SMARTEST GUYS IN THE ROOM: THE AMAZING RISE AND SCANDALOUS FALL OF ENRON, THE

THE SMARTEST GUYS IN THE ROOM THE AMAZING RISE AND SCANDALOUS FALLOF ENRON By Bethany McLean and Peter Elkind $26.95 Portfolio (US) ISBN 159-184-008-2

Until the spring of 2001, Enron epitomised the triumph of the new economy. Feared by rivals, worshipped by investors, Enron seemingly could do no wrong. Its profits rose every year. Its stock price surged ever upwards. Its leaders were hailed as heroes.

Then a young writer, Bethany McLean, wrote an article, 'Is Enron Overpriced' (published in Fortune magazine) that asked a simple question - how, exactly, does Enron make its money? - and the house of cards began to collapse.

Within a year, Enron was facing humiliation and bankruptcy. Though other business scandals were to follow, none has had the shattering effect of Enron's bankruptcy, which was the largest in US business history. Enron's collapse caused Americans to loose faith with a system that rewarded insiders with millions of dollars while small investors lost everything. It was swiftly revealed that Enron's success was an illusion, fuelled by billions of dollars in transactions and off-balance sheet deals that stretched accounting rules and gave the impression that Enron was a healthy, fast-growing company.

It was an illusion that Wall Street was willing to accept even though many on Wall Street knew the truth.

This book reveals that Enron was run by executives whose greed knew no bounds. Drunk on their own success, they were so certain of their brilliance that they believed that they could fool the world. These executives included Ken Lay - the genial but clueless CEO who revelled in the trappings of his office but ducked responsibility. From the earliest days, Eay's weakness allowed greedy lieutenants to run amok.

Africa, or more particularly Nigeria, entered the picture when Enron cooked up a deal to solve a familiar problem - how to capitalise on assets it couldn't sell. Enron was trying to sell three 3,600t floating power stations built on barges. Enron wanted to sell them so that it could book another $12m in earnings and $28m in cash flow. What it came up with was a sweetheart deal where Enron itself financed a $21m interestfree debt and provided an oral guarantee that it would repurchase the three barges.

Why would it do this? The answer was that Enron had chosen to adopt what was known as 'mark-to-market accounting' in 1992 - and remarkably the US government's own securities Exchange Commission had approved this move - which meant that the company could declare all future profits, on any deal it entered, on the day it signed a contract. As the authors point out, taken to its absurd extreme, this would allow, for example, a motor manufacturer to book all the future profits of a new car model at the moment that car is designed.

The fall of Enron was much more than a business scandal. Like the Watergate affair, it was an event that sent shivers around the world and tainted the US president. It also called into question the US's corporate governance systems and accountancy practices.

In this book, the writer who first declared that this particular emperor, Enron, had no clothes - Bethany McLean - joins forces with investigative reporter Peter Elkind to co-author a work that leads the reader behind closed doors and deep into Enron's past, to pierce the veil of secrecy that has surrounded this company's inner workings.

Copyright International Communications Jul 2004
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