Conspiracy of Fools (102 page)

Watson brought out a typed list of issues that had arisen since the deal was signed and read them to Lay. The communications breakdowns. A too-rich severance plan.

“But the most important issue here is the missing cash, the $1.5 billion,” Watson said. “We need an accounting of that, of where it went, by tomorrow.”

There was another matter that had to be dealt with, Watson said. He looked across the table into Lay’s eyes.

“A management change at the top of Enron is needed right away,” he said. “It has to happen if we’re going to stop the train and restore confidence and credibility.”

Lay didn’t change his expression. “I’ll talk to the board,” he replied.

Enron was cracking open. The quarterly filing had unnerved both the market and the credit-rating agencies. Its debt was put under review again, and its shares were the most actively traded on the New York Stock Exchange. That day, November 20, Enron stock fell almost 23 percent, closing at just about seven dollars a share.

Looking exhausted, Steve Kean walked across the fourth floor of the new building, holding a piece of paper in his hand. He spotted Ray Bowen and headed over to him.

“I’ve got a press release that Ken wants us to put out,” Kean said, his voice weary. “Could you look at it?”

Bowen read it. It was silly; just a statement about Enron’s trading volumes.
He made a face. “We can’t put this out,” Bowen said. “What do we accomplish by doing this?”

“Ray, I understand that,” Kean replied.

He sighed. “But
you
have to understand, I’m working for a delusional chairman who thinks all the company has is a PR problem that can be solved with a press release.”

On Wednesday, November 21, Dynegy’s president, Steve Bergstrom, was sitting in Whalley’s office, trying to get his head around Enron’s cash situation. The levels had kept dropping and now, Whalley said, were down to $500 million.

“The traders have been pretty anxious to prove they’re still in business,” Whalley said. “They’ve been putting up cash collateral for big trades.”

But they had hit a snag, Whalley said. The cash collateral didn’t
keep
anyone doing business with Enron. Instead, once the company posted cash, other traders closed out the position from the individual trade, pocketed the money, and walked away. Enron’s payments weren’t fooling anyone.

“Greg, you’ve got to conserve cash over anything else,” Bergstrom said. “That’s the most important thing.”

Whalley shrugged. Enron made markets. Conserving cash would kill the culture. It wasn’t going to happen.

“Look,” Whalley said, “we really stepped in it. But now we’ve got to get the merger back on track.”

It was Friday, November 23, the day after Thanksgiving. A squad of managers from Enron surrounded him. Across the conference table, three Dynegy executives—including Keith Fullenweider, the deputy general counsel, and Rob Doty, the CFO—peered back at them skeptically.

The Enron managers had come with several messages. First, things were getting worse. The revelations in the quarterly filing had sent the trading business back into a tailspin. Enron’s huge debt, on and off the books, had placed a stranglehold on the company. Doty argued that Enron had to meet with its banks and extend the repayment schedule.

“You’re right,” McMahon said. “We renegotiate with the banks or else we have to file bankruptcy.”

Whalley held his index finger to his head. “Hey, I’ll tell the banks I’ve got the gun to my head,” he said.

But concessions from the banks alone couldn’t solve all the problems with the deal. Enron was now dramatically different from what anyone had thought just two weeks before. New capital had to come from
somewhere
. Otherwise Enron wouldn’t be able to survive long enough for the merger to close.

Bold action was needed. Negotiations had to be reopened, the two sides agreed. They would meet with the bankers and try to strike a new deal.

Enron’s new GT Gulfstream corporate jet took off early the next morning. The cabin space was packed with executives, among them Lay, Whalley, McMahon, and Bowen. The plane was headed to the Westchester County Airport in New York. From there, the executives would travel by car to meetings at the Doral Arrowwood, an executive conference center and hotel, for the final negotiations with Dynegy and the banks.

Almost everyone on board was emotionally drained. The weeks of leaping from crisis to crisis, the endless negotiations, the grueling travel, the lost sleep had pushed them to their limits. Whalley alone seemed to have caught his second wind and was preaching about skydiving, a hobby he had relished since his days in the military.

“I’ll tell you, you guys ought to try it,” Whalley said. “Best adrenaline rush you’ll ever get.”

Lay was tired of the lecture, tired of Whalley. He turned to face him. “Greg, I’ve got enough of an adrenaline rush right now. I don’t need to add to my list.”

That morning, Jimmy Lee and a few colleagues from J. P. Morgan Chase squeezed in a round of golf before making their way to Arrowwood for the Enron meetings. It was a beautiful day, and the contingent arrived still dressed for the links.

“Okay,” Lee said as he took a seat, “here’s where we stand.” Best estimate, Lee said, Enron needed three billion dollars, but that could be overcome. Citi would kick in a billion, Chase would step up for a billion. Then another billion from Dynegy, plus a public recommitment to the merger.

“That would take care of everything,” Lee said.

Rob Doty from Dynegy answered. “We’re committed to this transaction, and we will step up for our third,” he said. “But we have concerns that have to be addressed.”

Price was issue one, Doty said. Enron had gone down the tubes; the original merger price was out of whack.

Lay listened to the harangue, achingly aware that his counterpart, Chuck Watson, wasn’t in the room. In fact, Watson hadn’t bothered to come up to the meeting at all and was instead down in Mexico, vacationing. He was leaving success or failure in the hands of his lieutenants.

This, Lay knew, was a bad sign.

———

That night, Ken Lay and most of his management team got drunk. Nothing much had been accomplished that day, though the discussions were scheduled to pick up again the next morning. So, desperate for a reprieve, the Enron executives had ordered steak dinners at the hotel restaurant, and then downed bottles of wine.

“Here,” Lay said late in the evening to McMahon. “Let me pour you some more.”

Whalley was silent at the table. Repeatedly that day, he had warned the banks and Dynegy that three billion dollars might not be enough to save Enron; if it had to keep prepaying for physical gas, he told them, the company would burn through the new cash before the end of December.

As the night wore on, Bowen grew increasingly uncomfortable. Across from him sat Lay, looking broken. This was Ken Lay—
Ken Lay!
Mr. Houston!—tranquilizing himself. It struck Bowen as all so terribly sad.

“The banks are just stupid,” Lay complained. But it would all work out, he promised. Enron would be saved.

An hour later, Lay headed up to his room. Soon after, McMahon needed to leave; he was so drunk he was unable to speak. His lips locked together, and he staggered off leaving his briefcase behind.

Bowen and Whalley sat alone at the table for a moment.

“I have no idea if this is going to work out or not,” Whalley suddenly said. “But I’m going to fire every weapon I’ve got. Everything I can do to save this company. I’m not going to die with any bullets in my chamber.”

He puffed a cigarette. “But if this Dynegy deal doesn’t close and we end up bankrupt, I guess I’m going to spend the next couple of years giving depositions.”

It would be months before Bowen would realize how accurate that prediction was.

The next morning at ten, everybody was back to work.

“Look,” Jimmy Lee said. “There has got to be a restructuring of this deal, with three billion dollars of new cash.”

He looked at the other faces in the room. “That has to be ready to be announced tomorrow,” he said. “Or the right thing for Enron to do is just file bankruptcy.”

After four hours of discussions, Dynegy was ready to issue their list of demands. Keith Fullenweider did the honors. “We’ve got an eight-point plan,” he said.

The terms were harsh. Dynegy traders would move onto Enron’s floors
now. Banks would convert three billion dollars in debt into an ownership stake in the merged company and come up with three billion dollars in new credit. The acquisition price would be cut by more than half. And on and on.

Fullenweider looked across the table at Lay and McMahon, who were leading the discussions for Enron.

“We need a change in management,” Fullenweider said brusquely. “Ken needs to step down. And we need a new CFO.”

McMahon wrote that down.
Wow. They’re firing me
.

“Okay,” he said once the presentation was done. “Let us go over this, and we’ll be back.” The Enron executives left the room to talk through Dynegy’s demands.

They returned in two hours. McMahon sat at the conference table and was the first to speak.

“Let me start this off, so everyone’s sensitivities are okay,” he said. “Ken is fine with leaving.”

McMahon smiled. “Now, as appealing to me as replacing the CFO sounds—I mean, I would love to let someone else take the job right now—we’re concerned. You haven’t told us a name. So we would withhold approval until we know who you want, because this is a pretty critical role now.”

Other than that, McMahon said, there were no issues.

What else did you think we were going to say? “No” isn’t exactly an option for us anymore
.

That afternoon, Steve Bergstrom, Dynegy’s president, was in Houston. He called his negotiating team for an update on the Enron talks, then consulted a few of his financial experts. What, he asked, would the ratio of debt to capital be in this new merged company?

The answer came back quickly: 65 percent.

Bergstrom was thunderstruck. He had never imagined such a lopsided number. Enron’s debt was impossible to overcome. It was like a virus, and as soon as Dynegy absorbed the body of Enron, it, too, would become infected. He contacted Watson.

“This deal will not work,” he said. “Our trading business will not survive.”

Watson was silent for a moment. “Let’s try to finish it,” he said.

The next day, Tuesday, November 27, Skilling was in a conference room at O’Melveny & Myers, scarcely able to contain his excitement. Three of his lawyers, including Bruce Hiler, were in the room. Then three more arrived—Bill McLucas and two of his colleagues from Wilmer, Cutler.

Skilling wanted to talk, to tell everyone his view of what had happened at Enron, how the company had been financially crippled by excessive spending on the international side and other silly mistakes. The lawyers took their seats.

Steven Rosen, a young Wilmer, Cutler lawyer, asked the first question. “Have you ever heard of a partnership called Southampton?”

Skilling didn’t hesitate. “Nope,” he said.

The whole interview struck Skilling as unpleasant. This wasn’t the collaborative effort, the chance to expound on his views that he had been hoping for. These lawyers clearly thought he was
responsible
. He couldn’t believe it.

“Would it surprise you to find out Fastow made about thirty-five million dollars from LJM in the last two years?” McLucas asked.

Skilling shrugged. “Depends on what he had at risk,” he said. “You guys should do a value-at-risk analysis.”

They haggled over the LJM approval sheets. Fastow had told the board that Skilling was approving each deal, McLucas said. That wasn’t the process, Skilling retorted. Only Causey and Buy were formally meant to approve each deal. McLucas brought out an approval sheet for a deal named Margaux, the sole LJM transaction signed by Skilling.

“You signed this one,” McLucas said. “There is a list of questions with answers, and you signed it.”

“Now, wait a minute,” Skilling shot back. “My signature doesn’t mean I’ve reviewed these questions independently and satisfied myself the answers are right.”

McLucas crossed his arms. “What does it mean, then?”

Skilling pointed at the signature page. “Right here, I saw Causey and Buy already signed,” he said. “The fact that they signed it was good enough for
me
to sign without reviewing the same facts again.”

That afternoon, the Dynegy deal was done—yet again. The Enron team had even hung around in Manhattan an extra day, waiting in the offices of Weil, Gotshal to receive a faxed copy of the revised deal-term sheet. It came over at about five o’clock, with Watson’s signature at the bottom.

With work wrapped up, a limo drove everyone to Teterboro Airport, where the Enron plane was waiting. Lay took his seat, looking morose but satisfied. The plane was just getting ready to pull out toward the runway when a radio message came across to the pilot. The engines slowed. The pilot stood and walked back into the passenger cabin.

“Mr. Lay?” he said. “There’s a Mr. Watson who needs to speak to you right away.”

———

The four executives dragged themselves off the plane.

“My God!” McMahon exclaimed. “Will his ego never cease?”

They walked into the terminal and were directed to a room with a speakerphone. On the line was Watson, who was soon joined by Jimmy Lee from Chase, and Michael Carpenter from Salomon Smith Barney.

Watson’s tone was ponderous. Something was up.

“I’ve been talking to my guys over the last number of days, and there are still some problems,” he said. “We’re very concerned about the debt-to-capital ratio of the merged company. Plus, there have been so many surprises.”

Watson started ticking off the familiar list. The Rawhide debacle. The problems with the quarterly filing. The Glisan scandal. McMahon slumped into a chair and slapped his hand to his head.
Okay, I know!
That was why Enron had agreed to everything Dynegy had demanded.

Lay was impatient. “Chuck, we’ve been all through this,” he said, his voice hoarse from a brewing cold.