The “Asshole” Story: Enron, Skilling and Research Process

“You appreciate it?” was Richard Grubman’s response to Jeff Skilling dodging his persistent questions about the financial health of Enron on April 17, 2001.

Next, Skilling called him an “asshole” on a conference call with investment managers and analysts. I had heard about this infamous and perhaps symptomatic of the problems with Enron moment for years.  I decided to see if I could actually hear it.

1. First, I’ll say something about that the conversation.
2. Then, I’ll discuss research process.

According to the account in the book, Smartest Guys in the Room, by Bethany McLean and Peter Elkind, the investor relations manager, Koenig, I think, knew they had problems as soon as the “asshole” hit the fan, so to speak..  Others had their jaws metaphorically or even literally hit the floor.  Why?

Richard Grubman was a managing partner of Highfields Capital, a hedge fund.  Hedge funds, if memory serves, take large deposits from investors and then use them plus various forms of leverage to make big, risky bets.  Grubman was known as someone who would “short” a company.   That is, he would borrow shares from a broker with an obligation to return them.  The shorter then sells them HIGH in the market now.  The shares fall due to the underlying issues or hunches that the shorter knew about.  Now she can buy back the shares she owes the broker for much less than the money earned at the prior sale.  So, you sell high today and buy low tomorrow, essentially.

Skilling blew up, most people presume, because Grubman pushed him for a balance sheet for the first quarter of 2001, and not just income statements.  The balance sheet, presumably, would have provided information on Enron’s actual positions on the various complex financial transactions it engaged in as part of “new” Enron.  Most people think Skilling blew up at Grubman because he was putting pressure on the façade of representations about Enron and that Skilling knew the “real” picture of a company perilous over-leveraged.

Here is another take:  Skilling disliked Grubman because he was a short seller.  CEOs, like Skilling, at times “blame” short sellers because their actions (selling BIG chunks of stock all at once) can be seen to push down the value of a stock.  In that narrative, short sellers are not “real business people” who make real products and value.  They profit off luck or fluctuations in the stock market.  To have Jeff Skilling, Mr. Asset-Light, criticize a short seller is very rich irony.

Ok, now, on to the process.

After about an hour of Internet research, I failed to find an actual audio file.  But in the process, I did discover some other very useful resources.

First of all, I tried to google “audio transcript Enron Skilling investor.”  That did not get close enough.  SO, I needed to turn to other sources to improve my search.  I think the conversation appears in your case.  I had read a fuller version in the book SGitR.

I used those sources to modify some search terms:

• Enron
• Skilling
• Grubman
• Calls
• Analyst
• 2001

I put them into google.  I found some goodies, but not the actual audio file.  But, since I had seen full transcripts, I knew an audio recording must exist somewhere to generate the transcript.

Take-aways:

1)      You have to be creative and persistent when searching to get the best of what is out there.

2)      Print sources, including INDEXES of books, can be useful.  Google only research will be less effective.

Here are some goodies I found:

The Department of Justice website on the Enron case, chock full of materials.

The “Powers Commission Report,” which was the report commissioned by Enron’s board to figure out what happened.

Cara Eliason’s Blog.  She seems to have a life-long passion that Enron was maligned.  Interesting.  She does have lots of interesting links on her website.

And, a reminder of one of my favorite articles: Bad Theory Destroys Good Management. This article by Sumatra Ghoshal mentions Enron as it attacks the problems with “agency theory.”  Agency theory is the idea that by properly aligning shareholder and manager interests, only good things can come.  Enron’s internal organization was a poster child for applying agency theory.

What do you notice about each of these?  They are information produced by a different sector.

The DoJ is a GOVERNMENT source

The Powers Report is a BUSINESS source- a business produced it.

The blog and the article are, loosely, SOCIETY sources.  They were not generated for monetary profit directly.  Or, in other words, they come from some other motivation.

These three types of knowledge producers will be very important when you get to the final paper process.

Fun extra: Richard Grubman was apparently arrested for throwing his keys at a parking attendant.

 Full transcript:

What follows is a transcript of that short exchange, taken from the now-infamous Enron conference call of April 17, 2001.

Operator: Richard Grubman of Highfield Capital.

Grubman: Good morning. Can you tell us what the assets and liabilities from price risk management were at quarter-end, what those balances were?

Skilling: We do not have the balance sheet completed. We will have that done shortly when we file the Q. But until we put all of that together, we just cannot give you that.

Grubman: I’m trying to understand why that would appear to be an unreasonable request, in light of your comments about daily control of all your credits. I mean, you have a trading desk with a $21 million matched book that’s two times your book value, and you cannot tell us what the balances are?

Skilling: I’m not saying we can’t tell you what the balances are. We clearly have all of those positions on a daily basis, but at this point, we will wait to disclose those until all of the netting and the right accounting is put together.

Grubman: You’re the only financial institution that cannot produce a balance sheet or cash flow statement with their earnings.

Skilling: Thank you very much, we appreciate that.

Grubman: We appreciate that.

Skilling: A%%-hole.