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Ethics & Policy Book Reviews 1 May 2003

Anatomy of Greed: The Unshredded Truth from an Enron Insider
by Brian Cruver
Published by Carroll & Graf; (September 2002)

Anatomy of Greed is a book about the fall of Enron, and that does not make it exceptional. What makes it exceptional for the business ethics professional is its insider look at the culture that spawned the implosion of the seventh largest company in the world.

Cruver was a young and ambitious Enron recruit in the spring of 2001. He presents himself not as a heroic Cassandra seeing the downfall of this corporate giant - rather as another true believer of the Enron myth, who compartmentalized everything that did not fit into the dominant narrative. He cheered with his fellow traders as then CEO Jeffrey Skilling called an analyst an "asshole" during a company conference call. He ignored the probing questions and observations from his Wall Street friend, who could not understand the insider deals being concocted. In short, Cruver may have been the typical Enron employee.

This book also helps shed light on how Enron conducted business and fooled all of the people all of the time during the 1990s. Enron's business was essentially creating new commodity markets. Take their weather derivative division as an example - some businesses are particularly vulnerable to the weather, such as tourism and snow plowing. A bumper year for snow might make the snow plow business rich indeed, and can spell doom for the local tourist businesses if it keeps customers away. Enron would sell a kind of "weather insurance" to business, for which they pay their premium and then, if the weather turned unfavorable, their policy would compensate the loss.
Enron dominated the new markets it created - essentially selling a weather policy to both the snowplow and the tourist business - thus ensuring it would achieve some profit no matter what the weather conditions.

Like all good scams, on the surface this appears logical. The problem was that Enron had no idea how to price business items that did not yet exist, or indeed, how to price items in a rapidly-changing regulatory environment like California's energy market in 2000. Thus, their growth was not built on successes from the past but by booking the largest deals it could. This meant that they became the darlings of Wall Street after booking enormous deals, such as a fifteen year deal to supply the San Francisco Giant's stadium with power, despite that, after two years, it became obvious their price was well below Enron's expense. These unprofitable ventures were subsequently spun off into shell companies to hide the loss. The profit for the entire fifteen-year deal had already been booked on their balance sheet.

The other problem with their business model was that even when they did make a profit, it was significantly overstated. Returning to the example of the snow plows and tourists, it should be obvious that on any given winter, Enron would be liable for paying one of those businesses. But when the deals were closed with each individual business, the estimated profit for the entire transaction was booked. That booked profit had liability.

The illogical nature of this business model shows another problem with Enron - it needed to both be able to commoditize new markets and be the biggest player. That meant using political influence to control the flow of potential competitors and circumvent antitrust laws when necessary. This is where Enron truly excelled.

"I'll keep my eye on power deregulation and energy market infrastructure issues," said the May 25,1999 note to Lay, written in response to Ken's letter congratulating (newly appointed US Secretary of Treasury, Laurence) Summers on succeeding Robert Rubin. Before Summers replaced him, Harvard graduate Robert Rubin was offered a spot on Enron's board by Lay. Rubin declined the offer, but did become chairman of the executive committee of Citigroup - one of several major banks that would invest in Enron partnerships and lend Enron hundreds of millions of dollars as the company began to fail. (p. 1-5) Cruver does not delve deeply into the backroom deals between the government and Enron, but expose enough tantalizing details to show how common it was - including personal contributions by Ken Lay to President Bush (more than $550,000, and encouraged another $550,000 donation from Arthur Anderson) both after he was elected to the Whitehouse and while governor of Texas, and astute back scratching with powerful political figures (Including a $97,000 donation to California governor Gray Davis; Karl Rove, Tom White and James Baker were all major shareholders, former executives or former board members; Senator Phil Gramm's wife, Wendy, served on Enron's board, and even a personal appearance by Ken Lay at celebrity golf tournament with tee partners former President's Clinton and Ford!).

The US Justice Department and the Texas Attorney General had to recuse most of their political leadership from prosecuting Enron because nearly all of them had accepted contributions - including Attorney General John Ashcroft ($57,000 for his failed 2000 Senate campaign) and Texas Attorney General John Cornyn ($193,000 in campaign money). Oddly, Harvey Pitt, then Chairman of the SEC and the man with a ham-hand for ethics, decided he would buck the trend and investigate Enron. Pitt shrugged off suggestions that his work on behalf of Arthur Anderson created a conflict of interest, famously quipping that those who questioned his independence were politicizing the process. Less than ten months later, Harvey Pitt was asked to resign his position at the SEC.

And lest the reader think this money was ill spent - Cruver documents how Enron received more than $1 billion in subsidized loans from the US government.

Ken Lay had stepped down as CEO not because he was retiring to work on his golf game, but because he intended to begin a career in politics.

Compounding this problem was Enron's lack of genuine risk management. Cruver explains in shocking detail how the risk management group was dramatically understaffed and actively subverted by management and Arthur Anderson. The late accounting firm used their name to help pressure Enron's internal controls to quickly approve new deals.

The larger lessons of Cruver's book illustrate that complex business models, even ones flawed to the bone, can survive for a long time if enough people are duped into it. In addition, once duped, stakeholders tend to resist all evidence to the contrary. Very literally, Enron's business strategy relied on brainwashing its employees, investors and regulators. The iron laws of economic supply and demand were repealed for this behemoth.

Enron, which had its Core Values enshrined all over the company, including the parking garage, also illustrates the spectacular failure of American business ethics, and its advocating community. The insistence on epiphenomenal features of good conduct, such as codes and nice little training programs, disguise the incredible weakness of it not having formulated a genuine performance criteria.

"The instructors focused on legal implications and how an incident could hurt your career. "Right and wrong" was not on the agenda. (p. 101)

Cruver's book should be read by anyone in the business ethics field - the only thing better would be a public mea culpa from Skilling or Lay. But their actions after Enron's collapse show they still do not believe they have done anything wrong - it was those "asshole analysts" who messed up a perfectly good Ponzi scheme.

Santiago Zorzopulos

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