Conspiracy of Fools (73 page)

But this time the finance group sweetened the deal. They priced the new shares for the Raptors at forty-seven dollars each, a significant discount, since under the sale agreement the shares could not be hedged. The discount was run past Kaminski, who agreed on the valuation.

The price cut was standard fare, but the next step wasn’t. Once the deal terms were signed, Enron waived the requirement forbidding hedging. The shares—worth less because they could not be hedged—could now be hedged. And no one told Kaminski, whose pricing was used to justify the numbers in the deal.

Of course, to hedge, the Raptors needed a third party to take on the risk
that Enron’s stock price would fall. They turned to Enron itself. Now, if the share price dropped, the company was obligated to make up the loss for the Raptors, which in turn were pledging to give Enron back its own money to make up for losses in the merchant investments. By any measure, the Raptors were a meaningless, laughable fraud.

After 3:30 on the afternoon of March 26, Ryan Siurek was in his office speaking with a colleague, Gordon McKillop. He had been working night and day on the Raptor restructuring, and the deal documents had finally been signed. He was exhausted and ready for a break. The telephone rang. “Ryan. Jeff Skilling.”

Siurek was shocked. He hadn’t expected Skilling’s call; he didn’t even think Skilling knew who he was. Unknown to Siurek, Causey had asked Skilling to send an “attaboy” the young accountant’s way.

“Listen,” Skilling said, “I just want to tell you how much we appreciate your hard work on the Raptor restructuring. It’s a really great transaction for Enron.”

Siurek muttered his thanks, and the two talked for a minute. From what Siurek could tell, Skilling had a working understanding of the deal.

In Washington, the heavyset, bearded man crossed Pennsylvania Avenue to the security booth at the northwest gate of the White House. A guard inside asked for his name.

“Harvey Pitt,” he responded.

Pitt, one of Washington’s most celebrated securities lawyers, was on the verge of achieving a career-long dream. Some time before, he had been contacted by the White House personnel office, inquiring if he would have any interest in serving as the new chairman of the SEC.

The son of a grocer and a seamstress, Pitt first attracted the attention of SEC officials during a moot competition in law school, and soon was working in the general counsel’s office at the agency. He stayed ten years, becoming the agency’s youngest general counsel, before moving on to become a top partner at Fried, Frank, Harris, Shriver & Jacobson. But he never lost interest in returning to the SEC—this time as chairman. Pitt wasn’t close to Bush; in fact, he’d never met him. But he knew this new President might grant him the post he coveted.

Security issued him an identification tag, and Pitt slipped it on. Minutes later, he was in the West Wing, being escorted to the Oval Office. Bush was waiting for him at the doorway. The two men shook hands.

“Mr. President, it’s an honor to meet you.”

Bush smiled. “Well, Mr. Pitt, delighted to meet
you.”

A White House cameraman snapped a picture, then Bush showed Pitt to the sitting area. Cheney was there, along with a handful of other staffers. Pitt greeted them, but Bush quickly made clear this meeting was his.

“All right, Mr. Pitt,” Bush began. “Why do you want to be the chairman of the SEC?”

They spoke for half an hour. Pitt had prepared for this moment for years and had an array of ideas ready to go. The SEC could become more than what it was, he said, and he was the person to drive the agency toward that goal.

For one thing, he said, the SEC should become a real-time enforcer of the securities laws; too often, investigations languished for years. Moving faster would give investors confidence that the cop was on the beat. Disclosure was inadequate, too, he said. Investors mostly received historical information, with little explanation of where companies would be down the road.

Bush nodded, occasionally asking a question. Finally, he had heard enough. “Well, Mr. Pitt, thank you for coming,” he said. “We’ll get back to you.”

Again, handshakes all around. Minutes later, Pitt was on the street, walking back to his office. He felt good about the interview. This job could very well be his.

Late on the afternoon of April 2, Amanda Martin was in Skilling’s office, again asking to be pulled out of Azurix. There were other things she could do, she said. She had fixed the troubled North American power plants; she could take on the same responsibilities for the India project, she argued.

Skilling’s tone was distant. “I’m not sure it will work, Amanda. I’m getting a lot of resistance from Andy about you coming back.”

Fastow
. It had been so many years since their battles began over that silly wind deal. Martin could scarcely believe Fastow was still carrying a grudge.

“But, Jeff, I don’t want to stay in Azurix,” she said.

“I need you there,” Skilling replied.

Everything about Skilling’s demeanor struck Martin as wrong. He seemed unsure of what he was doing. “Jeff,” she asked, “what’s going on here?” Skilling didn’t answer.

“You know, Jeff,” she continued, “every time I leave late at night, I go out to the parking lot and that whole row of cars of your lieutenants are gone. But your car is there. And I come in early in the morning, and no one’s arrived yet. But your car is there then, too.”

She leaned forward in her seat. “So what does it say right now about your organization that you’re working harder than the people who report to you?”

Martin waited to be shouted down. That would show her that Skilling still had the old fire in the belly. But he just sat there.

“The problem is, Rice, Pai, all your lieutenants, they’ve checked out; they’re not doing their jobs anymore,” Martin said. “You’ve made them too rich. They’ve got too much money. They don’t need to be here.”

Still no response. Martin plowed ahead. “And the next layer of people—Whalley, Delainey, and the rest—they’ll cut your throat if they thought it would get them to the feeding trough sooner. So what are you going to do?”

Skilling just looked at her with a sad expression, then silently glanced out the window. Finally, he looked her in the eye. “One thing about you, Amanda,” he said. “You always tell it the way you see it.”

He paused. “You’re most likely right,” he said.

What?
Skilling
never
conceded a mistake.
Never
. He was so quiet, so resigned. He looked lost.

“I don’t know what I’m going to do,” he said softly.

A week later, on April 9, Skilling finished wandering around the building, dropping in on traders and deal makers. Now he was headed to a conference room to meet with his CFO.

Fastow was getting anxious. LJM’s deals with Enron had slowed to a trickle. With stock prices sliding, there was little available that promised good returns, even in a rigged deal. With one exception: Enron Wind, a renewable-energy division. Enron was already negotiating to sell it to a unit of UBS, the global financial firm, but Fastow wanted in, with LJM2.

In the conference room, Fastow explained all the benefits LJM2 could bring by bidding for Wind. Skilling was unimpressed. He was tired of LJM, tired of Fastow jabbering about it. They never spoke about Enron anymore, he thought gloomily. It’s
always LJM, LJM, LJM
.

“I don’t want a structured deal,” Skilling replied. “You want to make a bid as a stalking horse, that’s fine.”

A stalking horse?
That meant LJM2 would be used just to force up the UBS offer. There was nothing in that for Fastow and his investors. “Wait, Jeff,” Fastow protested. “I think LJM can really bring some value to the table.”

They spoke for another twenty minutes. Skilling left the meeting confident he had gotten his point across.

Days later, on April 13, Mintz was at his desk, embarrassed as he worked on his latest trivial assignment. Fastow’s nanny had purchased a new car—a lemon—and now his boss had asked him to write a threatening legal letter
to the car dealer. Head buried in paperwork, Mintz sensed someone’s presence. He looked up and saw Michael Kopper.

“Jordan,” Kopper said brusquely, “LJM2 is bidding on the wind deal. Do you know where things stand with UBS?”

What?
In just two short sentences, Mintz’s worst fears about LJM emerged. The fund was elbowing its way in on Enron’s sale of an entire business? Not only that, but Kopper wanted to know what UBS was doing with its bid? No third party would
ever
get that kind of information.

“Michael, I don’t know,” he replied. “But I work for Enron. I don’t think that it’s right to be telling you how things are going with a potential competitor.”

Kopper started to speak. Mintz kept going.

“If you want to talk to somebody on the deal, call Lance Schuler, because he’s working on it,” Mintz said, doing nothing to hide his contempt.

Kopper’s eyes narrowed in anger. Mintz was pushing him off to Schuler, another lawyer? Giving him the brush-off?

“You know, Jordan, Lance was on the short list to get your job,” he hissed. “And he didn’t get it, because he didn’t know how to play well in the gray areas.”

Kopper stormed out.

This was out of control. Mintz needed to roll up his sleeves and figure out some way to get attention directed to the LJM problems, and get them fixed once and for all.

The following Monday, April 16, Fastow muttered curses as he read an e-mail. It was from Adam Umanoff, an executive with the wind company, canceling an appointment. The Enron deal maker in charge of the transaction, Mark Metts, had ruled that a meeting between the two would give LJM2 favored treatment over other bidders.

Fastow clicked the “forward” button on the e-mail, typed in Skilling’s address, and began composing a message:

“Jeff, I’m sure this is just a ‘misunderstanding’ but I know that UBS Capital has spent innumerable hours with management. While Mark says that he doesn’t want LJM to have an advantage, it looks like LJM is being put at a disadvantage.”

As Fastow banged the keyboard, a group from finance—Glisan, Mintz, Tim Despain, and Barry Schnapper—walked in for a 2:30 meeting. Fastow didn’t even look up.

“Until this is resolved, I’ll assume that LJM is out of the bidding and will not do any further work. Enron is back to one bidder (the lower one)—better for our company???”

“Great!” Fastow laughed. “That’s great!”

He hit the “send” button and stood.

“Goddamn Metts,” Fastow said as he turned to the assembled group. “I told Skilling that LJM could buy Enron Wind and get it off the balance sheet, and Metts is being an impediment. He’s not letting us do any due diligence.”

He smiled. “Well, Skilling’s aware of it now, and I’ll just let him speak to Metts about it.”

Fastow sat at the table, smirking with self-satisfaction. They went around, discussing the matter at hand. When the meeting ended, Mintz lingered behind.

“Andy,” he said hesitantly, “why does LJM want to buy Enron Wind?”

The sale, Mintz thought, would be too large to keep quiet. It would almost certainly require full disclosure, thrusting LJM front and center as a major issue for investors. All for a business that was really just expensive advertising, to project an environmentally friendly image.

But Fastow saw only dollar signs. “It’s a great asset,” he said. “
We’ve
screwed it up, but if somebody incubated it, you could double your money in two years.”

He smiled. “I’ll tell you, we’re going to invest like $600 million and turn it into more than a billion!”

Skilling looked at the e-mail he had just received, annoyed. What the hell was Fastow talking about?

A stalking horse!
LJM was a stalking horse. He didn’t want a structured deal. He wanted Enron Wind gone. He thought he had been very clear on that point. Apparently Fastow wasn’t listening.

Just before ten the next morning, Lay sat on an upholstered seat in the waiting area outside Vice President Dick Cheney’s White House office. He was there with Enron’s top government-relations executives, Steve Kean and Linda Robertson, for what was supposed to be a confidential meeting to spell out Enron’s vision for the Administration’s national energy policy.

Nine days into his presidency, Bush had named Cheney to chair the National Energy Policy Development Group, known as the Energy Task Force. Unlike many federal advisory committees, this one was staffed exclusively with government employees, meaning no public hearings would be required. This way Cheney and others in the Administration could hold meetings—like the one today with Lay—behind closed doors, setting the agenda without public scrutiny.

An assistant stepped into the room. “The Vice President will see you now,” she said.

Cheney was sitting at his desk when the Enron contingent walked in. He stood, walking toward Lay.

“Mr. Vice President,” Lay said, “delighted you could give us some of your time today.”

Cheney nodded. “We’re looking forward to hearing your ideas,” he said. He gestured toward an upholstered chair, and Lay took a seat. Cheney sat in the chair beside him, while the others found seats on a nearby couch. Lay held some talking points on his lap.

“Dick,” he began, “primarily what we hope is that any energy program by the Administration is market-driven, something that reflects economics and not just the government trying to pick the best technologies itself. The marketplace should make those choices.”

Cheney said nothing. Lay was preaching to the choir.

“But at Enron,” Lay continued, “we are primarily interested that natural gas and electricity are able to continue to be deregulated, in a way that will in fact give the maximum benefits to the customers.”

Things were all right in natural gas, Lay said, but a lot of work was needed in electricity. The California debacle showed how bad things could become. Regulators had to bring competition to all electricity markets, he said, to avoid another California.

“One of the biggest problems in electricity today is the grid system,” Lay said, sounding the main message he had come to deliver. “Regulated utilities and the state regulators still control the interstate transmission grid, even though it is clearly interstate commerce.”