Conspiracy of Fools (2 page)

In the Fort Worth Regional Office

In the Senate

In the House of Representatives

Staff, House Energy and Commerce Committee’s Subcommittee on Oversight and Investigations

Joint Energy Development Investments. A fund—jointly owned by Enron and the California Public Employees Retirement System, or Calpers—to invest in oil and gas properties.

Also formed between Enron and Calpers, for investments in a wider range of assets.

An off-books partnership controlled by an Enron executive. Used to purchase Calpers’s interest in JEDI to allow for the retirement system to invest in JEDI II.

Also known as LJM1. An investment fund managed by Enron’s chief financial officer. Used mainly to provide Enron with a protection against a decline in the price of its investment in a technology company, Rhythms NetConnections.

A far larger investment fund, also managed by Enron’s CFO. Used primarily to purchase investments and assets that Enron wanted to sell, and to provide cash to off-books entities that were also doing deals with the company.

A quartet of off-books entities which were, at one point, partly owned by LJM2. They were created for the purpose of providing Enron with a protection against losses from certain investments in other companies and assets.

The code name for a deal involving the sale by Enron of a portion of its video-on-demand business, formed in a joint venture with Blockbuster. Again, the sale was to an off-books entity created by the company.

OCTOBER 24, 2001—HOUSTON, TEXAS

Ken Lay settled into his black Mercedes 600 SL, easing out of his reserved parking space at the Huntingdon condominiums. From the lot’s entrance, he turned right onto Kirby Drive, the tree-lined road that served as a main thoroughfare through River Oaks, Houston’s wealthiest and most prestigious neighborhood.

The eight-year-old convertible cruised past the mansions bordering the street, homes that testified to the financial success of the city’s oilmen and corporate barons. Many estates peeked out from behind manicured shrubs and wrought-iron gates, or were far from the road on a ridge sloping down to the Buffalo Bayou. But Lay made no effort to peer beyond those veils of privacy. As Houston’s most influential businessman, he had already been welcomed in most every River Oaks mansion that might interest him.

The neighborhood’s elegance melted into Allen Parkway, a winding stretch of road that offered the most direct route downtown. Ahead, the morning sun was a blazing orange ball, rising behind a glittering glass-and-aluminum tower that defined the architectural rhythm of Houston’s skyline. It was the headquarters of Enron—
his
Enron—the once-obscure pipeline company that in a matter of years had been transformed into a politically connected energy colossus. Enron was now at the epicenter of Houston’s life, a ubiquitous player in everything from the city’s politics to its sports teams. But for locals, the sprawling giant would probably just always be known as Ken Lay’s company.

Lay lowered his car visor and glanced at the dashboard clock. Shortly before seven, early for his commute. But already he knew this would not be a normal day. His company was under attack; Lay was sure of it. Stock traders who had bet that Enron’s share price would fall were whispering rumors—no,
lies
—about his company.
The Wall Street Journal
was publishing a drumbeat of articles suggesting Enron had played games with its finances. It infuriated him.

They just don’t understand
.

By all rights, Lay shouldn’t even have been stuck with the mess. He had stepped down as chief executive the prior February, handing the reins to his handpicked successor, Jeffrey Skilling, the brains behind Enron’s spectacular growth. With market power came world influence, and—as Skilling’s profit machine rumbled along—Lay had emerged as a confidant of presidents, a media celebrity, and, at least in Houston, a household name. When Lay bowed out, he was celebrated as a man of vision who got things done. By year’s end, he was supposed to be ensconced in a new job at Kohlberg Kravis Roberts & Company, the buyout firm, basking in the glory of the empire he had left behind.

Then, with almost no warning, Skilling had up and resigned. Just like that, only months after winning the job. Lay had suspected for weeks that something was wrong with his successor; he had even quietly told a few Enron directors that Skilling seemed emotionally overwhelmed by his new responsibilities. Still, he had never imagined the man would just
leave
. The bombshell had left Lay with little choice. He contacted KKR’s principals, passing up their offer, and headed back to his old post.

But nothing was the same. Inside Enron, Skilling’s departure unleashed a torrent of anger and demands for change; outside, it fanned suspicions that there were some terrible secrets harbored within the company.

Rapidly, the press had lit into the company’s chief financial officer, Andrew Fastow, criticizing him for holding a second job as manager of investment funds that did deals with Enron. The allegations of a conflict of interest angered Lay; he had listened to Fastow reluctantly take on the additional responsibilities, just to benefit the company. And it had. The Fastow funds provided partners that knew Enron’s business, that could transact deals quickly. As far as Lay was concerned, Fastow had gone the extra mile for Enron and now was getting tarred for his loyalty.

We had every protection in place. We disclosed it all. They just don’t understand
. Lay turned in to the Allen Center Garage, parking one space from the walkway to the Enron building. He hurried to the company’s sleek metallic lobby, approaching a security checkpoint installed after the September 11 attacks. Holding up a magnetic card, he hesitated until the green light flashed, and then pushed past to the elevator.

The huge, mahogany-paneled reception area on the fiftieth floor was quiet and empty. Lay strode through, past a multicolored statue of an elephant colleagues had acquired on one of their many trips to India. Using a card key, he released an electronic lock and pushed open the heavy wooden door to the executive offices. He saw Rosalee Fleming, his assistant, busy at her desk.

“Morning, Rosie,” Lay said.

“Good morning, Ken. Andy Fastow called a few minutes ago. He said that he needs to meet with you urgently.”

“All right. Let him know I’m here.”

Lay slipped off his suit jacket as he walked into his office. He pressed a panel in the wall, popping open a hidden closet, where he hung the jacket. Lay pulled out his chair, but before he could sit, Fastow appeared in the doorway.

“Good morning, Andy,” Lay said. Fastow nodded. “We need to talk, Ken.”

“Well, come in. Sit down.”

Fastow shuffled toward a circular conference table bolted to the office floor. Lay reached inside his desk drawer and touched a button, sending a radio signal across the room to a release in the door. It shut automatically.

As Lay took his seat, he glanced across the table. Fastow looked awful, showing the strains of the last few days. Usually, he was neatly coiffed, everything about him fresh and tailored. But today his face sagged, his brow furrowed. He looked as if he hadn’t slept most of the night.

“I’ve got some information I need to share with you,” Fastow said. “Last night Ben Glisan met with some of the bankers, and they told him that they couldn’t proceed with a loan to us so long as I was chief financial officer.”

That was grim news. Glisan, Enron’s young treasurer, was a devotee of Fastow. If he couldn’t persuade the bankers to do business with the man, no one could.

It was a difficult moment. Lay had been fighting for days to keep Fastow in his job, fending off efforts by the company’s new president, Greg Whalley, to oust him. Lay respected Fastow, and the board almost revered him; he couldn’t just fire his CFO because of a few nasty newspaper articles. But this was different. If bankers wouldn’t do business with him, Enron itself was in peril.

“You know, Andy, we talked about this possibility,” Lay said. “Certainly the board and I have been very supportive of you, both publicly and privately. But we’ve also said that if you ever lost the confidence of the financial community, we would have to rethink the whole thing.”

Fastow nodded, his eyes downcast.

“So I need to call a board meeting and see what they think we ought to do,” Lay said. “I’ll do that as soon as I can, because, obviously, we’ve got a lot going on.”

Fastow was silent. “Well,” he said finally, standing as he spoke, “thank you for meeting with me, Ken.”

It pained Lay to watch Fastow trudge out of the room, back to a desk they
both knew he would soon be vacating. Lay was certain that in no time, the squall about Enron would pass, but by then, it would be too late to save the career of this talented young executive. Fastow would be a victim. It just wasn’t right.

Lay had no idea that Fastow had failed to tell him the most devastating news of all—news he wouldn’t learn for years to come.

At almost that very moment across town, Ray Bowen was standing naked in his upstairs bathroom, checking the shower temperature with his hand. As he lifted his foot to step inside, the telephone rang. In the bedroom, his wife answered the line and put the call on hold. “Hey, Ray!” she called. “It’s Jeff!”

This couldn’t be good, not at this hour. His boss, Jeff McMahon, head of Enron’s paper-market business, would only call this early with a problem. And Bowen knew Enron’s recent chaos had created plenty of those. Wrapping a towel around his waist, he stepped into a toilet room where he had installed a Panasonic phone system.

“Hey, Jeff. What’s up?”

“It’s bad, man,” McMahon said. “The shit really hit the fan last night.”

Bowen listened in disbelief as McMahon told the ugly story. Enron had reached the precipice of collapse. The markets for the billions of dollars in day-to-day credit that large companies need—to pay salaries, to meet obligations to vendors, to keep
the lights
on—had shut out Enron. The institutions that ponied up the cash in short-term loans known as commercial paper no longer believed the company was worth the risk. The marketplace—that living, breathing entity whose judgment its executives hailed as infallible—was passing its harsh, unemotional verdict: Enron could not be trusted to survive the week.

“How … how can that be?” Bowen stuttered.

“Don’t know, but that’s what I’m hearing.”

McMahon paused. “I think that’s it,” he said. “I think they’re going to fire Andy today.”

No kidding
. Fastow had so mismanaged the books that nobody trusted Enron with an overnight loan? Of course he was gone. And if Lay let sentimentality get in the way of that obvious decision, then Whalley would pull the trigger.

“So what’s the plan?” Bowen asked.

“I need your help. Whalley wants you and me to come in and help him figure it out. Can you be there by eight?”

Fifty-five minutes later, McMahon was in the offices of his division on the
fourth floor of Enron’s new building when he saw Bowen hurrying toward him.

“What do you think?” McMahon called out.

“We’ve gotta draw down the revolvers right away,” Bowen replied brusquely.

The revolvers
. The billions of dollars in standing lines of credit that Enron had available from its major banks. That was disaster money, the financial equivalent of a nuclear fallout shelter. And Enron needed it now.

The two men hustled to the fiftieth floor of the main Enron building. They headed to Skilling’s old office, where Whalley had recently set up shop. A few others were already gathered there. Whalley’s door was closed, and his secretary told the men they needed to wait.

“Greg’s meeting with Andy Fastow,” she said.

Minutes passed. Finally the doorknob clicked and Fastow emerged, flashing a nervous smile. Whalley pushed past and took command.