independence and started acting as though they too worked at Enron, and helped to obfuscate matters and hide criminal activity from the investors, analysts etc noted,
Quote “Coincidentally, but not inconsequentially, the U.S. economy during the 1990s was experiencing the longest bull market in its history. Enron’s corporate leadership, Lay excluded, comprised mostly young people who had never experienced an extended bear market. New investment opportunities were opening up everywhere, including markets in energy futures. Wall Street demanded double-digit growth from practically every venture, and Enron was determined to deliver” End Quote.
An army of young optimists who thought that empires are forever were making shady decisions to make the future pay for the present, and eventually, it all fell down. They had a lot of motivation to do bad deals, like I said, everyone was having a good time, again from the Journal of Accountancy,
Quote, “Enron pampered its associates with a long list of corporate perks, including concierge services and a company gym. Skilling rewarded production with merit-based bonuses that had no cap, permitting traders to “eat what they killed.” End Quote
There was a lot of financial wizardry going on, basically, to return to our analogy, to hide the fact that the wood, while glittery, was not gold. This included mark to market accounting, which basically is like borrowing profit from your future and Special Purpose Entities, or Special Purpose Vehicles which are used to hide bad debt, so that people don’t know that the hotel is losing money.
Basically, to follow our hotel analogy, you realise that your Lego bricks and rotting, and not stable, so you buy a restaurant, so you can offer an all-inclusive experience, and distract people from the creaks and leaks, but you say that the restaurant belongs to someone else, so no one knows you bought it, because people don’t like when you spend money, while owing them money. Then if the restaurant makes money, you keep it as profit, and if it loses money, you can stand around like the hot dog man in I think you should leave, asking, “We’re all looking for the guy who did this”. Noice. Normally, this shouldn’t work as well as it did, because someone should be watching and making sure it doesn’t. I am sure we would all love to be able to hide our credit card debts and student loans in the Cayman islands when going for mortgages, but that’s a lifestyle of the rich and famous, not us povvos.
In Enron’s case, the auditors were complicit, so it worked,
Quote “by leveraging special purpose vehicles, special purpose entities, mark to market accounting, and financial reporting loopholes, Enron became one of the most successful companies in the world”. End Quote
This class A wizardry is what allowed Enron to be able to report market anomalies when it came to their stock prices.
Quote “Enron's stock price mostly followed the S&P 500 for most of the 1990's. However, expectations for the company began to soar. In 1999, the company's stock increased 56%. In 2000, it increased an additional 87%. Both returns widely beat broad market returns, and the company was soon trading at a 70x price-earnings ratio”. End Quote.
The S&P, like the New York Stock Exchange or the FTSE are like Top of the Pops or MTV music charts for stock prices, they tell you who everyone is buying, so you know who is most valuable. Now imagine if you saw a Soundcloud artist with 15 downloads and 100 listens on MTV, you’d be a little surprised right? What Enron basically did was listen to their own music from 1000 different devices and buy their own music until everyone thought they were great, and then once they were on MTV, everyone started to buy, encouraged by the analysts until one day, someone was like wait- that’s not right, but by then it’s too late coz the person has already been on MTV cribs showing off 20 beautiful expensive houses. This Top of the Pops analogy works especially well for Billy and Fyre Fest and the recently convicted Sam Bankman-Fried who literally just made sure they were seen with people who were already famous to build their credibility.
Another trend that I find in white collar crime, is amazing returns, which are outside the norm are 100% of the time, a lie, and anyone who engages will lose their money. Unless you are investing in something completely new, and even then it might take some time to get off the ground, stock prices usually remain stable, and it was the wizardry which allowed Enron to be spending money like they all had trust funds, while reporting record profits year on year. I am sure if we look at how much they paid in taxes we would be shocked- or not.
Anyway, by the end, execs had started behaving in shady ways, surreptitiously selling their stocks, calling people names, quitting and unquitting. Then finally, it all really began to unravel, as Wall Street analysts and publications began to ask tougher questions, realising that perhaps, they had been had. By October 2001, Enron had reported a third quarter loss of $618 million, which would have been okay eventually with some serious cost cutting. However, Enron then announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations, which made everyone’s spidey sense finally start tingling.
Then, on Nov. 28, 2001, credit rating agencies reduced Enron's credit rating to junk status, effectively solidifying the company's path to bankruptcy. As I said, finance, business depends on networks, and once the big names start giving up on you, you’re done. By the end of the day, Enron's stock price had dropped to $0.61. Just 5 months earlier, it has been around 90 bucks. In the end, Enron's $63.4 billion bankruptcy was the biggest on record at the time. This is more than the annual GDP of countries like Costa Rica, Jordan, Tunisia and Bahrain. That’s a lot of money.
The Emperor’s New Clothes
So now that we know a little more about ENRON and how things worked there, and where that led, I would like to raise my first question for analysis. Some of the things in the book seem so strange, so farfetched. I didn't even know it was possible for a company to lend it’s staff millions, for the company to have a fleet of private planes to be used by execs, that you could expense strippers and 10k lunches, but people at Enron did. The execs were jet setting, shaking hands with all the important people in Washington or further afield, building castles in the sky through a combination of great salesmanship, PowerPoint presentations and subterfuge which is a long way of saying they were lying. So much of what went on was such an open secret that one has to wonder WHY everyone was so willing to be complicit, until the company went under, beneath the weight of all those lies.
In thinking about an answer to that question I went back to my childhood and the well-known tale of conformity and corruption by Hans Christian Andersen, The Emperor's New Clothes. I will now read it in full.
THE EMPEROR'S NEW CLOTHES
Hans Christian Andersen’s "keiserens nye klæder" TRANSLATION by jean hersholt. QUOTE
“Many years ago there was an Emperor so exceedingly fond of new clothes that he spent all his money on being well dressed. He cared nothing about reviewing his soldiers, going to the theatre, or going for a ride in his carriage, except to show off his new clothes. He had a coat for every hour of the day, and instead of saying, as one might, about any other ruler, "The King's in council," here they always said. "The Emperor's in his dressing room."
In the great city where he lived, life was always gay. Every day many strangers came to town, and among them one day came two swindlers. They let it be known they were weavers, and they said they could weave the most magnificent fabrics imaginable. Not only were their colors and patterns uncommonly fine, but clothes made of this cloth had a wonderful way of becoming invisible to anyone who was unfit for his office, or who was unusually stupid.
"Those would be just the clothes for me," thought the Emperor. "If I wore them I would be able to discover which men in my empire are unfit for their posts. And I could tell the wise men from the fools. Yes, I certainly must get some of the stuff woven for me right away." He paid the two swindlers a large sum of money to start work at once.
They set up two looms and pretended to weave, though there was nothing on the looms. All the finest silk and the purest old thread which they demanded went into their traveling bags, while they worked the empty looms far into the night.
"I'd like to know how those weavers are getting on with the cloth," the Emperor thought, but he felt slightly uncomfortable when he remembered that those who were unfit for their position would not be able to see the fabric. It couldn't have been that he doubted himself, yet he thought he'd rather send someone else to see how things were going. The whole town knew about the cloth's peculiar power, and all were impatient to find out how stupid their neighbours were.
"I'll send my honest old minister to the weavers," the Emperor decided. "He'll be the best one to tell me how the material looks, for he's a sensible man and no one does his duty better."
So the honest old minister went to the room where the two swindlers sat working away at their empty looms.
"Heaven help me," he thought as his eyes flew wide open, "I can't see anything at all". But he did not say so.
Both the swindlers begged him to be so kind as to come near to approve the excellent pattern, the beautiful colours. They pointed to the empty looms, and the poor old minister stared as hard as he dared. He couldn't see anything, because there was nothing to see. "Heaven have mercy," he thought. "Can it be that I'm a fool? I'd have never guessed it, and not a soul must know. Am I unfit to be the minister? It would never do to let on that I can't see the cloth."
"Don't hesitate to tell us what you think of it," said one of the weavers.
"Oh, it's beautiful -it's enchanting." The old minister peered through his spectacles. "Such a pattern, what colours!" I'll be sure to tell the Emperor how delighted I am with it."
"We're pleased to hear that," the swindlers said. They proceeded to name all the colours and to explain the intricate pattern. The old minister paid the closest attention, so that he could tell it all to the Emperor. And so he did.
The swindlers at once asked for more money, more silk and gold thread, to get on with the weaving. But it all went into their pockets. Not a thread went into the looms, though they worked at their weaving as hard as ever.
The Emperor presently sent another trustworthy official to see how the work progressed and how soon it would be ready. The same thing happened to him that had happened to the minister. He looked and he looked, but as there was nothing to see in the looms he couldn't see anything.
"Isn't it a beautiful piece of goods?" the swindlers asked him, as they displayed and described their imaginary pattern.
"I know I'm not stupid," the man thought, "so it must be that I'm unworthy of my good office. That's strange. I mustn't let anyone find it out, though." So he praised the material he did not see. He declared he was delighted with the beautiful colours and the exquisite pattern. To the Emperor he said, "It held me spellbound."
All the town was talking of this splendid cloth, and the Emperor wanted to see it for himself while it was still in the looms. Attended by a band of chosen men, among whom were his two old trusted officials-the ones who had been to the weavers-he set out to see the two swindlers. He found them weaving with might and main, but without a thread in their looms.
"Magnificent," said the two officials already duped. "Just look, Your Majesty, what colours! What a design!" They pointed to the empty looms, each supposing that the others could see the stuff.
"What's this?" thought the Emperor. "I can't see anything. This is terrible!
Am I a fool? Am I unfit to be the Emperor? What a thing to happen to me of all people! - Oh! It's very pretty," he said. "It has my highest approval." And he nodded approbation at the empty loom. Nothing could make him say that he couldn't see anything.
His whole retinue stared and stared. One saw no more than another, but they all joined the Emperor in exclaiming, "Oh! It's very pretty," and they advised him to wear clothes made of this wonderful cloth especially for the great procession he was soon to lead. "Magnificent! Excellent! Unsurpassed!" were bandied from mouth to mouth, and everyone did his best to seem well pleased. The Emperor gave each of the swindlers a cross to wear in his buttonhole, and the title of "Sir Weaver."
Before the procession the swindlers sat up all night and burned more than six candles, to show how busy they were finishing the Emperor's new clothes. They pretended to take the cloth off the loom. They made cuts in the air with huge scissors. And at last they said, "Now the Emperor's new clothes are ready for him."
Then the Emperor himself came with his noblest noblemen, and the swindlers each raised an arm as if they were holding something. They said, "These are the trousers, here's the coat, and this is the mantle," naming each garment. "All of them are as light as a spider web. One would almost think he had nothing on, but that's what makes them so fine."
"Exactly," all the noblemen agreed, though they could see nothing, for there was nothing to see.
"If Your Imperial Majesty will condescend to take your clothes off," said the swindlers, "we will help you on with your new ones here in front of the long mirror."
The Emperor undressed, and the swindlers pretended to put his new clothes on him, one garment after another. They took him around the waist and seemed to be fastening something - that was his train-as the Emperor turned round and round before the looking glass.
"How well Your Majesty's new clothes look. Aren't they becoming!" He heard on all sides, "That pattern, so perfect! Those colours, so suitable! It is a magnificent outfit."
Then the minister of public processions announced: "Your Majesty's canopy is waiting outside."
"Well, I'm supposed to be ready," the Emperor said, and turned again for one last look in the mirror. "It is a remarkable fit, isn't it?" He seemed to regard his costume with the greatest interest.
The noblemen who were to carry his train stooped low and reached for the floor as if they were picking up his mantle. Then they pretended to lift and hold it high. They didn't dare admit they had nothing to hold.
So off went the Emperor in procession under his splendid canopy. Everyone in the streets and the windows said, "Oh, how fine are the Emperor's new clothes! Don't they fit him to perfection? And see his long train!" Nobody would confess that he couldn't see anything, for that would prove him either unfit for his position, or a fool. No costume the Emperor had worn before was ever such a complete success.
"But he hasn't got anything on," a little child said.
"Did you ever hear such innocent prattle?" said its father. And one person whispered to another what the child had said, "He hasn't anything on. A child says he hasn't anything on."
"But he hasn't got anything on!" the whole town cried out at last.
The Emperor shivered, for he suspected they were right. But he thought, "This procession has got to go on." So he walked more proudly than ever, as his noblemen held high the train that wasn't there at all.” END QUOTE
So that was a little long, I apologise, but it does form the basis of my analysis for today. This story has always been particularly interesting to me because it's so dumb, so unlikely. Why would everyone lie to please an old man with too much power? When you put it like that though, it becomes perhaps a little easier to understand-I guess. One of the areas I was most interested in at Uni, perhaps the most- was social psychology. I wanted to understand how people work when they are part of a group, and honestly the answer is, they get a little scary. Conformity studies in psychology famously explored the role of an authority figure in getting people to do things, and that was scary.
They also explored what it means to conform even where there is no authority figure and when there is no threat of punishment if you don't conform, and again, still scary. Asch in 1951 showed through his experiments the importance of a numerical majority in creating an atmosphere of conformity. In the experiment, groups of 7 to 9 students were presented with some lines on a screen and asked which length of the line matched with another. They had to respond orally, in the presence of the other participants, who were not actually participants, but Confederates (people who were in on it). The participant also had to respond last, after everyone else had given their answers and the study showed that when the Confederates formed a wrong majority the subject conformed and also gave the wrong answer about 75% of the time. That’s a lot, folks.
In 1963, Stanley Milgram conducted a now seminal study on obedience. During it, participants were told that they were “teachers” in a learning experiment, and as part of that, would have to deliver electric shocks by pressing a button whenever the student got an answer wrong. They found that the majority of participants obeyed the rules and delivered the electric shocks (no one was actually getting shocked, but they could hear people complaining and crying out as they delivered these shocks, so to them it was real. When prompted to deliver increasingly dangerous levels of electric shocks to learners, the participants still obeyed even though they knew the voltage could kill them. Milgram concluded that the experimenters acted as authority figures thus creating a social pressure for participants to obey even against their own better judgement. We can see similar forces are at play in the Enron story.
One of the major fallouts from the collapse was the case of Arthur Andersen, the accounting firm which colluded in Enron’s “funny money” hustle by forcing their staff to work hard to keep Enron execs happy, even if that meant looking away from wrongdoing. Staff who shared some of their misgivings were moved off the account, a testament to the prevailing attitudes in which greed was good.
We also see the conformity in response to authority in the story of the emperor's new clothes where people refuse to believe and challenge the swindlers based on the evidence of their own eyes because of the fear of authority figures and the consequences of disobeying. We might consider ourselves immune to such pressures but time and again we have seen in crime, in politics, and even interpersonal relationships that group conformity and threats work to motivate people to act against their firmly held beliefs and do things they might not normally do. In the Asch study, follow up conversations revealed that some of the people who said that the lines matched, didn’t actually believe this was true. They just did not want to go against the group. Even though they didn't agree, participants later said that they thought they weren't seeing right just as we saw in the story of the emperor's new clothes. Some people even thought that perhaps they had misunderstood the task, so even in a situation where telling the truth had no negative consequences people still chose to conform in their numbers.
The results seemed to bleak so other research teams tried to switch the experiment around and see if they would get similar results. In those follow up studies, researchers found that while people conform to the majority up to 75% of the time when in a room with others, as in the original experiment, this only went down to 33% when they could give their responses alone.
The most significant thing for reducing conformity was the presence of dissenting voices, so you know, be thankful for people you disagree with, coz at least they make you think harder. In a different experiment, the study found that even if they're wrong, the presence of a dissenting voice can reduce conformity down to 5% when the confederate gives the right answer, down from 97% when the majority wrongly agreed. We see it in the story with the emperor, as soon as the kid calls out the bullshit, everyone else feels emboldened, but the parent of the child is the first to try and discredit him, and keep the lie going. No one wants to be the one taking a risk to call out bad behaviour, especially not at work where conformity and likability often form the basis for eligibility for promotions and salary raises, the pressure to conform can be a lot higher. In the smartest guys in the room, the authors outlined the culture at Enron and unfortunately it did not facilitate differences of opinion or dissent. They describe the
QUOTE “rank and yank” END QUOTE
approach to performance reviews in which every six months all employees except Jeff skilling and Ken Lay underwent individual reviews. During this session, one received written feedback reports from all colleagues and bosses assessing people in five criteria including teamwork, communication, of course the earnings- their bottom line. They describe the culture of friendships in which,
QUOTE “Executives simply refused to tell the truth about weak members of their team with whom they were friendly, knowing that all the other executives in the room were doing the exact same thing. Rather than reflecting a true meritocracy, the performance review committee became a perversion of it. Sometimes managers would purposely sabotage one candidate to ensure room at a higher level for one of their favourites”. END QUOTE
In such an environment, where bonuses could be up to six figures depending on how high up the food chain you are, would you risk rocking the boat with anything so inconvenient, as the truth? The role of individual authority figures who are able to go against regulatory standards, manipulate, cajole, and threaten people to obey are often the linchpins of such organisations. So much responsibility rests on their shoulders, the decision to say yes to some things and no to others that they become synonymous with their organisations and schemes. This is essentially what happened at Enron. The leadership fostered a culture of permissiveness in which appearances were more important than reality and for as long as the tide was out, the sandcastle was impressive but at the end of the day, it was still just a sandcastle.
You only need a small majority, or a powerful minority
In our little story our emperor in his new suit is relatively low stakes. He is rich and powerful; we almost applaud the swindlers who were able to take advantage of him and get away with it. However, in white collar crime this is rarely the case. The fallout from scandals like Enron in 2001 or SVB and FTX more recently and of course the crash in 2008 with its many moving parts revealed the importance of a fully functional system with the appropriate checks and balances to keep things from going awry.
When analysing seismic events such as the fall of Enron, SVB or FTX, it’s always important to remember that we are talking about systems. In an empire, the emperor is essentially the system, which is why he could afford to look stupid. However, in a democracy, in the capitalistic system in which we live, there are many cogs coming together to make the machine. If we allow ourselves to focus on individuals, we will lose the woods for the trees, because the behaviour of individuals can be misleading. Andy Fastow created an accounting culture in which 600 people colluded to get paid. Ken Lay created an organisation in which bullies and lies thrived and criminal activity was rife. But even when we consider these sizeable influences, the wider picture is that all this took place within a wider context, which is the way that stock markets and Wall Street, and regulations work.
While studying chemistry during the IB, I remember learning something which still blows my mind which is that in a kettle of water at 98 degrees, not all the molecules are the same temperature. Some are still cold, they have no kinetic energy at all, while the other ones have like 100% kinetic energy they're ready to become more, vapour basically. It's like a club. Some people are dancing, and some people are just sitting hugging the wall. That's what's happening in the water and what we know as temperature is the average of what's going on in that kettle, just as we know whether the club is happening (or whatever the youths are saying now) based on the majority of people who are dancing- not that everyone is dancing. So, in a system such as a kettle of boiling water or a club all you need is a majority to overwhelm the rest.
This is what happens with conformity, especially in a business-like Enron you just need the majority of people to be willing to collude, to be willing to bully their subordinates and make sure that they committed the crimes. You need the accounting team to agree to stretch the truth, to be creative with the facts.
In a political system it’s the same kind of thing you just need the majority to be able to vote and then this is who wins. To get things done, you need a majority of people to agree with you in order to be able to do most things OR you need to be the powerful minority, e.g the person paying for the things to happen or the person willing to hurt the most people until they do what you want.
This is why I am an advocate for effective regulation because sometimes you can't trust people to set their own limits. If they can find loopholes to game the system, they will, because greed is rewarded in capitalism.
Topic 2- Who watches the watchers-
Unfortunately, when we are talking about regulations, we are still talking about human involvement, which means that things can still go badly wrong.
One of my favourite sayings in Latin, I know like 5 lies at the heart of the matter. Quis custodiet ipsos custodes commonly translated as who watches the watcher or who can watch the watchmen. In a system built on trust, which capitalism essentially is, people have to behave in a trustworthy fashion. It’s one of the reasons we have external auditors looking at people’s books and making sure they pass muster.
Sadly Arthur Anderson, once a well-regarded accounting firm, and “the watchers” in our little tragedy, lost its way and began to encourage conformity to the Enron way, which is not what you want when you are playing with people’s money. It’s also not what we expect of the people put in charge to keep people sticking to the rules. The duplicity was everywhere. At Enron, the chief accounting officer Rick Causey failed to reign in some of the more criminal activities at Enron, leading to the downfall of the whole organisation. Describing the accounting team run by Fastow, the CFO and Causey, the chief accounting officer, MacLean and Elkind point to the accounting teams conviction that what they were doing was not breaking the rules but stretching them,
QUOTE, “To this day a few of the in-house accountants believe that they did not do anything wrong they knew that they stretched and twisted the rules to Enron’s advantage but they saw their actions as creative rather than misleading. however, this is not strictly true. Here is how an employee described the process by which they arrived at their wonderful shenanigans quote “So you have a dog but you need to create a duck on the financial statements fortunately there specific accounting rules for what constitutes a duck, yellow feet white covering orange beak so you take the dog and paint his feet yellow and his fur white and you paste on an orange plastic beak on its face and then you say to accountants this is a duck don't you agree this is a duck and the accountants say yes according to the rules this is a duck.
Everybody knows that it's not a duck but that doesn't matter because you've met the rules for calling it a duck and there was the ultimate problem. With Enron’s financial team working feverishly to exploit the rules there was no one willing to say that the duck was still a dog because they could come up with plausible rationales for a given structure was technically valid.
They believed they were on the right side of the law they were in fact proud of what they were doing in their view they were doing what was what every other company was doing except that they were doing it better and smarter because they were Enron, where everything was done better and smarter.” END QUOTE
It's regrettable but deserved that an organisation like Arthur Anderson which was for a long time nearly 100 years considered the most upright accounting firm should end up on the trash due to their willingness to collude, condone, and help Enron cover up their crimes. To quote Sean Paul,
“them hang out with too much dogs and catch fleas”.
Those of us from strict homes know that saying, tell me who your friends are, and I will tell you who you are, or even worse, birds of a feather flock together. Whoever taught our parents English, just so they could torture us was wicked, but the parents where not wrong. Listen to this description of Arthur Andersen’s beginnings and compare it to where they ended up.
QUOTE “Arthur Andersen started the first training school for accountants recruiting young men out of college so he could indoctrinate them in the Anderson way. They all had to dress the same, use the same methods offer the same level of service and uphold the same high standards. Competitors seized at what they saw as Anderson's arrogance and labelled its staffers androids. The founder could not have cared less.
Anderson successor Leonard Spacek ran the firm from 1947 to 1963 was every bit as self-righteous, often publicly scolding his profession for as he put it in a 1957 speech “failing to square its so-called principles with this professional responsibility to the public”. He regularly berated the securities and exchange commission for not doing enough for doing a good enough job rooting out accounting fraud claiming that the SEC was at best a brake on the rate of retrogression in the quality of accounting and continued his crusade for high standards even after he'd retired from the firm. The financial accounting Standards Board which was formed in 1973 came about largely before because of Spacek’s insistent lobbying.” END QUOTE
It was from these lofty heights Arthur Andersen fell, because of greed and if there's one thing we have I have learned from white collar crime is that there's usually a point at which one can stop. There are usually points at which one can rectify what’s been broken but every time people act as though they are powerful oracles able to see into the future. They are wrong, and without fail, even empires fall because they overstretched themselves and forget that the environment in which they are currently operating is not the same one in which they started. People become wise to their bullshit, and those people who are previously happy to be silent or complicit develop a conscience and the boat starts rocking. I'm sure that Louis the 16th didn't expect to find his head on a block awaiting the fall of the guillotine, but ironically one of life's constants is change, and whether you're running France is an absolute monarch or the world's leading energy company you have to be prepared for turbulence.
In closing, as I said, when I read about white collar crime, I am always trying to learn something from what happened. Obviously I'm trying to learn how to you know do business not to do crimes guys don't get it confused, I’m not smart enough to do crimes, but there are definite lessons to be learned, and from Enron, some of the lessons are
That’s all from me, I might do a small addendum on this episode with the aftermath, how it related to FTX and some interesting points about the media and the analysts, how people like Ken Lay try and rebrand themselves as victims when they are in the wrong.
For now, though, thank you for listening. Join me next week, when I finally be talking about Idris Elba as a wish granting genie.
Thank you.
Bibliography
1. https://benefitslink.com/articles/enronJCT2003.pdf
2. The smartest Guys in the room
3.https://www.investopedia.com/terms/e/enron.asp#:~:text=Enron%20was%20an%20energy%20company,and%20bankruptcy%20in%20recent%20history.
4. https://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html