The Enron Story That Waited To Be Told
By Howard Kurtz
Friday, January 18, 2002
Bethany McLean, a 31-year-old Fortune magazine
reporter with an impossibly soft voice, decided to take a hard look at
Enron last January.
The Houston energy company didn't like her questions.
The CEO, Jeffrey Skilling, called her unethical and hung up on her. The
chairman, Kenneth Lay, called Fortune's managing editor to complain. The
chief financial officer, Andrew Fastow, flew to New York to tell McLean
and her editors that Enron was in great shape.
McLean refused to be intimidated. "The company
remains largely impenetrable to outsiders," she wrote in Fortune's March
5, 2001, issue. "How exactly does Enron make its money? Details are hard
to come by because Enron keeps many of the specifics confidential. . . .
Analysts don't seem to have a clue." All this amounted to a "red flag"
that "may increase the chance of a nasty surprise."
The story sank without a trace. "At that point the
coverage of Enron was pretty glowing," McLean says. After all, the stock
had soared 90 percent the previous year and was selling for $76 a
Now that the company has collapsed amid charges of
financial chicanery, devastating its employees' retirement funds, Enron
is the hottest story in the country. Political reporters joined the fray
after learning that Enron had sought help from the Bush White House.
Teams of business journalists are digging into the largest corporate
meltdown in American history.
But as in the savings and loan debacle a dozen years
ago, it took news organizations too long to piece together the
"It's fair to say the press did not do a great job in
covering Enron," says Steve Shepard, editor-in-chief of Business Week
magazine, which ran only briefs on the company's financial problems
until a cover story in November. "Enron was really a systemic failure of
all the checks and balances we have on corporate governance: integrity
of management, board of directors, audit committee of the board, outside
accounting firm, Wall Street analysts and ultimately the press. And all
of us failed."
There were some notable early efforts. Last May, the
Wall Street Journal ran a front-page story on Lay getting a half-hour
meeting to lobby Vice President Cheney on the administration's energy
program. The story noted that over the years Enron had donated nearly $2
million to President Bush, Lay's longtime friend, and that some top
administration officials had worked for Enron.
"I feel pretty good about what we've done on Enron,"
says Alan Murray, the Journal's Washington bureau chief. "What we
clearly did not understand was that it was heading for a disaster."
The problem, he says, is that such stories often turn
on "arcane and technical" practices. "The press doesn't pay as much
attention to some of these regulatory issues that have more impact on
the world than the political issues we do pay attention to," Murray
If company auditors -- in this case, Arthur Andersen
-- don't raise questions, "it's very hard to know where to look," says
Larry Kramer, chief executive of CBS MarketWatch.com. "We didn't get a
lot of rumblings. Our coverage was robust, but was still based on events
after the fact."
A dramatic decline in stock is not necessarily a
warning of foul play, says Kramer, noting that his own company went
public at $97 a share and the stock is now worth $4. "People just got
dazzled by the size of the business," he says of Enron.
David Morrow, editor of TheStreet.com, says the press
is "too reactionary. It's too easy for the business press to look at
what the analysts are saying." Most Wall Street analysts had a buy
rating on Enron stock.
Indeed, only one group wanted Enron's stock to tank:
the short-sellers, professional traders who bet on a stock's decline.
One short-seller, Jim Chanos of Kynikos Associates, suggested to
Fortune's McLean that she look at Enron's Form 10-K, a required annual
filing with the Securities and Exchange Commission.
McLean says she understood Chanos's motive but was
struck by the document. There were "strange transactions," "erratic cash
flow" and huge debt. "It made you wonder, if their business was so
phenomenally profitable, why they had to be adding debt at such a rapid
rate," she says.
But the story was hard to write: "You can't just
spout off about derivatives and mark-to-market accounts and expect
people to get it."
Ironically, Fortune's own surveys had named Enron
America's most innovative firm for six straight years, and much of the
coverage was similarly upbeat. Last January, a Houston Chronicle story
was headlined: "Houston has $100 billion company; Enron Corp. sets
records for sales, earnings in 2000."
There were a few critical pieces, but they mainly
focused on politics.
In February, the Los Angeles Times reported on the
close ties between Lay and the president, noting that Bush had flown on
Enron jets during the campaign. In March, The Washington Post ran a
piece on Lay's growing influence. In May, the New York Times quoted the
federal government's top electricity regulator, Curtis Hebert Jr., as
saying Lay had offered to support his continued tenure if he changed his
views on energy deregulation. Hebert says he declined. Bush replaced him
In August, at a Fortune conference in Aspen, Lay told
Rik Kirkland, Fortune's managing editor, that Enron really disliked
McLean's story. A week later, Skilling quit as CEO after just six months
on the job, calling it a "personal decision."
"The main point of failure was when Skilling
resigned, because unless he had cancer or something it was
inexplicable," Business Week's Shepard says. "The failure of the press
was not saying, 'What's going on here?' " Business Week talked to
Skilling off the record but could shed no further light on the
To be sure, journalists were skeptical. "The
abruptness of the departure left many analysts questioning whether a
series of setbacks the company has suffered played a part in the
decision," the New York Times said. Enron's stock, which had fallen by
50 percent since January, dropped another 14 percent in two days.
Some commentators unloaded on the company. "Until
they clear this one up, Enron's a goner," former money manager Jim
Cramer wrote on RealMoney.com.
But hard information was scarce. "It's almost as if
you have to use forensic accountants when you're doing a company story
because many companies are using very aggressive accounting techniques
that are perfectly legal," Shepard says.
Enron fired Fastow in October for overseeing
questionable off-the-books partnerships, and in November the company
admitted overstating its profits by $600 million. But most papers played
these stories on their business pages.
Even Enron's Dec. 2 declaration of bankruptcy failed
to make the front pages of USA Today, The Washington Post, the Boston
Globe and the Philadelphia Inquirer. The CBS, NBC and ABC evening
newscasts each gave the announcement two sentences. The media were still
heavily focused on the war in Afghanistan.
Now that Enron's stock has been booted off the New
York Stock Exchange, Fortune staffers can't say enough about the way
McLean defied both Enron executives and conventional wisdom.
"It was a gutsy thing to do," Kirkland says. "We
trusted her. When you look back it's obvious: Why weren't we all asking