Baxter leaned back, flashing a fake smile. “Well, looks like Andy’s going to be general partner of his own partnership so Enron can take things off balance sheet.”
That was a surprise. Fastow was giving up the CFO job, after a little more than a year? Not a problem for Martin; she’d avoided Fastow since he threatened her a few years back. But a job change hardly seemed worth all the teeth gnashing.
“Great,” Martin replied. “When does he go?”
Baxter’s eyes narrowed, and Rice laughed.
“Oh, and you’re so smart,” Baxter said.
Rice just kept laughing. Martin was perplexed.
“Uh, okay,” she said. “Am I missing something?”
Baxter leaned in on the table. “He’s going to be the partnership’s general partner, and he’s going to be CFO.”
Martin looked from one man to the other. They were both staring at her expectantly. This had to be a joke.
“Oh, bullshit,” she said. “You can’t do that. It’s a conflict of interest.”
“Fucking ridiculous!” Baxter barked.
Rice laughed. “Yeah, you’d think.”
“Oh, come on, Ken,” Martin said. “It’s a conflict.”
Rice and Baxter answered together. “No, it’s not.”
“Says who?”
“The board approved it,” Rice said. “Skilling took it to the board, and the lawyers have signed off on it.”
“It’s just bullshit!” Baxter snapped.
Martin’s bewilderment deepened. The CFO of Enron was going to represent a partnership that was negotiating with Enron? The whole idea was just loony.
“Amanda, you’re an attorney,” Rice said. “Isn’t this a problem?”
“Well, I haven’t practiced in a while, but this is sort of Corporate Law 101” Baxter was in a rage. “This is the worst fucking decision that Skilling’s ever made! I don’t know what the fuck is wrong with him these days!”
“Are you sure they’re doing this?” Martin asked.
Baxter lowered his voice to a growl. “I went to Skilling and I told him he was making a fucking mistake. And he tells me he’s gone to the board and they’ve approved it. It’s a done deal.”
Martin brought a hand to her face. “This is frightening,” she said.
Baxter nodded. “Frightening,” he said softly.
“No,” Rice interrupted. “This is dangerous.”
Across town in Andersen’s Houston offices, Carl Bass was trying to absorb what he had just heard from his colleague Tom Bauer. “Oh, come on,” he said, a tone of bewilderment in his voice.
Bauer nodded. “Yup. They’ve set up this partnership to do business with Enron, and the CFO is running it.”
Bass could only shake his head. “That’s unbelievable.”
“I told Dave we should just tell them no and say we won’t do it,” Bauer said. “But I got overruled.”
This was going to be one hell of a Pandora’s box, Bass thought. It was Andersen’s job to audit transactions between clients and third parties, making sure that everything was arm’s-length, with no wink-and-nod agreements designed to pump up the value of low-grade assets. But with Fastow on both sides of the table, how could Andersen judge whether anything was arm’s-length? It was the same arm!
“You can’t audit this,” Bass said. “You can’t get inside Andy Fastow’s head and figure out if he’s doing an honest deal. It’s impossible! He’s on both sides of the equation. That should have stopped this idea right there.”
Bass quickly set to work digging for more information. One partner told him that it had been run to the top of the firm and approved.
The top of the firm. That had to mean John Stewart, head of the Professional Standards Group. Bass called Stewart in Chicago to ask if he had endorsed it.
“Well,” Stewart said, “I wouldn’t say we approved. We raised a bunch of issues on certain transactions. But we never looked at the entire thing and signed off on it.”
Bass finished the call, lost in reflection. He didn’t have the authority to do anything about this. But he couldn’t help wondering, what kind of business executives would entertain, much less champion, such a terrible idea?
In Buenos Aires, a team of Azurix executives walked toward the administrative building for AGOSBA, its new water service. It had been weeks since Azurix won the company, bidding about twice the nearest competitor. But now, with the contracts signed, Azurix and its executives were firmly in charge. The team, led by John Garrison, head of South American operations, arrived at the door and strode inside.
Everything was a shambles. Computers had been pulled out of the wall and stolen. Filing cabinets were open, documents missing. The building had been looted.
In the days since taking control, no one at Azurix had thought to secure the offices. Argentine workers, fearful of losing the security of government employment, had rebelled against the privatization by wrecking the place.
After about an hour of assessing the damage, the executives realized that things were far worse than they had imagined when they first arrived. Stunned, Garrison headed over to the phone. He had to call Rebecca Mark in Houston right away.
“You’re never going to believe this.”
Mark, sitting in her office in Houston, could hear the panic in Garrison’s voice. “What’s the matter?”
Garrison answered slowly. “We don’t have a billing office,” he said.
“What do you mean, we don’t have a billing office?”
“We don’t have the computer system. We don’t have computerized records. We don’t have anything.”
This couldn’t be true. “You’ve got to be kidding me.”
“No, I’m not kidding,” Garrison replied. “Everything’s gone! We’re providing water to two million people and don’t know who they are. We can’t bill them!”
———
The numbers didn’t lie. Huge sums of money had flown out Enron’s doors since January, far more than had been budgeted. All for a hodgepodge of merchant investments, slapped together by deal makers in wholesale who were looking for something to tout come bonus time.
Cliff Baxter, who on July 1 had been appointed chief executive of Enron North America, the wholesale division, was still assembling a unit to stop bad merchant deals. And there were plenty that needed stopping—investments in paper companies, a Thailand steel mill, a fiberboard plant, an environmental services company—all businesses Enron knew next to nothing about.
On July 7, Enron’s top managers met in the Evergreen 1 Room at the Houstonian hotel. Sitting at one of three tables assembled into an open-ended rectangle, Fastow and McMahon laid out the sorry statistics. Enron had budgeted $1.1 billion for merchant investments in the first six months of 1999. But the company had blasted through $3.6 billion—or $2.5 billion more than planned.
Something had to be done with all those investments, particularly the bad ones. Fastow already had an inkling that the solution might lie in the special-projects group.
In the research unit, Stinson Gibner walked into Vince Kaminski’s office, a self-satisfied expression in his face.
“Guess what,” Gibner said flatly. “There’s a problem with the Rhythms hedge.”
Kaminksi looked up from his desk. “Already? They were just put in place a week ago!”
Gibner nodded knowingly.
“What’s the problem?” Kaminski asked.
The finance group didn’t know what it was doing, Gibner said. In the best scenario, the value of the put option in the hedge would move up by a dollar for every dollar lost in Rhythms’ share price. But Fastow and his colleagues had used a long-term put option. None of them seemed to be aware that the short-term prices of such puts moved less than the prices of the stocks that they hedged. So now, every time Rhythms’ stock fell a dollar, the put went up by only fifty or sixty cents. And the difference would have to be reported by Enron as a loss.
Kaminski chuckled. “Just confirms what we said. Peopl
e who don’t know anything about hedging shouldn’t hedge.”
The two analysts knew that there weren’t many people at Enron who could fix the problem. Pretty much only the research unit.
“What do we do?” Gibner asked.
Kaminski sighed. “Well, I suppose we should be good corporate citizens and try to fix it for them.”
If nothing else, lunch was sure to be uncomfortable.
The four Andersen accountants took seats around the restaurant table. Three—Debra Cash, Tom Bauer, and Carl Bass—worked on the Enron account. The last was Gary Goolsby, a global risk partner from the Houston office. The three had asked Goolsby to lunch that day so they could lay out their concerns about their lead partner, David Duncan.
“I don’t know how else to say it, Gary,” Cash said. “Dave is just too close to the client.”
Enron already pushed hard for fast answers, Bauer said, and didn’t like to hear no. But none of the accountants had the sense that Duncan was conveying the risk of this assignment to the Enron audit committee.
“In that kind of environment, you can’t get too close to the client,” Cash said. “But Dave is out socializing with Rick Causey, playing golf with him. They go out together with their wives. He’s too close.”
Duncan seemed wrapped up in keeping Enron happy, the accountants said. They didn’t necessarily think his independence had been compromised, but feared that it could be.
Goolsby listened politely and told them to keep him posted. But he wasn’t all that worried. Keeping clients happy was Duncan’s job. To Goolsby, it sounded like he was handling things just right.
McMahon and Kopper waited in the mahogany-paneled alcove outside Fastow’s office. The next meeting of the Performance Review Committee was coming, and the three wanted to prepare. The idea was, by reviewing each employee at a pre-PRC meeting, they could present a united front at the real thing.
Fastow led everyone to a conference room, where they paged through notebooks stuffed with information about their teams. One at a time, they rattled off each executive’s accomplishments, working out what ratings they planned to recommend.
When Glisan’s name came up, Kopper ticked off five deals he had worked on in the last six months, including LJM. “These are deals only Ben could have done because of his accounting and finance background,” he said.
They all agreed that Glisan deserved a high rating. McMahon flipped a page and mentioned Bill Brown, who had been handling some of the company’s treasury operations. McMahon said Brown was involved in a number of very important deals.
Kopper huffed. “Oh, come on, Jeff, an associate could have done those.”
“Yeah, I have to agree,” Fastow said. “Those aren’t even close to the kind of things Ben is doing.”
This is ridiculous. These two steered all the best deals to the darlings like Glisan, then complained when others didn’t do them. Maybe it was time to throw that out on the table.
“That’s part of the problem,” McMahon said. “Michael, you steal all the structured deals, anything that is the slightest bit flashy. But Bill could do those.”
“Oh no,” Kopper said. “He’s nowhere close to Ben.”
For several minutes, Kopper and McMahon debated the merits of Brown versus Glisan. The argument was resolved with Glisan rated category one, Brown category two. Another McMahon recommendation, Barry Schnapper, was also placed at two. Later they turned to Cheryl Lipshutz, another Kopper favorite. Kopper reviewed her work for the year so far.
“Cheryl should be rated with Ben as a one,” he said.
“No way,” McMahon shot back. “Bill and Barry are every bit as good as Cheryl. If you put her as a one, Bill and Barry should be up there, too.”
More back-and-forth. Fastow held up a hand. There had to be a compromise here, he said. The three hammered out an idea.
“Fine, that’s it,” Fastow said. “Ben’s our top guy. Then Cheryl, Bill, and Barry are close behind as twos.”
McMahon and Kopper voiced agreement. They had a deal.
The next day at the PRC, everything was playing out as planned. Kopper held up Glisan as the cream of the crop, recommending him as a one; Lipshutz was also excellent, he said, but placed her as a two. McMahon presented Brown and Schnapper—both category two.
Once all the names were on the table, the lobbying began. One executive went after Bill Brown, suggesting that he should be pushed down to make room for one of his own guys.
McMahon felt pretty good. This was the benefit of the pre-meeting, so finance could beat back these kinds of attacks. McMahon tossed out some more details about Brown’s work to justify his ranking. He glanced over at Fastow, waiting for him to voice his support.
Fastow cleared his throat. “Well, you know,” he said slowly, “I think there’s a big difference between Cheryl compared with Bill and Barry.”
McMahon’s jaw dropped. That wasn’t the deal.
“So,” Fastow continued, “I would keep Cheryl at two and bump Bill and Barry back to three.”
“What?” McMahon blurted out.
Fastow glanced at him, looking smug. “You know, Jeff, we’ve got to make something happen here.”
McMahon stared at Fastow in a cold fury. You son of a bitch. McMahon had fallen for a setup. He had been conned into putting his guys behind Glisan. Now that he’d already pushed them as twos rather than ones, he couldn’t start all over, lobbying for them as ones but settling on twos. It all became clear. Their little tête-à-tête the day before hadn’t been called to manage the PRC; Fastow had used it to manage McMahon.
Minutes later, as the debate moved on, McMahon stormed across the room and cornered Fastow.
“You fucked me!” he whispered in a fury. “Not only did you fuck me, you fucked these two people!”
Fastow shrugged. “Well, we’ve got to move forward.”
Kopper noticed the commotion. He wandered over.
“Why did we have yesterday’s meeting if we’re going to do this?” McMahon pressed.
“Well,” Fastow said, “I think Cheryl is above them.”
“Yeah,” Kopper interjected. “I think that’s right.”
McMahon shot Kopper a look. “Thank you very much, Michael. You would think so. She works for you!”
He turned back to Fastow. “You screwed me, Andy. They’re at the same level. We agreed.”
“We had to move on, Jeff,” Fastow said simply.
McMahon clenched his jaw. He threatened to refuse to vote for the results, blocking the required unanimous approval. But Fastow knew it was all just bluster. McMahon wasn’t going to keep everyone locked up in a room, trying to get them to overrule the CFO. Maybe if he had recommended his guys for category one to begin with. But of course, he hadn’t.
Fastow had played the corporate chess game all too well and had checkmated McMahon. He had co-opted the PRC process, shown it for the political sham it could be. All to reward Kopper and his favorites.
On July 27 in Birmingham, England, a room at the Centre City Tower filled with the chattering of reporters waiting for a press conference. A door opened and a group of British officials walked in. A thin man stepped to the front—Ian Byatt, the government’s top water regulator. He was flanked by John Prescott, the Deputy Prime Minister. The signal was clear: whatever Byatt was going to say in the next few minutes had the full backing of the government’s senior ranks.
“I’ve got good news for customers,” Byatt began.
Regulators had completed their review of rates charged by British water companies, he said, and prices would be cut. Wessex Water, for example, would have to drop prices by 14 percent. At the same time, he said, companies would be required to spend more money to improve water quality.
Questions came quickly. Many water utilities had recently been privatized, a reporter said. What will this mean for the companies that bought them?
“There is no doubt that profits will be lower,” Byatt said. “They will come down, and they will stay
down.”
At Azurix, shell shock.
The company had been public less than seven weeks—seven weeks!—and now Wessex, its revenue machine, had been kneecapped by this new ruling. They had known something was coming, but hadn’t really believed that it would be this bad. Coupled with Buenos Aires, the Wessex situation brought Azurix dangerously close to disaster.
Rebecca Mark called an emergency meeting. Looming over the conference table was a painting of two cowboys on horseback, deep in conversation. It was titled True Lies; Mark had hung it as an unspoken barb at Enron’s culture of mendacity. Mark glared at the speakerphone, connected to Colin Skellett, the top executive at Wessex.
“How the hell did this happen?” she snapped. “Why didn’t the utilities get together, negotiate against it? What can we do about it?”
“It’s a done deal, Rebecca,” Skellett replied. “There never was much we could do.”
Mark closed her eyes, trying to control her fury.
“I want you to file a protest,” she said.
“No, no. You don’t want to make them angry.”
“Well, what’s our recourse? We don’t just have to live with it. Can we appeal?”
“Rebecca, it’s done. We have to live with it.”
Mark sank into her chair.
Seven weeks.
The glow from his television and computer screens bathed Ray Bowen in flickering light. He was in his home office, his chair pulled up to the credenza, typing at his computer as his eyes darted occasionally to the TV screen. The phone rang, and Bowen’s wife answered in another room. “Ray!” she called. “It’s Andy Fastow.”
Bowen grabbed the receiver. Fastow’s voice was stern.
“Ray, you and I need to talk. I hear you’ve been making a lot of noise that you don’t like LJM.”
LJM. This wouldn’t be pleasant. Ever since he had heard of the deal, Bowen had bad-mouthed it to anyone who would listen. Now apparently his words had gotten back to Fastow.
“After all the things I’ve done for you, I can’t believe you would go around behind my back!” Fastow raged.
He raised his voice, his anger snowballing. Bowen had heard it before. They were headed for a blowup.
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