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Jeffrey Skilling in front of the Enron building
08.12.05
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DAVID BRANCACCIO: NOW on PBS...

They were snide, cynical and cutthroat … but why did Enron's traders rejoice when a forest fire threatened a major electrical line in California?

TRADERS: "There's a fire under the core transmission line… "Burn baby Burn"

BRANCACCIO: It's all part of a surprising documentary called ENRON: THE SMARTEST GUYS IN THE ROOM, about corporate fraud of shakespearean proportions.

ALEX GIBNEY: They created a wonderful myth that everybody wanted to believe in. And I mean everybody. The analysts, the banks… the investors the accountants, the lawyers. Everybody wanted to believe in Enron. It was the new idea. But at the end of the day, it wasn't real. It wasn't tangible.

You know, how could we, you know, entertain that kind of suspension of disbelief? But that's what the Enron people were masterful at, was being able to - indulge people in that suspension of disbelief. To create this grand fiction. They were like a movie studio.

BRANCACCIO: Filmmaker Alex Gibney uncovers the greed of the people who made Enron possible.

BRANCACCIO: Hey there.

Did you laugh or did you weep when WorldCom CEO Bernie Ebbers got 25 years? He cried, as you know. So did his investors. And what about the Enron boss, Ken Lay? His trial is on the way. If ever there was a tale of unbelievably screwed up excess — almost laughable if it weren't so tragic — it is the Enron story.

It was a culture of greed aided and abetted by lawyers, accountants and Wall Street bankers. All in Alex Gibney's documentary, ENRON: THE SMARTEST GUYS IN THE ROOM. It's a chance to see what happens when deregulation means no regulation and capitalism runs amuck.

Alex, thanks for coming in.

ALEX GIBNEY: It's good to be here, thanks for having me.

BRANCACCIO: Okay, so you've made a doc, a documentary. But I think I've finally figured out the genre of your Enron film. Isn't it like OCEANS ELEVEN?

ALEX GIBNEY: It's a heist film.

BRANCACCIO: A heist film?

ALEX GIBNEY: Primarily that's what it is, or that's how we structured it. At the end of the day, it's the best way to really understand it. You understand how it went up, and how it came crashing down. But you gotta understand it from the inside out. From the point of view of the perps. I think that's the way to make it work.

BRANCACCIO: Sadly, of course, it's not fiction. In fact, it might have been your money and my money if we had-- something in a 401-K retirement plan that had Enron in it.

ALEX GIBNEY: Indeed.

BRANCACCIO: I wanna know about the corporate culture that produced the meltdown that became Enron. Pretty aggressive culture.

ALEX GIBNEY: It was a very aggressive culture. And in a funny way, it wasn't that atypical. I mean-- it was, you know, Sun Tzu's THE ART OF WAR. That's where they were really going. It was-- the idea was they had this brutal system inside the company in which each employee was graded on their performance. And the bottom ten percent were supposed to be fired.

So that was pretty hostile. And the idea was everybody would battle each other inside of the company. Then they'd go outside into the marketplace and then they'd eat everybody's lunch.

BRANCACCIO: It had a cool name, like a lot of things in this Enron film, Rank and Yank.

ALEX GIBNEY: That's it. Rank and Yank.

BRANCACCIO: And you had like a trader in the film talking about, "Yeah, I'd step on my grandmother's neck, you know, if I had to"

ALEX GIBNEY: Well, the idea was if somebody was in your way you just rip 'em apart if you hone those warrior skills inside the company, then outside the company you're really gonna take no prisoners.

BRANCACCIO: So at the top of this company, you had Ken Lay, the son of a Baptist preacher. But you had Jeffrey Skilling who become CEO. And he starts out, you know, a young man, he's kind of a dweeb. That doesn't seem like a warrior. So he has to really go through a change. Let's take a look at that.

BEGIN CLIP:

MIMI SWARTZ: The other thing about people at Enron is that a lot of them were former nerds, and including Jeff Skilling.

PETER ELKIND: He had been paunchy. He had big glasses. He was losing his hair. And Jeff Skilling one day kinda woke up and decided to change himself. And he started working out, lost a lot of weight. But he really did remake himself through sheer will and force of personality.

END CLIP:

BRANCACCIO: So, if you subscribe to the great man theory of history, it does matter that Jeffrey Skilling has this kind of personality?

ALEX GIBNEY: He's a classic American figure, I think, not unlike The Great Gatsby. You know, he remakes himself, he reinvents himself. That's really what the Enron story's all about, it's reinvention, or invention. At the end of the day, it's making it up.

BRANCACCIO: And this is something that we love in America. Except, if it unravels.

ALEX GIBNEY: If it unravels. That's the problem. They created a wonderful myth that everybody wanted to believe in. And I mean everybody. The analysts, the banks, the investors, the accountants, the lawyers. Everybody wanted to believe in Enron. You had analysts saying, "Look, it's a black box. We don't understand it. But-it's working. So why's anybody gonna argue with this?" It was the new idea. But at the end of the day, it wasn't real. It wasn't tangible.

BRANCACCIO: They're in the business of setting up this facade. And as long as somebody didn't puncture it, everybody could make money.

ALEX GIBNEY: That's right. Because the stock kept going up and up and up and up and up.

BRANCACCIO: So we see this part in the film where Enron gets into yet a new venture. It involves Blockbuster video, and Enron supposedly has figured out this cool way that the movies can be delivered through data lines into people's houses. Everybody gets very excited.

BEGIN CLIP:

CNN: Just last week Enron captivated Wall Street with its bold move into broadband, teaming up with Blockbuster to deliver movies on demand.

CAROL COALE: It was like being at a religious cult meeting. People started jumping up from their seats, with their cell phones and their Blackberrys, running out to the halls to call their bosses.

NARRATOR: One analyst summed up his recommendation to investors in one word Wow! Enron's stock soared 25 percent in one day.

JEFF SKILLING: And you can tell from the response of the stock market that they like the strategy. It makes sense.

PETER ELKIND: They announced that they had developed the technology. It would be in test markets by the end of the year.

JEFF SKILLING: And the technology works. The quality is great and the customers like it, so we've made a lot of progress.

PETER ELKIND: The truth was that Enron was just struggling with the technology for video on demand.

NARRATOR: The technology didn't work and the deal with Blockbuster soon collapsed. But with the magic of mark-to-market Enron used future projections to book $53 million in earnings on a deal that didn't make a penny.

END CLIP:

BRANCACCIO: You have to do some pretty fancy accounting for something that doesn't make a penny to book more than $50 million in profits?

ALEX GIBNEY: Enron committed an original sin early on in its career. And they adopted a form of accounting called mark to market accounting, which in the securities industry can be very conservative. It's a way of booking your profits or losses, you know, on the day when it happens.

But Enron persuaded the SEC to let them do it on contracts that lasted over ten years. So they would book profits on a ten-year deal the very day that deal was signed. Ultimately it was Enron's original sin because the gap between expected profits and the actual cash that was coming in the door became so enormous that they had a real problem on their hands.

BRANCACCIO: Well, it's like if you set up a lemonade stand. And after four hours I say how much did you make and you say $0.25. Or you say $200. I say how'd you get $200? You only made $0.25? And you say, well, over the next ten years with this lemonade stand, I'm gonna make all this money.

ALEX GIBNEY: And I'm gonna book that profit today.

BRANCACCIO: Today. But what's interesting here is this isn't fraud, this is authorities. This is accountants saying, "Enron, that's perfectly okay."

ALEX GIBNEY: And the SEC saying it's perfectly okay. In a funny way, Enron was a rule following company. Every rule to them was a kind of roadmap of possibility. So this was another example of how they took a rule and followed the letter of the law while completely violating the spirit of it.

And of course the SEC is complicit too because over time they were supposed to check Enron's estimates. But between 1998 and 2001, SEC never bothered to check.

BRANCACCIO: So so much for the-- a few bad apples theory of Enron?

ALEX GIBNEY: Correct.

BRANCACCIO: It goes pretty wide.

ALEX GIBNEY: It goes very wide. I think the thing about Enron that's so staggering is that it's not about Enron. It's about our investment banks. It's about out accounting firms. It's about our law firms. It's about our journalists. It-- there was--

BRANCACCIO: Journalists not telling the story of Enron in real time.

ALEX GIBNEY: Correct. And not being skeptical enough about what was happening. Everybody wanted to believe in Enron because it was such a wonderful story. It was such a wonderful myth. And everybody was making money off it.

BRANCACCIO: Now let's talk about California. I actually lived out there when the lights were going out in late 2000, early 2001, as the electrical market there just went haywire. Now people need to know, California, at the behest of industry, deregulated, to some extent, its power markets. It reconfigured the power market. Set up a new scheme.

And Enron figured out some pretty cool ways to go after that. BEGIN CLIP:

TRADER: Hey, this is David up at Enron.

POWER PLANT GUY: Uh, huh.

TRADER: There's not much demand for power at all here.

TRADER: If we shut it down, can you bring it back up in 3 or 4 hours?

POWER PLANT GUY: Oh, yeah.

TRADER: Why don't you just go ahead and shut her down then, if that's ok?

POWER PLANT GUY: Okay.

GOVERNOR DAVIS: When you see two or three energy companies with 30, 35 percent of their entire capacity down for maintenance on a single day and as a result the price of electricity is skyrocketing three or four hundred percent and then a week later someone else does it up in Northern California you begin to believe something's not smelling right here.

TRADER: Stan, do you think we should take Copper off line?

POWER PLANT GUY: Yep, I was just looking at that.

TRADER: I think that'll be a good call.

POWER PLANT GUY: OK.

LORETTA LYNCH: Those guys at the flip of a switch could just yank the California economy on it's leash whenever they wanted to. And they did it, and they did it, and they did it. And they made so much money.

END CLIP:

ALEX GIBNEY: It's staggering how little regard there was for any kind of moral consequence of what they were doing. I mean, they were attacking their own customers in effect.

BRANCACCIO: You got a hold of some of the audio tapes of some of these traders on the phone during this crisis. You take a look at some of this stuff, besides the fact that it's profane, it does seem to depict people who have no regard for the consequences of what they're doing. I mean, take a look at this.

BEGIN CLIP:

NEWS ANNOUNCER: During the height of Wednesday's blackout, fire crews had to free people trapped in elevators.

TRADER: All that money you guys stole from those poor grandmothers in California.

SECOND TRADER: Yeah, Grandma Millie, man.

SECOND TRADER: She's the one who couldn't figure out how to ******* vote on the butterfly ballot.

FIRST TRADER: Now she wants her ******* money back for all the power you've charged right up her ***.

END CLIP:

DAVID BRANCACCCIO: You thought that people who are educated, people who are as smart as some of these guys would be thinkin' through what they're doing.

ALEX GIBNEY: The fact is, I mean, if you go into a lot of trading floors, they all have this kind of macho posture. It's part of the trader culture, to some extent. But they lost any perspective about what it is they're doing 'cause they're not trading apples or oranges or toys, they're trading electricity.

BRANCACCIO: What does it say about human nature?

ALEX GIBNEY: Well, it says something pretty damning about human nature. But it also says that it's predictable within a certain context. And I think a lot of these people-- it was interesting, I spent a lot of time trying to figure out who these people were off the job. And off the job, they were pretty admirable people in fact. These weren't bad apples. But within a corporate culture that rewarded this behavior, they were suddenly allowed to run amuck.

And furthermore, all of this happens within a larger context in which-- you know, I put Ronald Reagan in the film. I think it goes back to that, where it's-- government is not the solution, it's the problem. And the idea was that markets are a kind of force of nature. So you just have to do what the markets tell you to do.

BRANCACCIO: Well, but you bring up this issue of Enron as the ultimate expression of deregulation that took about 25 years to deploy in this country?

ALEX GIBNEY: That's right. But this sense that the market is always going to be beneficial to everybody is wrong. It's just wrong. "Economics is not a science. It's politics in disguise."

BRANCACCIO: And where was politics in all this? Okay, California's a blue state. Okay, it was a Democrat at the time that was the governor, Gray Davis. But the sixth largest economy, an engine of growth in this country, was under attack by these energy traders. You would have thought our elected officials in Washington would have ridden in like the cavalry and helped the situation.

ALEX GIBNEY: No one wanted to distort the market. And what's interesting is as soon as regional price caps were installed, finally. When the Democrats took over the-- Senate everything stopped. All of the problems stopped instantly. All they had to do was set those price gaps.

Now, the Democrats also didn't behave that well earlier on in this crisis. Everybody seemed to think that it was okay. That you just have to let the market work itself out, even though enormous numbers of people are suffering. But also you had, I think there was a political element in this in that it's very early in the Bush administration. But this California area is something that clearly, in my view, was a favor to Ken Lay.

BRANCACCIO: They were helping out someone who may have given some money, also was a-- was a pal. And Enron at this time probably needs the profits coming in from California to prop up what, you sketch out as this house of cards, where there really aren't the profits that people think because it's not transparent. And things internally are not looking good, at one point in the film, to someone who's important. Jeffery Skilling. He's startin' to sweat it. And you see in this scene that the pressure is starting to weigh down on him.

BEGIN CLIP:

AMANDA MARTIN-BROCK: Jeff looked at the numbers and he knew that we were in a massive hole. It was the only time that I saw him truly, truly worried about keeping the stock price up. And he just kept saying to me, 'I don't know what the hell I'm going to do.'

PETER ELKIND: The broadband business was in complete meltdown. And there were all sorts of other problems that Jeff Skilling as the company's Chief Operating Officer was wrestling with. And in the middle of all this, Ken Lay walks in Jeff Skilling's office holding up fabric swatches for the new G5 45 million dollar corporate jet he wanted to buy. And he said to Jeff, asked him a very important question, 'which of these cabin configurations do you like best, Jeff?'

END CLIP:

BRANCACCIO: Cabin configurations? I mean, is this an argument that Chairman Ken Lay in fact was out of it and therefore not responsible?

ALEX GIBNEY: Well, I would separate those two. I think to some extent he was out of it. He was all about the private jet, the fabric swatches. And to some extent, he was about the political trappings of Enron.

But I think-- responsible, well, that's another story. He was the CEO. Over a short period of time, he was paid, between salary and stock options, close to $300 million. If someone's being paid that much to be one of the smartest guys in the room, does he not hold some responsibility for the company? I think so.

BRANCACCIO: And also, after Jeff Skilling suddenly leaves the company with no warning for personal reasons. But then Ken Lay does take control of the company and there are still some problematic things that happen under his-- under his specific watch.

ALEX GIBNEY: Well, when he comes back, and that's the focus of the criminal investigation into Ken Lay, even as the company is taking a very rapid dive, Ken Lay says things like, "The company's never been in better shape. We've just got a few-- rid of a few problems like California and some other things. We're right-- right back on track."

He pumps up the company in a way that seems utterly irrational, given what's going on. And in fact one person turns to him-- in a Q&A session with employees and says, "I would like to know if you are on crack."

BRANCACCIO: And he looks very awkward at that stage. But there's all these examples of Ken Lay saying, "Oh, the Chief Financial Officer Fastow has the full confidence of the board." And then the next day, Fastow gets fired.

ALEX GIBNEY: It's very hard to reconcile. I mean, Ken Lay's defense is, "Look, how am I supposed to know what my chief financial officer was doing?" Well, Ken Lay and the board approved these special purpose entities that Andy Fastow embarked on, which was the source of, ultimately, Enron's collapse.

BRANCACCIO: We should explain that. I mean, one of the things that Enron came up with is you set up these other companies that don't appear when you look at "How's Enron doing?" At-- at those numbers. And you put some Enron debt in there. You put losses into these other companies. So it makes Enron's assets look better.

ALEX GIBNEY: That's right. Andy Fastow created a separate entity only to do business with Enron. And by the way, he was the chief financial beneficiary of that company. And that's how he's getting money. He got almost $45-50 million for doing that. But somehow the board is just unaware of that.

It's because they weren't watching. They weren't paying attention They didn't want to know what Andy Fastow was doing because without Andy Fastow, Enron probably would have collapsed two years before it did.

BRANCACCIO: That's what drives you crazy. Nobody really wanted to know. All these investors didn't really want to know. But that then becomes a problem for our market system.

ALEX GIBNEY: Well, it's a really huge problem. And it goes to this issue of the diffusion of responsibility. At the end of the day, you ask everybody involved in the Enron mess, the investment bankers, the lawyers, the accounting firms-- the chief executives, nobody was responsible. "It wasn't my fault." Why? "The bankers signed off on it. The accounting firm signed off on it. The law firm signed off on it."

So you have a kind of insider's game in which everybody plays this little game with accountants, with lawyers, with opinions. And they rig them. But they rig them in such a way that they play with the rules all the time. And they can do so because it's within the context of a rather insular financial community.

BRANCACCIO: What about the rules of unintended consequences. Nobody wants an Enron. But things happened after Enron collapsed. Washington did change the regulatory regime. There are corporations right now chafing against the new rules. But maybe it wrang out some of the excesses that had built up during the boom-boom '90s. And in fact corporate America's a safer place, and your investments and your retirement funds are now more safe because of Enron.

ALEX GIBNEY: These were important changes. But at the end of the day I'm afraid that the bigger problem is more of a cultural problem. This idea that so long as you make money, it's okay. So long as we continue to maintain that and don't think about the social consequences of the market, then I think we have a real problem.

BRANCACCIO: You know who I want to be in the Enron story? I've figured it out. There's a guy that you talk about in the film by the name of Lou Pai. And he was CEO of one of the Enron divisions, Enron energy services I think it was?

ALEX GIBNEY: Correct.

BRANCACCIO: Mysterious guy.

ALEX GIBNEY: Here was a guy who sailed off with Enron with more money than anybody-- $350 million.

BRANCACCIO: He quit early on, after being CEO of this division. Just sort of rode off into the sunset.

ALEX GIBNEY: A division that lost a titanic amount of money. Whose losses Enron managed to bury in the California- boom. But here was a guy who was addicted to strippers. He spent most of his working hours at the strip clubs.

Ultimately, he fell in love with a stripper at one of these clubs. She bore his child. Not surprising, his wife got terribly upset. Boom, she institutes divorce proceedings. Lou Pai is forced late in Enron's-- you know, arc to sell all of his stock. But he has a reason to sell it. So it doesn't look like he's selling because he knows the company is going down.

BRANCACCIO: But he gets to pocket a fortune out of this. Everyone else is, like in jail. And their lives are a mess. And the employees have nothing.

ALEX GIBNEY: I believe he's now transferred his real estate holdings. But he had a mountain in Colorado named after him. Mt. Pai. And his ranch was actually larger than Rhode Island.

BRANCACCIO: So hundreds of millions of dollars for Lou Pai. When Enron collapsed, what did the typical Enron worker end up getting as a severance?

ALEX GIBNEY: Severance pay was about 45 hundred dollars.

BRANCACCIO: Four thousand, five hundred dollars. That's like a couple months mortgage on an average house.

ALEX GIBNEY: That's right. And the fact of the matter was a lot of employees also lost. They were, you know, convinced by Skilling and Lay and the others to invest all their 401k's in Enron stock. And so a lot of that just cratered.

BRANCACCIO: And that's a thing about-- you watch some of this stuff and it has this tragic comedy aspect to it. But - you end up, at the end, with Enron as this horrible tragedy.

ALEX GIBNEY: It's not a pretty picture. There's one PGE lineman-- a guy who was, for most of his life, a part of a publicly regulated utility in Portland, Oregon. Who had, at one time, $350,000 for his own retirement and the education of his children. At the end, he had $1,200. Lost it all.

BRANCACCIO: So where are the Enron big shots now? I mean, Fastow is due for some time behind bars. The CFO.

ALEX GIBNEY: That's right. Ten years. He'll ultimately get-- right now, he's busy working with the Department of Justice testifying against his former bosses, Jeff Skilling and Ken Lay.

BRANCACCIO: Presumably helping them build the case against the other guys?

ALEX GIBNEY: That's right. He's going to be the prosecution's chief witness. And Lay and Skilling are going to go to trial together. Along with the Chief Accounting Officer, Rick Causey in January, 2006.

BRANCACCIO: What's Ken Lay doing in the meantime?

ALEX GIBNEY: Ken Lay is living in Houston. And Jeff Skilling, from what I understand-- is working for Habitat for Humanity.

BRANCACCIO: Alex Gibney, director of Enron, THE SMARTEST GUYS IN THE ROOM. Thank you very much.

ALEX GIBNEY: Thanks, a lot, David.

BRANCACCIO: Now that you're dying to see it, the question is: where? We've put up info on our Web site at pbs.org.

Now here's a look at what we're working on for next week:

This is where the suburbs end and the farms begin. Thinking of leaving the city for some fresh air? Well, think again.

LYNDA UVARI: Someone referred to is as living in a toxic soup, and that, you know, it's constantly we're constantly barraged with some kind of chemical, and that's true.

And that's it for NOW. From New York City, I'm David Brancaccio. We'll see you next week.

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