Preface

Enron is well on its way to becoming the most intensively dissected company in the history of American business." So wrote Bethany McLean and Peter Elkind in their 2003 account, The Smartest Guys in the Room. Today, Enron stands as the most-analyzed corporate scandal in modern history, with countless books, journal articles, and reports about an iconic company gone rogue.

Imprudent investments coupled with financial and accounting legerdemain constitute the well-documented why of Enron's artificial boom and decisive bust. But the why behind the why-the attitudes and strategies that produced risky and deceptive practices-has been less chronicled and little understood.

Simplistic criticisms have abounded. "Fish rot at the head" declared one popular Enron book. "Shocking incompetence, unjustified arrogance, compromised ethics, and an utter contempt for the market's judgment" found another. "Thoughtless and incompetent leadership" and "careless and lazy management" concluded the most professorial study of Enron to date.

Hubris, amorality, and greed were certainly present at Ken Lay's company. But accusations of incompetence, lethargy, and thoughtlessness fall short. Enron brimmed with smart, dedicated, focused decision makers who tirelessly sought to create a new kind of company. How and why did so much talent and effort go astray? Why was "innovation corrupted," as a Harvard Business School professor asked.

Was it capitalism run amok? A species of market failure? Or was it, directly or indirectly, a nonmarket failure, an unintended consequence of interventionist public policies and a contra-capitalist ethos by, respectively, government and executives?

More specifically, did prevalent government involvement with natural gas, coal, oil, and electricity before and during Enron's life shape the leadership and strategies atop the once storied company? Did special features of America's mixed economy invite financial deceit and other delinquencies at the grand experiment called Enron?

If so, why did bad practices come to dominate Ken Lay's Enron rather than, say, Lee Raymond's Exxon (later Exxon Mobil) or Charles Koch's Koch Industries? What was so different about Enron? What was the role of the company's founder and beginning-to-end chairman, the Great Man of his industry, and, as much as anybody, Mr. Houston?

These questions have been inadequately explored for several reasons. First, many journalists lacked deep familiarity with Enron and the energy industry. Second, employee-book retrospectives (a dozen or so), which might have offered deeper insight, tended to be provincial and personal narratives. Third, most analyses were preoccupied with Enron's last years and missed how earlier developments made the end all but predictable, absent a major (even radical) course correction. Above all, though, most accounts failed to appreciate the political dimension of Enron's profit centers and the pervasively contra-capitalist mentality of Enron's leadership.

Lacking technical depth and theoretical breadth, mainstream history became misleading history, especially when placing Enron in its social-economic-historical-political context. Ironically, commentators fell back on Enron's own misleading self-narrative about its free-market reverence.

The company, and no one more than Ken Lay, time and again pledged allegiance to free enterprise, deregulation, privatization, and competition. Come the implosion, that rhetoric was taken at face value. If Enron was capitalism, then capitalism was prone to flim-flam and deception, even fraud-and failure. Conclusion: More, tighter, smarter regulation was and will be needed; privatization must be checked, especially in undeveloped countries; and business-funded lobbying must be constricted, if not banned. Only then can the government intervention that might have prevented Enron prevent future ones.

This narrative stubbornly persists. The fall of the company remains a modern-day allegory for the perils of free enterprise and the capitalist spirit. Business students and professors purport to draw lessons about the need for regulatory oversight. Pundits, politicians, and intellectuals continue to make ideological points by using the company's name as a metaphor for unfettered profit seeking. The result is that, even after the 15th anniversary of Enron's bankruptcy (December 2, 2016), the company still lacks the detailed, chronological, you-are-there history needed for fuller interpretation and better insight.

A complete history must focus on Enron's beginning and maturation-and even its antecedents. What the company actually did-not merely what it said it was doing-must be established. Painstaking analyses must document how the company's principals, and no one more than Ken Lay, acted, interacted, reacted, and failed to act during his company's solvent life (approximately 17 years).

But more than better documentation is required. The real lessons of Enron require a reliable, integrated worldview spanning the social sciences. Earlier interpretations, albeit presented as just-the-facts, rested explicitly or subtly on the worldview of American Progressivism: Whatever capitalists do is capitalism. The result was a contradictory and unintelligible picture of a supposedly free-enterprise firm profiting heavily from its political influence. This book, and the tetralogy Political Capitalism of which it is a part, endeavors to resolve that contradiction.

Capitalism at Work (Book 1) explicated the classical-liberal worldview; Edison to Enron (Book 2) detailed the back story of Enron's industry and Ken Lay's early career. Drawing on those previous works, this book (and the one to come) will trace the false prosperity and spectacular demise of Enron to the company's violations of classical-liberal principles in epistemology, ethics, business, and politics.

Contra-capitalism is most easily recognized in the pursuit of special government favor, a practice that came to define Enron. Its deepest roots, however, lie in transgressions of the "bourgeois morality" (or Smilesian virtue, as Book 1 termed it) that has always constituted the foundation of commercial capitalism. Such contra-capitalist transgressions may be essentially personal-such as self-deceit, imprudence, recklessness, and prodigality. Or they may be intracorporate vices that violate the rules for honest cooperation and best-practices leadership.

The false representation of achievements and difficulties, philosophic fraud, was Enron's greatest corporate sin. But mixing personal and professional relationships, serving multiple masters, substituting image making for profit making, and CEO worship were others. Such contra-capitalism is explained in the Introduction and identified throughout this book to show that Enron, in spirit and in practice, was radically antithetical to classical liberalism.

Classical liberals applauded the fact that the market, not regulators, exposed and ruined Enron. True, but the broader point and the deeper moral of the story is this: Enron and Ken Lay, as they were and became, would not have existed in a truly capitalist culture. The ambitious and talented Lay took a political company to the top of a politicized industry within a politicized economy, fooling nearly everyone about the firm's economic sustainability and goodness.

The first draft of history, emanating from news analyses and resulting books about Enron, reached three major conclusions: one correct, one partially so, and one wrong. Affirming, completing, and rectifying those takeaways is the task of the present book-and the finale to follow.

The first conclusion-Enron should have failed-is sound. Ken Lay and Jeff Skilling reversed cause and effect by arguing that Enron had been undermined by bad press and short sellers of ENE stock. Enron was not "a great company," as Skilling and Lay each maintained. And Enron certainly was not "a strong, profitable, growing company even into the fourth quarter of 2001," as Lay avowed until his death. Enron was a hollow enterprise that had precious few assets to offset liabilities when liquidated after its 2001 bankruptcy.

Enron was able to deceive outsiders, and even itself, for far too long. The company's few critics and short sellers were brilliantly right, in retrospect, working from traces of smoke to find fire. If anything, Enron should have failed sooner. Many years of apparent success, Ken Lay's mighty persona, political correctness, new-economy hyperbole, and financial trickery kept the mirage shimmering for years longer than otherwise would have been the case.

The half-true conclusion is that a successful, sustainable Enron was sunk by the loss of Richard Kinder and the ascension of Jeff Skilling as 1996 turned into 1997. "It was one of the saddest days for Enron when Rich Kinder left," an Enron board member reminisced. "Sometime around 1996-1997, Enron crossed the line," a book author wrote. "Richard Kinder's departure as the financial conscience of the company seemed to be a critical step in this transformation."

Enron employees echoed the same sentiment. "I think that your book and other people's books are going to come back and say, Enron's downfall started on...