Andy Fastow took to the stage on Day 2 of Pendulum Summit 2020. Surrounded by anticipation, the audience were eager to hear the tales of the former Enron CFO including the details of their infamous fall from grace in 2001. In a very open and honest discussion, Fastow shared the main lessons he took from this experience with the audience.
Have a look.
1. Admit When You’re Wrong.
If you remember just one thing from this talk today. I hope this is what you remember. I believe that what I did was wrong. I believe that what I did was unethical and I take full responsibility for my actions.
I consider myself the person most responsible for Enron’s failure. You will not hear anything from me today that contradicts that. You will not hear me try to blame other people to minimize what I did in any way, I am the guy responsible.
I’m sure because this is such a big crowd that there are people in this room that were adversely impacted by what happened to Enron, by my actions, and if there are people I apologize to you. I don’t expect anyone to accept my apology, but you deserve to hear it and you deserve to know that I mean it.
I got both an award for CFO of the year and a prison card for doing the same deals. How’s that possible? How is it possible to be CFO of the year and to go to federal prison for the same thing? Let me make it even more difficult for you and tell you that every single deal I did when I was in Enron was approved by Enron accountants and by outside Auditors and by Enron’s attorneys and by Enron’s outside attorneys and by the board of directors. No information was withheld.
How’s that possible? How is it possible to have all those gatekeepers that were aware of all of your actions, more importantly, how is it possible that all those really smart people approve all of your actions and you’re committing fraud?
If I had to sum it up in one word. This is the word I use that explains what can happen and that is: loopholes.
A loophole implies that you can technically follow the rules but that you can intentionally get around the principles of those rules right? Let me ask this question a different way. If your kids came home one night and you’re sitting around the dinner table and one of your really clever children says Mom Dad, I just want to get something clear here…You’ve given me a bunch of rules that I have to live by but if I find a way around those rules, you’re not going to punish me? You’re not going to ground me if I find a loophole?
I suspect without asking you all that there’d be a rather lengthy discussion ensued about the principal and the meaning of those rules and why we have them. As you can see, there is this interesting disconnect between how we perceive what we perceive is an appropriate way to behave in business and what we expect from our own family. Why is there that disconnect?
It kind of makes sense this word loophole right? Because the advisors were there to help you conduct business. They are the ones who are the guardians of the rules and are doing just that, guarding the rules. They’re only answering a very narrow specific question. Are you following the rules?
The problem is that in the real world if something goes wrong people will not ask are you following the rules? They’ll ask was that behavior acceptable? Is that behavior what a reasonable person under normal circumstances would engage in? and if the answer to that question is no, then there is a problem. You’re in trouble. That was my situation.
3. Could Happen to Anyone or Any Company
When looking at other companies there’s no way they would intentionally break the rules? They might have made a few bad choices but what they were doing is just trying to find ways to get to the answer they want. For example: Bank of Ireland. So the bank had a little sandal about that. That’s kind of interesting because if you look at what happened on the day the market found out about the comics trades, Bank Of Ireland lost over a third of its value.
The Bank Of Ireland did not intend to break any law. Do you think so? I think they were just exploiting a type of closure. What happened was the Bank of Ireland was helping companies avoid German taxes. It sounds like a worthy exercise and in most cases banks are good at helping companies avoid taxes. The people in Germany weren’t really happy about that, when they heard that BOI were helping companies having made about 400 billion dollars worth of taxes avoid paying them. As a result the value of Bank Of Ireland dropped precipitously. So I know people like to think of Enron as a one-off but as can see that is not the case.
Ireland is the international headquarters for one of the most valuable companies in the world. Apple computer. Why is that? Why? Taxes! It is the Irish tax structure. It’s great and it’s a big part of your allure, helping companies avoid paying taxes.
The problem is one day people may wake up and think differently and there may be a populist revolt around the world. They may say who is helping those rich billionaires avoid paying taxes and they may not feel the same way about Ireland in the future.
When I was talking to a few of you last night at dinner. You all seemed really proud. We’re just really smart. We created a competitive advantage and that’s a good thing and I don’t disagree, but I’m also not so sure you want me to agree with you either.
This is a little interesting. There’s another company in the U.S called Caterpillar. It makes huge tractors, farm equipment, etc. They were recently raided by the FBI in front of congress and some of these people may be going to prison from doing the same deal that happens in Ireland.
It’s a little random who gets picked and who doesn’t get picked. No one believes it can happen to them right? Everyone believes that they are a good person and we are good people, I don’t believe there’s anyone in this room who doesn’t want to do the right thing and challenges and convinces people to do the right thing. However, the challenge is convincing people they even have a decision to make in the first place.
I didn’t see that I even had an ethical decision to make in following the rules.. Why should I think about it? To me rules weren’t moral or immoral they were amoral, they were just a set of rules to be followed. We try to figure out ways to exploit rules all the time. Nobody thinks prison can happen to them. Everyone sees themselves as good and most people are good. People want to be a good member of the community, a good member of their church and a good member of their family, we want to do that. That’s probably why you’re sitting in this room, it’s because you’re that type of person.
5. You Must Be Able To See Through Different Lenses
Once when I was giving a talk much like this one in San Francisco I asked, Do you live in the San Francisco area? And he said yeah. You probably have a very expensive house probably worth more than 5 million bucks and he said yeah. I asked are you married with children? He said yeah I have a wife and two children and I said, that’s great. I asked, why do you live here? He said I think San Francisco is the best city in the world. It is a beautiful city with a beautiful climate. The culture is great, wonderful food, it has everything, right? I replied I totally get why you would want to live here because it’s a great place to live but I said here’s the problem.
Every geologist, seismologists and volcanologist in the world unanimously agrees that California’s more than 1,000 years overdue for a catastrophic earthquake.
All the Sciences have agreed so why have you chosen to put your family on the San Andreas fault line when you can afford to live anywhere in the world? Do you think about when the ground shakes and what you will tell yourself when the ground shakes? He replied saying I tell myself well, I have my house built higher than code so it’s safer and weather reports are smarter so they’ll probably give us advance warning.
I said your brain knows where you want to live so it blocks out the fact that you’re living on the fault line and that at any moment it can kill you and your family. Then when the ground shakes you rationalize away your thinking by saying that my house is built pretty well.
I said I hope that earthquake never comes but if it does everyone will first rush here to help you and save as many people as they can but after the dust settles everyone’s going to turn around and say what the heck were you thinking? Shame on you? Everyone told you this was going to happen all the sciences agreed and said this was going to happen and you chose to ignore? Shame on you for putting your family at risk.
We all see through different lenses and the challenge is to look through both of those lenses before the earthquake hits, before the shock happens.
6. Realise You Are Wrong
While I was in prison my family came to visit me this time. Miraculously, I’m still married. I have the best wife in the world, with all due respect to the ladies. I was literally the most difficult person in America to be married to for several years and even given that fact she still chose to keep our family together and we’ll be married 35 years next month. She’s the hero in this Enron story. Anyway, she came with my two sons to visit me in prison and I was sitting alone with one of my sons and he said to me Dad, I’ve been doing a lot of reading about you on the internet. Can I ask you some questions? I of course said sure. Go ahead.
He said well, I read the transcript from your sentencing hearing and he said it didn’t make any sense to me. He said at your sentencing very few people spoke. The first guy that got up to speak was the attorney representing the Enron shareholders. This guy should have been the most angry guy in the room because shareholders lost so much money, but he got up and he asked the judge to be lenient. He said that what you did was wrong, but that it’s a very common practice in business, and there’s an entire industry of bankers, attorneys and accountants who do nothing except help companies find loopholes.
What you did was wrong, but he said to the judge to understand the context that this wasn’t an idiosyncratic problem. It was a systemic problem.
Then the prosecutor got up, this was the US attorney that was putting me in prison and he said to the judge that the government believes that what I did was illegal, but they also believe that when I was doing it, I didn’t think it was illegal.
The judge spoke for a long time. He spoke for a long time because he did something very controversial. When I plead guilty I agreed to serve 10 years in prison, but when I went to be sentenced he only sentenced me to six which surprised everyone, no one saw that coming and you can imagine given the magnitude of Enron that was a very controversial thing to do especially in Houston Texas where we were so he had to explain it and basically the explanation was there were two reasons.
Firstly, the government acted horrendously when they made up fake charges against my wife and secondly that in fact all my deals were approved and I had never withheld information so my son looks at me and says Dad I still don’t get it?
You’re doing what everyone else did and you got permission, you were following the rules why are you in prison? And that kind of thing makes sense for a teenage boy. What do we tell our kids when they are growing up, when they go out we tell them to get permission and follow the rules. We don’t say get permission, follow the rules but if something happens which then leads to an unethical situation hire an attorney to discuss it etc. What I really thought he was asking me was do I think I should be in prison?
I told him I was pleading guilty. I told him I thought I was guilty but he was asking me do I think I should be in prison. And so this is what I said. I said Jeffrey, I could try to explain all the rules but even if I did it wouldn’t matter. Let me just tell you why I believe I’m guilty and why I believe I deserve to be punished.
Let me do that using a parallel story. I said you’re 15 years old and in one year you’ll be driving. One night when you’re driving you want to go to a party so you ask Mom if that’s okay, and I’m sure she’ll say yes, but she may have some rules and one of those rules will be you cannot drink alcohol. Would you agree with them?
He said yeah I said, okay, but you’re going to get to that party and when you walk in the door the first thing that is going to happen is your buddy’s going to offer you a beer and you’re going to be a 16 year old boy and there’s only one thing in the world you’re going to want to do more than drink beer. So you’re really going to want to drink that beer but you’re saying no no no. I have one rule. I cannot drink alcohol, which is good for you.
I said what if you have a really clever friend and he reaches into his pocket and takes out a chewable tablet. He says Hey Jeffrey, this is a beer table. If you chew this tablet, it’ll be exactly the same as drinking a beer except that you won’t be breaking the rule because the rule is you cannot drink beer.
So do you do it? And he looks at me like I’m a complete idiot and he says of course not so why not? That wasn’t the point.
I said that’s why I’m going to prison that’s why I deserve to be in prison. I was like that kid with the beer tablets. I was like the beer pusher in every way I could find to technically follow the rules but get around the point. So that’s what I did and in doing so caused a great deal of harm to a lot of people not just in financial harm but personal harm as well. Well, what a 15 year old boy understood intuitively in his heart in those few minutes took me until I was 45 years old to understand.
For those of you who have subscribed to Pendulum Talks you can re-watch his presentation from start to finish at your convenience. Enjoy it.