A One Minute Summary of The Smartest Guys in the Room by Bethany McLean and Peter Elkind

This is a One Minute Summary of The Smartest Guys in the Room by Bethany McLean and Peter Elkind.

The book is about the rise and fall of Enron, a natural gas company that ended up committing shareholder fraud and going out of business, taking down one of the 5 biggest accounting firms – Arthur Andersen.

The company started out as a natural gas business, that learned how to be profitable when the government deregulated gas.

There was abuse of power, using corporate jets for personal matters, billing visits to strip clubs.

In addition, because the company used Mark to Market accounting, they counted earnings on deals they did by estimating current and projected earnings.

There was abuse of power, using corporate jets for personal matters, billing visits to strip clubs. The leaders in the company started to use legal accounting tricks to manipulate their earnings to show they were positive every quarter and keep the stock price up.

They would create companies to buy bad assets, and then later buy them back after the quarter results were published.

They would publish their quarterly earnings, and then publish the balance sheet a month later, so it was hard to see that the earnings were actually not earnings.

If you looked at both you would see that their regular cash flow was negative, and only selling assets to these other companies was keeping them positive.

They were over spending on projects and not managing risk, hence, their earnings were actually negative.

Because they knowingly covered up poor earnings to mislead shareholders, they were convicted of fraud.

Basically, the leaders became arrogant, and didn’t know or turned a blind eye to what their underlings were doing, and their underlings were following orders to make the earnings positive…some were more blatantly doing it for their own self interest like the COO, who created another 2 outside companies to help cover up Enron’s poor earnings, that pocketed 40 million dollars for himself.

The accounting firm Arthur Anderson went under with Enron.

Banks like Chase, Merrill Lynch and JP Morgan all knew what was going on, and were fined for their involvement.

Analysts gave them Buy ratings, without investigating.

Moody’s and Standard and Poor’s gave them investor grade credit rating without investigating.

It wasn’t just the top execs that were greedy, everyone was.

Riding a Bull Market, everyone had blind optimisim.

Riding a Bear Market (the dot com crisis), everyone has blind pessimism, and that’s when people started investigating and Enron went under.