Beaten into Submission

Everyone loves Enron, or I guess I should say loved.  Analysts, Wall Street, investors, traders, you name it; they all were loyal to Enron.  It’s easy to jump on the bandwagon, be beaten into submission by Enron, and end up as a friendly ally and some green in your pocket.  But I like the non-conformist.  Anyone willing to step out of the norm and speak their mind holds a higher place in my book.  After reading about John Olson, an analyst entangled in a small piece of Enron, I was astounded by his demise.  Employed by Credit Suisse First Boston, Olson covered Enron in the late 1980s.  The thing that intrigued me about Olson was that he was unlike all the other analysts; he refused to kiss Enron’s butt or submit to their demands.  He also followed the company carefully, recognizing flaws on many levels.  This led him to make decisions that were unfavorable to Enron.

“Olson had stubbornly stuck a hold rating on the stock – which, as everyone on Wall Street knows, is a polite way of saying sell.” (Smartest Guys in the Room, p.234)

Despite Ken Lay complaining to the CSFB investment bankers, Olson held strong.

“An account published recently in the New York Times reported that Lay also tried to silence Olson by complaining to his boss. After U.S. News and World Report published Olson’s critical comments about Enron last year, Lay reportedly sent Olson’s boss a handwritten note that said, “John Olson has been wrong about Enron for over 10 years and is still wrong. But he is consistant (sic).” According to the Times, when his boss showed him the note, Olson retorted, “You know that I’m old and I’m worthless, but at least I can spell “consistent.'” (source)

Olson left CSFB after submitting his top five stock picks, of which Enron did fall under, and joined Goldman Sachs.  He only spent two years here before joining Merill Lynch, where he would soon meet the repercussions of his actions.

Working for Merrill Lynch under Rick Gordon, a social friend of Lay’s, Olson’s lukewarm feelings on Enron did not change.  What is unbelievable was the petty, middle-school grudge that Enron held against Olson.  Since Olson was a member of Merrill Lynch, “Merrill got less than its proportionate share of Enron business. (Smartest Guys in the Room, p.235)  Despite the harm Olson was causing, Merrill still kept him around; until the summer of 1998.  Enron sent a memo to Merrill explaining that they would be left out of one of Enron’s last equity offerings.

“The decision to leave Merrill out was “based solely on the research issue and was intended to send a strong message as to how ‘viscerally’ Enron’s senior management” felt about John Olson.” (Smartest Guys in the Room, p.235)

What?! The way I see this is Tommy (Enron) is getting back at Jimmy (John Olson) for kissing the girl he liked by the monkey bars! Nothing more than a stupid grudge (I would like to know what part of Org. Theory covers that!)  Of course, Merrill could not be left out of this huge deal, causing Gordon and Tilney to write a memo to the Merrill president and get Olson fired.  How does it happen that the man who was fair and accurate got fired?  Clearly messing with the love of Enron is more like playing fire.

Lastly, while Enron was still running back in the 1990’s, Olson was making predictions about the company.    After Enron’s bankruptcy in 2001, Olson posted advice for “Spotting Future Enrons” that I found interesting and that I will leave you  to question over.

“Spotting Future Enrons

To the average investor, Olson offers advice that seems to come straight out of a Warren Buffett stockpicking guide: “Always invest in only those things you understand. Invest only in companies that are making money.”

A guiding rule of securities analysis, says Olson, is to ask, “What kind of investing credentials does this price-to-earnings ratio buy me? What kind of growth rate and profitability, return on equity, etc. does it get me? You don’t really need anything else to understand the business.”

Needless to say, numbers are only useful if the company doesn’t engage in shady accounting practices. But Olson isn’t a cynic, and emphasizes that rogue shenanigans like Enron’s are the exception, not the rule. “Most companies don’t engage in this kind of gamesmanship,” he notes.

Olson is also optimistic about the energy sector as a whole, and speaks quite bullishly about other firms. “Enron had a trading mentality, an adrenalin-rush atmosphere. Skilling looked down upon hard assets; he wanted to do everything synthetically. But others, such as Dynegy, Duke Energy, El Paso, Reliant – have different cultures. Certainly the ratings agencies have raised the bar on trading companies, but I think the energy trading industry will be strong once again in six to 12 months.” (source)

3 Responses

  1. When I read about Olson in the book, the exact same thing bothered me! It was really refreshing to learn about someone who wasn’t jumping on Enron’s bandwagon. It’s so sad to see that just because he didn’t follow suit, his career at all of these big-wig financial institutions was cut out from underneath him…by Enron nonetheless. What bothers me even more is that people didn’t see these kinds of challenges from analysts as a healthy balance to the norm of infatuation with Enron. Hopefully, people realized Olson’s strong insight and took to heart his advise on the energy industry after Enron’s collapse.

  2. I agree with both of you. It is not only impressive that Olson had the smarts to figure out the intricate Enron books but the guts to do the right thing with his findings. Not only could he have just brushed this under the carpet, I would bet money that he probably had the opportunity to be bought out by Enron if he would have written his reports how they wanted him to. He couldn’t have been the only analysts to suspect Enron from cooking the books, but it appears that he was the only one to stand up against them. I am very impressed.

  3. I’m in agreement too. It was took a lot of courage for Olsen to stand up to a company that nobody else will stand up too. It was really impressive too that Olsen could see this all coming too. However, although I admire Olsen, it’s much easier to say this in hindsight.

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