A quick primer on the Enron scandal (courtesy of A Boy and His Computer):
Explaining the Enron collapse through simple financial terms.
If you’re an average layperson, your grasp of high finance consists of knowing your ATM code. So you’re probably bewildered by this scandal surrounding the collapse of Enron, which had been the seventh-largest corporation in America.
Today we’re going to explain the Enron story, using simple financial terms that you can understand, such as “dirtballs.”
Q. How, exactly, did Enron make money?
A. Nobody knows. This is usually the case with corporations whose names sound like fictional planets from Star Wars. Allegedly, Enron was in the energy business, but when outside investigators finally looked into it, they discovered that the only actual energy source in the entire Enron empire was a partially used can of Sterno in the basement of corporate headquarters. Using a financial technique called “leveraging,” Enron executives were able to turn this asset into a gigantic enterprise whose stock was valued at billions of dollars.
Q. What does “leveraging” mean?
Q. Why didn’t Wall Street realize that Enron was a fraud?
A. Because Wall Street relies on “stock analysts.” These are people who do research on companies and then, no matter what they find, even if the company has burned to the ground, enthusiastically recommend that investors buy the stock. They are just a bunch of cockeyed optimists. When the Titanic was in its death throes, with the propellers sticking straight up into the air, there was a stock analyst clinging to a railing, asking people around him where he could buy a ticket for the return trip.
Q. So the analysts gave Enron a favorable rating?
A. Oh, yes. Enron stock was rated as “Can’t Miss” until it became clear that the company was in desperate trouble, at which point analysts lowered the rating to “Sure Thing.” Only when Enron went completely under did a few bold analysts demote its stock to the lowest possible Wall Street analyst rating, “Hot Buy.”
Q. What other stocks are these analysts currently recommending?
A. Mutual of Taliban.
Q. Doesn’t Enron have a board of directors whose members are responsible for overseeing the corporation?
A. Yes. They are paid $300,000 a year.
Q. So how could they have allowed this flagrant deception to go on?
A. They are paid $300,000 a year.
Q. But didn’t Enron have outside auditors? Why didn’t they discover and report these problems?
A. Yes, Enron had one of the most venerable auditing firms in the nation.
Q. What do you mean by “venerable?”
A. We mean “stupid.” As a result, Enron executives were able to deceive the auditors via slick and sophisticated accounting tricks.
Auditor: OK, so you’re saying you made $600 million in profit.
Auditor: Can I see it?
Executive: Sure! It’s right here in my desk! UH-oh! The drawer is stuck!
Auditor: Wow! Just like last year!
Q. What should be done to punish the Enron executive dirtballs who, knowing the company was in trouble, cashed in their own stock and screwed thousands of small investors?
A. In the interest of putting this ordeal behind us, we believe they should receive only a slap on the wrist.
A. With a hatchet.
Q. Isn’t that a pretty severe punishment?
A. Actually, it has been deemed harmless.
Q. By whom?
A. Wall Street analysts.