If there’s one word that explains why Enron Corp. failed and why former executives Ken Lay and Jeff Skilling, convicted in Houston last month, are facing long stints in prison jumpsuits, it’s this: hubris. Enron failed because Lay (who faces up to 165 years in prison) and Skilling (185 years) didn’t understand basic business management. They believed that Enron was so good and its business model so impressive that they didn’t have to work at making real cash profits. It almost sounds too obvious to say it, but Enron failed because it ran out of cash. And the failure to manage the company’s cash is directly attributable to purposeful mismanagement by Lay and Skilling. Lay has a Ph.D. in economics from the University of Houston but couldn’t read a cash-flow statement. Skilling has a Harvard M.B.A. but once told another Enron employee that cash “didn’t matter.”
At trial, their arrogance was on full display. The lawyers for Lay and Skilling tried to convince jurors that Enron had done everything legally. The two executives had no choice but to take the witness stand, where the prosecutors ripped their stories apart. On the stand, Lay and Skilling had two choices: admit they were stupid, or admit they were crooks. The latter choice being unappealing, both men took the former, and throughout their trial insisted that they’d been duped by subordinates. Fortunately, jurors didn’t buy their bullshit. Lay was convicted on numerous charges, including conspiracy, bank fraud, securities fraud, mail fraud, and (in a separate bench trial held immediately after the jury trial) making false statements to banks. Skilling was convicted of securities fraud, insider trading and conspiracy.
While it’s satisfying to see Lay and Skilling convicted, the trial left several important questions unanswered. For instance:
What did Ken Lay do with that $70 million? During the trial, prosecutors hammered Lay for his sales of Enron stock in the year before the bankruptcy – sales that Lay insisted he made because he was repaying some $70 million that he’d borrowed from Enron. Now remember, in addition to millions of dollars in salary and bonuses he got from the company, Lay sold a total of $184.5 million worth of company stock in the three years before Enron’s bankruptcy. And yes, Lay led a lavish lifestyle—one that included a $200,000 birthday party for himself in February 2001—and owned numerous vacation homes. But $70 million? A former Enron employee who worked directly for Lay attributed his profligate spending habits to his wife, Linda –who, you may recall, went on TV in early 2002 to declare that she and Ken had “nothing left” and were “fighting for liquidity.” (Poor people go broke. Rich people fight for liquidity.) “Linda spent money like Ken was printing it in the penthouse,” the former Enron employee told me. Like other former employees, she carefully watched Linda’s wardrobe during the trial—and those outfits apparently included many new ensembles straight from high-end stores like Neiman Marcus. While on the witness stand, Lay acknowledged that he and his wife led a lavish lifestyle that was “difficult to turn on and off like a spigot.” Statements like that, combined with Lay’s overt arrogance, helped convict him. As Houston lawyer David Berg said, Lay is going to jail “because he was so obnoxious on the stand.”
Why aren’t we seeing more criminal prosecutions of the bankers who helped hide Enron’s debt? In 2003, the Securities and Exchange Commission extracted $135 million from J.P. Morgan Chase & Co. for its part in a series of deals that allowed Enron to hide $2.6 billion in debt between 1997 and 2001. The SEC said the megabank had “aided and abetted Enron’s manipulation of its reported financial results.” Other big banks and securities firms have also paid fines. But when it comes to criminal prosecutions, only three executives from Merrill Lynch have been indicted by the Justice Department for their roles in the Enron meltdown. The lack of zealous criminal prosecutions against the other crooks who actively “aided and abetted” the Enron fraud proves there is one set of laws for small time thieves and a whole other set of rules for white collar criminals. Indeed, the only real prosecution of the banks has been left to tort lawyers—the same tort lawyers that George W. Bush has been campaigning against for years. In October, the biggest civil case against the banks will go to trial in Houston. It’s being headed by the securities lawyers at Lerach Coughlin Stoia Geller Rudman & Robbins LLP.
Where are Phil and Wendy Gramm? While it’s true that Enron was Bush’s biggest career patron until 2004 and that the Bush Administration went far out of its way to help Enron whenever it could, the Gramms performed the most egregious political whoring on behalf of Enron. In 2000, Phil Gramm pushed a bill through the U.S. Senate that exempted Enron’s trading business from federal oversight—even though Wendy was serving on Enron’s board. For her part, Wendy got her job on the Enron board just days after leaving her post at the federal agency supposedly regulating Enron. In 1993, she had pushed a ruling through the Commodity Futures Trading Commission that freed Enron’s energy derivatives business from federal regulations.
Is George W. Bush actually Ken Lay? For watchers of the Bush administration, much of the hubris at Enron should prove disgustingly recognizable. Listen to these concepts and see if they sound familiar: Enron insisted the old rules didn’t apply to them; it was going to remake the world in its image; anyone who disagreed with its vision was viciously maligned; and as it descended into bankruptcy, it kept cooking its books to make it appear healthier than it was.
Now that “Kenny Boy” Lay appears headed for jail, let’s hope a similar fate awaits other Bush cronies. Scooter? Karl? Or even better, Dick?
Robert Bryce, a contributing writer for the Observer, is the author of Pipe Dreams: Greed, Ego, and the Death of Enron.