“I’m doing this because it’s good for Enron, not for me!” Fastow shouted. “Goddamn it! I am sick and tired of people attacking this! It’s good for you, it’s good for your business! So fuck you guys!”
Bowen hadn’t said a word.
“I’ll tell you what!” Fastow yelled, careening out of control. “We’ll shut it down! And you fucking guys won’t be able to get your fucking deals done because you won’t have the fucking capital. So just figure it out on your own!”
Bowen held the phone away from his ear as the screaming escalated. Finally, a break in the tirade.
“Andy,” Bowen said, “I’m not going to deny I’ve had issues with this. But my big failure here is not being man enough to talk about it to your face. Talking behind your back was unfair, I grant you. And I apologize for that.”
Fastow deflated. “Look,” he said, calming down. “Come by and I’ll explain it for you. Maybe you’ll be okay with it.”
Bowen agreed, but the conversation gnawed at him. In bed, he tossed and turned, replaying the diatribe in his head. It seemed so out of proportion, almost as though Fastow had more at stake in LJM than it appeared. Bowen pushed the thought aside. He must be reading too much into things.
Kopper and Glisan strode into the London offices of Greenwich NatWest on the afternoon of August 5. They were there ostensibly on business for Enron, which was paying for their airfare and hotel. But in truth, they had come to discuss a deal to help Fastow earn more money from LJM.
They were greeted by David Bermingham and taken to a conference room filled with bankers from Greenwich and Credit Suisse First Boston, LJM’s outside investors. Before getting started, the group telephoned Houston, bringing Anne Yeager, another Fastow favorite, into the meeting.
CSFB made the presentation. The bankers noted that Enron had restricted LJM from hedging the stock it had contributed to the fund; after all, hedging ultimately requires short sales, which can drive down the price. But CSFB had come up with a complex transaction, called Sails, which would allow the fund to hedge the Enron stock anyway.
With Sails, LJM would lock in a guaranteed minimum return on the Enron stock while still getting a ten percent cut of any future increase. Better for Fastow, LJM would receive a payment of tens of millions of dollars. Even though the outcome was exactly like a sale, there were plenty of bells and whistles attached, all to give everyone the ability to argue that something else had happened. While Enron stock would be converted to cash, CSFB and Greenwich agreed that they would deem it a new capital contribution, not a sale.
The semantic game didn’t affect the fundamentals, but it opened up a world of opportunity for Fastow. Since he was prohibited by the board from benefiting from LJM’s Enron stock, he could only profit from the sixteen million dollars in cash contributed by the fund’s investors. But with Sails, Fastow would have a kitty of tens of millions in new cash for personal profits. All they needed to do was spend a few months putting the deal together.
Everyone laughed. “Boy,” Glisan said. “This is a great day at the office.”
After months of effort, Karen Denne from Enron’s public relations office landed the big fish: CFO magazine had selected Fastow as one of the year’s best chief financial officers. Now the final push. The magazine was writing an article about Fastow, and Enron’s top executives needed to participate in interviews. Skilling and Lay readily agreed.
But first, Fastow. Denne stopped by his office on August 11 to brief him about the interview, explaining that it would be conducted by Russ Banham, a freelance writer.
Fastow laid a sheet of paper on his desk. “I’ve got several points I want to discuss on this,” he said.
Minutes later, they were on the phone with Banham from his home office in Missoula, Montana. After some initial discussion, Banham asked something specific about Fastow’s work.
“Let me take a step back and raise a few points to explain that,” Fastow replied.
Point one … Point two …
“Well,” Banham said, “that raises another question.”
Fastow listened for a moment as Banham spoke.
“Point three,” he began, ignoring the question.
The next morning, Denne stopped by Skilling’s office to prepare him for the Banham interview. He was in high spirits, obviously happy that his guy was being recognized by his peers. By the time Banham was on the line, Skilling was in a jolly mood.
“Hey, Russ, how ya doing?” he said. “Glad you’re taking the time to talk to us.”
Banham, who had interviewed plenty of corporate CEOs, was struck by Skilling’s warm banter. Most corporate types were standoffish; Skilling treated him almost like a drinking buddy. And he was effusive in his praise of Fastow.
“Andy has the intelligence and youthful exuberance to think in new ways,” Skilling said. “He deserves every accolade tossed his way.”
That day, a letter from Fastow went out to his LJM investors, informing them that he had just paid himself $550,000 from LJM in a semiannual management fee.
His million-dollar commitment to the fund had been in place forty-two days; now more than half the money was back in his bank account. He’d get the rest in six months, with the payment of his next fee. And he would still own a million dollars’ worth of LJM. It was a no-lose deal.
Wearing shorts and a T-shirt, Fastow jogged toward the Enron building. He pushed through the door and began walking across the lobby. Suddenly he noticed Jim Timmins coming toward him. He had been avoiding Timmins for weeks, ever since hearing his ideas for a huge investment fund. Nothing he could do to put him off now.
Timmins wasted no time in getting to the point. “Andy,” he said, stopping Fastow, “I’ve been trying to reach you. Do you like this equity-fund idea at all?”
“Yeah,” Fastow said. “We’re going to do it.”
“Really?” Timmins asked. “Who’s going to run it?”
Fastow shrugged. “I am.”
Was this a joke? “Really. Now, how do you do that?”
“The board has given me a code-of-ethics waiver to set up these kinds of partnerships.”
Timmins scarcely knew what to say. “Are you kidding me? You’re the CFO!”
“Well, yeah, there it is.”
Fastow thought for a second. Now was the time to start snagging what he could from Timmins.
“So I’ll tell you what I want from you,” he said. “I want your top-ten institutional contacts.”
Too few. That wasn’t the way it was done. “I’ll give you twenty-five,” Timmins said.
Fastow shook his head. “Nah. Just boil it down to the top ten.”
———
On an afternoon in September, Dave Duncan dropped by to visit Carl Bass. Enron had reorganized the international division, with the result that Bass had little accounting work to do there. Duncan wanted to redeploy him and believed he had come up with the perfect solution.
“So here’s my thought, Carl,” he said. “Why don’t you come work with me on Enron’s structured-finance deals?”
A warning light went off in Bass’s head. He knew structured finance was where Enron played the loosest on the accounting rules. No matter what objections Bass might raise, Dave Duncan was driving the bus and was going to do pretty much whatever Causey wanted.
Fortunately, he had a way out. John Stewart, Andersen’s top accounting guru, had been trying to recruit him for the Professional Standards Group. He promised Bass he could stay in Houston and could even continue working with Enron—advising the Andersen accountants rather than directly dealing with the client. Until now, Bass hadn’t made up his mind whether to accept. But Duncan’s suggestion made his choice easier.
“I don’t know, Dave,” Bass said. “I’ve got this opportunity to work with the PSG.”
Duncan shrugged. “Well, if that doesn’t work out, let me know. Then you can work with me on structured finance.”
Before the week was out, Bass called Stewart to say he would
love to come aboard.
Kent Castleman was puzzled.
He had recently moved to Brazil for Enron but was still involved in selling a stake in its Cuiabá plant to LJM. He now knew the fund was Fastow’s and had called the office to find out who was handling the deal. Cheryl Lipshutz, a Kopper and Fastow favorite, got on the phone.
Castleman paused. “You’re negotiating for LJM?”
“That’s the assignment,” Lipshutz responded.
Strange. An Enron executive was negotiating with an Enron executive—to sell something from Enron? Not his place to question.
Enron was selling part of Cuiabá? To LJM? That Fastow partnership? Carl Bass was thunderstruck. This Rhythms hedge was bad enough, but now Andersen was letting Enron sell assets in a deal that couldn’t be audited. Andersen must not have thought this through. He hunted down Duncan.
“Dave, about Cuiabá. Are we certain they can do transactions like this with this partnership?”
“Oh yeah,” Duncan responded. “I’ve run it up the flagpole. It’s a legitimate deal.”
Legitimate? Bass seethed. Andersen was compromising itself for fat fees from an out-of-control client. Well, Bass hadn’t left for the PSG yet. He was still responsible for international accounting. And, by God, he was going to do everything he could to stop this one.
The deal terms were more outrageous than Bass had imagined. LJM didn’t even plan to put in any cash up front for its Cuiabá stake. Fastow just wanted to commit to pay in the future and receive ownership based on that.
Bass put his foot down. There could not be a sale here unless LJM ponied up the money. Enron squawked, pleaded, argued. But Bass held firm. Enron and Fastow backed down.
But Bass’s biggest impact on the Cuiabá negotiations derived from something he had done years before with John Stewart from the Professional Standards Group. Something no one at Enron knew anything about.
The accounting was the big problem. As Castleman and Lipshutz struggled through their bizarre transnational discussions, they kept tripping up on new rules.
Recently, the accounting rule setters had issued a revised policy for power plants; now they were considered real estate. Under the old rules, Enron had been able to enter into “sales” of plants to off-books entities, structuring the deals to retain the future risks—and benefits—of ownership. It was a sale in name only, but the rules allowed it. That’s why the change stung; real-estate rules were tougher. A “sale” was a sale.
No one knew the change had been driven by someone who worked in the building. Carl Bass had quietly lobbied for more than a year on the reformulation, all to block some of Enron’s irrational transactions.
But Fastow liked things the way they used to be. Even with the new rules, he wasn’t interested in letting his fund take the risk of owning a stake in some lousy foreign power plant. Fastow boasted to Kopper and others that he and Causey had struck a verbal deal. LJM would not be a true owner of Cuiabá, just a temporary warehouse for it. Under the agreement, Fastow said, Enron would be responsible for finding another buyer—and if it couldn’t, the company would buy the stake back from LJM, at a profit to the fund.
The deal Fastow was describing was hard to believe. Was it even legal? He had managed to avoid the consequences of the change in accounting rules, and structure another “sale” where Enron held on to all the risks of ownership. With this deal, Enron’s profits would soar. Fastow’s fund would look smart. Everybody would be happy.
Ken Lay walked down a richly appointed hallway in a Manhattan office building. The place was elegant, with expensive artwork and rich, lustrous paneled walls. These were the offices of a business that clearly spent to impress, to show off its financial prowess with every meticulous—and expensive—detail. That was a good sign; today Lay hoped to persuade his counterpart here to do business with Enron’s retail division.
Lay approached the reception desk.
“Ken Lay to see Dennis Kozlowski, please.”
Kozlowski headed Tyco International, a global conglomerate that dabbled in everything from fire alarms to disposable surgical devices. He was a corporate dynamo, a man whose name was whispered in comparison to Jack Welch, the General Electric chairman and renowned management guru. Kozlowski and Tyco were exactly the kind of clients Enron wanted—visionary, innovative, aggressive.
Moments later, a door opened. A hulking man with a large, bald head bounded in. “Ken,” he said, thrusting out a beefy hand. “Dennis Kozlowski.”
The two wandered back to a conference room, where Lay was introduced to Mark Swartz, Tyco’s CFO. The conversation was pleasant enough. They parted amicably, with the gears in motion for a final deal. Lay liked the men; they struck him as smart and honest.
None of them could have imagined that in less than three years, they all would be indicted—Lay for his role in the Enron debacle, Kozlowski and Swartz for taking hundreds of millions of dollars out of Tyco for themselves.
Fastow was almost giddy.
A 300 percent rate of return. The way he and Kopper figured it, LJM was already hitting those numbers in a little over ten weeks. Not all of that could go Fastow’s way; the board had specifically restricted him from taking personal profits from increases in the price of Enron stock turned over to LJM by the company. But they were well on their way to finagling around that.
And now Fastow was ready to move to his biggest project of all. In his LJM presentation to the board, he had suggested it would be a precursor to an even larger fund. None of the directors gave the idea much thought, but Fastow brought it up again to Skilling in August, describing the fund as a way to manage risk and improve its balance sheet. Skilling thought the idea sounded good.
Fastow had the plan laid out. He had hired Merrill Lynch to sell the fund; he had snagged Jim Timmins’s top-ten institutional investors. And he was set to use Timmins’s idea of creating an Enron fund that became independent from the company. It would be his way out, his step toward becoming a fund manager full-time. No more begging for bonuses. He would be wealthy. He would be a player in Houston society.
Fastow had no doubt: LJM2 would transform his life.
“LJM2 will have a lot of unique features,” Fastow said. “It will have access to massive deal flow from Enron. It will, in truth, be a virtual Enron.”
It was 9:15 on the morning of September 16. Fastow had traveled to New York to present his big proposal to Enron’s bankers. His first visit was with Chase Capital Partners, an investment arm of Chase Manhattan bank. He had described his vision weeks before to Rick Walker, Chase’s banker in charge of Enron, and had won him over. Walker pushed Chase for the investment; it would make Fastow wealthy, he wrote his bosses, and buy the bank a lot of business from Enron.
But in the meeting this day, as Fastow described LJM2, the Chase executives seemed perplexed. Why would a CFO do this? Why would the company want him to?
“This pool of capital is viewed as a good thing by the board,” Fastow said. “LJM2 will be the best bid on lowball deals by virtue of having better information.”
And despite the demands of his CFO job, there was no danger he would neglect the fund. “Half my time will be effectively spent on LJM2’s business because of the overlap with Enron,” Fastow said.
The rewards would be ample. Look at the first LJM, he said. Its returns were hitting 300 percent. There was plenty of reason to expect that LJM2 would do even better.
Just before lunch that day, Fastow headed to Merrill Lynch’s offices at the World Financial Center to visit with its private-equity group. Already Merrill had a special relationship to LJM2; it had agreed to raise money from institutional and wealthy investors. Now Fastow was asking Merrill’s principals to kick in a few million of their own.
“This is what I want to be my next step,” Fastow told the group. “I want an investment business, and this is a unique opportunity to set it up with unique access to deals and to develop that track record I need to develop.”
The story he spu
n now differed from what he had told the board. No more breast-beating about his sacrifice. No words of concern about his position at Enron. Instead, just the bald truth: he wanted a more lucrative career. But why should they believe he could deliver stellar performance?
“Let me simply say I can do twice better than anyone else because I will have better information than anyone else,” Fastow said.
The bankers laughed. The idea was just audacious.
Fastow displayed a chart headlined “Involvement of Principals in Price Funds.” Listed on it were the names of LJM2’s professional staff: Fastow, Kopper, Glisan, and Anne Yeager.
For nearly an hour, Fastow wove his tale of riches to come, opportunities to seize, deals to be done. The bankers ate it up. He was so pleased with the reaction, Fastow couldn’t help taking a dig at his outside advisers.
“The only thing that’s amazing to me,” he said, “is that our really smart investment bankers didn’t figure this out first.”
Four days later, on September 20, Jimmy Lee, chief of global investment banking at Chase, sat at his rosewood desk, glancing over the pages of Fastow’s presentation.
This is just stupid. Fastow was clearly out of his league and didn’t understand much about private investments. But Enron was a big client. Chase couldn’t blow this off. He reached for a pen and scribbled the name of a banker, Rod Reed, across the cover sheet. He asked Reed to review the proposal with Rick Walker, along with Arnie Chavkin, a principal of Chase Capital Partners.
“I am skeptical because the guy running it is inexperienced and sounds very naïve,” Lee wrote. “However, the relationship is very big and important. We ‘may’ have to do a little.”
Lee sent the material on its way. His message was clear: The corporate client was a player. If Chase needed to invest in the CFO’s silly pet project, so be it.
The bankers who received Lee’s instructions didn’t feel any better about Fastow’s proposal than he did. A lot of it struck them as wrongheaded.
Chavkin couldn’t make sense of the fund’s fee structure. Fastow said LJM2 would receive two percent of its total capital, but at the same time Enron was paying for finding and structuring deals. Fastow’s information came from his work at Enron, work he was paid to do. Even the cost of LJM2’s staff was being picked up by Enron. What was the management fee for? Shouldn’t a portion go to Enron? What about all the oversight needed to monitor the conflicts, would Enron be reimbursed? And generally, why would this fund be considered independent of Enron at all?
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