Power Failure, by Mimi Swartz with Sherron Watkins, Doubleday, 2003, 379 pages, $26.00.

Reviewed by Daniel Gillespie

Don’t run out and buy the hardcover copy. Wait until it comes out in paperback or borrow it from the library. It’s good, but not all that compelling. However, it does provide an illuminating inside account of the fall of the House of Enron, where Ken Lay reigned as chairman of the board of directors.

The authors chronicle how the company, with the lack of any moral compass, developed into an organization whose leaders took whatever measures would be necessary for the company to meet its target numbers for the year. Those target numbers were the earnings and resultant ever-rising stock prices. Unfortunately, those target numbers that were met annually were based on creative accounting. How did it happen? The company had its origins in a Texas pipeline company that delivered oil to suppliers. The business morphed into a company that supplied energy to the world. It not only sold oil, it sold electricity. At one point it even embarked on a misguided, unsuccessful venture into the broadband market that caused the company to lose millions. Along the way a large part of the company became involved in trading energy. The traders bought low and sold high. It has been alleged that they were able to do this, sometimes at will, because they, in effect, often cornered the market or arranged for an artificial shortage. There were some trading practices alleged to be of questionable ethics and legality during the California "rolling blackout" energy crisis during late 2000 and early 2001. California filed suit against Enron for actions during that episode.

Swartz and Watkins chronicle the company’s "innovative" accounting techniques, with obscure footnotes, signed off on by outside auditors like Arthur Andersen, whose largest client was Enron. Over time, Andersen billings for Enron approached $1 million per week. More than a hundred Andersen employees, including Sherron Watkins, became Enron employees. Future revenues, several years out, were included in current year income statements. Losses were artfully transferred to off-balance-sheet special purpose entities reportedly created with the assistance of Andy Fastow. Watkins, an accountant, recounts how the books were cooked to meet the projected numbers for the year, so the stock would rise. Each year there was more pressure to keep it so, and each year a more creative solution was fashioned. The fall of the House of Enron was inevitable, as Sherron Watkins predicted in her now famous memo to Ken Lay. Watkins is referred to in the third person in the book as a "whistleblower." Normally, however, whistleblowers blow the whistle to an outside regulatory agency, and this is seldom accomplished by writing an anonymous in-house memo to the CEO. It’s difficult to "blow the whistle" on your company if the complaint is being made in-house. Her description of the company’s situation is reminiscent of the character played by Claude Rains in Casablanca, Inspector Louis Renault, who is "shocked" to learn that there is gambling going on in Rick’s American Café.

Mimi Swartz and Sherron Watkins record how, as the stock price was in its final free-fall, Lay attended a black-tie event at Rice University as the guest of honor. On that occasion, he was awarded the Enron Prize for Distinguished Public Service Award from the James A. Baker III Institute for Public Policy. Previous awardees included Colin Powell, Nelson Mandela and Mikhail Gorbachev. The featured speaker for that occasion was Alan Greenspan. During the question and answer session after Greenspan finished his remarks, he was asked for advice about entering the job market. "I do not deny that there are innumerable people who survived in business by being less than wholly ethical," Greenspan said, "but I will say to you that those are the rare examples. The best chance you have of making a big success in this world is to decide from square one that you’re going to do it ethically." He didn’t enlighten his audience how that might relate to certain key Enron executives. He didn’t have to.

As Alan Greenspan might have put it, a knowledgeable investor who bought and held Enron stock would clearly be acting on "irrational exuberance," especially if he had inside information on what was really happening in Enron’s executive suites. This book provides that insider’s account.