Conspiracy of Fools (35 page)

Fifteen pages of resolutions were distributed. They included authorizations for Enron to sell debt, preferred stock, and other securities and changes to policies on corporate guarantees. The resolutions ranged over so many issues there wasn’t time to discuss every detail. Nothing was mentioned about a paragraph on page 14, giving authority to Enron’s CFO to issue guarantees of up to ten million dollars without approval.

No one knew that for years, Enron had struggled in its structured deals, trying to find investors willing to cough up far less than that amount. If Fastow could use an Enron guarantee—assuring potential investors who provided the three percent that they would get their money back—that hunt might not be so difficult anymore.

The directors had just handed Fastow a loaded pistol. It would not be long before he pulled the trigger.

Just past 2:15 on the afternoon of October 27, a yellow cab snaked through Park Avenue traffic in midtown Manhattan. In the back, Skilling sat beside Fastow, gazing through the car window at pedestrians. To his agitated mind, their faces were frozen in fear, dark circles defining their eyes. The elite of the financial world worked here, and Skilling thought they had good reason to be terrified.

A global economic depression was on the way; Skilling was sure of it. Russia had defaulted. The Asian financial crisis was still digging into world economies. The Fed had been forced to engineer a bailout of Long-Term Capital Management LP, a hedge fund, on concern its collapse would trigger a market meltdown. Skilling feared the gathering financial storm would swamp Enron itself. Banks were ruthlessly tightening credit. If they shut off the spigot to Enron, the consequences could be dire.

So he had ordered Fastow to fly to Paris, Düsseldorf, Brussels, and London, seeking reassurances from the banks. Now the time had come for meetings with Enron’s New York lenders, and Skilling wanted to attend these himself; any banks planning to call Enron’s loans would be more likely to listen to the company’s number two than to its CFO.

The taxi pulled in front of the fifty-three-story headquarters of Chase Manhattan Bank. Within minutes, Skilling and Fastow were upstairs, in an office near a trading floor. A short man with gray hair and a chunky gold ring on one finger bounded toward them. It was Jimmy Lee, Chase’s colorful chief of global investment banking.

“Gentlemen, good to see you,” he boomed.

After the pleasantries, Skilling got to the point.

“Listen, guys, I’ve got no illusions,” he said. “There’s probably a liquidity crunch on the way, and you might have to start making choices among your borrowers.”

Skilling braced himself, then asked the question. “So I need to know, if you have a problem, where does Enron stand? Will you continue to support us?”

Lee smiled. “Jeff, we like Enron,” he said. “This is exactly the kind of business we want to do long term.”

Skilling listened as other bankers in the room praised the company—and Fastow. He always kept them up on events, always gave them plenty of feedback. He made the bank comfortable.

Afterward, as the two Enron executives left the building, walking to Park Avenue, Skilling was exultant.
This
was how it was supposed to be; any doubts he had harbored about appointing Fastow as CFO evaporated.

“You know, Andy,” he said, “they could be putting the screws to us right now, and instead they’re telling us how much they want to work with us.”

Fastow nodded, smiling broadly.

“This is what makes the difference, Andy,” Skilling continued. “When times are tough, if we’re doing a good job with our bankers, that makes all the difference.”

Skilling slapped Fastow on the back. “Keep up the good work, man,” he said.

A week later, a group of Chase bankers held a lengthy meeting about Enron. There was a lot to talk about. The bank had committed $750 million in two credit lines to different Enron-related entities. They had made large commitments for the Elektro acquisition.

But some of the best deals weren’t quite so straightforward. For example,
in the past year, Chase had arranged what looked like $650 million in gas trades involving Enron and a Jersey company called Mahonia. But in reality, Mahonia was a front for Chase itself. No gas changed hands; money simply circled from Chase to Mahonia to Enron, then back again, with the equivalent of interest. The transactions were effectively loans dressed up to look like energy trades. That let Enron report the borrowings as cash flow and trading liabilities. Chase bankers knew Enron loved the deals, because they could use them to hide debt.

With all this business, Enron was at the top of the heap at Chase. The bank ranked corporate customers based on a color code, with “blue” clients having the richest potential for bringing in future fees. And Enron, the bankers agreed, was the bluest of the blue.

After the meeting wrapped up, one banker, Matt Lyness, approached George Serice, a colleague. Lyness was stunned by the numbers he just saw—in “Enron shock,” Serice joked. Chase couldn’t be the only bank putting together off-balance-sheet deals with Enron, Lyness mused to Serice.

“Just how much in off-balance-sheet commitments do these guys have?” he wondered.

Serice was coy. “You don’t want to know,” he replied.

Should Enron try to raise its triple-B-plus credit rating to an A level?

Skilling had pushed the question for years. For most companies the answer would be obvious: yes. An A rating was insurance against defections by trading partners in wobbly markets. Trading was Enron’s profit center. There was good reason to go all-out and protect the crown jewel.

But, somehow, nobody on the board seemed to worry much about Enron’s credit rating. The complacency rested on the assumption that Enron had grown so powerful in the energy markets that trading partners would have nowhere else to turn. Besides, raising the rating would have a price. Enron would have to cut billions in its debt levels and limit its financing choices. Its light-speed growth would slow. All to ward off some unseen, theoretical future threat. It was, some directors and managers thought, like spending millions of dollars for insurance against being hit by an asteroid.

Skilling raised the question with Pug Winokur.

“Tell me, Jeff,” Winokur responded, “what business are we losing because of our credit rating?”

Skilling shrugged. “None.”

“So what business would an A rating bring in?”

“None.”

Winokur smiled. “So why do we need it?”

The logic seemed strong. It wasn’t like Enron was in danger. Skilling dropped the idea.

Ken Rice walked briskly into a conference room down from his office. Kevin Hannon, his co-chief executive in Enron’s wholesale-trading division, was there waiting.

The two men were getting together for the task that everybody hated—putting together their budget for the coming year, reporting not only current performance but projected profits for 1999. And there was no doubt that whatever numbers they wrote down, they had to be larger than the ones reported this year. That’s what Enron told Wall Street was coming, and that’s what wholesale trading had to deliver.

The past year’s performance was not an issue. By any measure, it had been spectacular—almost 50 percent higher, before interest and taxes, than in 1997. The problem, as always: what to do for an encore?

Rice sighed. “Man, this is gonna be hard. How the hell are we gonna make earnings next year?”

Both Rice and Hannon were already familiar with the tyranny of Enron’s mark-to-market accounting. They called it “the treadmill,” and each year it just got steeper and steeper. No matter the division’s performance, once January rolled around, the earnings cupboard would be empty. All the cash coming in for the next several decades on energy contracts had already been eaten up, reported as current profits.

Maybe it was time to break out the idea they had been tooling around with for months: using the fledgling Portland telecom business—now called Enron Communications—to trade Internet bandwidth like a commodity. The idea was simple: Couldn’t Enron’s West Coast network swap broadband time and access with a network in the East? Then it could transform a regional network into a national business. New markets meant big profits. And no potential market was bigger than the one for the Internet.

Rice looked up from the paperwork. “Kevin, it’s time for us to get serious with what we’re going to do next.”

Hannon stared at Rice evenly. “Bandwidth trading?”

“Yup. Gotta get serious.”

Thirty million dollars
.

For Rex Shelby, the number seemed beyond comprehension. Enron Communications wanted to pay thirty million for his tiny, eight-person Houston company, Modulus Technologies, and its cutting-edge software
called InterAgent—sort of a tool kit that programmers used to link computers and operating systems.

Modulus had attracted interest from an industry giant, Sun Microsystems. Then a friend, Scott Yeager from Enron, had dangled greater opportunities before Shelby: not just the thirty million, but the prospect of going public, making Shelby and other shareholders millions more. Sun executives were stunned; they were offering less than fifteen million dollars and thought
that
was a stretch. They walked away.

Even so, Shelby wasn’t dazzled by the prospect of vast riches. He drove an old Toyota. He ignored friends’ advice on how to minimize his income taxes. What enthralled him was the chance that Enron would allow him to make his mark on the high-tech world by letting him pursue a dream.

Joe Hirko and Yeager, both with Enron Communications, had told him they wanted to build an advanced, software-driven “intelligent” network, providing more options and features than were usually available on the Internet. It would be a bandwidth-on-demand method for delivering data, video, whatever could be carried over the network. Inter Agent, they said, would be key to the vision.

Building the network, of course, would involve a lot of cash. But at the same time, a separate part of Enron was pursuing another strategy—bandwidth trading. Shelby had no idea that even before he started, Enron Communications was already going in two different directions.

At noon on November 20, a Friday, executives swarmed about a conference room on the forty-ninth floor of the Enron building. On one side of the giant table sat executives from international; on the other were corporate officers, including Skilling and Causey. The meeting had been called for international to lay out its performance for the past year and its expectations for the future.

Skilling reviewed the bound report in front of him with growing anger. Despite his enthusiastic comments to the board about Enron’s inroads overseas, the results were disappointing. Something had to change.

This, he knew, would be his last battle with Rebecca Mark—at least over international. Now that she was in charge of Azurix, this meeting would be her swan song with her old division. It wasn’t going to be pleasant.

Skilling tossed the latest report on the table.

“We’ve got to get these returns up,” he snapped.

“Our returns are excellent,” Mark shot back.

Skilling gaped at her.
Is she on the same planet?

“What are you talking about, Rebecca? We’ve got billions invested, and
you guys are pulling in like sixty million dollars for the quarter, and even that’s a stretch.”

“All our projects make money,” Mark replied simply.

Skilling tossed up his hands. “Come on, Rebecca! What are you talking about! Look at the Dominican Republic!”

There wasn’t, he figured, much argument there. That project destroyed a hotel. The Dominicans stopped paying. On any level, the Dominican Republic was a disaster.

Mark didn’t bend. The returns there were strong.

Skilling blinked. “How the hell do you figure that?”

“Cash in, cash out, we got all our money out. We got millions of dollars in cash out from fees.”

“Rebecca,” Skilling said, “we still have to pay back the financing. We can’t just count money we put in and money we took out. We’ve gotta pay it all back!”

This is beyond ridiculous
, Skilling thought. Here they were, the chief operating officer and the vice chairman of Enron, and they didn’t have anything close to the same idea about how to calculate investment returns.

McMahon glanced up from his desk when he heard the tapping on his open door. It was Bill Brown, one of the division’s better deal guys. McMahon invited him in.

Brown hesitated. “Uh, no. Can we go to your conference room? I’ve got a problem I need to discuss.”

McMahon pushed back from his desk, following Brown next door. The conference room was one of the few spaces on the floor without a glass wall. Apparently, Brown didn’t want anyone to see this meeting taking place.

McMahon flopped into a chair. “Okay, what’s up?”

“We need to make a change in JEDI,” Brown started.

McMahon couldn’t take it all in. Something about changing the division of cash flow out of JEDI. There were going to be some fees paid to Enron’s partner in JEDI.

“So you know Calpers was bought out by Chewco—”

McMahon interrupted. “No, I don’t know anything about that. Remember, I’ve been in London.”

“Oh, okay,” Brown replied, walking over to the whiteboard. “Let me draw the structure for you.”

McMahon watched, mesmerized, as Brown sketched boxes within boxes and lines.
What the hell is that?
he wondered.

Brown pointed at the boxes, explaining how each fit in the deal. Then he tapped a small box at the bottom. “This is where the equity ownership of Chewco is,” he said. “That’s Bill Dodson.”

McMahon said nothing for a second. “Okay.”

“You know who Bill Dodson is?”

Some wealthy investor?
“Never heard of him.”

Brown set down the marker, fixing McMahon with a look.

“He’s Michael Kopper’s domestic partner.”

It was as if all the air had been sucked out of the room. McMahon couldn’t have heard that right. “Michael Kopper?” he asked.

“Yeah.”

A pause.
“Our
Michael Kopper?” Brown nodded.