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.
McMahon was an accountant. He knew the equity portion of Chewco had to be independent. “That works?” he asked. “I mean, that doesn’t make it an affiliate?”
“No, the lawyers all signed off,” Brown replied.
McMahon brought his hand up to his head and laughed. “Okay. That seems kind of crazy. I mean, if there was an officer of the company in that box, or even an officer’s wife, that would raise a lot of accounting questions.”
Brown shrugged. “Yeah, well, Kopper’s not an officer. And Dodson’s not a wife.”
Boy. That seemed an awfully thin string to hang such a huge accounting question on. Why did Enron do it this way?
“All right, so what’s your question?” McMahon asked.
“Okay, here’s the issue. Michael is representing Bill in this negotiation”
McMahon sank in his chair. “Oh, Christ. Why is he doing that?”
That was the way that Dodson set it up, Brown said.
<
br /> McMahon was flabbergasted. “All right, well, I guess you negotiate with Michael. Just get a reasonable deal.”
“That’s the problem,” Brown said. “Michael is being a real prick about negotiating Chewco’s fees, and he’s close to Andy. So all this is likely to go to Andy.”
“So?” McMahon said. “Bring it on. Get a reasonable fee, and if he doesn’t agree to it, we’ll go to Andy and tell him that Michael’s harming the company.”
He smiled. “Remind Michael who signs his paychecks. It says Enron on the bottom of those things, and if he’s trying to get a few extra hundred thousand for his domestic partner, let’s tell Andy he’s screwing the company.”
“Okay,” Brown said. “So I’m going to go ahead and negotiate this as hard as I would with anybody else?”
McMahon leaned in. “Yeah, Bill. That’s how it works.”
Joe Sutton stepped into the Enron boardroom, eager to share the good news with the finance committee. The government in Sào Paulo, Brazil, needed cash. Another stake in Elektro was up for sale. Enron had the inside track.
“This is a fabulous opportunity,” Sutton declared. “By making an additional investment, Enron International will enjoy either a substantial increase in recurring earnings from Elektro or a substantial gain by selling the equity when market conditions improve.”
Of course, there were risks, Sutton said, such as the chance of a currency devaluation. But a sharp drop was unlikely. The government was working to get its finances in order, he said, and the International Monetary Fund had put a plan in place to stabilize the country’s economy.
After a brief discussion, the committee authorized a bid of as much as $700 million for an increased stake in Elektro at the auction scheduled for January 15. The next morning, the full board signed on to the idea.
Everyone was excited. It seemed like a smart move.
Ben Glisan swiveled his chair, pulling up to his desk. His twenty-seventh-floor office was piled high with accounting and financial files—cluttered testimony to the esteem he had won at Enron. All the best deals, all the challenging transactions, were coming his way. His accounting acumen made him irreplaceable in special projects, and both Fastow and Kopper were making sure to take good care of him.
Reaching onto his desk, Glisan picked up a form authorizing an electronic funds transfer. A bank wire.
Here was graphic proof of his new standing. Glisan, just thirty-two years old, could sign his name, and that same day corporate funds would move out of Enron’s bank account to whatever account he designated. He reviewed the form.
$400,000. For Chewco. Payment of a fee from Enron.
Glisan scribbled his name on the authorization line.
This was the fee that Brown had been negotiating and that McMahon suggested taking to Fastow. In the end, Kopper got what he wanted. Under the new deal, the percentage of cash distributions going to Chewco was moving up. And Fastow ordered that Chewco get its fat fee for being willing to revise the agreement. In essence, Chewco was being paid a fee for agreeing to take more money.
The illogic was staggering. But in secret, events were taking place that made the reasons for the payment clear. After receiving his fee, on December 30, Kopper wrote a series of checks—to Andy, Lea, and their two sons—each for ten thousand dollars or less. Just below the level that had to be reported to the IRS. Just below the amount that would force the bank to issue a currency-transaction report to the government, as a guard against money laundering. Then, in January, as a new tax year rolled around, Kopper wrote checks again. All told, Fastow received more than sixty-seven thousand dollars of the fee, tax-free.
Kopper then dutifully entered the transactions into the file on his laptop, keeping score of how he and Fastow were doing on their secret deals.
Mike Jakubik reached for the telephone in his London home and dialed Houston. For weeks, he had been parrying with Enron over the job offer and making only minor progress. The compensation package, while unspectacular, was all right, but the company was shortchanging him on his title. He was a managing director at Bankers Trust, but Enron wanted him to come in one step back, as a vice president. Still, he was uncertain about his future at Bankers Trust and plowed ahead on the Enron offer.
The Jakubiks entered into contracts to sell their London house and buy another in Houston. Mike’s wife, Nancy, shopped for schools in Houston for their sons. One boy was autistic, and arrangements proved difficult. But the Jakubiks decided that the Enron opportunity was worth all the effort.
Then, a stumbling block. Out of the blue, Bankers Trust paid Jakubik a huge bonus and promised to make him a key player in its future. McMahon bristled at the news; he refused to sweeten Enron’s offer. It was take it or leave it.
Now, twenty-four hours later, Jakubik had made his decision and called McMahon. “Jeff, it’s Mike.”
“Hey, how you doing?” McMahon said coldly.
“I’m going to take the job, Jeff.”
“Ahh, great!” McMahon replied, his tone warming instantly. “Fantastic!”
The next morning, Jakubik gave notice to Bankers Trust. He and his wife took the final steps for selling their house and pulling the kids out of school. They had cast their lot with Enron. There was no turning back now.
Why the hell did Enron need Mike Jakubik anyway?
Fastow had been thinking about it. He didn’t really know Jakubik. He didn’t know whose interests he would represent. The guy seemed pretty independent. There was a better idea. A better alternative.
Michael Kopper. If Kopper was running the investment fund, Fastow could have a piece of it. Maybe it would be his ticket out of Enron, his route to big money. Kopper would be there for him, would let him play a role. Jakubik might not be so accommodating.
It was settled. The fund would be Kopper’s job. Jakubik could do something else.
Few corporate start-ups spend their early lives in a palace. That is because, with huge initial expenses and little hopes for massive revenue, hoarding cash to pay only for the essentials is often necessary for survival.
Azurix, Enron’s new water company, was an exception.
The new Rebecca Mark division was set up in Allen Center, across the street from the Enron building. Mark’s own office was built with a private bathroom, gorgeous fixtures, deep woods. Nearby, an extravagant circular staircase was constructed between two floors, lending the place an air of elegance.
The free-spending attitude spread. In one of her early days at Azurix, Amanda Martin was in Mark’s office when she glanced at the floor. No carpeting or polished wood here; instead, limestone had been installed.
“Rebecca, this is good,” Martin said, admiring the floor. “I want limestone in my office, too.”
She got it. And then so did one of her colleagues.
“I ought to be CFO of the Year.”
Fastow was perched on the edge of his chair in his expansive fiftieth-floor office, one arm resting on the circular conference table. Across from him sat Mark Palmer, Enron’s head of corporate communications, whom he had just summoned for a special assignment.
“I’ve seen it in CFO magazine,” Fastow said. “Each year they name CFO of the Year. I want it to be me. Could you do that, get them to write a nice article about me?”
Palmer smiled, then laughed. Fastow was CFO of Enron, a Fortune 100 company. Why worry about such silliness?
“Are you joking?” Palmer asked.
Fastow squinched his face, shutting his eyes tight for a second before jerking up his eyebrows. Another tic.
“No, no, I’m serious,” he replied. “Do you realize what a great job I’ve done at this company?”
He rattled off his achievements. He was using Enron’s stock in creative ways—sticking it in partnerships as capital, all sorts of things. And the Elektro and Wessex financings—strokes of genius, Fastow said. He had persuaded investors to buy debt from off-balance-sheet entities just on the promise that Enron would issue new stock to pay them back i
f they ever got stiffed. For nothing but a future commitment, Enron got billions—billions! All thanks to Fastow and his innovative thinking.
As Fastow boasted, Palmer occasionally glanced off to his left at a long buffet-type table. It was built from wavy strips of blond wood, with bumpy, impractical surfaces. It was furniture as art, a triumph of form over substance, much like Fastow himself these days. After landing the CFO’s job, he had stuffed his office with expensive knickknacks, with the seeming purpose of displaying an elevated taste worthy of Houston’s moneyed class. His wife, Lea, had even begun decorating him, hiring a fashion consultant to make sure he dressed the part.
Fastow fiddled with a pen. This thing with CFO magazine was important, he said. It would be useful for him to have before the time of Performance Review Committee—the PRC—where bonuses and promotions at Enron were awarded.
“Every year I schedule time with Jeff Skilling and go tell him how great I am,” Fastow said. “It’s right before the PRC, and it’s all about Andy.”
Fastow squinched his face again. “I do it because I want to keep my profile up with Jeff, let him know the great things I’m doing”
Palmer tried not to recoil. He had heard of businesspeople with huge egos, but he had never actually encountered one whose conceit matched his reputation.
“If CFO magazine writes a nice article, names me CFO of the Year, I can use that,” Fastow continued. “I can show Jeff I’m being recognized. It’ll help with the PRC.”
Now Palmer got it. Fastow wanted to be recognized by the magazine so he could make more money.
“Well, okay,” Palmer began. “But understand, Andy, I don’t know how to proceed on this. No guarantees.”
Fastow nodded and stood. “Keep me updated,” he said.
Palmer headed down to his division on the forty-ninth floor. Maybe, he thought, if he assigned the task to a top lieutenant like Karen Denne, there would be a chance of pulling something off. He found Denne at her desk.
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