Welcome back to the Deep Dive. We are doing something
a little different today. Usually when we look
at a business failure, it's a story about bad
timing or, you know, a product that didn't quite
click or maybe a CEO who fell asleep at the wheel.
But today, today we are looking at the grandfather
of them all, the ghost that that really haunts
every single boardroom in America. It really
is. It's like the patient zero of modern corporate
trauma. We are talking about Enron. And I know
what you're thinking. I know the Enron story.
Smartest guys in the room, cooking the books,
jail time. But looking through this stack of
research you've pulled together, I mean, the
scale of the delusion is just staggering. It
wasn't just a scam. It was a cultural phenomenon.
That is exactly the right way to frame it. You
have to remember, for six years running, Fortune
magazine named Enron America's most innovative
company. The rule. They weren't seen as criminals
in the 90s. Not at all. They were like the Beatles
of capitalism. They were trading water. They
were trading weather. They were going to stream
movies before Netflix was even mailing DVDs.
They were the future. And now the name just means
fraud. Plain and simple. But here's the weirdest
part of the file you sent me. And it's the reason
we are actually pulling this out of the archives
right now. Enron is back. Yeah, we have to talk
about that. It is the strangest coda to a corporate
tragedy I think I have ever seen. I'm looking
at this timeline in the source material. Late
2024, early 2025. There's an Enron reboot, a
micronuclear reactor. A crypto token. What is
happening? It's essentially performance art meets
late stage capitalism. But the fact that it went
viral, the fact that people engaged with it,
that tells you everything about how powerful
the Enron brand still is. It's become this symbol
for the ultimate grift. We are definitely going
to get to the Enron egg and the whole satire
thing later in the show. But our mission today
is to understand how we got there. We need to
go from the humble pipelines in Omaha all the
way to the prison cells in Texas. I really want
to understand the mechanics of the illusion.
How do you hide that much debt? How do you convince
the world you're profitable when you're just
bleeding cash? It's a mix of incredibly complex
accounting and, well, incredibly simple human
arrogance. And it all starts with a culture clash.
Right. Let's start at the beginning. Section
one in our outline, the merger and the intestine
mistake, which honestly, that sounds like a bad
name. It does, doesn't it? Yeah. But to understand
Enron, you have to understand the two parents
that made it. Picture the landscape in the mid-'80s.
On one side, you have Inner North. They're based
in Omaha, Nebraska. Think Warren Buffett country.
Okay, so very conservative, Midwestern. Extremely.
They're a Depression -era success story. They
run this massive natural gas pipeline network,
and they run it like utility. Low -risk, steady
returns. These are the guys who wear cardigans.
They drink coffee at 8 a .m., they go home at
5 p .m. Got it. Parent A. Safe. boring, reliable.
Then you have Houston Natural Gas, HNG. This
is the aggressive Texas counterpart. They are
run by a guy named Kenneth Lay. They are ambitious.
They're leveraging up and they are fighting for
territory in a very, very volatile market. These
guys wear cowboy boots and eat steak dinners
and talk about conquering the world. So you have
oil and water or I guess gas and gas. Gas and
gas, but with very different pressures. So in
May 1985, Inner North. the Safe Omaha Company,
acquires HNG for $2 .3 billion. On paper, this
makes total sense. Inner North had the North
-South pipelines. HNG had the East -West pipelines.
Put them together, and you have the second largest
gas pipeline system in the entire United States.
It creates a national grid. So it sounds like
it should have been a boring, reliable, cash
-printing utility business, a monopoly almost.
It absolutely should have been. But the culture
clash was immediate. The Omaha people and the
Houston people, They just hated each other. And
even though Inner North was the one buying HNG,
Kenneth Lay, the guy from the smaller Acquire
company, he manages to outmaneuver the Inner
North CEO, Sam Signar, and takes control. Whoa,
that's a serious power move, eating the Acquirer.
It is. And it's the first sign that aggression
was going to win out over conservatism in this
new company. So Lay moved the headquarters to
Houston. And he decides this new behemoth needs
a new identity. The temporary name was just H
&G Inner North Inc. Which is not exactly catchy.
No, not at all. So Kenneth Lay decides they need
a brand. And this is my absolute favorite detail
from the early days because it just foreshadows
everything. He didn't just brainstorm a name
over lunch. No, no. He hired Lippincott and Margulies,
a high -end consulting firm. They spent over
$100 ,000 in 1980s money on focus groups, design
studies, the works. Wow. That's probably a quarter
million dollars today just to pick a name. And
after months of work, they came back with a winner.
They proposed the name. Enter on. Enter on. You
know, it sounds futuristic. It sounds strong.
Enter the future. The on switch. I can see it.
Kenneth Lay loved it. He thought it projected
power. He announced it to the employees. They
began printing stationery. They ordered the signs.
Enter on. And then just a few weeks before the
stockholder vote in 1986, someone, and it was
probably a low -level employee with a dictionary,
raised their hand. Because they finally looked
it up. They finally look it up. Enteron is a
medical term. It specifically refers to the elementary
canal, the digestive tract. Oh, no, the intestines.
The gut. They had spent a fortune to name their
massive new energy conglomerate the intestine.
Invest in the intestine. We are flushing the
competition down the, wow. Exactly. It's a total
disaster. Lay was humiliated. They had to scramble.
So they basically just chopped the middle letters
out of the word. They removed the T and landed
on Enron. It's a funny story, but does it signal
something deeper? I think it does. I think it
signals a tendency to prioritize the flash and
the concept over the actual due diligence. They
wanted a cool, modern name, but they didn't bother
to check the dictionary. It's a small oversight,
but it's so telling. It's style over substance
right from day one. And speaking of oversights,
even in these early days, there were already
financial cracks weren't there. We tend to think
of the fraud as a late 90s thing, but the sources
point to an incident way back in 1987, the Valhalla
incident. This is absolutely crucial. Enron Oil,
a subsidiary, was based in Valhalla, New York.
They were supposed to be doing boring hedging,
basically just protecting the company from price
swings in oil. But the traders there, they started
gambling. They were engaging in huge unauthorized
trading on the price of oil. And I'm guessing
they were making a lot of money at first. Oh,
they were bringing in huge profits. And because
they were profitable, the executives in Houston
didn't ask any questions. In fact, there is evidence
that when auditors raised alarms about the complete
lack of controls, Leah sent a message saying
effectively, please keep making us millions.
So the precedent was set right there. If you
make money, we don't care about the rules. Precisely.
But then, of course, the market turned. In 1987,
the traders made a bad bet. A really bad bet.
They tried to hide it. Enron Oil reported an
$85 million loss, but the reality was much, much
worse. The true loss was somewhere between $142
and $190 million. That's enough to wipe out a
company back then. It almost did. And it was
the first concealment. It established a culture
where earnings were more important than ethics.
But Enron was still, at its core, a pipeline
company. To become the Enron we all know, they
needed a new vision. They needed Jeff Skilling.
Enter the McKinsey consultant. Okay, section
two, the shift. Jeff Skilling is the architect
of the Enron legend. He wasn't an oil guy. He
was a strategy guy, a true believer. In 1989,
while he was still consulting for McKinsey, he
pitched Enron a big idea. You have to understand,
before this, natural gas was just boring. You
dug it up, put it in a pipe, and signed a 20
-year contract with a utility at a fixed price.
It was a physical delivery business, pure logistics,
moving molecules from point A to point B. Skilling
looked at that and said, that's inefficient.
He proposed the gas bank. Okay, let's unpack
the gas bank, because it sounds simple, but it
fundamentally changed the entire industry. Think
of it like a normal bank, but for gas. A gas
producer, a guy with a well, wants to sell gas,
but he's afraid prices will drop next year. A
utility, a power plant. Wants to buy gas, but
they're afraid prices will spike. And Enron steps
into the middle. Enron steps into the middle.
They say to the producer, we promised to buy
your gas at a set price. And they say to the
utility, we promised to sell you gas at a set
price. Enron becomes the market maker. They absorb
all the risk. And because they're sitting in
the middle of all these deals, they can start
trading. They can trade futures, swaps, options.
They don't just move the gas physically anymore.
They trade the financial obligation of the gas.
They turned a physical commodity into a financial
product. I mean, Wall Street must have absolutely
loved that. Oh, they went crazy for it. It unlocked
massive liquidity and made the market more efficient.
But it required a completely different mindset.
In 1988, they had what they called the Come to
Jesus meeting. That sounds dramatic. It was.
It was the moment they decided to aggressively
pursue unregulated markets. They weren't just
a utility anymore. They were a trading firm.
And Skilling was the guy leading the charge.
He joined the company full time in 1991 to run
this gas bank division. And he brought this aggressive
up or out culture with him. And this leads us
straight into Section 3, the innovation trap.
Because once Skilling took over, they decided
this model worked for gas, so it must work for,
well, everything. Everything. Skilling had this
philosophy he called asset light. He famously
said in 2000 that... Business assets were an
outdated means of a company's worth. Asset light.
That sounds great in a boardroom. It means getting
rid of the heavy stuff, right? The pipes, the
power plants, the trucks. Exactly. He didn't
want to own things that rust. He wanted to focus
on intellectual assets, the trading algorithms,
the deals, the market positioning. He wanted
Enron to be a platform, not a utility. And that
led to a massive, massive trading spree. In 1999,
they launched Interon Online. Which was huge
at the time. It was the first web -based transaction
system for commodities. And they traded everything.
I mean, everything. Not just oil and gas. They
traded plastics, pulp paper, steel. They even
started trading weather risk. Wait, weather risk?
How in the world do you trade weather? They're
called weather derivatives. If you're a ski resort,
you lose money if it doesn't snow, right? If
you're a theme park, you lose money if it rains
all summer. Enron would sell you a contract that
paid out if the weather went against you. It's
actually the legitimate financial product now,
but Enron was pioneering it at a massive scale.
But then we get to the stuff that wasn't so legitimate,
or at least where the hype completely outpaced
reality. We have to talk about broadband. Oh,
broadband. This was the absolute peak of the
dot -com bubble. And Enron decided that bandwidth,
the capacity to move data over the Internet,
was just another commodity like natural gas.
They thought they could create a market and trade
it. They called it the Enron Intelligent Network.
They did. They bought up tons of dark fiber,
inactive fiber optic cables that were already
in the ground. And they built this massive state
-of -the -art facility. In Las Vegas, they claimed
they could stream the entire Library of Congress
anywhere in the world in minutes. And they made
that huge deal with Blockbuster in 2001. This
is one of my favorite details in the stack. They
announced a 20 -year deal to stream movies on
demand. It sounds exactly like Netflix, years
before Netflix streaming. But the technology
just wasn't there. The last mile connections
to people's homes were still dial -up for most
people. The deal collapsed almost immediately.
But here's the kicker. Enron executives hyped
this broadband division to the moon. The stock
price soared. Executives sold $924 million in
stock while telling the public that broadband
was going to be worth $40 billion. And in reality?
In reality, the broadband division was bleeding
money. It reported massive, massive losses. The
blockbuster deal never generated a single dollar
of real profit. But because of their accounting,
which we will get to. They booked imaginary profits
anyway. It wasn't just broadband, though. They
tried to do the same thing with water. Right,
Azurix. This was Rebecca Mark's baby. She was
a major executive, kind of a rival to Skilling,
and she wanted to build a global water empire.
They acquired Wessex Water in the UK. Which was
actually a good company, from what I understand.
It was a solid, profitable utility. But then
they took Azurix public. They overpaid for assets.
British regulators forced them to cut water rates.
They took on massive debt. Azrix became a money
pit. And Enron eventually had to suck all the
cash out of it and sell it off for a huge loss.
And then there were the international projects.
I feel like this is where the asset light philosophy
really crashed into the messy reality of the
physical world. It definitely did. Take Dabhol.
in India, a $2 .9 billion disaster. They built
a massive gas -fired power plant in a region
that couldn't afford the electricity. The Indian
government got into a dispute with them, stopped
payments, construction halted. It was a political
and financial nightmare that dragged on for years.
And my personal favorite of all the disasters,
the Dominican Republic barge. Oh, this is a vivid
one. They had a power plant mounted on a barge
off the coast of Puerto Plata. It was supposed
to provide reliable power to the local grid.
But the soot from the plant's smokestack was
blowing directly onto a nearby luxury hotel.
So the guests are sitting by the pool eating
dinner and just getting covered in soot. Exactly.
Yeah. Blackening their food. And because of the
currents, garbage from a nearby slum kept clogging
the water intake for the power plant's cooling
system. They had to hire men in rowboats to paddle
out and literally push the garbage away with
sticks. You can't trade your way out of that
problem. No. That is the reality of physical
assets. They are messy. Enrod didn't like messy.
They liked clean, beautiful spreadsheets with
big numbers on them. Which brings us to the engine
room of the whole disaster, section four, the
mechanics of the fraud. How did they make these
messy failures look like record -breaking profits?
New main tools, really. Mark -to -market accounting
and special purpose entities. Okay, let's unpack
mark -to -market because this sounds like legitimate
accounting jargon, but they completely weaponized
it. It is legitimate, but for certain things
like trading securities. If you own a stock and
it goes up today, you can record that gain today,
even if you haven't sold it yet. That makes sense
for liquid assets. But Enron wasn't using it
for stocks. They were using it for these huge
long -term deals. Right. Let's go back to that
blockbuster deal. It was a 20 -year agreement.
Enron's accountants basically estimated how much
profit they thought they would make over the
next 20 years. Let's say they just pulled a number
out of the air, $100 million in future profit.
Under mark -to -market, they booked that $100
million as current income immediately. Before
they streamed a single movie. Before they made
a single dime. That's it. They signed the contract,
popped the champagne, and booked the entire projected
profit of the deal. So what happens when the
deal falls apart three months later? Well, technically,
you're supposed to write it down as a loss. But
Enron didn't like doing that. So they had massive
profits on their books that were actually just
imaginary future earnings that never materialized.
It completely disconnected reported profit from
actual cash. They were reporting billions in
income but had no cash coming in the door. So
they were cash poor but profit rich on paper.
And to hide the debt and the lack of cash, they
turned to these special purpose entities. Enter
Andrew Fastow, the CFO. He was the architect
of the shell game. The SPEs. These had crazy
names like LJM, Chuko. So Fastow created these
off -balance sheet partnerships. The idea was
simple but, well, nefarious. If Enron had a bad
asset, say... that failing broadband business
or a power plant in Brazil that was losing money,
they would sell it to one of these SPEs. So Enron
gets the asset off their books. Exactly. The
debt associated with that asset disappears from
Enron's balance sheet and they get to record
a sale. So they book even more fake revenue.
But who was running these SPEs? Who was on the
other side of the deal buying this junk? Well,
that's the craziest part. Andy Fastow. He was
the CFO of Enron, representing the seller, and
he was also the manager of the LJM partnership,
representing the buyer. Wait, what? That is a
massive, blatant conflict of interest. It's the
definition of conflict of interest. He was basically
sitting on both sides of the table, negotiating
with himself, and he was paying himself millions
in management fees from these partnerships. He
made over $30 million personally from these deals,
but the only way these... SBEs could afford to
buy Enron's garbage was because they were backed
by Enron stock. Ah, there it is. So as long as
Enron's stock price kept going up, the shell
companies had value on paper and they could keep
buying the bad debt. It was a self -fueling cycle.
It was a Ponzi scheme built on the stock price.
The moment the stock faltered, the whole house
of cards was destined to collapse. And while
they were juggling these books, they were also
wreaking havoc in the real world. Section 5.
The California Energy Crisis. This is where the
story gets really, really dark. This is where
the smartest guys in the room became the bad
guys. In 2000, California deregulated its energy
market. It was a deeply flawed system, and Enron
exploited it ruthlessly. We've all heard about
the rolling blackouts. I mean, traffic lights
going out, businesses shutting down, grandmothers
stuck in elevators. And Enron traders were actively
causing this. They had these strategies with
names like Death Star and Get Shorty and Ricochet.
They would intentionally encourage power plants
to shut down for maintenance to create artificial
shortages. And when supply goes down, the price
goes up. It skyrockets. They were selling power
at 20 times the normal value. They were extracting
billions and billions of dollars from California
ratepayers. And there is a specific piece of
evidence that really just nails the culture here.
The Grandma Millie tapes. These are recordings
of Enron traders talking during the crisis. And
they just destroy any defense that they were
just, you know. providing liquidity to the market
i have the transcript right here one trader asks
they're taking all the money back you guys stole
from those poor grandmothers in california and
the other trader laughs and says yeah grandma
millie man but she's the one who couldn't figure
out how to vote on the butterfly ballot they
were mocking the elderly voters in florida while
ripping them off in california and then the line
that really sticks with you jammed right up her
ass for $250 a megawatt hour. It's just chilling.
It shows a complete and total lack of empathy.
To them, it was just a video game. They were
high -fiving in Houston over creating blackouts
on the West Coast. So you have the accounting
fraud, the moral bankruptcy, and this financial
house of cards. Eventually, gravity has to kick
in. Section 6. The Unraveling. The peak was August
of 2000. The stock hits $90 a share. Everyone
loves Enron. But the skeptics were starting to
circle. Right. Bethany McLean. She wrote a piece
for Fortune magazine titled, Is Enron Overpriced?
Such a simple question. She just asked, how exactly
does this company make money? She looked at their
financial documents and she couldn't figure it
out. And the reason was because it was unfiguratable.
It was nonsense. And then there was Daniel Scotto,
a utility analyst. He suspended his ratings on
energy companies in California, warning that
they weren't going to get paid. He told investors
to sell Enron. And Enron did not handle the criticism
well. There's a famous conference call in April
of 2001. Richard Grubman, a skeptical analyst,
asked Jeff Skilling for a balance sheet. Skilling
kind of dodged, said they couldn't produce one
just yet. Grubman pushed back, saying, you're
the only company that can't release a balance
sheet along with your earnings. And Skilling's
response to that? He said, well, thank you very
much. We appreciate that, asshole. On a live
conference call with Wall Street. It was the
emperor has no clothes moment. CEOs of solid
companies don't call analysts names like that.
It showed the stress. It showed the sheer arrogance.
And internally, people knew. Right. Sharon Watkins.
The VP of corporate development. She wrote an
anonymous memo to Kenneth Lay in August 2001.
She warned him in black and white that the company
would implode in a wave of accounting scandals.
She laid it all out. The SPEs, the inflated profits.
She knew. But Lay didn't fix it. He tried to
cover it up. He was selling his own stock while
telling employees to buy more. And that's the
ultimate betrayal. The stock started free -falling.
They tried to arrange a merger with Danagy, a
rival, to save themselves, but Danagy took one
look at the real books and ran for the hills.
And then, on December 2001, Enron filed for Chapter
11 bankruptcy. At the time, it was the largest
bankruptcy in U .S. history. $63 billion in assets.
Just gone. Thousands of employees lost their
jobs. But worse, so much worse, they lost their
pensions. Enron had encouraged employees to put
their entire 401ks into Enron stock. When the
stock went from $90 to pennies, their retirement
savings just evaporated. Unbelievable. Let's
talk about consequences. Section 7, the aftermath.
The legal fallout was massive. Arthur Anderson,
the accounting firm that signed off on all this
fraud, was convicted of obstruction of justice
for shredding tons of documents. Literally. They
were running industrial shredders 24 -7. And
even though the conviction was later overturned
by the Supreme Court on a technicality, the firm
was destroyed. The damage was done. The big five
accounting firms became the big four. And the
executives. Kenneth Lay was convicted of conspiracy
and fraud. He died of a heart attack before he
could be sentenced, so technically his conviction
was vacated, but, you know, history judges him.
And Skilling. Jeff Skilling got 24 years. He
ended up serving about 12. He was the face of
the arrogance, really. And Andy Fastow, the architect
of the whole shell game. He cut a plea deal.
He testified against the others. He got six years.
And out of all this mess, we got the Sarbanes
-Oxley Act. Yes. A huge piece of legislation.
It made executives personally liable for the
accuracy of financial statements. It tried to
put some guardrails up to prevent this from ever
happening again. And what about the actual assets,
the stuff Enron owned? This is the irony. The
boring stuff, the pipelines, was sold off and
is still operating profitably today. It's valuable,
real infrastructure. And the future, the broadband
stuff. The famous Las Vegas broadband facility.
It was sold for pennies on the dollar. It was
bought by a guy named Rob Roy who started a company
called Switch. Switch, the massive data center
company. The very same. That facility is now
part of what they call the SuperNAP, one of the
most advanced data centers in the world. So the
idea was right. The Internet did need massive
bandwidth. Enron was just too early, too fraudulent,
and way too focused on the stock price to actually
build the business. That is a fascinating nugget.
The vision was actually correct. The execution
was criminal. Precisely. It's the story of the
whole company in a nutshell. Now, we have to
jump to the present day. Because if you thought
the Enron story ended in 2001, you haven't checked
Twitter, sorry, X lately. Section 8, the satirical
reboot. This is one of the strangest codas to
a corporate history I have ever seen. On December
2, 2024, the at Enron account on X posted. We're
back. Can we talk? And the Internet just lost
its mind. It did. People had no idea if it was
real, if it was a scam or what was going on.
It turns out the rights to the Enron brand have
been bought at an auction for $275. $275 to own
the Enron name? That's a steal. And the people
who bought it are linked to the Birds Aren't
Real movement. For listeners who don't know,
Birds Aren't Real is a Gen Z satirical conspiracy
theory claiming that all birds are actually government
drones. It's a huge piece of performance art.
Exactly. So these performance artists resurrected
Enron. They announced a new CEO, a guy named
Conor Gatos. They staged a power summit on January
6th, 2025. And they announced new products, the
Enron Egg. The Enron Egg. a micronuclear reactor
that is capable of powering a suburban home for
10 years. Using 20 % enriched uranium, no less.
Obviously, this is not a real product. It's biting
satire on the tech industry's tendency to overpromise.
It's skewering the clean energy hype cycles we
see all the time. And they launched a crypto
token, of course. Had to. Enron on the Solana
blockchain. Which is just perfect. Enron was
the original financialization of everything company.
Crypto is the ultimate financialization of, well,
nothing. The token's market cap spiked to $700
million and then crashed 76 % in 24 hours. It's
like they reenacted the Enron stock chart in
speedrun mode. It's performance art reflecting
reality in the most direct way possible. They
even had the CEO get pied in the face, which
mirrors a real incident where Jeff Skilling was
pied in San Francisco after the collapse. So
why do you think this brand still resonates?
Why are kids who weren't even born when Enron
collapsed making memes about it? Because Enron
has become the archetype. It is the shorthand
for corporate villain. It's the symbol of the
suit -wearing sociopath who will destroy the
world for a bonus. In an era of skepticism about
capitalism, about tech bros, about AI hype, Enron
is the patron saint of the grift. It really is.
It's the ultimate cautionary tale that it seems
nobody seems to actually learn from. And that
leads us to the big question, doesn't it? So
what does this all mean? We've walked through
the history, the fraud, the blackouts, and now
the memes. The takeaway for me is all about the
danger of intangibles. Enron was obsessed with
being asset light. They wanted to trade intellectual
capital. They didn't want to get their hands
dirty with actual pipes and actual plants. And
today. Look around. We have crypto companies
valued at billions of dollars with no actual
product. We have AI companies trading on revenue
multiples that assume they will own the entire
future of the economy. We have a market that
is completely obsessed with narrative over cash
flow. We are doing it again, aren't we? We might
be. I mean, Enron wasn't an anomaly. It was a
preview. They were trying to monetize the idea
of value rather than value itself. And when you
look at how much of our modern economy is based
on intangible assets, on brand value, and on
speculative tech, you really have to wonder.
Have we actually learned the lesson? Or did Enron
just do it 20 years too early? That is a terrifying
thought to leave us with. Next time you see a
company hyped as changing the world, but you
can't quite figure out how they make money. Yeah.
Maybe go look for the pipelines. Look for the
boring stuff. And maybe check if they named their
company after an intestine. Always check the
dictionary. That's it for this deep dive into
Enron. Thanks for listening and stay curious.
And stay skeptical.