'Conspiracy of Fools' a riveting read

By William R. Wineke

It's pretty hard to read Kurt Eichenwald's history of the economic disaster known as Enron without feeling one's jaw drop.

"Conspiracy of Fools" (Broadway: $26) tells the story of a corporation led by crooks and incompetents who somehow managed to convince the world's investment communities that they had reinvented the corporate wheel.

What's scarier, there's some evidence that Enron's top executives even convinced themselves that they were business geniuses.

Instead, what they managed to do was create a business built on a foundation of sand which, when the storms came, left thousands of employees with neither jobs nor retirement savings and which left creditors holding the bag for about $67 billion.

In its wake, it also destroyed Arthur Andersen, one of the world's major accounting firms, and rocked the foundations of Merrill Lynch, one of the world's major brokerage firms.

This book is 675 pages long and I couldn't put it down.

Enron CEO Kenneth Lay, buddy of both Presidents Bush, and the popular face of the Enron demise, actually comes off pretty well in this book. Eichenwald merely portrays him as a glad-handing dunce who didn't have a clue of what was going on in his company.

Jeff Skilling, Enron's president and short-time CEO, comes across as a possibly alcoholic depressive who can't bring himself to believe that his company's chief financial officer, Andy Fastow, is not only incompetent but is also a crook who is lining his pockets by the tens of millions of dollars, almost all of which comes from Enron revenues.

What brought Enron down, Eichenwald asserts, was, essentially, bad accounting that covered a multitude of corporate sins.

It used an accounting technique called "mark to market" that allowed it to sell contracts for energy to be delivered over many years and then assume that all the revenue derived over the life of the contract could be recorded as revenue during the first year.

The concept was designed for stocks, not energy. What it did in Enron's case was to allow the company to record revenue that didn't exist and might not exist for several years. What really made it bad was that Enron consistently faced a cash-flow crisis because its accounting system assumed it had money that it didn't yet have.

That's where Fastow came in. Because Enron wanted to protect itself from the uncertainties of what future markets might hold, it needed to hedge its holdings. Fastow set up private corporations to trade with Enron - even though he was Enron's CFO - that would, supposedly, protect the parent company.

The problem was that Fastow's private companies wrote sweetheart deals that guaranteed Fastow and his friends huge profits but which were underwritten by Enron stock. If Enron did well, Fastow and friends would make even bigger profits. If Enron did badly, its downside risk was protected by ... its own stock.

It was a house of cards that could never survive, and it didn't. But the Enron execs lived high while it lasted and the business community at large touted them as real geniuses.

wwineke@madison.com

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