Conspiracy of Fools (30 page)

In Kinder’s last months, he had served as his own CFO, but now Enron had no one in the position. The CFO managed the balance sheet, made sure the credit rating stayed high, lined up cash for operations, and dealt with accounting. Fastow had picked up most of those responsibilities, with Causey taking the accounting role. But truthfully, Fastow was a deal guy. Neither Lay nor Skilling thought he had the chops to be CFO. So Enron had hired a headhunting firm, Spencer Stuart, to find someone qualified.

So far, none of the candidates had wowed Skilling. But Denise Boutross McGlone, the woman he was meeting today, was supposed to be something special. She was CFO at Sallie Mae, the quasi-governmental body in the education-loan business. McGlone knew complex financings and could oversee a multibillion-dollar portfolio, all talents Enron needed.

Skilling reached 1775 I Street and went up to suite 800, Enron’s Washington headquarters. After greeting everyone, he was escorted to an office.
Soon after, McGlone arrived. She was all energy, with a direct, self-confident manner.

“I really appreciate you coming here,” Skilling said. “Were you surprised by the call?”

“No, not surprised,” McGlone said as she sat. “I’ve heard of Enron and what it does. Seems pretty impressive.”

They spoke for forty-five minutes. McGlone hit Skilling with rapid-fire, insightful questions. Skilling was impressed; she had clearly done her homework.

Gee, this is fun
, Skilling thought. “All right,” he said. “Do you think you have an interest in Enron?”

McGlone nodded. “Yes. I’m not sure Houston is a good fit, but the company sounds very interesting.”

“Well, listen, I’m going to talk to Ken Lay. We’ll get back to you and let you know how we’re going to proceed.”

“Fine,” she said, standing. “Thank you very much for meeting with me.”

Skilling watched McGlone make her exit. In a flash he was on the phone, dialing Lay’s number. He wanted to let him know that Enron may have found its next CFO.

Fastow was stunned.
Enron’s credit rating was about to be downgraded
.

This was the worst possible timing. He knew Skilling and Lay were hunting for a CFO, and he desperately wanted the job. If Enron’s credit rating dropped from investment grade to near junk—if it was deemed less worthy of lenders’ trust—that hope would die. Enron would be charged more for loans, its profits would fall, other traders would be less likely to do business. Fastow was sure to be blamed.

“Holy shit,” he told a colleague. “I’m about to be CFO and we’re about to be downgraded.
That
doesn’t work.”

Fastow fumed, blaming the problem on Bill Gathmann, Enron’s treasurer. That work, he thought, was the boring stuff—managing cash, maintaining bank relations, visiting rating agencies. Careers were made on high-flying deals, not by babysitting bean counters. So he left those details to Gathmann. Now that decision could cost him the promotion.

Fastow found out that Gathmann had taken numbers to New York before they had been prettied up. All the tweaks—the deals that made things look better—were missing. Looking at the raw numbers, Moody’s Investors Service had gone berserk; Enron, they concluded, wasn’t generating enough cash to pay the interest on its debt.

Enron had just twenty-four hours, then Moody’s would announce its downgrade. Fastow called an emergency meeting of his best credit people, trying to forestall disaster. He looked around the room desperately.

“Listen,” he said, “I’m not a good credit guy. I don’t know how to do this.” Pages of raw financial data were brought in and passed around; it was the first time most people in the room had seen the numbers. Enron had a lot more debt than it reported. Masking borrowings could be done legally, but Enron seemed reckless in its use of those methods. It was almost as if Fastow believed off-balance-sheet debt didn’t exist. But it did, and there was too much of it, more than Enron’s cash flow could comfortably support. Now that the numbers had been laid out so clearly for Moody’s, the problem had to be fixed.

Ray Bowen went to the whiteboard and gave Fastow a quick lesson on credit. At each step, Fastow asked questions about fundamental issues.
Is this guy for real?
Bowen wondered. How could someone making a play for the CFO job have such a fuzzy understanding of the basics? It was like teaching introductory swimming to the new lifeguard.

Bowen cut to the chase.

“Andy,” he said, “it probably wouldn’t hurt to put in more equity.” Enron needed to sell stock and use the money raised to pay down debt. This wasn’t rocket science.

Still, Fastow reacted as if some deep secret had been revealed. “Yeah,” he said. “But Skilling’s never going to issue equity at this point.”

Bowen laughed. “He will if he wants to keep this company’s credit rating at investment grade.”

Fastow hatched a plan. Gathmann would be blamed. Enron would commit to bringing in a new treasurer and raising more equity. That day, Fastow made the pitch, and Moody’s bought it. With some fast work, he had sidestepped the event that should have wrecked his career.

The half-dozen executives and accountants from Andersen and Enron laughed and joked as they played a round of golf on a private Arizona course. Every year they put together a game at some of the better Arizona courses when Enron held its management conference there. But during this round there was more than usual on the agenda.

“Listen,” Rick Causey told the assembled Andersen accountants, “we need to talk about Carl Bass.”

Days later, Bass looked up at his colleague Tom Bauer, disbelief etched on his face. “They think I’m too
rule-oriented?” he
repeated. “Tom, I’m an accountant!”

Bauer was sympathetic. None of this was his idea. Causey and the accountants in Enron’s trading group wanted Bass gone. Bauer had been selected to let him know.

“I understand, Carl,” he said. “But they’ve got this perception.” Enron thought Bass didn’t try hard to come up with creative answers, Bauer said. So Andersen was going to move him out of trading and over to international.

Bass’s face was tight. Not long ago, he had fought to stop Enron from booking fifty-one million dollars in bogus earnings, and they’d run him over. Now they were pushing him aside.

“This is wrong,” he muttered.

Fastow’s eyes narrowed as he stared at Skilling.

“Are you fucking kidding me?” he barked.

“Now, Andy—”

“No!” Fastow said, holding up his hands. “No.”

He shook his head. “I can’t fucking believe this.”

It was 1:30 in the afternoon on March 2. The front-runner for the CFO job, Denise McGlone, was flying to Houston the next day to meet with senior management. Among them was Fastow, and Skilling had just let him know.

“Listen, Andy—” Skilling began.

“Why wouldn’t I be CFO?” Fastow interrupted. “Is there anything I haven’t achieved that I should have?”

“Andy, look, it’s the obligation of the board to turn over every stone. I think you have a good shot at being CFO, but we need to look at the alternatives.”

Fastow looked away. “Goddamn it.”

His jaw clenched. “Fine,” he said. “I’ll do what you want.”

Then he walked out.

The next morning at eight, Skilling turned his gray Mercedes 500 SE onto the drive of the Four Seasons Hotel downtown. McGlone, waiting just outside, climbed in.

“Hey, Denise, good morning!” Skilling said.

“Morning, Jeff,” McGlone responded.

Skilling turned left onto Lamar Street, heading toward Enron’s offices. Already something didn’t feel right. McGlone was reserved, almost pensive. Maybe, Skilling thought, she was just nervous about the day’s meetings.

“Have a good trip down?” Skilling asked.

“Oh yes, it was fine.”

Silence. “Okay, well, you’ll be starting out the morning meeting with Rick Causey,” Skilling began.

The rest of the day would be busy, with McGlone visiting a new department about every hour. Then, for dinner, Skilling and Lay planned to take her and her husband to a Houston hot spot called Café Annie.

Skilling parked at the Allen Center Garage and escorted McGlone over to the Enron building.

“How can you do this, Jeff?” Fastow demanded. “I trusted you. I thought we were in this business together!”

It was ten o’clock that morning. Fastow had made a last-minute appointment with Skilling and now was almost pleading for the CFO job. This was a personal betrayal of Andy Fastow by Jeff Skilling, he said. How, he asked, could Skilling do it? Skilling listened, surprised at the desperation. Fastow didn’t seem the type to beg for a job.

After Fastow said his piece, Skilling went to find Lay. Weeks before, he had told Lay that Fastow would never leave Enron if he was passed over. Now he wasn’t so sure.

Word came back fast on Denise McGlone:
huh?

Somehow, the dynamo that Skilling—and, after him, Lay—had met on the East Coast had become a milquetoast in Houston. Causey and Fastow came away believing Enron intimidated her—or at least they told Skilling that.

By early afternoon, when Skilling met with her again, McGlone had already fallen back in the pack as far as he was concerned. She seemed subdued; clearly, something about Enron was bothering her. After she left for her next meeting, he went for another visit with Lay.

“Boy,” Skilling said, dropping in a chair, “that was just a totally different Denise than I saw in Washington.”

Lay nodded. “Yeah, me, too. Totally different”

This wasn’t going to work, they agreed. They needed somebody dynamic. There was still their number-two candidate—Ron Hulme, a McKinsey consultant. But if Hulme said no, Fastow was the only choice left.

Two days later, March 5, Skilling was leafing through a document on his desk. It was a deal-approval sheet—or DASH—seeking authorization for executives in Portland to make a relatively small, ten-million-dollar investment in an Internet start-up called Rhythms NetConnections.

For its money, Enron would own ten percent of Rhythms, a high-speed Internet data-transport company. The return was estimated at about 19 percent
per year, with Enron holding the stake until 2003. Skilling flipped to the back. A sticker marked where he needed to sign. His subordinates had already given approvals. Not a lot at risk here. Skilling signed his name and wrote in the date.

The next bomb was ticking.

By early the next week, things had gotten tight. Fastow was grumbling about quitting. Skilling was preparing to take his kids on a vacation. He wanted the CFO search resolved. He talked it over with Lay and put together a plan. Skilling called up Hulme and asked him to come over.

Hulme arrived that afternoon in Skilling’s office. The time had come for an answer, Skilling said.

“Look, I’m leaving soon for spring break with the kids, and Andy’s about to quit,” Skilling said. “If you want the CFO job, it’s yours. If not, I’ve gotta give it to Andy or else I’m gonna lose the guy.”

“Well, Jeff,” Hulme said, “I appreciate the offer …”

That was all Skilling needed to hear. Hulme didn’t want it. Fastow would be Enron’s CFO. The decision was made.

That evening, Fastow picked up the receiver on his home phone. “Hello?”

“Andy,” he heard Skilling say. “Ken, I, and the board would like to offer you the job as CFO of Enron.”

Fastow sighed in relief as the news sank in.

“Jeff,” he said, “I’d be proud to accept the job.”

The next morning, Lay was in his office, getting ready to leave for a ten o’clock flight. Fastow appeared, tapping on the door. Lay broke into a smile and walked toward him.

“Andy!” he said.

Fastow beamed, shaking Lay’s hand. “Ken,” he said, “I just wanted to thank you and the board for placing so much confidence in me. I’m not going to disappoint you.”

“Well, Andy, we became convinced after looking at the other candidates that you were the best choice. I’m sure you’ll do a great job, and I’m delighted it worked out.”

Lay promised that he would put out an announcement the following day, making everything official. Causey, of course, would continue handling the accounting side. And Skilling had decided to name Rick Buy as chief risk officer. All three announcements, Lay said, would be issued at the same time. Fastow thanked Lay again and left.

With that, the top financial job at one of the nation’s largest companies was in the hands of a criminal.

The e-mail hit the system at 5:30 the next afternoon.

“As Enron’s finance and capital related activities increase in complexity,” it began. Around the building, eyes zipped down computer screens. Fastow, CFO. Causey, top accounting guy. Buy, chief risk officer.

Back in finance, there were congratulations for Fastow. But when he wasn’t within earshot, the gossip took a sharp turn.
Andy Fastow? As CFO?
What was up with that?

Shirley Hudler, who worked on the JEDI partnership, was stunned. She had worked with CFOs at other companies, and Fastow was no CFO. He was a terrible manager. He wasn’t particularly smart. He didn’t know accounting, treasury operations, nothing. He had done some fancy structured transactions, but that made him a deal guy, not a CFO.

Then Hudler had a thought. Was this some sort of salvage operation to undo the damage to Fastow’s reputation from his retail flameout? Nothing else made any sense.

How else could they name someone so unqualified to such an important job?

Vince Kaminski stared at the e-mail on his computer screen. What were they thinking? Selecting Andy Fastow—
Andy Fastow!
—was bad enough. Still, there was only so much damage an incompetent CFO could inflict. But
Rick Buy as Enron’s new chief risk officer?

How could they name someone so unqualified to such an important job?

Kaminski, Enron’s top risk analyst, considered Buy a nice enough guy—but that was the problem. The chief risk officer had to go to the mat to stop bad ideas. That wasn’t Buy. He wasn’t confrontational, wouldn’t get in people’s faces. He’d already let a lot of lousy merchant investments slide by. He sure wasn’t going to grow a backbone now.

He didn’t even have the background for the job. An engineer by training, Buy was all about systems and organization. That was fine when he ran Enron’s credit analysis, assessing the finances of business partners. But that was arithmetic; risk analysis was calculus. Kaminski was sure this was a disaster in the making.