God I love Twitter. I really do. There is a certain chaos that just thrills me. So there I was, minding my own business, when someone named Dubai At Night said that McKinsey was responsible for the collapse of Enron. Of course, I had to speak up. I said that “They approved it bc it was legal. The trading models had nothing to do with the collapse of Enron. McKinsey was clean.”
And at the slightest whiff of push-back, this person went all defensive and crazy:
The whole thing is indicative of the ego problem on Twitter specifically and the net at large. You think you have a monopoly on info, and you don’t. And it is unwise to tangle with people who know more than you do.
To address the issue of McKinsey specifically, McKinsey might have been involved in analyzing trading strategies, but I cannot see McKinsey saying anything about how Enron handled its financial reporting. McKinsey consultants are not accountants, and few have accounting backgrounds.
The other problem with attacking McKinsey is that McKinsey consultants offer advice and the analysis behind their advice. They are not attorneys nor accountants. If a client likes McKinsey’s analysis and advice, it is still the responsibility of the company to vet the ideas with their attorneys and CPAs. McKinsey consultants do not have the kind of liability that those other professionals have — this is mostly good because the point of having consultants around is for out-of-the-box thinking.
So even without addressing the central thesis of this person’s tweets, I can discount them because he doesn’t seem to understand the role of McKinsey. And I would bet anyone ten thousand dollars that he did not write any such “report” on behalf of McKinsey for Enron Corporation.
You think you have a monopoly on info, and you don’t. And it is unwise to tangle with people who know more than you do.
This is absolutely right, and highly ironic. Unless you worked at McKinsey, in Houston, serving Enron for more than 6 years, you know less about that relationship than I do – regardless of what else you may know about Enron.
As for policy and what McKinsey did and did not advise, Ron Hulme (lead partner on the account), published multiple articles on off-balance sheet financing outlining the exact schemes Enron used. Yes, they were legal, but the leverage they created helped precipitate the collapse. And, McKinsey advised strongly on the mark-to-market treatment that led to unsustainable financials.
Everything McKinsey did was legal – they were exonerated after multiple internal and external reviews – but it definitely led to poor strategic decisions. That is what I said in my “crazy” tweets.
The whole thing is indicative of the ego problem on Twitter specifically and the net at large. You think you have a monopoly on info, and you don’t. And it is unwise to tangle with people who know more than you do.
This is correct, but ironic. You have no idea who I am, where I worked, what I know, or whom I know. Yet you presume to know more than I do – and I’m sure you do know more about Enron. However, unless you are Ron Hulme, Suzanne Nimocks or a handful of their key clients, you do not know more than I do about what McKinsey said and didn’t say to Enron.
And, I did not say McKinsey was evil. As should be apparent, regardless of whether you choose to believe it, I worked there and was quite senior when I left. I have no idea why I’m bothering with defending myself here, though I would appreciate those tens of thousands of dollars – send me an email and I’ll confirm what I claim.
Regarding the Firm’s work – Ron Hulme published multiple articles on precisely the type of off-balance sheet financing that Enron used. And, McKinsey influenced the mark-to-market financing that allowed Enron to book the NPV of each deal in year 1, creating a tremendous pressure to “lap” those earnings with brand-new deals each year. It was the combination of that pressure and the creative financing it enabled that led to the overleverage that, combined with a loss of investor confidence, brought down the company.
But, enough reasoned arguments – please continue your assumption-based ad hominem attacks.
First, thank you for your comments. I am always happy to talk with people who care about Enron.
Second, you said:
I disagree. It is not that I think you’re totally ignorant, it is that I think you’re arrogant about what you think you know. And that arrogance blinds you to learning more. Believe me, I fell into that trap early on too. It isn’t fun. But once you sit down and shut up and learn something, it actually helps colorize the picture for you.
And pause. “The leverage created by [multiple articles on off-balance sheet financing] helped precipitate the collapse.”
Okay, explain how some articles written can help precipitate a massive collapse.
This is incorrect. There is nothing wrong with mark to market accounting, and it is used today. Secondly, mark to market accounting had nothing whatsoever to do with the collapse, and there was never anything legally suspect with Enron’s use of mark to market accounting.
McKinsey’s internal and/or external reviews mean not a whit when it comes to the overambitious DOJ. Had they done anything that the DOJ could connect to illegality, they’d be done for. So if you want to make the argument that McKinsey gave legal but bad advice, I’m open to that (though skeptical because McKinsey would unwittingly play a part in shoring up the Broadband defendant’s innocence claims.)
Correct. I only know that you said some incorrect things on Twitter.
I do presume to know more than you do because your tweet was plainly wrong.
There goes that arrogance thing again.
It is entirely possible you were there. I am not doubting your credentials – I am doubting your knowledge. I am puzzled why someone who worked at McKinsey would not see the obvious problem with claiming that McKinsey wrote things that helped bring down the company. Are you saying that there is a new angle on the scandal – that it was really Enron following McKinsey’s advice that helped bring down the company? That would be very revolutionary and full of holes. And since the McKinsey people I know are stark raving geniuses and would never claim this, I am curious why you are.
This is a little clearer than the previous comment. But I have trouble imagining Jeff Skilling or Fastow or Ken Rice or anyone else who had great relationships with McKinsey saying that they’re going to leave behind their own business model to do exactly what McKinsey tells them without even checking to see if it is legal. I don’t see that happening.
I will say that it is a new take on the entire Enron scandal and I can respect that a great deal — even though I think it is wrong. I can appreciate anyone thinking about the collapse a little differently. But it does not change the fact that there was a run on the bank caused by investors’ loss of confidence.
You made only one argument, which I said was interesting. And I didn’t lay down any ad hominem attacks. Simply dismissing your tweet isn’t an attack.
Addendum:
Whether or not you were with McKinsey is not the point. Like most people, you seem to believe that your small window into Enron was the only thing that influenced Enron executives.
At any given point in time, Enron was using consultants and advisors from a dozen different firms. McKinsey was respected at Enron, but not slavishly. Enron executives had no problem making their own decisions — they saw McKinsey as information gatherers and aggregators, not decision makers. Skilling, in particular, had no problem disagreeing with McKinsey.
Also, you are likely confusing chicken and egg. McKinsey consultants are often (usually) strongly influenced by the interests of their clients. So the idea that Enron relied on McKinsey to come up with ideas that they themselves could not have developed is unknowable. It is just as likely that McKinsey simply documented and expanded on ideas they discovered at Enron.
I have also read and analyzed tons of McKinsey reports done for Enron. For every idea in the reports that might mesh with something Enron did, there are lots of ideas that Enron rejected. So, my point is that McKinsey was not the center of creative thinking at Enron that you seem to believe. In fact, there are EBS emails in which people make fun of McKinsey.
I agree with a good portion of your response, especially McKinsey’s relative unimportance in the grand scheme of things in any company they advise. That is part of why I left.
However, neither your post nor your tweets (“hahahhahhahhhahaaa”) were the calm, dispassionate response you claim above, and “this person went all defensive and crazy” is absolutely an ad hominem attack – there is nothing crazy about saying that I know more about what McKinsey said to Enron than almost anyone in the world. I was there and was a senior member of the team. The only people who know more about that particular subject (not Enron at large, but McKinsey’s advice – my tweet was very specific) – were a few people more senior to me and our key clients.
Given that you didn’t have any idea who I was or what I know, accusing me of arrogance while saying “you shouldn’t tangle with people who know more than you” is certainly ironic. And, continuing to lecture me on things like “It is just as likely that McKinsey simply documented and expanded on ideas they discovered at Enron,” while I was in the room when these were discussed, is similarly arrogant. For the record, yes there were many elements that McKinsey learned from Enron, and many that we taught them. I know which was which – it is not “unknowable.”
As for the core argument – I never said Lay, Skilling, etc. abandoned their core model. But McKinsey absolutely helped create and influence that core model. Mark-to-market accounting is legal and standard for some types of transactions, but they used it for everything. It created intense pressure because there were no recurring revenue streams, so every year started from zero and to show growth the traders needed to book ever larger deals. The capital required to do this was immense and diluted RoIC, so they moved it off the balance sheet. As investors started getting nervous, covenants on those deals were tripped and the snowball started.
Yes, it was a run on the bank. But the bank run was enabled by the covenants in the off-balance sheet transactions that were necessary to fund the businesses required to lap the massive deals that had been marked-to-market with often optimistic assumptions. And, many of those assumptions and much of that philosophy was recommended by McKinsey.
So, yes the reality is more nuanced than “McKinsey brought down Enron,” but 140 characters does cause some limitations, especially when the entire thing was just a second tweet to praise McKinsey’s PR for keeping Rajat Gupta’s McKinsey relationship secondary to his Goldman one which you decided to pick on.
By the way, where are my tens of thousands of dollars?
My Opinion based on observation and research: McKinsey people especially Ron Hulme were arrogant and very influential. They did have Skilings’ ear. They did heavily influence the “Asset Light policies” which lead to the high risk over leveraging of Enron. They did promote selling off real revenue producing assets for short term gains.
They did promote the pure financial mindset at Enron that empowered Andy Fastow to be the golden boy. Fastow did actually bring down Enron when he “as CFO” self dealt and caused the public to lose faith in Enron.That triggered the run on the bank.
They did help influence Skilling and others to believe producing real things was the old way of doing business and doing financial deals that did not have actual value was the new way of doing business. If you did not see it the McKinzie way you were an “old school person” and you were gotten rid of in Enron.
Getting rid of pipelines and selling off the revenue producing assets for short term gains was part of what led Enron to be so highly leveraged. This over leveraging helped set the stage for the “run on the bank.”
They also did not stand up and help their client Enron or their champion Skilling when things went south. They bolted and left defendants hanging in the wind like the spineless, arrogant, self absorbed (Rich from charging high fees for bad advice) people they were.
In other words, they are “consultants” who only care about themselves and do not take responsibility for bad advice. They did not come to the aid of someone like Skilling who believed in them.
They abandoned all defendants who they could have helped tremendously by explaining to the DOJ and the jury how things really were at Enron. There were no conspiracies other than Fastow and Cropper and no side deals like was claimed by the DOJ.
They did not step up for the defendants and help them win their cases by explaining how they were not aware of fraud or conspiracies and they would have been given their influence and freedom to look at all things inside of Enron. They hid and would not meet with defendants to help them. They abandoned those people when they were needed most. They should be ashamed for their gutless behavior.