The Enron Story That Waited To Be Told
"Enron was really a systemic failure of all
the checks and balances we have on corporate
governance: integrity of management, board of
directors, audit committee of the board, outside
accounting firm, Wall Street analysts and
ultimately the press. And all of
us failed."
By Howard Kurtz
Washington Post Staff Writer
Friday, January 18, 2002; Page C01
Bethany McLean, a 31-year-old Fortune magazine
reporter with an impossibly soft voice, decided
to take a hard look at Enron last January.
The Houston energy company didn't like her
questions. The CEO, Jeffrey Skilling, called
her unethical and hung up on
her. The chairman, Kenneth Lay, called
Fortune's managing editor to complain.
The chief financial officer, Andrew Fastow,
flew to New York to tell McLean and her editors
that Enron was in great shape.
McLean refused to be intimidated. "The company
remains largely impenetrable to outsiders,"
she wrote in Fortune's March
5, 2001, issue. "How exactly does Enron make
its money? Details are hard to come by because
Enron keeps many of the specifics confidential. . . . Analysts don't seem to have a clue." All this
amounted to a "red flag" that "may increase the
chance of a nasty surprise."
The story sank without a trace. "At that point
the coverage of Enron was pretty glowing," McLean
says. After all, the stock
had soared 90 percent the previous year
and was selling for $76 a share.
Now that the company has collapsed amid charges
of financial chicanery, devastating its
employees' retirement funds, Enron is the hottest
story in the country.
Political reporters joined the fray after
learning that Enron had sought help from
the Bush White House. Teams of business
journalists are digging into the largest
corporate meltdown in American history.
But as in the savings and loan debacle a dozen
years ago, it took news organizations too
long to piece together the clues.
"It's fair to say the press did not do a
great job in covering Enron," says Steve
Shepard, editor-in-chief of Business Week
magazine, which ran only briefs on the company's
financial problems until a cover story in November.
"Enron was really a systemic failure of all
the checks and balances we have on corporate
governance: integrity of management, board of
directors, audit committee of the board, outside
accounting firm, Wall Street analysts and
ultimately the press. And all of
us failed."
There were some notable early efforts. Last May,
the Wall Street Journal ran a front-page story
on Lay getting a half-hour meeting to lobby
Vice President Cheney on the administration's energy program. The story noted that over the years Enron
had donated nearly $2 million to President Bush, Lay's longtime friend, and that some top administration
officials had worked for Enron.
"I feel pretty good about what we've done on Enron,"
says Alan Murray, the Journal's Washington bureau chief. "What we clearly did not understand was that
it was heading for a disaster."
The problem, he says, is that such stories often
turn on "arcane and technical" practices. "The press doesn't pay as much attention to some of these
regulatory issues that have more impact on the world
than the political issues we do pay
attention to," Murray says.
If company auditors -- in this case, Arthur Andersen -- don't raise questions, "it's very hard to know where to look," says Larry Kramer, chief executive of CBS MarketWatch.com. "We didn't get a lot of rumblings.
Our coverage was robust, but was still based on
events after the fact."
A dramatic decline in stock is not necessarily a warning
of foul play, says Kramer, noting that his own company
went public at $97 a share and the stock is now worth $4. "People just got dazzled by the size of the
business," he says of Enron.
David Morrow, editor of TheStreet.com, says the
press is "too reactionary. It's too easy for
the business press to look at what
the analysts are saying." Most Wall Street
analysts had a buy rating on Enron stock.
Indeed, only one group wanted Enron's stock to
tank: the short-sellers, professional traders who
bet on a stock's decline.
One short-seller, Jim Chanos of Kynikos Associates, suggested to Fortune's McLean that she look at
Enron's Form 10-K, a required annual filing with the Securities and Exchange Commission.
McLean says she understood Chanos's motive
but was struck by the document. There
were "strange transactions," "erratic
cash flow" and huge debt. "It made you wonder,
if their business was so phenomenally profitable,
why they had to be adding debt at such a rapid
rate," she says.
But the story was hard to write: "You can't
just spout off about derivatives and mark-to-market accounts and expect people to get it."
Ironically, Fortune's own surveys had named
Enron America's most innovative firm for
six straight years, and much of the
coverage was similarly upbeat. Last January,
a Houston Chronicle story was headlined:
"Houston has $100 billion
company; Enron Corp. sets records for
sales, earnings in 2000."
There were a few critical pieces, but they mainly
focused on politics.
In February, the Los Angeles Times
reported on the close ties between Lay and the
president, noting that Bush had flown on Enron
jets during the campaign.
In March , The Washington Post ran a
piece on Lay's growing influence.
In May, the New York Times quoted
the federal government's top electricity regulator,
Curtis Hebert Jr., as saying Lay had offered to
support his continued tenure if he changed
his views on energy deregulation. Hebert says
he declined. Bush replaced him
months later.
In August, at a Fortune conference in Aspen,
Lay told Rik Kirkland, Fortune's managing editor,
that Enron really disliked McLean's story.
A week later, Skilling quit as CEO after just
six months on the job, calling it a
"personal decision."
"The main point of failure was when Skilling
resigned, because unless he had cancer or
something it was inexplicable,"
Business Week's Shepard says. "The failure of
the press was not saying, 'What's going on here?'"
Business Week talked to Skilling off the record
but could shed no further light on the situation.
To be sure, journalists were skeptical.
"The abruptness of the departure left many
analysts questioning whether a series of
setbacks the company has suffered played a part
in the decision," the New York Times said.
Enron's stock, which had fallen
by 50 percent since January, dropped another
14 percent in two days.
Some commentators unloaded on the company.
"Until they clear this one up, Enron's a goner,"
former money manager
Jim Cramer wrote on RealMoney.com.
But hard information was scarce. "It's almost
as if you have to use forensic accountants when
you're doing a company story because many companies
are using very aggressive accounting techniques
that are perfectly legal," Shepard says.
Enron fired Fastow in October for overseeing questionable off-the-books partnerships,
and in November the company admitted overstating its profits by $600 million. But most papers played these stories on their business pages.
Even Enron's Dec. 2 declaration of bankruptcy
failed to make the front pages of USA Today, The Washington Post, the Boston Globe and the Philadelphia Inquirer.
The CBS, NBC and ABC evening newscasts each gave the announcement two sentences. The media were still heavily focused on the war in Afghanistan.
Now that Enron's stock has been booted off the
New York Stock Exchange, Fortune staffers can't
say enough about the way McLean defied both Enron executives and conventional wisdom.
"It was a gutsy thing to do," Kirkland says.
"We trusted her. When you look back it's
obvious: Why weren't we all asking
these questions?"
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