Jeff Skilling Moved To Alabama

According to CNBC, Jeff Skilling has been moved to a minimum security prison in Montgomery, Alabama.

[A] sentence reduction qualified Skilling to move to the minimum-security facility, which holds 874 male inmates and is located on the grounds of Maxwell Air Force Base. Inmates work in support jobs for the base, ranging from kitchen help to serving as tutors. At his previous facility, the Englewood Federal Correctional Institution in Littleton, Colo., Skilling taught Spanish classes after teaching himself the language, according to his attorney.

Jeff is set to emerge from prison in 2017, after spending a little more than ten long years in prison.

California Is Still In The Dark

It is interesting how the press still loves the simplistic interpretation of Enron’s role in the California black-outs back in 2000 and 2001. As in this recent article, the press seldom talks about California’s own role in creating its blackouts. As serious studies have shown, California planted and nurtured the seeds of its own energy problems — California’s own actions are clearly the leading cause of their blackouts.

Enron’s role in the blackouts is interesting and counter to the simplistic way that the press presents it. Enron was a huge proponent of energy de-regulation and championed transparency in energy markets. Enron’s belief was that if everybody in the energy marketplace had access to the same information, then Enron would benefit because Enron would analyze and use the information better than anybody else. And that is pretty much what happened.

The “manipulative trading schemes” that Enron used in California were based on the same information available to everyone in the marketplace. Enron was not withholding information — they were using available information, including California’s own arcane set of state energy rules, to make money from trades in the California energy market.

One thing to remember is that Enron was not an energy “broker” who simply matched consumers to suppliers. Enron was actually a principal in every one of its trades, meaning that Enron took a genuine financial risk — Enron bought and sold actual energy product. Therefore, if Enron paid or accepted too little or too much money in a contract, then it had to know how to cover that risk. Really, all Enron was doing in California is putting together buy and sell strategies that enabled it to buy and sell from the most favorable sources.

Enron did nothing in the California trades that was not available to others in the market. Enron simply out-smarted everyone else. Therefore, the question about those trading strategies always struck me as more of an ethical question rather than a legal one. Knowing that California, through its own ineptness, had put itself into a vulnerable energy situation, should Enron have refused to execute those trading strategies even though they were legal?

The real lesson from those Enron strategies should have been to teach states not to duplicate the energy actions and rules of California. Basically, California wants to shield itself from the weaknesses that its own actions have created. The fact that California remained vulnerable to the trading strategies recently used by JP Morgan shows that California has learned nothing and still blames others for its own mess.

Petrocelli Agrees!

Jeff Skilling’s attorney Daniel Petrocelli appeared on Bloomberg BusinessWeek today and AGREED with the explanation that a lack of equity caused the credit rating downgrade that, in turn, led to Enron’s bankruptcy:


“Certain decisions that were made backfired. There wasn’t sufficient capital given the company’s credit rating, for example, a credit rating that Skilling argued vehemently to the Board that he wanted to improve, but was overruled.”

Of course, we now know that the “decision” that “backfired” was when Ken Lay unwound Raptor, which resulted in the company not having “sufficient capital given its credit rating”.

See these posts for the backstory:

Why Enron Went Bankrupt

Why Enron Went Bankrupt 2

WMDs & Enron

It’s a travesty that this wasn’t revealed earlier. If Lay had issued the stock, Enron may have survived. And regardless, if Lay had owned up to the mistake, he and Skilling may not have been found guilty. After all, in Enron-ese, juries “Ask Why”. The jury never got a truthful answer. We finally have a truthful answer that explains it. Petrocelli just confirmed it.

WMDs & Enron

WMDs and Enron

I have to admit it. I originally bought into the government’s story about WMDs in Iraq. I even supported the war because of it. Then, upon learning that it was an intentionally false narrative, my world was turned upside down.

So it is with Enron.

Upon learning that it was the unwinding of Raptor and the failure to issue stock (as Enron said it would) that led to Enron’s bankruptcy, my world was again turned upside down. And it begged the most fundamental of questions:

If Raptor were not the cause of losses in 3rd quarter 2001, why did Ken Lay intentionally make it sound like it was?

If the Board actually approved of all the SPE deals (which it did), why did Lay say they were a problem?

Why was the WSJ running articles about LJM and Fastow?

Since Lay and the Board knew what Fastow was earning (proved decisively at the Lay/Skilling trial), why did Lay say it was a “revelation” and use the excuse to fire Fastow?

When everyone knew that Enron had some serious problem (e.g. International, Water, Merchant Investments, New Power), why was Lay saying everything was hunky-dory?

Now, the revelations from former Enron executives:

Ken Lay and Greg Whalley’s strategy was: (1) to blame the losses from the businesses/assets and Causey/Duncan accounting mistakes on Fastow; (2) to argue that they solved the problem by eliminating Fastow; and (3) to assert that everything in the business was fine.

The articles in the WSJ about LJM and Fastow were planted by Cliff Baxter. Execs say that they still don’t know whether Baxter planted the articles as part of Lay’s strategy to demonize Fastow. They think not; rather, they believe that it was done purely out of animus, and that the PR problem it caused gave Lay another reason to sacrifice Fastow. They point out that it is rather ironic that Baxter was planting the stories, since Baxter used LJM more than any other exec to make his numbers.

The document shredding at AA and Enron was done to protect AA and Causey. It turns out that AA was on probation for its botched Waste Management and Sunbeam audits. Another sanction by the SEC would have caused its auditing license to be suspended, effectively putting it out of business.

It was insane for Lay to assert everything in the business was OK. Everyone, especially the banks, equity analysts, and rating agencies knew the opposite was true (Dabhol, anyone?) There is no doubt that by suggesting that Fastow’s actions were nefarious, it caused the market to get more, not less, nervous. And it probably paved the way for the government to turn what would have been a minor civil settlement into a major criminal case. Raptor/LJM/Fastow were the non-existent WMDs and Ken Lay was Dick Cheney.

Today In Enron History

On July 12, 2001 Enron released its 2nd quarter earnings. Here is the press release. During the earnings call, Jeff Skilling was still bullish. There were good things to report; wholesale was still driving strong results. Enron did report a $201 million loss for the broadband unit in the second quarter, but that was expected; Jeff Skilling had estimated EBS would lose a billion before it started making money.

Here is a contemporaneous CIBC equity report.

Later, Jeff Skilling would be found guilty on Count 26 of his indictment, which said he had lied during presentations to securities analysts and rating agency representatives, specifically on the July 12, 2001 conference call.

Why Enron Went Bankrupt: Part 2

Now that I really comprehend the underlying cause of Enron’s bankruptcy, I’m starting to see things I really didn’t notice before. I had a quick discussion last night with one Enron executive who pointed out that when Enron collapsed, Enron management blamed the losses from the assets on the SPEs (and Andy Fastow). I am thinking specifically of the 3rd quarter press release announcing the $700 million loss. Enron didn’t say the assets lost value, they said they took “a $700 million loss in connection with unwinding Raptor.” That sounds like Raptor caused the loss. But Raptor didn’t cause it. Unwinding the Raptor swap, which hedged those losses with Enron stock, just caused Enron to have to recognize the losses, because there was no new stock issuance to offset it.

My support for Ken Lay as an executive and a defendant has been unwavering, and continues to be. But part of truly understanding someone or something is being truthful about them and the truth is, Ken Lay chose to keep the stock price high rather than issue equity and dilute the stock that hedged all of Enron’s investments.

It was a decision that would have catastrophic consequences.

Why Enron Went Bankrupt

This article in the Harvard Business Review is the most lucid explanation of Enron’s bankruptcy to date. The most stunning paragraph is this:

As the value of the assets in the SPEs became impaired, Enron faced an unpleasant choice: issue new equity as promised, thereby diluting current shareholders and causing a drop in stock price, or risk a loss of Enron’s investment-grade rating and potentially destroy the firm.

Enron’s CEO at the time, Ken Lay, decided against issuing the stock (and against living up to the financial structure created by Fastow), apparently believing that (a) dilution would cause an even greater loss of confidence than would the impairment of Enron’s balance sheet from including the SPEs and (b) the rating agencies would back down. Instead, the rating agencies downgraded Enron, the trading operations were forced out of business, $4 billion of debt was accelerated, and Enron was forced to file for bankruptcy.

Nobody’s ever said it quite like that. Quite so clearly and simply and powerfully.

What is staggering about this is that it is the exact opposite of what was publicized by pundits, newspapers and naysayers. In his analysis published in HBR, Professor Weiss explains that the “oft-maligned” SPEs actually would have saved Enron, had it not been for Lay unwinding them. Let that sink in a moment: unwinding Raptor actually caused the bankruptcy.

Quite simply, a number of Enron assets (such as the Azurix, International, and Merchant Investments HAD declined in value. Even if these assets were on-balance sheet, Enron would have had to issue a ginormous amount of equity in order to maintain the investment-grade rating. When Lay backed out of his pledge to do so, it was game over with the agencies.

The argument to date has been a total non-sequitor: Enron went bankrupt because it was being forced to issue equity. That’s like saying a sick patient died because he was being forced to take life-saving medicine. The issuance of new equity was the life-saving medicine. It pains me to say that Ken Lay and Greg Whalley took the medicine away.

Cute Baby Kittens & Enron


Who doesn’t love little baby kittens? ENRON! That’s who!

Or something.

In this article the author has some thoughts about what he called an “internet monopoly”:

The idea is this: Cable offers more bits than any telephone wire and as the cost of running new wires and trucks keeps going up, that’s not going to change. Thus, as consumers switch from buying cable television services to Internet subscriptions, the cable system still has the advantage. It can charge what it wants for those bits, and charge the people on the other side, like Netflix, for reaching “its” customers.

My favorite version of this dream was dreamt by Enron in the late 1990s. Enron built a communications market just as it built markets in energy, and the idea was that if it could control access to all the Internet’s major pipelines of data, it could do just what it was doing to California with electricity, squeeze everybody. Trouble is, as I later wrote in a self-published book about technology history, most recently offered as “Moore’s Lore”, Enron had a cat problem.

You can’t get two cats, sell a litter of kittens, and then capitalize those cats based on all the kittens they and their descendants will later supply. Cats are like widgets, those imagined items you read about in economics. They have infinite utility but no economic value.

Oh. Wait… what?

Gas isn’t kittens. Nor are bits and bytes, and anyway you certainly can monetize cats? If your business plan is kitten-based, you could start start a market on breeding awesome kittens and securing anything the progeny produces in the future – be it prize money earned in cat shows or just more kittens.


And yes, kittens do have economic value. Have you ever tried to buy a Bengal cat? They go for about $500 a piece. Granted, you probably won’t become a millionaire with them, but to say that they have no economic value is just plain wrong.

Anyway I am being cheeky. I get the feeling the intention of the analogy was to wink at mark to market accounting, which would be a huge fallacy. And of course it’s an absurd analogy… the author really has to stretch to claim that one of Enron’s projects didn’t work because EBS (Enron’s “communications market”) obviously was a raging success.

I fear the farther we get from Enron’s demise, the foggier its critics get on exactly what happened in those pretty blue towers.

Why Did Enron Go Bankrupt?

I recently wrote a post about Andy Fastow. I have some corrections to make to that post. I wrote:

Many people believe that it was revelations about questionable deals created by Fastow that started the spiral that lead to Enron’s downfall.

That was sloppy and inaccurate writing. There were no “revelations”. Everything that Andy Fastow did at Enron Corporation was approved by the board and disclosed in the quarterly 10K forms. There were no “questionable” deals – I meant “challenged” deals.

Currently I’m struggling with a central question about Enron’s downfall and frankly haven’t resolved what exactly “started the spiral” that led to Enron’s downfall. The more I ponder it, the more mysterious it becomes. The facts don’t make any sense. Declining stock price does not equal bankruptcy. A stock, after all, can trade at a penny without a company going bankrupt.

And the bankruptcy is bizarre and has none of the hallmarks of a typical bankruptcy. Did Enron’s creditors call in a loan they couldn’t pay? No. Was Enron out of cash? Nope, it had about $2 billion in cash in the bank. Were there vendors that went unpaid? No. So why did Enron declare bankruptcy?

Jeff Skilling was absolutely telling the truth when he said that Enron was in good shape when he left the company in August, 2001.

Executives at Enron say there were three types of businesses at Enron. There were good businesses, which include the pipelines, which are still making boat-loads of money at Kinder Morgan. The trading business was huge. The traders went to Centaurus where John Arnold quickly made $20 billion with Enron’s assets in five years. The wind company is worth about 500 million to GE. PGE was worth 1.5 billion.

The crappy businesses were: International, Water, Merchant Investments (which were hedged in Raptor). And then the perspective businesses were things like EES and EBS, which was working on cool, emerging technologies like cloud storage. Google, Apple, Microsoft and other companies now hold patents created by Enron. Out of all that massive value, the crappy businesses were a tiny portion of the corporation. The assets far outweighed its debts. It was surely not a “house of cards”.

So why did Ken Lay voluntarily declare bankruptcy? Furthermore, many companies declare bankruptcy but they don’t just vanish the way Enron did. Heck, hasn’t American Airlines been in bankruptcy since the Kennedy administration? WHY DID ENRON GO BANKRUPT?

We need to understand this. All that’s been put out there are emotional, sensationalized explanations that don’t stand up to scrutiny. ‘Run on the bank’, ‘Perfect storm’, ‘Crisis of confidence’, ‘Andy stole money’, and ‘Hidden debt’ are all phrases that are incorrect or non-sensical. None of them explain why Enron went bankrupt. Justice demands that it be explained.

Andy Fastow’s Effect On Enron’s Stock Price

I’m studying Enron’s stock price around the time CFO Andy Fastow left Enron Corporation (here’s the history of Enron’s stock price). The day before Fastow departed Enron, the stock had dropped less than one half of one percent (20.65 to 19.79). When he left, ostensibly to restore the confidence of Wall Street, the stock dropped even more dramatically, about 2%, from 19.79 to 16.41. From then on, the stock was in freefall. Though the stock was already losing value rapidly, there is a possibility I had never considered before. What if it was losing value because Andy Fastow left. If getting Andy Fastow off the payroll was going to buoy the stock price and “restore confidence”, well, that didn’t happen even a little bit.

In fact, Enron’s stock price didn’t respond to much of anything from then on except to fall. Why?

Andrew Fastow Speaks Out

Enron’s former CFO Andrew Fastow spoke recently at the annual ACFE (Association of Certified Fraud Examiners) conference. For information about what Fastow said, check out articles here, here, and here. I have written many times about Fastow on this blog. He is the person who seems to generate the most hostile responses from my readers, even more hostile than the responses I get when I write about Jeff Skilling.

Many people believe that it was revelations about questionable deals created by Fastow that started the spiral that lead to Enron’s downfall. Given the overall size and scope of Enron’s businesses, the Fastow deals should have been considered insignificant (at best) by the market. However, toward the end of 2001, the recent implosion and the 9/11 terrorist attacks had created a paranoid culture in America that spurred people to react with irrational alarm that fed into Enron’s death spiral. The public and press demanded that the Feds find scapegoats for the Enron bankruptcy and, thus, the witch hunt was launched.

Enron was a highly leveraged company that used enormous amounts of short-term credit through the use of commercial paper and large amounts of trade credit supplied to Enron by the companies with which it did business. When Enron lost it’s investment grade credit rating, in part due to revelations about Fastow’s deals, Enron quickly ran out of cash to meet the financial obligations that it’s business model generated. Unfortunately for Enron, this happened before the bail-out mentality of the recent Great Recession — if it had happened in 2008, Enron would most likely have been bailed out (which would have been an inexpensive propostion in the case of Enron compared to what the Feds paid to bail-out financial institutions during the Great Recession).

Among the interesting comments by Fastow at the ACFE conference was his assertions that “Enron did not have to go bankrupt at the time that it did,” and that “The decisions that made Enron go bankrupt were made after Skilling resigned.” These statements are particularly significant coming from Fastow who has no reason to say anything now. These statements are also in line with information that the Skilling defense team had in hand and were planning to use in a motion to dismiss Skilling’s convictions and to request a new trial — those plans were dropped in Skilling’s recent sentencing deal.

In addition, although Skilling was not formally accused by the Feds of “causing” Enron’s bankruptcy, the bankruptcy was a strong undercurrent in the Feds’ public comments about Skilling, and they used it heavily during his prosecution and trial, often talking about how people were hurt by Enron’s bankruptcy (without adding, of course, that the Feds themselves did not hold Skilling responsible for the bankruptcy).

I am happy that Andrew Fastow is speaking out, and I hope that he continues. I hope many more Enron people will begin speaking out as the Feds’ hold over them diminishes with time. We need to hear a lot more from the people most directly involved with Enron and the Enron legal events.

UPDATE: Please see this post for several corrections to this post.

Enron and Shakespeare

As I reflect on yesterday’s re-sentencing of Jeff Skilling, the thing that strikes me the most is what a colossal failure the Enron criminal prosecutions have been for the Department of Justice (DOJ) and what an expensive fiasco they have been for the American taxpayer. It is a tragedy of Shakespearean proportions that has occurred because the press and the public “winked” at the prosecutorial abuse of the DOJ instead of insisting on justice.

Of the dozens of people indicted (and hundreds of others simply harassed) by the DOJ in the Enron prosecutions, Skilling is the only example of a trial “success” that the DOJ can try to point to. But what is the Skilling prosecution really an “example” of?

Well, first of all, the Skilling prosecution is essentially a textbook example of a witch hunt. As Enron Task Force (ETF) prosecutor John Hueston wrote in an essay for the American Criminal Law Review back in 2007, the DOJ had no compelling evidence of criminal wrongdoing by Skilling, and therefore the ETF prosecutors had to struggle to “weave” a tale in order to have anything at all to present to a jury. At Skilling’s trial, the prosecutors failed to actually prove any of the counts against Skilling, but instead painted Skilling as a “greedy, lying bastard” to play on the ingrained bias of the jurors. I encourage everyone to read the transcripts of the Skilling trial — you will be shocked at the shallowness of the prosecutors’ case.

The Skilling prosecution is also an example of federal government misuse of taxpayer funds. As this blog has pointed out, a reasonable guesstimate of the cost of the Skilling prosecution to the American taxpayers is at least $80 million dollars so far (and that is not including the cost of the efforts expended on the prosecution and intimidation of others in an effort to get them to turn on Skilling). So the Feds spent $80 million of taxpayer funds in order to get Skilling to turn over $40 million to Enron “victims”. Obviously, it would have been much cheaper for the Feds to simply have given $40 million of taxpayer funds to the Enron people — that would have cut the drain to the taxpayers in half!

A prison sentence of 14 years means that Skilling will serve about 11 years. That means that the American taxpayers have paid more than $7 million per prison year for the lurid pleasure of seeing a non-violent, first-timer offender languish in prison. This is an example in fiscal stupidity.

The tragedy of this legal and financial fiasco is that it was foreseeable and avoidable. As federal prosecutors John Hueston and John Kroger have written, the Feds were not able to find a tangible reason to believe that anyone at Enron, with the exception of Andrew Fastow, committed any criminal offense. All of the criminal indictments, including Fastow’s indictment, should have been pursued as civil complaints. Civil proceedings would have accomplished prosecution, punishment, and deterrence much more effectively than criminal proceedings at a fraction of the cost to the taxpayer. Skilling still faces a civil proceeding, but his criminal defense has depleted his funds — there is little left for recovery. The criminal witch hunt by the Feds has cost not only the American taxpayer, but the alleged Enron victims also. The Enron prosecutions have been a lose-lose proposition for everybody!

As the Prince says toward the end of Shakespeare’s Romeo and Juliet:

See what a scourge is laid upon your hate …,
And I, for winking at your discords too,
Have lost a brace of kinsmen.
All are punished.

10 Reasons Houston Doesn’t Care About Enron Anymore

Forbes has published an article titled Why Houston Doesn’t Care About Enron Anymore.

On the face of it, it is good news. It’s over: hooray! But there are also some really cruel remarks about Ken Lay, which are just inappropriate.

Houston healed up, as did the rest of the country, so I guess we can all put away our Ask Why stickers and go home. Oh, except for the Jeff Skilling and the other innocent people who went to prison for nothing more than the aggrandizement of the DOJ.

Time does heal the collective. We don’t sit around and bawl our eyes out over 9/11 every day, or malinger over a loved one who passed away when we were 6 years old. But the individuals of the injustice – Jeff Skilling, Rex Shelby, Scott Yeager, Andy Fastow and many others – can hardly be expected to simply shake it off. It is their life we’re moving on from, and whatever scars they have won’t go away so easily.

The world really is moving on. I was a decade younger when I began writing about Enron, and I am not the same person I was. Yet the agony and injustice of it still eats at me. That angst is precious to me; it is what I have instead of justice. It reminds me of how brilliant some human beings are, and what can be accomplished with skill and competence instead of glamour and glitz. It motivates me to do better. To reach farther. And it reminds me to quietly whisper to myself, every once in a while, “fuck the police.”