Conspiracy of Fools (72 page)

Everyone knew what that meant. Enron, as a massive trader, could not survive if its credit rating fell below investment grade to junk status. Other traders would shut the company out of the market, fearing it lacked the financial wherewithal to stand behind its commitments.

The Raptors only increased the danger level, Kindall said. He focused on Raptor I. “Already there are unrealized losses totaling hundreds of millions of dollars in Raptor. It’s conceivable that just the disclosure of those kinds of unrealized losses may force our stock price and credit rating down to an extent that we hit one of the trigger events and set off the domino effect.”

Kaminski spoke up. His group needed a budget to finish its project, to identify the full scale of the threat. Much work remained to be done: assembling a complete list of
all
the off-books entities, calculating the risks they contained, and creating a forecast of expected liabilities.

Kindall agreed. “We need to take each off-book vehicle and closely examine all of the assets in them.”

He paused. “Once we have that information, we would then be able to estimate the probability of ruin.”

It was all there.

In a single stroke, Kevin Kindall—an inconspicuous mid-level analyst relying on scraps of data—had exposed the financial rot eating away at Enron.

It had come to this: Enron, the supposed corporate success story of the last decade, had ignored—no,
disdained
—the basics of business, allowing them to slip away in its single-minded pursuit of profit. To executives richly rewarded for each newfangled deal, cash management was boring, not the cutting-edge stuff that let Enron be
Enron
. Closely tracking exposures was seen as an expense, not a moneymaker. The workaday business of business just didn’t have the kind of sizzle that won plaudits and praise. Buying insurance? A monkey could do that.

That was the culture that had flared in the high-money days of the 1990s and had since spread through Enron like wildfire. Now, with eerie precision, Kindall had predicted the scenario that would ravage the company in just seven short months. The disclosure of the Raptor losses. A market shock. A cascading collapse as Enron’s stock price blew through one trigger after another, pushing the company toward its ultimate demise.

It was as if an unknown engineer at the White Star Line had laid out the dangers of icebergs to the
Titanic
months before the great ship’s ill-fated voyage. There was still time. Changes could be made, disaster averted. The
survival of Enron depended on the response of Ben Glisan, a man whose secret million-dollar profit from a partnership gave him plenty of reason to oppose letting anyone look too closely at Fastow’s dealings.

As Kindall wrapped up his presentation, Glisan skimmed the last two pages of the written report. The analyst was explaining how the recent
Fortune
magazine article had spelled out a series of dismal statistics for the company, which would be even worse if the “hidden Enron” in all of the off-books partnerships were included.

Glisan flipped the pages closed. “Well, I appreciate all the work that went into this,” he said. “But there really isn’t anything to worry about.”

Nothing to worry about?
Kaminski bridled at the brush-off. Kindall’s analysis portrayed a company that could be on the precipice, and simply not have the data to be aware of it. This might be a matter of life and death.

“Ben,” Kaminski said, “we can’t know that without conducting a full analysis.”

Glisan smiled. “Vince, I was involved in designing almost all of these vehicles,” he said. “We know what the risks are. It’s not an issue.”

Kaminski pressed his point; more study was needed, he insisted. Glisan raised his hands, relenting a bit.

“All right, Vince, I hear you,” he said. “I’ll go through this again and get back to you.”

The next morning at eleven, Glisan—now Enron’s only senior executive with the knowledge of the potential debacle the company faced—boarded a Continental Airlines flight with his family for a weeklong ski trip to Beaver Creek, Colorado, where they would be staying at the luxurious Villa Montane Townhomes. There he could relax, hit the slopes, maybe forget about work for a while.

Glisan never bothered to get back to Kaminski and Kindall about their analysis. And he also neglected to tell Lay, Skilling, or any of Enron’s directors about the terrifying warning he had just received.

Enron’s deal with Blockbuster was dead.

The skirmishes of the last few months had escalated into all-out warfare. Blockbuster complained that Enron had failed to provide the technology and access to customers that it had promised; Enron countered that Blockbuster wasn’t delivering quality content. By March, the recent contractual agreement forbidding either side from walking away had expired, and both were ready to call it quits.

In the days before the deal was called off, Lay was briefed on the troubled arrangement by David Cox, the primary negotiator. The movies secured by Blockbuster had been terrible, he said—lowbrow teen sex romps like
Porky’s 3
and a bunch of how- to videos. As Cox described it, the celebrated Blockbuster relationship with movie studios was a bust. As the biggest player in video rentals, it had used its leverage to extract big studio concessions for its retail stores. The studios weren’t about to help Blockbuster build another business using their content, and several studio executives had quietly let Enron know that.

Lay listened with dismay. After all, the entire basis of the agreement with Blockbuster had been its supposed Hollywood contacts. But apparently no one from Enron had bothered to check by calling the studios. It was as if this twenty-year contract had been entered into on the fly.

Still, Cox was quick to assure Lay that all was not lost. Enron, he said, was developing its own Hollywood contacts. It would all work out in the end.

Perhaps. But that prospect didn’t change the fact that Enron’s twenty-year contract with Blockbuster would soon be terminated, just eight months after it was signed. Now its video-on-demand business would have no business partner, little content, and few customers. Yet, because of Project Braveheart, Enron would still have what really mattered to its executives: more than $111 million in reported revenues, enough for the broadband division to reach its financial targets.

The morning after the Blockbuster deal was canceled, Carl Bass was at his home office, surfing the Internet. He noticed a Reuters report on a news Web page.

“Blockbuster, Enron Broadband End Video-on-Demand Deal,” it read. He clicked on the story.

This could be bad. Bass knew that Enron had reported huge revenues from Braveheart, already a shaky deal. Not even Enron could argue a business with a name-brand partner was worth the same once the joint venture ended. Bass opened an e-mail and addressed it to John Stewart. He pasted a copy of the Reuters article in it, then typed a message: “I do not know if you knew of this yet.”

Stewart was on his computer at that moment and opened Bass’s e-mail. The Reuters report was disturbing, given the revenues Enron reported from Braveheart. In his reply, he typed that this was news to him.

“So what happens to the joint venture and the part that was securitized through an SPE to produce a material gain?” he typed.

———

That’s the sixty-four-dollar question
, Bass thought.

He hit the “reply” button. “One would think (no direct knowledge since my phone no longer takes their calls) that there should be a loss reported,” he typed. “The ‘venture’ has now lost its value.”

A loss would never be taken. The collapse of the Blockbuster relationship, Enron executives argued, was a good thing. Its partner’s dicey relationship with movie studios had impeded the joint venture’s success. With Blockbuster out of the way, Enron was sure to sign the studios up even faster. Why, executives enthused, with Enron now fully in charge, Braveheart might even be worth
more
, not less, than was originally projected.

A week had passed, and Mintz still hadn’t heard back about his LJM memo. He asked his secretary to set up a meeting with Causey and Buy, and they agreed to get together a few days later. At the appointed time, Mintz arrived at Causey’s office. Buy showed up soon after, and the three took seats at the circular conference table. Mintz placed a copy of his memo on the table in front of him.

“Okay, Jordan,” Causey said, “it’s your meeting. What’s up?”

“Well, I wanted to find out what you guys are thinking about the memo,” Mintz said.

Blank stares. “What memo?” Causey asked.

Mintz felt himself deflating. They never read it.

“I wrote a memo about the policies and procedures on LJM and how they weren’t being followed,” Mintz said. “I included recommendations on how to fix the problems.”

Causey closed his eyes and nodded. “Oh, yeah.”

He stood and walked over to his desk, riffling through piles of papers. Buy looked evenly at Mintz.

“I didn’t bring my copy with me,” he said.

Causey started walking back to the table. “I can’t lay my hands on it right now,” he said.

Keeping up a tough front, Mintz suggested that he have Causey’s secretary run the copy he had brought through the Xerox machine. A fine idea, Causey and Buy agreed. Minutes later, everyone had a copy of the memo. Causey and Buy leafed through it. Their faces gave no sign of recognition.

“How do you want me to proceed?” Mintz asked, trying to end the awkwardness of the moment. “Should I just go through it page by page?”

Absolutely, they replied. Slowly, Mintz reviewed his concerns and recommendations. Causey and Buy repeatedly muttered words of approval, then encouraged Mintz to move on to the next topic. Mintz reached the last page.

“Now we have this screwed-up situation where these LJM people are on the twentieth floor,” he said. “And I want to be sure I have your support in getting them moved out.”

No question, they said. Mintz should get it started. They were behind him all the way.

Mintz was back in his office about ten minutes later. He slowly closed the door and walked to his credenza. He placed his copy of the memo there and just stared at it.

They hadn’t read the memo. Even when they heard about it, they could barely disguise their indifference. He had hoped they would be so outraged that they would set things straight. Instead, they had just patted him on the back, wishing him good luck in taking on his boss.

What a bunch of pussies
, Mintz thought.
I can’t believe these guys are senior executives with this company
.

Riding an Enron elevator, Skilling glanced at one of the television screens embedded in the wall. The stock price flashed by and he almost winced. Below fifty-six dollars a share.

Just last August, Enron’s stock had hit an all-time high of more than ninety dollars a share. It had fallen steadily since. And today, March 21, it would hit a new fifty-two-week low.

No doubt, the 1990s were over. In just the last eight weeks, the value of telecommunications stocks had plunged—Level 3, Global Crossing, all of them—and a vicious cycle had begun. Many of those high-tech companies had financed their operations by selling stock; now, with no takers, the prospect of their collapse loomed large.

Enron was being hit every which way. The market knew about its India troubles, making investors skittish. That
Fortune
article—
that
Fortune
article!
—had started raising questions about the quality of its earnings.

Now the high-tech debacle was draining its shares of the value from Broadband. But as storm clouds gathered, Skilling put on a happy face. The shakeout was a good thing, he insisted, since less competition meant lower prices for network access. It also meant fewer businesses to trade with, but Skilling expressed no worries about that.

Still, there was another element to the stock-price collapse in Skilling’s mind. The real troubles had started about the same time that Lay was announcing his plans to leave. Each day’s new drubbing struck Skilling as the market’s vote on his elevation. Investors apparently wanted Lay, not him. They were giving him almost daily criticism of his performance. And Skilling hated criticism.

As the elevator whooshed along, an Enron employee interrupted Skilling’s thoughts. “Jeff,” the employee said, “what’s happening to the stock price?”

Skilling glanced over at the employee, then looked back at the television screen. “I don’t know,” he said.

How did things get to this point? By March 22, Fastow and the other executives in finance were struggling to answer that question and avert disaster.

The problem again was the Raptors. When they had been created, everyone pronounced them a stroke of genius. With Enron’s shares trading at close to ninety dollars at the time—and climbing—no one expected they would so quickly reverse course, so there were no concerns about the price trigger built into the structure. In essence, if Enron’s share price fell below fifty dollars, the stock meant to provide the Raptors with capital would effectively disappear. Back then, the trigger point seemed laughably low—
-fifty dollars a share?

But today, the price was at fifty-five and falling. Worse, losses were still piling up from the collapse of values in the merchant investments hedged by the Raptors. Now there was a good chance that in a week or so, the Raptors could arguably have no capital. The hedges would vanish, and all those merchant-investment losses would come back.

To fix the problem, Fastow and Causey brought in some top accounting minds. They came up with what they viewed as the perfect solution: if the Raptors needed more capital to hedge Enron’s investments, Enron would give it to them.

The two best Raptors would continue to be harnessed to support the worst. Then Enron would pump another twelve million shares of stock into the stronger ones. The deal was done on credit, with the two stronger Raptors pledging to pay Enron another $568 million sometime in the future. In essence, the finance group was doubling down,
again
, in its bet that Enron’s share price would rise. A price run-up would bail out the entire structure and allow the Raptors to make good on their obligations, eventually.