I just watched The Smartest Guys in the Room, a documentary about the rise and fall of Enron. I have a special interest in Enron, as I margined my entire stock portfolio and shorted it in my 10th grade mock stock competition for a few days, but relented to my partners advice that it couldn’t fall any more and went long Enron, only to finish dead last. If we would have stayed with the original trade, we would have had a free trip to New York! But enough of that.
The documentary has interviews with the journalist who first started to question Enron’s meteoric rise, former employees and executives and plenty of video from the companies many meetings and pep talks. It is really well done and very interesting, notching an Academy Award Nomination in 2006. If you are at all interested in the Enron story, or corporate fraud in general, check out this documentary.
The most interesting part of the documentary centered on Enron’s role in the blackouts that plagued California in winter 2001 and summer 2002. I was always skeptical about claims of meddling and corporate scandal in the blackouts, but the documentary painted a very explicit case that showed overt meddling that caused up to $30b of losses in the California economy, the recall and end to the political career of Gray Davis and ultimately the election of The Governator to California’s highest office.
The documentary showed audio of Enron traders telling power plants to shut down, which caused rolling blackouts. The traders also were taped diverting power from California power plants to other areas to try to drive up the price. It worked. Power was $40 per unit before they started their shenanigans and spiked to $1000 per unit at their peak and Enron made billions. This part of the business was pretty much the only successful part, but was clearly unethical, if not illegal.
The rolling blackouts caused huge economic damage to California’s economy, ended a political career, caused traffic accidents and many other consequences so that Enron could make money. Add this business practice to their cooking the books, it was pretty clear that Enron was very corrupt. It was also interesting to see how complicit investment banks, ratings agencies, the Bush Administration, accountants and journalists were in allowing Enron to get away with fraud for so long.
There are many parallels to the current financial crisis in that so many people were blinded by greed, derelicting their moral and fiduciary duties. They turned a blind eye to poor business practices and extreme risk taking. Its interesting to see history repeat itself so quickly. Check out the documentary. Its playing for free on Mark Cuban’s HDnet channel for the next few weeks.