The How and Why of Enron-And Next: Who’s Going to Jail?

What Went Wrong at Enron: Everyone’s Guide to the Largest Bankruptcy in U.S. History , by Peter C. Fusaro and Ross M. Miller. John Wiley & Sons, 256 pages, $14.95.

In the faraway burg of Houston, Tex., a once-modest utility, in the process of going bankrupt, sent $63 billion in shareholder value up to money heaven. In the history of squandering other people’s wealth, this is an unprecedented milestone; to achieve it, Houston Natural Gas first had to evolve from an industrial to a post-industrial to a thoroughly postmodern company; finally, high finance kissed up against metaphysics, and Enron, as it was now called, became a virtual medium for capitalism itself. Jeffrey Skilling-Enron’s C.E.O. at the time-captured this transformation best, switching his vanity plates from “WLEC” (World’s Largest Energy Company) to “WMM” (We Make Markets). By the time it hit the pink sheets, Enron had created emporia for thousands of products, from metal to pulp and paper to electricity and pollution rights. It was an Enron world; the rest of us just traded in it.

Enron’s status as the avatar of Adam Smith, Freidrich von Hayek and Milton Friedman didn’t last long. A fortnight ago, the company’s accounting firm, Arthur Andersen, was found guilty of a felony, and as a consequence will cease to exist. Meanwhile, fresh disclosures of widespread management-level bilking at Enron hit the papers on an almost weekly basis. What Went Wrong at Enron arrives as a useful road map for this sorting-out period. The authors, Peter Fusaro and Ross Miller, have a deep background in arcane finance, and even as they lay out in detail a convincing pattern of malfeasance, one finds oneself echoing whistleblower Sherron Watkins: “No, no, no, you must have it all wrong, it can’t be that, that’s just too bad, too fraudulent.” Those are the words that Ms. Watkins wrote to Ken Lay in 2001, imagining what someone who took a minute to examine Enron’s numbers might say. “Surely,” she continued, “AA&Co wouldn’t let them get away with that?”

AA&Co-Arthur Andersen-did let them get away with it, and Mr. Fusaro and Mr. Miller trace out not simply how, but why. In essence, Enron was addicted to innovation. Its advantage as a pioneer in each new market was enormous, but also short-lived: “As producers and consumers would figure out how the market worked they would strike increasingly better deals, squeezing out Enron’s profits in the process.” To please the Street, and to make these evanescent windfalls appear recurring, Enron had to keep expanding into new (and ever more implausible) markets-a costly proposition that required the company to assume ever more debt. And here’s the rub: Enron was not merely a toll-collector, a middleman skimming the vig off every transaction. It was a “counterparty”-that is, technically, it bought and then sold all the underlying goods that were traded under its aegis. To remain a certified counterparty, Enron had to maintain a high creditworthiness, which caught the firm in a bind: How to finance all that spasmodic expansion, while keeping the balance sheet clean?

Enron turned to the now-infamous S.P.E.’s, the Special-Purpose Entities that allowed them to move debt off their balance sheet while magically inflating profits. S.P.E.’s are not in themselves wicked; and according to Mr. Fusaro and Mr. Miller, they’re not even all that uncommon. They are ripe for abuse, however, and it seems plain that Enron’s chief financial officer, Andrew Fastow, set up some as vehicles for his personal enrichment. Other high-profile accusations seem to hold up under scrutiny: The employee pension fund was locked up to help buoy the stock, while upper-level managers cashed out; the company manipulated California’s crudely semi-deregulated electricity market to its own ends; sham trades with Qwest were booked to inflate sales figures.

So who’s going to jail? Mr. Lay, according to the lachrymose plea from his wife Linda on the Today show, was a figurehead and thus an innocent dupe; but it’s worth recalling that sophisticated Enron, Enron-as-investment-bank, was in many ways created when Mr. Lay enlisted Michael Milken to help fend off a hostile takeover back in the 80’s. Within a few years-and long before either Mr. Skilling or Mr. Fastow darkened the door-a subsidiary of Enron had been busted by a go-get-‘em federal prosecutor named Rudy Giuliani. Mr. Lay claimed that the culprit was a rogue division; still, the scam foreshadowed the current Enron scandals-inflated earnings, accounting irregularities, hidden losses.

John LeBoutillier, a former Harvard Business School professor, recalls asking a top student what he would do if he discovered his company manufactured a potentially lethal product. “I’d keep making and selling [it],” he replied. “My job as a businessman is to be a profit center and to maximize return to the shareholders. It’s the government’s job to step in if a product is dangerous.” The student’s name? Jeffrey Skilling.

Cunning and saurian, Mr. Skilling is the visionary who crafted Enron’s “asset-lite” strategy, unloading pipelines and oil wells while converting the company into, essentially, a giant hedge fund. The notorious ex-C.E.O. of Enron has outdone Mr. Lay in pleading innocent by pleading ignorance, offering Congress the most elegantly concocted seven syllables in the history of buck-passing. To pertinent questions about Enron’s sham partnerships, Mr. Skilling, a former McKinsey & Company partner, serially replied, “I am not an accountant”-finger-pointing by sleight-of-hand. (Mr. Skilling even tore a page out of the Gore playbook: When asked about his well-documented presence at a meeting in which dubious deals were discussed, Mr. Skilling replied that the power had gone out in the hotel-people might not have noticed him leaving the room.)

Not so long ago, we were sold on Bush II’s promise that his would be a “C.E.O. Presidency.” The phrase was meant to reassure us-he only needs to master the briefing memo, people-and to evoke as well an image of buck-stopping probity. Now, according to some of those same Bush cheerleaders, “C.E.O.” seems to imply zero accountability. “We had people who could handle the details,” former Halliburton C.E.O. Tom Cruikshank replied tartly, when asked about Enron-style accounting irregularities during Dick Cheney’s tenure. “That’s not what we wanted him for.” The buck stops-um, somewhere over there, please.

All of which produces a peculiar disconnect. It’s as if you’re playing poker and your opponent, after laying down a perfect low, walks away with the pot. Read ‘em and weep, says Global Crossing C.E.O. Gary Winnick, walking away with $700 million after presiding over the largest telecom bankruptcy in history. Read ‘em and weep. We can only hope that beds are being made up, mints laid out and mini-bars carefully stocked at the nation’s white-collar prisons.

In the meantime, What Went Wrong at Enron is a tidy, helpful book, a bit bland, sorely lacking in partisan oomph. More volumes on their way, no doubt. Read ‘em and weep.

Stephen Metcalf writes for Slate and reviews books regularly for The Observer.