Ben Gilbert: belief

Transcript context

…These two bozos just racked up a billion dollars in trading losses. This time, Lay does fire them. Fortunately, for young Enron and for Lay, but unfortunately for the rest of the world, this happens early enough in the quarter that the trading floor is able to dig out enough of these losses, that they don't have to report the whole billion dollar loss come earnings time, and only end up reporting I think less than $100 million of losses. The company miraculously survives. You would think that Lay would learn his lesson here, but no. This is what we're dealing with. Let's for a moment say, why are there traders? That's an interesting thing that's happening here. I thought this was a pipeline company. I thought this was a logistics company that moves natural gas from one place to another and charges customers for the services associated with that. The traders originally are there, to your point, to help match supply to the demand. It's not like everybody just got a computer in front of them where they can automatically be buying the right products to fit their needs at the right price at this moment in time. You need to interface with people. Those people can quote spreads wherever they want. They can say, ahh, I got a seller for this price, and you're the buyer and I'm sensing that you'll buy for that price. Okay, I'll match, make supply to demand. I'll quote a spread where I think I can make the most possible money on this trade, and we'll go with that. This is the beginning of them being both a logistics energy transportation company and also a financial organization of sorts, a trading desk. Yes, a trading desk, a proto financial institution for the energy industry. Speaking of, back to Houston, and the promised McKinsey strategic engagement. It's happening. Jeff Skilling is lead hotshot partner to develop a strategic plan for this very thing, the new finance and trading operations of Enron. One day, Skilling has an absolutely brilliant idea. Brilliant by his own estimation and he proclaims it to everybody how brilliant it is. What if Enron goes one step further from Lay's original innovation of creating a spot market for energy? Rather than just being the facilitator of the market being the pipeline in the middle, what if Enron started acting even more like an investment bank in this industry? The phrase that he uses for this idea is Enron becoming a "bank for gas." The idea is that they can go to oil and gas producers to drillers, and they can buy up a lot of the future production that's going to come out of their wells. Kind of almost like the old companies used to do. But rather than Enron then being the customer for what's going to come out of those wells, they repackage—this is the securitization that you were talking about a minute ago, Ben—all of these future energy commodities. They slice it and dice it, and then they resell it to buyers, to consumers of energy, on whatever timeline and term length they want. We've gone now, the industry, from the pipelines, buy the assets from the producers, buy the energy commodities from the producers, and then sell them to customers. Lay's innovation is to create a market where you let the producers and the customers trade directly today.…

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