Conspiracy of Fools (17 page)

As they ate, the couples chatted about children. Lea had recently given birth to her first child and spilled out questions to Teresa, a pediatrician. Ken bragged about his three kids’ accomplishments, while Andy talked about his new son, Jeffrey—a name that had already led to jokes inside Enron about Fastow using his baby to kiss up to Skilling.

The conversation turned to the office. Fastow had just started running the retail-electricity unit; Rice figured that Fastow had set up the dinner to pick his brain about the wholesale-electricity business he ran.

“Hey,” Rice said, “how are things in retail?”

Fastow broke into a smile. “Oh, just great. Really great. We’re really going out, taking on some big stuff.” Rice sipped his margarita.

“We’ve got some really important challenges,” Fastow continued. “We’re trying to redefine how people buy electricity. We want to come up with ways to provide services that look nontraditional, that really open people’s eyes with how we differentiate our product.”

Rice nodded, saying nothing. A bunch of marketing buzzwords. Not a good sign.

“That’s what we’ve got to do,” Fastow went on. “We’ve got to come out with new and creative things.”

“Okay,” Rice said. “That sounds good.”

“Like take M&M’s.”
M&M’s? The candy?

Fastow’s words tumbled out excitedly. “M&M’s is now putting blue M&M’s in the bags, and they’re making a big deal out of blue just so they can sell more M&M’s.”

Rice vaguely knew what Fastow was talking about. Mars, the maker of M&M’s, had just introduced a new color for the candy and had launched a big advertising blitz announcing its arrival. That was fine for a candy promotion, but what the hell did that have to do with selling electricity? Was Enron going to create new colors for it?

“Okay,” Rice said. “I think that’s a creative marketing strategy for M&M’s, but what does it mean? What’s the analogy for electricity?”

“I think we can come up with some products that really attract people’s attention like that.”

Rice nodded, trying to hide his dismay. Fastow might be good at finance,
but he sure didn’t understand commodities; there, price was everything. Rice decided to offer a little electricity primer before Fastow embarrassed himself in front of Skilling with all this talk of blue M&M’s.

“Well,” Rice said slowly. “Okay. But I think the real key for the electricity consumer is that they’re interested in price and they’re interested in convenience.”

Fastow stared at Rice blankly.

“But consumers don’t know what their comparative costs are,” Rice continued. “Price signals aren’t in their hands. If you figure out a way to let consumers understand their costs, they could make intelligent decisions, and then you could compete on price.”

Silence. Fastow blinked. “We’ve got other creative ideas, too,” he began, launching into a description of another marketing gimmick. Apparently, he hadn’t listened to a word Rice had said.

Rice rocked back in his chair.
Okay, I get it
. Fastow liked Fastow’s ideas and didn’t care for what anyone else had to say. If this was how Fastow was going to run things, Rice figured, retail was probably doomed.

Some time later, Fastow paid the bill, and the two couples headed back to the valet. The Rices’ car came around first; Armando’s valets tended to favor expensive vehicles, so the Porsche had been sure to arrive before the Fastows’ boxy, two-door SUV. The Rices thanked their hosts and piled into the car.

Teresa waited until they pulled away before saying anything. She had noticed Fastow jabbering at Ken a lot and not listening to his responses. It struck her as odd.

“What was that all about?” she asked.

Rice held the steering wheel.

“I have no idea,” he said.

On the east side of downtown Portland stands the World Trade Center, a trio of buildings overlooking a promenade that opens to the Willamette River. A symphony of glass and concrete, the towers are the corporate epicenter for Portland General Electric, a utility that served Oregon and was pushing for the deregulation of electricity.

On the morning of January 17, 1996, a cab carrying Cliff Baxter and Ken Rice pulled alongside the brick sidewalk in front of the trade center. The two hustled out of the car and headed for a covered walkway. Brilliant stretches of deep blue peeked past a lattice of glass and aluminum overhead as they walked through a wave of pedestrian traffic. Baxter and Rice arrived at Tower One and boarded an elevator for the top floor.

This, they knew, was an important day for Enron’s electricity business. Once Skilling gave up his idea for a massive energy consortium, Baxter began seeking a more reasonable alternative, an alliance with a single utility. If Enron was going to be a player, the thought went, it needed such a relationship in the West, where the industry was being shaped by the expectation of deregulation in the giant California market.

The hunt for a partner had been frustrating; too many utility executives seemed more interested in their golf games than in their corporate strategies. A bunch of nine-to-fivers wouldn’t fit the Enron mold. What they needed was a company pushing for change, on the leading edge. Portland General seemed perfect, if only its chairman and chief executive, Ken Harrison, could be persuaded to deal.

The elevator stopped, and the Enron officials strode into Portland General’s executive offices, a place that dripped with a woody and conservative style common to utilities. Rice approached the receptionist.

“Hi. Ken Rice and Cliff Baxter to see Mr. Harrison.”

Fifteen minutes later, they were summoned into a conference room just off the lobby. Harrison was waiting at the large table, his back to an enormous picture window. Alongside him sat Joe Hirko, the company’s chief financial officer. Baxter and Rice said their hellos and found their seats.

Rice took it from there, reminding everyone of the meeting more than a year earlier when they had discussed Skilling’s now-abandoned idea for an electricity consortium. The utility executives nodded and smiled; the silliness of that proposal didn’t need to be mentioned.

“We still believe there’s a lot we could do together,” Baxter said. “We’re interested in talking about a formal strategic relationship with Portland General.”

Rice set his arms on the table. “We’ve looked at your position in the market and what you guys are doing, and we think that we can bring in capabilities that complement what you’re doing, and vice versa.”

The Enron executives pressed hard. Deregulation was a force that couldn’t be stopped, they said. Companies that prepared would flourish. Those that didn’t would flounder. Harrison and Hirko listened attentively, nodding.

“We agree with you on the direction of the market,” Harrison said. “We’re already trading electricity; we know that area pretty well. But I think there are some things we should be doing together.”

He smiled. “So let’s talk some more,” he said.

The strategy session in Fastow’s retail group dragged on for hours.

Weeks into his new job, Fastow had yet to devise a business plan for Skilling. His ideas were vague, flighty, unmoored to the practical details of
the real world. On this day in early 1996, he and his top team thrashed through various proposals, scribbling notes on a whiteboard, trying hard to cobble together
something
.

Fastow glanced through the room’s glass wall and saw Vince Kaminski walking by. Kaminski was Enron’s resident genius, a top risk analyst who had worked on Wall Street before coming to Houston. Now the Polish-born Kaminski was the man Enron most relied on to protect the company from unseen perils. When Enron held investments that could lose worth, it was Kaminski and his team of financial rocket scientists who concocted complex hedges, devices that—in the perfect world—went up in value as the price of the original investment declined. His advice, Fastow felt sure, would be an important part of any retail strategy.

“Hey,” Fastow said, pointing to the hallway. “Get Vince in here.”

Somebody pulled in Kaminski. He was soft-spoken yet excitable, a man who quickly assessed colleagues’ brainpower—and Fastow had never made it high on his list of high-voltage intellects. Long ago, when Fastow had incorrectly boasted that his business was unaffected by interest rates, Kaminski had concluded the man was a lightweight.

Fastow stretched his legs under the table. “Vince, we’re putting together the strategy for retail,” he said, inadvertently punctuating every
s
sound with a slight whistle. “I wanted to see if we could get your input”

“Of course,” Kaminski said. “What have you planned?”

The whole idea was based on the inevitability of electricity deregulation, Fastow said. “When that happens, electricity prices are sure to drop.”

Kaminski nodded solemnly, already recognizing the flaw in Fastow’s thinking. Electricity prices would go down under deregulation
in theory
. What if oil and gas prices spike upward? What if the deregulation is done badly? What if there’s a nuclear meltdown, sounding the death knell for that part of the industry overnight, creating power shortages?

“Yes?” Kaminski said. Arguing was pointless.

“So, we offer consumers long-term contracts, below current rates. Then deregulation happens, prices drop, and our contract price will be above the market price. We’ll make profits on the spread”

Kaminski folded his arms. Fastow hadn’t disappointed; the idea was ridiculous. Basically, Enron would make a massive bet on the timing of deregulation, with losses piling up until new rules came about. Then—if prices dropped—Enron would charge
above market
rates? What about customers who went bankrupt? Was Enron going to sue everyone who switched providers? And once Enron spent a few years ripping off its retail customers, how would the company renew its contracts or attract new business?

Before Kaminski could respond, a Fastow deputy spoke. “There is one problem with the idea,” the executive said. “We’re guaranteeing ourselves some pretty big losses in the first few years”

“That’s right,” Fastow nodded.

He glanced at Kaminski. “Vince, can you come up with a hedge that would offset losses in the initial years?”

Kaminski smiled to himself.
How could a man like this be in charge of a business?
A hedge could only offset declines in an asset’s value, not operating losses from a failing business. The only hedge for a money-losing business was a moneymaking business—and one of those certainly wasn’t going to be coming out of this meeting.

“If I could come up with such a hedge,” Kaminski said patiently, “I would say forget about having customers. We can all just make money by hedging”

The cell phone on Ken Rice’s belt rang as he walked through downtown Houston. He snapped it off its holder and pushed the answer button.

“I just got a call from Oejay Irkohay,” a voice said, sounding conspiratorial.

Rice laughed. It was Cliff Baxter, with news on the Portland General talks. In a faint stab at security, Baxter had taken to speaking in pig latin whenever discussing the negotiations over a cell phone.

Oejay Irkohay
. Joe Hirko, Portland General’s CFO.

“Okay, Iffclay Axterbay,” Rice responded. “What did Oejay have to say?”

The talks had not progressed much in the weeks after the first meeting in Portland. What started as a discussion about vague cooperation had turned into a proposal for a formal joint venture. But that idea was floundering; there were too many technical problems, too many opportunities for each side to rip the other off. Writing an agreement that surmounted the mutual wariness seemed impossible.

Hirko wanted to get together again, Baxter explained, and make another stab at a deal. Rice agreed, and the negotiation teams scheduled a new meeting at a hotel in Laguna Niguel, California.

Once everyone arrived, the talks went round without resolution. After several hours of effort Hirko called for a break and left the room.

Baxter rubbed his face in frustration. “This is never going to work.”

“I know,” Rice replied.

A pause. “The only thing that’ll work is a full-out merger,” Baxter said. Rice nodded. “Let’s go ask Hirko what he thinks.” Baxter and Rice walked out of the conference room and found Hirko in the hallway.

“Look, Joe, I don’t think we’re going to get there on a joint venture,” Baxter said. “What about a merger?”

Hirko breathed in deep. “If anything is going to work,” he said, “it’s going to be a merger.”

Sherron Smith flipped through the pages of an investment presentation, her face tightening in disgust.

A former accountant, Smith had worked at Enron since October 1993, when she was hired to manage JEDI, Enron’s joint venture with Calpers. At first she had enjoyed Enron and her boss, Andy Fastow, who struck her as energetic and dynamic, with occasional touches of thoughtfulness. But over time, Fastow’s shortcomings as a manager had alienated her. That year he had even failed to show up at the semiannual Performance Review Committee meeting, where managers pushed to get bonuses and promotions for their staff. As a result, Smith had come away with a disappointing fourteen-thousand-dollar bonus and a simmering anger toward Fastow. She had even considered quitting.

Then, salvation. Fastow moved to retail. Rick Causey, Skilling’s favorite accountant, took over, and her world brightened. Causey was a friendly, doughy man who had already promised to get raises for Smith and her colleagues. The change rekindled her good feelings for Enron.

Her job, put simply, was to act as JEDI’s gatekeeper. Executives around Enron were always looking for JEDI to invest in their deals. But too many proposals were fanciful—badly thought out, badly structured, or just plain bad.

When deal makers made a sloppy presentation to Smith, she savaged them. She delighted in shocking people with uncomfortable truths—about anything at all, including herself. The knock on Smith was that she tried too hard to be one of the boys—so long as the boys were truck drivers and longshoremen. Her foul mouth at meetings was legendary, and this day, no one expected things to be any different.