Enron:The Smartest Guys in the Room.
Enronis a movie documentary by Alex Gibney and focuses on the rise andfall of a crooked corporation called Enron. It is based on a bookwith a similar title by the author Bethany McLean and Peter Elkind.Staged in the 20th century, it tells a story of the greatest businessscandal where the management of America’s largest company walkedaway with over a billion dollars whiles the investors and employeesleft with nothing. The scandal was possible as a result of the threekey people CEO Ken Lay, COO Andy Fastow and Accountant ArthurAndersen manipulating the balance sheet records and deceiving alltheir investors. A significant outcome of the swindle was themark-to-market where the CEO hid the financial losses of the company.The mark-to-market concept is sensible and only practical in tradingof securities but is perilous to other forms of businesses (Thomas,2002).
Theconception of a new market of forward contracts was the origin ofJeffrey Skilling working for Enron. He identified a new market nichewhere they started prospecting in other energy markets like fossilfuels, coal, and electricity in addition to pulp and production ofpaper. They were able to accomplish this using the ‘asset light’philosophy. As of 2001, the corporation’s profits were soaring andtheir pursuit to deregulate the electricity market had succeeded. Infact, they had maintained very high stocks which were 55 times itsearnings. This caught a few individual’s eyes, Richard Grubman, aWall Street analyst, questioned their accounting practices. Hereleased a record claiming that Enron could not release a balancesheet along with its earnings (Thomas, 2002).
Thedecline of the large corporation had significant effects on theemployees’ retirement benefits plans and insurances despite losingtheir jobs. Despite seeing that the company was plunging deep, theywere cautioned against selling their shares by the management, citingthat it was a temporary problem that would go away. Just a few weeksa few weeks after announcing bankruptcy, the company froze itsassets, and the employees had to watch helplessly as their moniesevaporated. After the scandal, several of the top executives landedin prison for their roles in the scheme and most are currentlyserving time there. Bethany McLean, who is known for her work in theEnron Scandal, currently resides in Chicago. Cliff Baxter is known tohave committed suicide right after being sued for $30 million afterthe bankruptcy. After being sentenced to six years and further twoyears of probation, Andrew Fastow was incarcerated at the FederalPrison Camp near Pollock, Louisiana on December 16, 2011. To date, heworks as a document review clerk for a law firm in Houston. JeffreySkilling is, however, serving 24 years and four months at theMontgomery Federal Prison Camp and is scheduled for release onFebruary 21, 2019, according to the Federal Bureau of Prisons(Thomas, 2002).
SherronWatkins did not face any charges as she, and two others wereconsidered whistleblowers for the fraud in the company. On July 7,2004, Kenneth Lay was indicted by a grand jury on several counts offraud but died because of a major heart attack on July 5, 2006. LouPai, who was the CEO of Enron Energy Services, was not charged withany criminal wrongdoing. He currently stays with his family at theCanaan Ranch in Houston where they train dressage horses. From thismovie, it is outrageous that Enron thought it could defraud thecompany employees and the investors and then get way with the crime,the law eventually caught up with the fraudulent management (Thomas,2002).
This2010 documentary film starred Matt Damon and was directed by CharlesH. Fergusson. It is the first film to expose the truths behind the2008 economic crisis that resulted in a global financial meltdownthat cost millions their jobs and a loss of over $20 trillion in theform of CDOs and CMOs (McCloskey,2011).A CDO refers to a collateralized debt obligation security instrumentand is a type of structured credit product that creates a tiered cashflow. It eventually makes the cost of lending cheaper for theaggregate economy. In the real sense, it is when the original moneylender issues loans on less stringent measures. A CMO in the otherhand is a collateralized mortgage obligation issued by a third partydealing in residential mortgages. It could be by bank loans, bonds,or any other financial institution (McCloskey,2011).
AIGbetter known as the American International Group played a significantrole in the 2008 crisis. Being a global company with about $1trillion in assets, it was an impossible thing to think of itsfailure however, in 2008 the unthinkable happened. During the crisisthey lost over $99.2 billion and were it not for the Federal ReserveBank, it would have never resurfaced. The bank stepped in with a loanof $85 billion to keep it from sinking (McCloskey,2011).The reasons for its fall were quite simple they failed to put upcollateral before swapping sales of credit defaults, they also failedbecause they did not set aside capital reserves thereby hedging itsexposure. Another hidden reason is the fact they gave out securitylending that they thought would make money but eventually brought inhuge losses. The effects were that there was the elimination of thefederal regulations (McCloskey,2011).Asa matter of fact McGraw Hill plays a significant role in thefinancial collapse through its daughter company S&P Capital. Itwas responsible for creating an illusion on the ratings of themortgage securities. The misconception made it very easy for thebanks to package the bogus instruments of the CMO and CDO securityinstruments (McCloskey,2011).
Asa result of the crisis, the government signed in a program calledTARP. Now, TARP stood for Troubled Asset Relief Program and wasauthorized by Congress in the EESA Act of 2008 (McCloskey,2011).Simplyput, it was a way for the government to buy stocks from strugglingcorporations and then sell the stock back to them in a few years. Thegovernment made its profit while the companies got a chance to standon their feet. The program can be seen to have positive effects onthe economy just a few years after its conception. Banks have beenstabilized people have retained their homes and credit hascontinuously flowed to the public, but most importantly the taxpayerhas seen a massive return on investment. However, the long-termeffects are unknown yet (McCloskey,2011).Some of the people who were directly or indirectly involved includeBarney Frank, who is an American politician. He currently stays inNewton, Massachusetts with his husband, Jim Ready. Kristina Davis iscurrently the ambassador for the poverty organization Oxfam and stayswith her adopted daughter in Los Angeles, California. Glenn Hubbardis one of the interviewees for the Inside Job documentaries. He iscurrently the Dean of the Columbia University Graduate School ofBusiness (McCloskey,2011).
Anotherperson to be interviewed was Christine Lagarde, who is currentlyserving as the Managing Director of the International Monetary Fund.George Soros is one of the 30 richest people in the world and gavehis view on the documentary citing predictions in most of the world’seconomic crises. He is currently the head of the Soros FundManagement. Eliot Spitzer is an American politician that served inthe midst of the 2008 financial crisis as the 54th governor of NewYork. His 2007-2008 budgets turned to a deficit that started leadingthe nation in lost jobs, and he had to take measures to counter thefinancial effects. Dominique Strauss is a former French politicianand controversial figure. He was one of the interviewees for thedocumentary and quotes several CEOs of some of the biggest banks astaking part of the responsibility for the 2008 crisis (McCloskey,2011).
Thismovie strongly condemns Ivy League schools like Harvard and ColumbiaUniversities. The film raises pitfalls in the system and brings tolight what happens when there are no checks or balances or when thereis a misuse of the capital system. There have been rising cases offraud among the Wall Street CEOs, and some of the incumbentpresidential hopefuls are keen to look into the matter. HillaryClinton and Bill Sanders have put up the fight and say they wouldjail the Wall Street bankers (McCloskey,2011).DonaldTrump has also chided the Wall Street though it has evidently beenthe chief source of income and fortune. According to Gina Chon of theCNBC, Trump has waged a series of campaigns against Wall Streetaccusing them of committing murders (McCloskey,2011).
Ina nutshell, soon after watching the documentary, you will be sunk ina heap of despair because you will discover that you have nowhereelse to turn to or anyone remaining in the face of the earth totrust. The sobering truth is that the crisis was chiefly as a resultof the legal and not criminal means as many would think. It is aresult of greedy individuals who sought all means to enrichthemselves at the expense of the weak and innocent (McCloskey,2011).
The2012 movie documentary follows a billionaire couple at the height oftheir wealth as they begin constructions of one of the most expensivemansions in the history of America- the Versailles. It was directedby Lauren Greenfield and depicts David and Jackie Siegel the ownersof Westgate Resorts. At the beginning of the film, David owns one ofthe largest timeshare companies in the world (Greenfieldet. al., 2016).A timeshare is an arrangement where several joint owners of aproperty have the right of usage as a vacation spot under aparticular time-sharing agreement. The main reason for buying into atimeshare is that you get an excellent deal at a relatively lowerprice. Thus, a very expensive property can be afforded throughtimeshare because you only pay for the time you are using it and notfor the entire period you have taken the deal. It also guarantees avacation destination and reduces the last minute rush of looking fora spot. However, the main drawback of owning a time is the annualfees attached to it. Sometimes the prices increase without yourcontrol (Greenfieldet. al., 2016).Timeshares are pretty hard to resale and thus when one goes bankruptit is usually advisable that it is the first expense you cut out fromthe budget because of the recurring costs.
Atthe height of their wealth, the Siegel family decided to expand intoa larger home which they named Versailles after Chateau de Versaillesthe home of Louis XIV (the ‘Sun-king’). The economic crunch downand the 2009 financial crisis made things very hard. It had threemajor effects the housing market collapsed thereby leading to areduced sale in the timeshare, the recession hit the people prettybad and caused credit to dry up across the United States. It wasn’tvery straightforward for Siegel either as the banks started squeezinghis company dry. It wasn’t easy for the family as they had to cutdrastically down on their expense and slow down their lifestylealmost to a standstill. What was once their pride only became a vaguevision on the horizon as the construction of the Versaille stoppedand went into foreclosure. With numerous layoffs, there was no moremoney to run the business or even get enough nannies as the movieironically displays. The lack of funds trickled down to theirhousehold budgets as they had to lay off 15 of their best householdstaff and Jackie was even forced to use a commercial jet instead ofbeing flown in a private jet (Greenfieldet. al., 2016).
Thismovie only seeks to point out the cons of spending beyond your budgetand the risks of mismatched couples, one a decent man smart enough tomake billions but foolish enough not to secure it wisely and anoverspending shortsighted wife who is clueless about what to do withall the riches. Interestingly, it leaves you wondering whether takinga timeshare is a good idea or not, considering that those who boughtinto the timeshare idea remain trapped into the deal with no idea howto get out. You won’t fail to be empathetic for the entire familyfor their downfall from riches to rags this is particularly the casefor Jackie, who fell pretty hard in a very humble way of living.Nobody would want to be in such a situation, or be brought up in sucha family (Greenfieldet. al., 2016).For many, they would rather grow from rags to riches and not theother way round. And that explains why people amass wealth by allmeans and do whatever it takes to remain a top. The fall downwards isvery treacherous and painful.
Greenfield,L., Barrett, L., Downs, J., & Froehlich, P. (2016). TheQueen of Versailles (2012).IMDb.Retrieved 19 March 2016, from http://www.imdb.com/title/tt2125666/
McCloskey,S. (2011). Inside Job. Policy& Practice – A Development Education Review,(13). Retrieved fromhttp://www.developmenteducationreview.com/issue13-review3
Thomas(2012).Review – ENRON: THE SMARTEST GUYS IN THE ROOM.Paulkienitz.net.Retrieved 18 March 2016, fromhttp://paulkienitz.net/enron/smartest-guys.html