Bear Left Exclusive: The Art of Enron
1 April 2002, Houston, Texas
Two professors at the Houston Academy of Humanities and Arts have revealed to Bear-Left.com that they were the inspiration for the misdeeds at Enron over the past two decades. Professor Gregor Otchalnik of the Department of Fine Arts and William Hoops of the Department of Business Administration say that they paid retainers to Ken Lay, Jeffrey Skilling, and Andrew Fastow to act outrageously as a gigantic piece of performance art.
However, the ersatz actions of their minions at Enron often mimicked the real-life actions of executives at other companies. In order to continue their Enron project, they goaded Lay, Skilling, and Fastow into more and more outrageous stunts. Eventually, the line between art and reality blurred, and the lives of thousands of Enron workers were forever changed for the worse.
"Will and I cannot fully express our sorrow and shame for how this all turned out," said Otchalnik. "We meant for this whole project to be an ironic comment on both art and business. It just went horribly wrong." The stock market bubble of the 1990s made even the most ludicrous ideas, like those that they fed Lay, Skilling, and Fastow, seem both credible and salutary.
The whole operation was funded by an anonymous donor to the Academy, who wanted to support Otchalnik's ideas about conceptual art. In 1980, Otchalnik made a minor splash in the art world with his work "Cream Puff," a rusted-out AMC Gremlin that he towed to various used-car lots in Harris County. Hoops, an historian of business cycles, turned his dissertation on infomercials into the acedmic best-seller Now How Much Would You Pay?.
Otchalnik and Hoops first hired Lay in 1984, then brought Skilling and Fastow into their fold in the early 1990s. They picked Lay because Enron was an up-and-coming Houston natural gas utility. The two professors convinced Lay to try to mold Enron into a "new economy" company: rather than stick with the tried-and-true public utility model, law would create an energy trading firm that would create huge amounts of revenue and profits without any real cash flow. If their scheme worked, Enron would appear huge even though it generated little cash and did no productive work. At the time, the concept was outrageous. In time, the concept became the norm.
Otchalnik convinced Lay to approve of a new logo for the company, one that would signal to the world the absurdity of the company. Lay convinced his colleagues and subordinates to come up with a logo uncannily like the "blivet" so beloved by engineering students. The Enron logo resembles the blivet, although it lacks the optical illusion that makes three legs turn into two.
By 1992, Enron had become a large and successful company. But Otchalnik and Hoops still had much of their grant money outstanding and brought Skilling and Fastow into the cabal. Hoops convinced Lay and Skilling to propose a lucrative options plan to the board. Hoops believed that the options plan would be seen by Wall Street as so lucrative as to be self-defeating. "Options are supposed to link management pay to the success of the company," he said. "But when there are too many options given to key executives, then they benefit disproortionately from short-term stock increases." The rank-and-file shareholders by contrast, generally depend on the company's long-term health.
Although Hoops was the brains behind the details of the option plan, Otchalnik was on board as well. "We wanted to show the absurdity of the financial statement game," he said. "For tax purposes, companies deduct the cost of options as a business expense. But for financial statement purposes, options do not hurt income." Enron's stock plan was so lucrative for its top executives that in many years it paid no federal income taxes, yet reported healthy earnings to Wall Street.
Wall Street paid little heed to these shenanigans, mostly because as lucrative as Otchalnik and Hoops thought the Enron option plan was, other plans from legitimate companies were rivaling or even surpassing it.
The next step for the professors was to link Enron so tightly to a political party that even the American press would note the corruption of both donor and recipient. At first, Lay and Skilling coordinated donations to both Democrats and Republicans, but the Republican party was clearly better for a number of reasons. In Texas in particular, Republicans were eager and willing to fight for any sort of deregulation of utilities.
otchalnik and Hoops needed a pliable political party, and the Republican party was as pliable as possible. It was already dependent on donations from energy companies, so pleas from a natural gas company to deregulate made doubly good sense. Enron's need for deregulation meshed with Republican habits and Republican philosophy.
By 1995, the grant money was about to run out, and Enron was to the eyes of Wall Street a respected and even an envied company. Hoops laments most what they did next. "Skilling and Fastow came to us and proposed one final strategy," he said, "and we provided them with a retainer to implement it." In order for Enron to keep growing, it would need to get debt off of its books. Fastow proposed to set up a series of partnerships with outside investors who would take some of the risks of the transactions. In theory, this would protect Enron shareholders, but Fastow knew that Enron would guarantee these transactions with E stock if anything went wrong.
It is here that Otchalnik and Hoops believe that they lost control of their minions. Hoops had seen it happen before. "Remember on Wiseguy when Ken Wahl's character doesn't know if he's really in the mob or really still a cop?" he asks. "I think that these fellows had that happen to them." The money to be made from the partnership transactions was tremendous. Fastow made sure that he and his friends at the company were in position to take advantage of the partnerships. And because Lay, Skilling, and Fastow knew how the transactions worked, they could make tens of millions of dollars each from knowing to sell their Enron stock while the stock price was still high.
"Up until this point, if we had walked away from the whole project, no one would have been too hurt," said Otchalnik. "Enron's growth would have to slow down. Maybe the art would manifest itself to the world, and maybe not. But we just got too full of ourselves. We didn't mean for it to go as far as it did."
The professors approved the idea and committed to using the last of the grant money on the project. Lay, Skilling, and Fastow would grow Enron by any means necessary in order to show just how absurd American business was becoming. They created hundreds of offshore entities, many in the Cayman Islands, a notorious haven for tainted money from America. They expanded Enron's reach from gas pipeline infrastructure, power plants, and natural gas trading to all sorts of weird ventures, including trading broadband Internet capacity and trying to work with Penthouse magazine on an online porn network.
Enron spent millions of dollars on television ads that did not sell anything but the company images. It pumped up its income statement and balance sheet with revenue from phony deals with fiber optic companies. It used "mark-to-market" accounting to recognize all of the icnome from multi-year contracts in the year that the contract was signed.
All the while, Wall Street fell more deeply in love with Enron. Its accountants, Arthur Andersen, kept approving of its accounting treatment. When brokerage analysts came to call, Enron had nothing but good news for them. When those analysts visited Enron's trading floor, busy employees filled each workstation. Most of the employees, it turned out, were administrative staff on the trading floor just to look busy for the analysts.
But early in 2001 two things happened that started the Enron death spiral. First, Lay announced a restatement of the balance sheet to eliminate $1.2 billion of shareholder capital. Otchalnik and Hoops thought that Wall Street would ignore this, but the end of the dot-com boom meant renewed attention to balance sheets. Lay, Skilling, and Fastow were beginning to feel the heat. The bottom fell out in April 2001, when Skilling cursed out an analyst in a conference call. The professors knew that he had snapped from the pressure of leading a double life. Short sellers on Wall Street finally smelled blood, and journalists flocked to the story. Ultimately, bad manners undid what calculated absurdity could not.
Even after Enron filed for bankruptcy, Law, Skilling, and Fastow never let anyone in on the secret that they were agents of an academic conspiracy to undermine American business. They were the consummate double agents. Although they became almost completely corrupted by the money that they could make, they never revealed the true inspiration for the rise of Enron.
Otchalnik and Hoops recognize that Lay, Skilling, and Fastow may never acknowledge their roles in the weird academic exercise underpinning key aspects of Enron's existence. But they are not surprised. Otchalnik remarked that "these men are proud of what they did. The mark of a true artist is his commitment to the art, regardless of the attitude of the world. Their milieu was the corporate boardroom, and they will not reveal their techniques to anyone. No great artist would."
Otchalnik and Hoops are certain that Congress and the FBI will want to speak with them. Their legal counsel, Alan Duces of the Houston firm of Duces Tecum, is sure that his clients will see prosecution. "While there is no law specifically barring performance art in a white-collar environment," he said, "there are restrictions on poetic and artistic license. We will vigorously fight any such charges."
The two professors have posted apologies on the Internet at http://www.haha.edu/faculty/gotcha.htm and http://www.haha.edu/faculty/whoops.htm.
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