Though Fortune magazine had named Enron its most innovative company for seven years, Enron stock short-seller Jim Chanos couldn’t figure out how it earned all its money. Chanos called upFortune writer Bethany McLean.
“Can you explain how Enron makes its money?” Chanos asked her.
As a former investment banker at Goldman Sachs, McLean had the skills to produce investment spreadsheets. She discovered the “very basic question” Chanos had asked was unanswerable.
As most Americans probably know, Enron was revealed in October 2001 to have been hiding billions of dollars in debt for several years.
The company, allegedly producing $101 billion in 2000, watched in horror as its stocks dropped from about $35 a share in October 2001 to almost nothing in November. Stockholders lost almost $11 billion as Enron went bankrupt.
Chanos thought it was humorous that Fortune had awarded Enron with the title, despite McLean’s inability to decipher its revenue. McLean, though, disagreed.
“I like to defend my old magazine (Fortune) by pointing out that Enron (really) was the most innovative company in corporate America,” McLean said; the audience responded with laughter.
McLean shared what she learned as a business reporter during the Enron scandal as part of her lecture at 10:45 a.m. Wednesday in the Amphitheater. As a reporter who later covered the 2008 financial crisis, though, she said she could not offer any ways out — instead, she could offer only advice: Take responsibility.
McLean was the third speaker for Week Seven’s topic, titled “The U.S. Economy: Beyond a Quick Fix.” McLean currently is a contributing editor to Vanity Fair and to Slate, as well as a nonfiction author.
“If you would have asked me after Enron if we were going to have another financial crisis,” McLean said, “I would have said, ‘No. I’ve seen the big one in my lifetime.’”
She knows now that she was wrong.
She said some people try to pin all the blame on the government’s home-ownership policies — specifically on Freddie Mac and Fannie Mae. This is not the case, she said.
Responsibility for the financial crisis lies with many people, a point she covers in All the Devils Are Here: The Hidden History of the Financial Crisis, a book she co-wrote with Joe Nocera, a columnist for The New York Times. Banks could see the crisis coming, she wrote, but continued with bad practices — thus, it’s inaccurate to call the crisis an accident.
Perhaps one of the biggest lessons she’s learned, she said, is that events look different later on, when everything is out in the open.
To business executives, she offered one special bit of advice: “If you don’t want to see something on the front page of the paper or the home page of your favorite blog, then don’t do it.”
She spent a short time detailing the people she covered in Devils who were most influential in bringing about the financial crisis.
“None of what I’m saying now is to defend what Angelo Mozilo (former CEO of Countrywide Financial) or Dick Fuld (former CEO of Lehman Brothers) or what any of the other big players — the “devils” in our book — did in the financial crisis,” McLean said, “but there is a difference in the unethical and the illegal.”
Even Enron executives, she said, were “only narrowly prosecutable.”
She said this may be a good thing, but she also said her co-author Nocera thinks there should be laws to prosecute people for such “rampant criminality.”
What’s more frightening to McLean than “outright criminality” is incompetence, she said.
A perfect example of such incompetence, she said, is the credit rating agencies. As these agencies swiped in money, she said, they began to appear as if they had “sold their souls.” AAA ratings were in high demand to sell securities; providing incentives to agents became the best way to achieve that rating, McLean said.
However, these same agencies became more and more incompetent, she added, thanks to investment bankers. After the fact, McLean discovered credit agencies were required to confirm very little in their reports.
The financial industry — especially Merrill Lynch — is just as incompetent, she said. One Merrill Lynch executive said in Devils, “We fell for our own scam.”
Every firm on Wall Street, McLean said, put special pride in the phrase “risk management.” That phrase, she added, is one of the “most utterly meaningless pair of words in existence.”
She said a major lesson she learned in the Enron scandal was to listen to skeptics like Joshua Rosner, author of Housing in the New Millennium: A Home without Equity is Just a Rental with Debt. Rosner warned of a possible market collapse as far back as 2001, when the book was published. Though skeptics can be crazy and awkward, she said, they’re sometimes right.
Another discovery of hers, she said, is that the U.S. is too busy trying to fix problems of the past instead of avoiding future ones. Furthermore, she added that ideology shouldn’t cloud the facts. Both of these criticisms could aid the future, she said.
“If there’s one critical thing, I think it’s that we all have a real duty to be honest about the past,” McLean said. “My biggest fear today is that there’s a real attempt to rewrite history — even recent history.”
She said she recently read a column that blamed President Barack Obama for the government bailout, even though it was a Republican decision. Similarly, Democrats say it’s the fault of greed and unregulated financial systems. The crisis, she said, is a result of all of these.
“To be perfectly honest, I don’t have a great fix for this,” McLean said. “One of the great luxuries of being a journalist is that I get to be an armchair critic, and I get to criticize after the fact without coming up with solutions. But I do have a moral point in all of this, which is that everybody needs to have a sense of responsibility.”
Bethany McLean is an editor at large at Vanity Fair and a business columnist at Slate. She is the co-author, with New York Times business columnist Joe Nocera, of All the Devils Are Here: The Hidden History of the Financial Crisis, a Times best-seller which traces the origins of the Great Recession back several decades.
McLean worked at Goldman Sachs for three years as an analyst in the investment banking division before joining Fortune in 1995. While at Fortune,
where she’d eventually become an editor-at-large, McLean wrote an
article for the magazine in 2001 that raised questions about the
profitability of Enron, then a darling of the stockmarket. In 2003 she
co-wrote a book about the scandal that led to the energy company’s
collapse, The Smartest Guys in the Room. It was developed into
an Oscar-nominated documentary in 2005 and was a Chautauqua Literary
& Scientific Circle selection in 2004.
McLean has appeared on “The Daily Show,” “The Colbert Report” and
several PBS programs. She graduated from Williams with a double major in
math and English.