Conspiracy of Fools (71 page)

Fastow laughed nervously.

Then he moved on. He stopped mentioning Toyota.

Gradually, McLean forced Fastow to deal with her. His answers were all generalities, loaded with business-school buzzwords that might dazzle the local bridge club but weren’t going to sway sophisticated financial journalists.

As the story unfolded, the editors relaxed. Enron had been so insistent on meeting, they and McLean had feared she had missed something, some silver bullet that would kill the article’s thesis. But the more Fastow spoke, the less they worried. He didn’t marshal evidence to counter McLean’s point. He just argued that she was wrong. He wasn’t accomplishing anything. In fact, he was damaging his cause. To fly to New York to make such a feeble assault sure signaled a company desperate to keep its stock price up.

This story was going to run in the next issue. No doubt.

———

After a round of questions, McLean glanced at her notes. She had something else to ask.

“I read about the related-party transactions involving LJM Cayman,” she began. It was as if the quality of the air in the room changed. Fastow stiffened. The editors weren’t sure what this was about; McLean’s draft said nothing about any entity from the Caymans.

“One of our senior executives runs that fund,” Fastow replied. “It’s confidential who it is.”

Some photo editors came by and commandeered the conference room. The two sides moved the discussion to Impoco’s office. After two hours they were done; the mood lightened as the executives turned on some Texas charm.

The visitors gathered their things. Palmer and Koenig said their good-byes and headed toward the elevator. Fastow dawdled for a moment, then turned to look at McLean.

“I don’t care what you say about the company,” he said. “Just don’t make me look bad.”

CARL BASS SHIFTED HIS
feet nervously as he waited for an elevator on the ground floor of a Houston office building. It was March 2, a Friday, just weeks after he had been offered a new job to manage Andersen’s relationship with the SEC, a post that would have meant relocating to Chicago. Days before, he had finally declined, saying that he wanted to stay in Houston, handling accounting issues.

Then yesterday, another call. Gary Goolsby, a top partner in Houston, asked him to drop by. As Bass rode up, he couldn’t shake the feeling he was about to be ordered to Chicago. He stepped off on the thirteenth floor. Goolsby welcomed him warmly and whisked him to his office. There, his demeanor hardened, like a doctor about to deliver bad news.

“Carl, I’m going to tell you something, and I’m going to tell you straight up,” he said. “Enron has a big problem with you consulting on their engagement.”

Bass’s mouth fell. He wasn’t
on
the Enron engagement. He was with the Professional Standards Group, work that in theory made him anonymous to the outside world. How did Enron even know what he was doing?

“Who has a problem?” he asked.

“Causey in particular thinks you’re caustic and cynical toward their transactions. It’s a big client-relationship issue, and, long story short, we’re not going to let you consult on Enron transactions anymore.”

The demands to sideline Bass had been swirling for weeks, and Andersen had tried, timidly, to fight them. But even the appeal to Causey from Joseph Berardino, Andersen’s new chief executive, had been to no avail. So Andersen caved. Standing up to Enron wasn’t considered a plausible option; the deep-pocketed client could shift its consulting business at the drop of a hat, leaving Andersen only the low-paying audit work. That was a risk that the Andersen partners were simply unwilling to take.

Bass, however, was flabbergasted. To his way of thinking, clients couldn’t boss accountants around like this. Accounting judgments were based on the rules, not the person. Bending to Enron’s demands was sure to have a chilling
effect, maybe nudge Andersen partners to loosen up their interpretations. Then again, Bass figured that was what Enron wanted to achieve.

“Gary, I’m stunned,” Bass said. “If they don’t want me involved, that’s their call, I guess. But I can’t believe the firm is going along with this.”

“We’ve attempted to talk to them—”

“Gary, it shouldn’t be their call!” Bass retorted. “Them, of
all
clients. A high-risk, maximum-exposure client! And we’re letting them dictate to us what our quality-control procedures should be!”

Goolsby held up a hand. “Carl, I’m not telling you to quit. Maybe consider that SEC opportunity in Chicago.”

Bass said he would think about it. Then he left.

The next morning in Galveston, music filled the Moody Gardens coliseum as a group of young girls broke into a competitive dance routine. Two of Bass’s daughters were performing that day, and he had driven the family down the previous afternoon for what was supposed to be a time of fun.

But as he sat in the auditorium, Bass could only stew. Something had shattered for him. Andersen had a storied history, a tradition, and central to that was its unwavering integrity.
That
Andersen would never have allowed Enron to have its way like this. That Andersen was gone. The tradition was dead. It tore at Bass.

So be it. He would not be party to the collapse of values. He would not let a client decide his fate.
I’m just going to leave the group
, he thought.
Maybe leave the firm
.

One way or another, he had to do something.

In his home office the next afternoon, a Sunday, Bass switched on his laptop and connected to the Andersen network. He was scheduled to speak the next day with John Stewart, a top partner in the OSG, about Enron’s demand. But first Bass wanted to tell his side of the story.

He opened an e-mail, addressing it to Stewart. “I know you did not ask me for this,” he typed. “But I believe you should at least have a version of what I know about this Enron ‘thing’ with me.”

He recounted all of Enron’s questionable deals in December—Braveheart, Fishtail, and of course the absurd forty-five-day Raptor guarantees. His involvement in these had been limited to communications with the Andersen partners, who were obviously blaming the accounting judgments on
him
rather than presenting the decisions as the firm’s opinion.

“Once we conclude something, or render some advice, the engagement team should deliver that advice or conclusion as if it were their own,” Bass
wrote. “It is after all the engagement team’s responsibility to sign the opinion—not ours.”

He typed for almost an hour. He hit the “send” button shortly before seven that evening.

John Stewart was a gentle man, not easily prone to anger. But the Bass affair had thrown him into a fury—at Enron, to be sure, but also at Andersen. He arranged a meeting with a number of senior partners in Chicago.

“The behavior of the client in this instance has been unprofessional,” Stewart declared. “This should not have been allowed to happen.”

One senior partner, Larry Rieger, agreed to speak with David Duncan, but that went nowhere. Soon Stewart reached a new resolve. If Enron didn’t like what Carl Bass had to say, too bad. His was too fine a mind to ignore; Stewart was still going to consult him. But he’d do so on the sly, so that nobody at the company would know.

After months of work, Jordan Mintz had almost completed the memo summarizing his concerns about LJM. With a little more work, it would be ready for Causey and Buy.

First, he wanted to be sure his bosses knew what he was up to, so he forwarded a draft copy to Fastow. Then he briefed Derrick, the general counsel, as well as other Enron lawyers, telling them about his findings and promising to send them a copy of the final memo.

The writing was a measured, almost dry account of the LJM funds and the shortcomings Mintz had detected. Some dated back to problems McMahon had protested years before, like the fact that Enron allowed LJM staffers to work alongside the company’s own finance employees.

To fix the system, Mintz proposed an array of actions. More requirements that analysts explain
why
a deal was in the company’s interest. Better involvement by Skilling in reviewing transactions. And coordinated approval of deals by an in-house legal, accounting, and commercial staff.

On March 7, the day before Mintz planned to send out the final memo, he was working at his desk, trying to get out early for his son’s seventh birthday. Kopper appeared in his doorway. Before Mintz could say a word, Kopper stepped in, throwing Fastow’s copy of the memo at his desk.

“What are you trying to do?” Kopper snarled. “Shut us down?”

Kopper stormed away, leaving Mintz behind, feeling a shiver of self-satisfaction. His little missive had apparently drawn some blood.

———

That same day, Vince Kaminski sat in his office, reviewing a stunning document. It left no doubt that Enron’s finance division could well be spinning out of control.

The decision the previous year to have a team analyze Enron’s company-wide risk was paying off. This document—written by the team leaders, Kevin Kindall and Li Sun—established a strong case that Fastow’s off-books partnerships had created an uncontrolled, unseen threat to Enron’s survival. The work was based on limited information, and more research was needed. But this effort had been undertaken without any real budget. Pushing it to the next level required money—and cooperation from the finance group.

Kaminski needed to get this in front of the right people and win their support so Kindall could finish the job. He had little concern about whether his team would get what it needed. Anyone could see that their findings so far were just a preliminary sign of a very large, very ugly problem.

On March 9, Kaminski and his analytic team dropped by Ben Glisan’s office for their scheduled presentation. Glisan led the group down the hall, where everyone took a seat at a conference table. Kaminski launched the discussion with the history of the analytic team and the rationale behind conducting a company-wide risk analysis. Then he turned the floor over to Kevin Kindall.

Glancing down at his report, Kindall went through his analysis. It was calm and reasoned, but painted a graphic picture of a finance division out of its depth, taking risks it did not fully comprehend.

Global Finance—through its structured deals—had entered into repeated arrangements where purchasers of assets could force Enron to take them back through what were known as total-return swaps. But nobody had any idea what potential damage these arrangements might cause in the future. No one kept a book on the swaps; basically, Fastow and his crew had no clear idea of how many there were or of the terms that had been created for them.

Then there were guarantees to purchasers that were issued by the finance division; again, no one kept track of them. The best estimate was that the finance group had put out some twenty-seven hundred corporate guarantees, without assessing the associated risks. It was like a bad housekeeper sweeping dust under the rug and forgetting about it.

There was another problem spelled out by Kindall, one Kaminski considered an emergency issue: Enron, a Fortune 50 corporation, had no idea of its cash position on any given day. No system was in place to track daily inflows and outflows for the whole company. What did exist, Kindall said, resulted in untimely reports from divisions, forcing Enron to borrow money
unnecessarily, simply because no one knew if the cash was available. Disorganization was needlessly increasing Enron’s debt levels.

Still, the biggest risks were in the special-purpose vehicles, Kindall said, the off-books partnerships that had been the key to Fastow’s work.

“We weren’t able to gain access to a lot of information,” Kindall said. “But what we could review pointed to the existence of huge risk exposures that Enron simply hasn’t fully analyzed and does not understand.”

Just two off-books entities, Whitewing and Marlin, created enormous hazards. Because of their structure, underperforming assets that the entities had purchased could lead to future liabilities for Enron, Kindall said.

Plus, the deals had been structured with “trigger events” involving Enron’s share price and credit rating. Basically, to make the entities more attractive to outside investors, Fastow and his team had made commitments on behalf of the company—to issue stock, assume debt, or otherwise take on new obligations—if Enron’s stock price or credit rating sank.

Of course, that was exactly the time that Enron
shouldn’t
be taking on such commitments. Issuing more stock when the stock price was falling meant that the price could fall even
faster
. It was like striking an agreement to hose down a house with gasoline if a fire started. To make the original deal sweeter for outside investors, Fastow had created a structure that could push the company toward collapse as soon as trouble started.

Glisan listened silently. He wasn’t all that concerned about the triggers in Whitewing and Marlin. Finance used them all the time; even the Raptors had stock-price triggers. He knew all about them.

Kindall flipped the page of his presentation. “We’ve assessed the likelihood of hitting one of those triggers. For example, we have a five percent chance of a credit downgrade in the next twelve months.”

Five percent
. That struck Glisan as high.

“But you have to understand, these are just the triggers we have located,” Kindall said. “There appear to be other triggers embedded in other vehicles as well.”

Those were hidden in documents that Kindall’s team hadn’t been allowed to review. The triggers appeared to have been assembled without regard to each other. Ultimately, they could all be activated in tandem, since they were all based on the same two factors.

“It’s likely the occurrence of one trigger will push down the share price so far that we hit another one embedded in some other vehicle,” Kindall said.

He cleared his throat. Presenting doomsday scenarios was never easy. “In truth, it’s conceivable we could hit a cascading series of triggers, setting offa domino effect, where each trigger pushes down our stock price even more,”
he said. “That would result in a massive decrease in the share price and lower our bonds to a junk rating.”