Not the smartest film in the cinema

Enron: The Smartest Guys in the Room is essentially a morality tale about America’s largest ever bankruptcy. It tells how excessive human greed led to the rise and eventual fall of Enron with numerous employees, consumers and shareholders hurt in the process. Alex Gibney’s documentary also takes sideswipes at the Bush administration, which had close links to Enron, and at free market ideology.

Yet it is precisely the moralism of the film that is its weakness. There may be a case in fiction to construct a story solely to illustrate a straightforward moral point. In a documentary, by contrast, it is important to have a least some awareness of the broader social context in which a narrative operates. Admittedly, it is not possible to do justice to all the complexities of the Enron scandal in a film of less than two hours. However, it distorts the story to present it as simply a misanthropic study of the darker side of human behaviour.

Enron’s origins were in companies involved in the production and supply of energy. They built infrastructure, such as power plants and pipelines, as well as producing and distributing both electricity and gas. In 1985 Houston Natural Gas merged with InterNorth and took Enron as a name.

The roots of the scandal go back to Enron’s shift under the leadership of Kenneth Lay and later Jeffrey Skilling – ‘the smartest guys in the room’ of the film’s title – towards transforming Enron into an energy ‘trading’ company. Rather than simply producing physical energy, the emphasis shifted to complex financial transactions and bets on such things as the movement of energy prices. Later on it even got involved in other forms of trading such as on internet bandwidth and weather options (essentially betting what the weather would be like). For such activities it was named America’s most innovative company by Fortune, one of America’s leading business magazines, for several consecutive years. It was widely seen as a model company of the ‘new economy’ of high technology and sophisticated financial transactions.

Along the way the documentary presents Enron as heavily involved in political lobbying, although it overstates the importance of such activity. It was the largest contributor to George W Bush’s first presidential election campaign and it lobbied strongly for the deregulation of the energy industry. Enron wanted controls on the energy market loosened so that it would be freer to engage in the trading activities that were becoming central to its business.

By the start of this decade the company began to be embroiled in scandal. In 2000/2001 California suffered an energy crisis with rolling blackouts and rising prices. Many held Enron, which had benefited from deregulation and had allegedly manipulated energy prices, partly to blame. Then in 2001 a few analysts and journalists finally started asking probing questions about how Enron was making such large profits. After years in which it was widely accepted that the firm’s accounts were too complex to be properly analysed, they started to question how it made money. It gradually became clear that Enron had engaged in a massive accounting fraud. The profits it had declared were largely fictitious. America’s seventh largest company filed for bankruptcy protection. Enron employees lost their jobs, and investors in the company’s stock – which also included many workers who held Enron shares in their 401(k) pension plans – lost virtually everything.

Some of America’s other premier companies were also implicated in the scandal. Arthur Andersen, Enron’s auditor and one of the leading US accountancy firms, surrendered its licence to practise accounting in America as a result. Tens of thousands of its employees lost their jobs. Wall Street’s investment banks also suffered a blow to their reputation with the failure of their analysts properly to probe Enron’s accounts for many years. Rather than serve the interests of investors, which such institutions are theoretically supposed to do, they stayed close to Enron to win its lucrative business.

Gibney’s Enron: The Smartest Guys in the Room, based on the book of that name by Bethany McLean and Peter Elkind, takes a simplistic view of the scandal. It is built largely around the key protagonists, including Lay, Skilling and several of their lieutenants. The message of the documentary, which is sometimes conveyed explicitly, is that these are bad men who were driven by pride, arrogance and greed. They took advantage of the dark side of the American dream at the expense of the many who lost their jobs and their savings.

The problem with this approach is that, whatever the personal failings of Lay and Skilling, they did not operate in a vacuum. Enron was at the forefront of some of the key trends in the American and global economy. They certainly took advantage of such developments but they did not create them.

Conceptually there are two main trends that should be understood. The first is the development of a huge financial economy alongside, although not separate from, the real economy. Once global economic growth started to slow in the 1970s it increasingly became profitable to play the financial markets rather than engage in real economic activity. As a result the scope of financial activity has increased enormously since then.

Second, there has been a shift in financial markets from moving capital towards trading risks. Despite the complexity of many financial transactions they can often be seen as slicing up risk in different ways and redistributing its ownership. For example, one party might want to bet on a falling oil price while another might want to bet that it will rise. Today’s financial markets allow them to take such bets without any physical transfer of oil. This trend, which became important from the 1980s onwards, is a response to the growing fear of risk in society.

From such a perspective the Enron affair can be seen in a different way. The explosive growth in risk trading was the result of risk aversion rather than, as the documentary suggests, a gung-ho mentality. The primary impetus for the growth of such financial instruments is as a sophisticated form of insurance rather than straightforward gambling. For example, an airline might want to bet that fuel prices will rise as a way of protecting itself against such increases. The extra expense of higher fuel costs can be offset, at least temporarily, by winning the bet on rising prices. Clearly once risk is traded in this way there is significant scope for miscalculation and even outright fraud. If risk is mispriced the resultant losses can be enormous. And if traders make further mistakes in an attempt to cover their losses they can quickly get into serious trouble.

This alternative approach shows that the fundamental problem in relation to the economy is not the likes of Lay or Skilling. It is rather the privileging of ‘financial engineering’ over real productive economic activity. Economic atrophy has meant that attention is increasingly focused on financial manipulation rather than on producing goods that can be useful to society. The emphasis on risk management also is so intense that it detracts from thinking of new opportunities and genuine innovation.

Ties between companies like Enron and the political elite can also be seen in a different way. Business leaders are seldom in favour of a free market in the sense of minimal state intervention in the economy. What they really want is state regulation in a way that benefits them rather than the rest of society.

The problem with Enron: The Smartest Guys in the Room is not that it misses out on the nuances of the Enron scandal. On the contrary, the documentary gets it fundamentally wrong. The affair was driven by a culture of risk aversion rather than by timeless human greed. And, despite the free market rhetoric, Enron was in its own way heavily dependent on state intervention. Perhaps Lay and Skilling were not particularly smart after all, but Gibney’s documentary is not that intelligent either.

Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)).