Conspiracy of Fools (12 page)

“Yeah, we’re asking to go to mark-to-market.”

A pause. “Why?”

“Because,” Skilling said, “we think it’s a more accurate reflection of what is going on in the business.”

The staffer shook his head. “We’ve been trying to get the banks to go to mark-to-market accounting for years.”

“Well …,” Skilling began.

“I think this makes all the sense in the world,” the staffer interrupted, gathering his notes as he stood. “Sorry, I’ve gotta go.”

Skilling smiled as the staffer headed out of the room. “Well,” he said, “I think
he
gets it.”

The SEC ruminated over the idea for months, calling Enron periodically for more material—copies of Skilling’s presentation, information about other market participants. More meetings were held in Washington to review details.

Finally, on January 30, 1992, a call came to Skilling from Jack Tompkins. “Jeff, I just got a letter from the SEC, and they’ve agreed with our accounting change.”

“Really?”

“Yeah, they put some conditions in place, but they signed off on the idea.”

Skilling hurried upstairs to see the two-page letter. Posey was already there and handed Skilling a copy. Reading it, Skilling broke into a smile.

“Thank God,” he said. “There’s some logic in the world after all.”

After a round of congratulations, Skilling and Posey headed to their offices, now on the thirty-third floor. Skilling walked into the bullpen and called for everyone’s attention.

“We got mark-to-market!” he crowed.

The announcement elicited a burst of congratulatory chatter from the Enron executives. At last, their business was ready to take off. “Folks,” Posey announced, “I’m going out and getting us all some beer to celebrate.”

Still, there were loose ends. In its letter the SEC said it would allow Enron to use mark-to-market accounting beginning in January 1992. Days later, Tompkins wrote back, informing the SEC that Enron would be applying the
new accounting treatment for 1991, although he said that the effect on earnings would not be material.

As far as the executives at Enron were concerned, they had no choice. They needed the profits they would gain from collapsing the estimated lifetime revenues of their gas contracts into a single year. Without them, under traditional accounting the company could miss the earnings targets Wall Street was projecting for the year just ended.

Accounting techniques—approved by the nation’s top securities regulator—now allowed Enron to report fast-growing profits. But the related cash would not finish flowing in for years. With high earnings and low cash, about the worst thing Enron could do at that moment was start throwing money into another risky business.

Rebecca Mark pushed open the door to a conference room for a group of dignitaries from India. The delegation, led by the country’s Power Secretary, Srinivas Rajgopal, had been in America almost a week and had flown to Houston on this day in May 1992 specifically to meet with her. The thirty-seven-year-old onetime Missouri farm girl had made a name for herself helping Enron build power plants in several countries—just what the Indian delegation wanted.

The meeting this day came at a time of transition for both India and Mark. After decades of shunning foreign investment, the Indian government had begun aggressively seeking overseas capital; in particular, it needed power plants to overcome chronic energy shortfalls that often paralyzed the country’s factories.

Enron had almost no track record in the developing world, but Mark wanted to change that. An attractive woman with a wave of blond hair that illuminated her face, Mark had just lost an internal political battle. Despite her work on a number of plant projects—including one constructed in Massachusetts while she attended Harvard Business School and a hugely successful plant in Teesside, England—she had drawn the short straw when the company split its power business into three units. The lucrative deals in Europe and the United States were divvied up to others. Mark and her team handled what was left—the riskier developing world. India was right in her bailiwick.

The Indian delegation took their seats and quickly got to the point. Rajgopal said that Enron had come to his attention because of its plant in Teesside. India needed such a project, he said. Mark listened, with reservations. She knew India mostly relied on high-polluting, coal-fired power plants, a business she wanted nothing to do with.

“I must tell you,” she said, “we don’t do coal, we do gas. We have some ethical issues about coal.”

“We understand that,” Rajgopal said. “That is why we’re here. We want you to bring gas into India.”

Ludicrous
. India had no reserves, no infrastructure of a gas industry. Gas would have to be imported, but that seemed unlikely, she told her guests. A pipeline through Pakistan was too risky, and the only other alternative—shipped liquid natural gas, or LNG—was pricey. Plus, the investments required—gas field drilling, liquefaction technology, ports—meant that to justify the costs, an LNG plant would have to be huge, at least two thousand megawatts.

“The size would drive up the cost of electricity,” Mark said. “In my view, you can’t afford LNG.”

Rajgopal shook his head. “We think we can.”

Mark still was dubious. The cost of electricity would be almost double that from a coal plant, she said. How could India possibly handle that?

“We’re very power short,” Rajgopal responded. “Our industries need power. We want to look at LNG.”

The government was willing to make whatever commitments were necessary to ensure such a project worked, Rajgopal said. Mark sat back in her chair. These were determined people. Could this be the break her team needed?

It was almost a magical moment. After losing the internal battles, her group might well be stumbling into the lead role on one of the world’s biggest projects. It would cost billions. And it would shower cash on Mark and her team. Enron effectively paid the power-plant developers a percentage of their deals, based on estimates of the money they would bring in. The larger the project, the more electricity it produced, and—consequently—the bigger the bonuses, often running into millions. Enron would invest the cash, and the international team would get rich.

“Okay,” Mark said. “We’ll take a look at it.”

With that, the fuse was lit. Enron would soon be pursuing wildly contradictory strategies. One brought in huge earnings but little cash, and depended on Enron’s credit rating to survive. The other would devour cash while producing next to no earnings for years, potentially putting the credit rating at risk.

Enron was on a collision course with itself.

ROWS OF LUXURY CARS
lined Wroxton Road near Andy Fastow’s house in the upscale neighborhood of Southampton Place. It was a weekend evening in December 1992, the night of the Fastows’ holiday party for Enron’s executives and bankers. Already the crowded street was forcing latecomers to park more than a block away; the crisp evening air whipped by as they scurried back, past historic bungalows and Victorian-style lampposts that battled feebly against the darkness. From the Fastows’ front walk, new arrivals could see a huge crowd through the shutters on the Georgian home’s first-floor windows.

Just inside, Lea Fastow stood near a staircase in the entry hallway, playing hostess to perfection. She greeted new arrivals personally, dispensing warm smiles and cheerful words. Framed artwork and delicate knickknacks lent the house a sumptuous air of class. Many of the guests complimented Lea on her decorating skills, already the stuff of legend around the office. Andy wandered from room to room, chatting up the revelers.

The mood was relaxed and celebratory, capping a fantastically successful year. Gas Services had taken off; following the accounting change, the division had blown through its projected numbers, the bottom line rising in an unswerving, near-vertical climb. After years of stumbling from one embarrassment to the next, Enron now inspired awe and fear in competitors, thanks largely to the cocksure, bubbly young people packed shoulder to shoulder at Fastow’s house. That evening everyone felt successful, smart, and richer than they had ever dreamed.

One late arrival, Amanda Martin, headed up the Fastows’ front walk, watching the festivities with a sense of wonder. A lawyer by training, Martin, thirty-six, was blond and attractive, but it was her smarts that wowed Enron executives. Although her job was to clear away legal land mines in Enron’s deals, she never hesitated to challenge transactions she thought wrongheaded; her pointed questions, raised in her lilting Afrikaner accent, could deflate the most arrogant of deal makers.

Martin found Enron a delight. Skilling and his vision for the industry
captivated her. The staid old pipeline company was, in Skilling’s group, more like a Wall Street deal factory, attracting young, smart people on the make. Martin and the rest became Skilling’s youthful acolytes, eager to shatter the constraints of the old world.

From the start, Martin formed a close bond with Andy Fastow and relished his seeming lack of pretension. He would schmooze with colleagues into the wee hours. And on weekends, when Martin sometimes brought her young son to work, Fastow thought nothing of getting down on the floor to horse around with the boy. True, Fastow had a dark side—yelling when things didn’t go his way, shoving a banker in the heat of negotiations—but Martin viewed those outbursts as standard fare in a high-pressure profession.

But if Fastow the sour deal maker put Martin off, Andy the bubbly games player was always a delight. Just the other day, Fastow’s wicked sense of humor had taken one of Enron’s outside lawyers down a peg. All week, the lawyer had been bragging about the deal he had struck on a Jaguar. The jabbering only stopped when the lawyer was told that he had a call from the police. The lawyer had purchased a stolen car, the caller informed him, faxing over the evidence to prove it. Only then did everyone listening to the escapade collapse in laughter; the lawyer had been taken in by one of Fastow’s elaborate practical jokes.

Tonight, Martin was confident that Fastow the fun loving would be waiting inside. As she rang the front bell, a truck pulled up and a delivery man climbed out, carrying a large object to the Fastows’ entryway. Lea opened the door, greeting Martin as the delivery man arrived. He set down a giant, hideous bust of Elvis Presley.

“Mrs. Fastow?” he said. “We’re delivering that bust you ordered.”

“I’m sorry?” Lea said, looking mortified. “That’s not mine. We never ordered it.”

“No,” the delivery man said. “It’s for you. It’s all paid up. Where do you want it?”

Lea glanced around at her guests as her husband walked over to see what was going on. Martin had already figured it out: the Jaguar lawyer was getting his revenge, right in the middle of Fastow’s holiday party. She shook with laughter. God, she loved working for this place.

The tall, patrician man walked casually through the lobby of the Enron building toward the elevators. He was dressed in a finely tailored, top-of-the-line suit and a muted tie. It was the kind of look that seemed calculated to attract notice, but the man paid no attention to the stares set off by his arrival. As someone with one of the world’s most recognizable faces, James
Baker III, the former Secretary of State in the Bush Administration, was pretty much used to them, particularly in his hometown of Houston. After being ushered through security, Baker headed to the fiftieth floor, where a beaming Ken Lay waited, eager to hear the thoughts of Enron’s newest consultant.

“Jim, thanks for coming to see us today,” Lay said, pumping Baker’s hand. “Well, Ken, it’s an honor.”

It was early 1993, not long after Bill Clinton’s inauguration as President. While Lay had been disappointed by Bush’s defeat, he also viewed it as an opportunity to attract top-flight talent to Enron. Baker—and Lay’s old friend Robert Mosbacher, the former Commerce Secretary—were offered consulting contracts to lend their international expertise to Enron’s overseas power projects.

The deals were signed on February 22, 1993, and Baker and Mosbacher soon began examining company projects. One caught Baker’s attention: the Indian power plant that Rebecca Mark had contracted to build. Constructing the plant in Dabhol, about a hundred miles south of Bombay on the rocky coast of the Arabian Sea, struck Baker as tricky business. Enron had made efforts to protect its interests, winning agreements from the Maharashtra State Electricity Board to purchase virtually all of the plant’s power, securing guarantees from the state and national governments, bringing in contractors involved in the construction as part owners. But Baker saw dangers that appeared to have escaped Enron’s attention.

He dashed off a one-and-a-half-page memo, raising red flags. Enron, he cautioned, seemed to be assuming that the politicians negotiating the deal would be around to enforce it; the company was betting on a single horse, without forging alliances with other political factions. Worse, the company had failed to give locals a sense of ownership in the plant, say, by bringing in an Indian company as a corporate partner. It would be a serious error, he warned, to underestimate the potency of Indian nationalism and its potential to harm the deal.

Baker sent the memo to Enron’s officers, who promptly filed it away and largely forgot about it.

The hunt had lasted almost three years. But now, having found Enron, Christopher Bower was ready to bring down the big game.

Bower, founder of the Pacific Corporate Group in La Jolla, California, held one of the country’s most intriguing jobs—helping Calpers, the giant retirement system for government employees in California, invest more than two billion dollars in private deals. With that kind of money jangling in his
pocket, Bower was welcome in most any corporate or Wall Street office and had heard hundreds of investment ideas. But time and again, he and his team of eleven professionals found the proposals unexciting.

Then, paydirt. Bower came to Houston, meeting with Fastow and his finance executives, and pushed a simple idea. Enron wanted to finance gas producers through off-books entities but needed outside money to meet the accounting rules. The Cactus deals had been fine but required Enron to wander around, tin cup in hand, scaring up investors. Calpers was ready to fill the gap. It could provide cash custom-fit for Enron’s needs, up to half of a $500 million fund. Enron, already cash starved, could use its own stock to finance the other half.