The top lawyer for EBS was Kristina Mordaunt, who had just received more than one million dollars for her secret Southampton investment. Fastow and Kopper had the satisfaction of knowing that two key people on the other side of the table were financially beholden to them.
After the final terms were negotiated, the deal-approval sheet, or DASH, went around for everyone to sign. There was a line for Skilling’s signature, but he was on vacation in Africa. So the sheet instead was shipped over to Lay.
He studied the document. Four people had already signed, including Mordaunt, Lawyer, and Glisan, all secret participants in Fastow’s schemes.
Lay didn’t know how to run the numbers or how to assess the valuation. But he knew he could trust his people. He signed with a flourish.
Kopper answered the phone in his office. Andy Fastow was on the line, giggling.
“What would you think,” Fastow said, “about the Nigerian barges coming back to LJM?”
Enron’s commitment to take Merrill Lynch out of its investment in the Nigerian barges by June 30 was starting to look like a disastrous miscalculation. Merrill executives were banging on Enron’s door, demanding their money back. But the company could find no takers.
So Enron turned again to Fastow and LJM2. There were no negotiations. LJM2 simply paid Merrill more than $7.5 million, giving it the 22 percent return that had been promised so many months before.
Now Merrill’s problem was Fastow’s; he didn’t want an interest in a bunch of Nigerian barges either. He persuaded Enron to shift its guarantee to LJM2; it would find another buyer and take the Fastow fund out of the deal with a profit. The obligations and risk of ownership remained with Enron six months after it reported the profits from the “sale.”
The rolling commitment left some Enron executives queasy. Sales were supposed to be clean, not weighed down with secret side agreements. One Enron accountant, Alan Quaintance, heard rumors about what was going on and approached the lead finance executive on the deal, Dan Boyle. Quaintance mentioned what he had heard about secret guarantees and said he considered it inappropriate.
Boyle seemed surprised. “I don’t see why,” he said.
Enron’s trading business was going great guns, but not enough to offset the huge expenditures—and investment losses—piling up all over the company. Even with the LJM2 shenanigans, Enron would miss Wall Street’s predicted earnings of thirty-two cents a share for the second quarter.
Fortunately, it had some airplanes to sell—airplanes that, according to the company’s books, were worthless. The planes had been part of a deal begun in 1997, called Cochise. In essence, Enron had shuffled a bunch of paper to create expected future tax deductions. Then—for lack of a better term—it “marked to market” those expectations, reporting the future deductions as current income. Using the tax credit the deal created reduced the book value of the planes from $46.7 million to zero.
So in the final days of the quarter, Enron sold the planes for $36.5 million to an entity controlled by Bankers Trust. Now the energy company could report every penny of its airplane sale as income. But the bank wouldn’t be stuck with the planes for long. There was already an agreement that a few weeks later, one of Enron’s innumerable entities would buy them back. For the same price.
Fax machines were starting to annoy Rick Buy.
The company’s chief risk officer had purchased a new summer house in New Hampshire, a bucolic retreat from the hurly-burly of his job. But as the end of the quarter approached, deal-approval sheets, particularly for LJM2 deals, kept scrolling out of the fax machine.
It was, after all, near the end of the quarter, and it remained Buy’s responsibility to review such deals. No one had ever formally told him that the directors wanted him to handle the job; instead, Skilling and Fastow had just let him know informally about his new duties. But they didn’t instruct him specifically on what he was supposed to be looking for.
Pages from a new approval sheet churned out of the fax machine. Buy eyeballed the terms to make sure they struck him as reasonable. It looked fine. He signed it.
It was 3:45 on the afternoon of June 26. In some parts of California, temperatures exceeded a hundred degrees. Air conditioners were going full throttle. The electricity grid was approaching a danger point. Another stage-two alert. Customers voluntarily shut off their electricity.
———
The evening stars pierced the African sky above a forest belt surrounding Mount Kenya. There, Skilling, his younger brother, Mark, and his oldest son were vacationing, spending that night in early July in one of a series of rustic cabins. Skilling was relaxing on the back porch with Mark. He dragged on his cigarette as he watched the sky.
This is the life. Just mountains and trees and sky. No international projects. No water companies. No complaints. Nobody picking at him to give them, do for them, fix for them.
Why was he at Enron anymore? What the hell was he trying to prove? He took another puff. The smoke pleasantly burned his lungs before he exhaled it into the still air.
He glanced at his brother. “How would you like to come work for me?” he said.
Mark was taken aback. “What are you talking about?”
“I’m really thinking about what I’m going to do after Enron,” Jeff said calmly. “I need to start getting stuff in place. Would you have any interest in helping me?”
The idea wasn’t fully formed. Mark was a lawyer; maybe, Jeff suggested, he could manage his money, handle tax issues. But Mark had just moved to Turkey and was happy with his new life. Houston had little appeal for him.
“I don’t know. Right now I’m enjoying Istanbul.”
“Look, there are some neat lofts downtown. I can invest in one, you could stay there. I could set you up in an office, have a secretary available for you”
“I don’t think so, Jeff,” Mark said. “I mean, right now, I’ve got some things I still want to do.”
Jeff wasn’t going to be so easily put off. “Why don’t you take to the end of the year and think about it.”
That long? Mark was surprised. But some things about the proposal still bothered him. “Well, I’m a little concerned about being fired by my own brother,” he said.
Jeff stayed quiet. “Yeah, that would be an unfortunate thing,” he said finally.
Andy Fastow was rolling in cash. While Glisan and Mordaunt had reaped just over a million dollars each from Southampton, Fastow and Kopper each raked in $4.5 million. Fastow, who aspired to a place in Houston’s wealthy philanthropy circuit, stuffed the cash in the newly formed Fastow Family Foundation. It was a great way to stave off taxes and still have the money available for vacations and other expenses that he could declare as foundation business.
Besides, Fastow didn’t need the money. Still sitting in LJM1 was more than twenty-five million dollars from the Sails deal, which converted a huge slice of the Enron shares into other assets. And Fastow had the sole power to decide when he would receive his share.
On July 14, the time came. Fastow declared a cash distribution from LJM1 to its investors. He filled out three wire-transfer requests, authorizing the movement of money from the LJM bank account in the Cayman Islands. The signed documents were faxed to the bank, and in the blink of an eye the funds were wired.
The two largest investors in LJM1—CSFB and Greenwich NatWest—each received $5.9 million. But Fastow made out the best: he transferred $17.9 million to himself.
After three weeks in Africa, Skilling returned to the office on July 17, feeling despondent. He had tasted life without Enron and liked it.
Early that morning, Lay dropped by. Weeks before, he had seen that Skilling was burning out and had hoped an extended vacation would recharge his batteries.
“Welcome back,” Lay thundered as he strolled into Skilling’s office. “Did you have a good time?”
Skilling looked up from his desk, his face sagging.
“I had a great time,” he said. He blinked and swallowed. “And, Ken, I
didn’t want to come back.”
Lay made a joke, laughing it off. But he could tell his young president was serious. Skilling needed a new challenge. He needed to know that he would be running Enron by year’s end. Lay had to figure out some subtle way to let him know: the CEO spot was his to lose.
In Manhattan, Lay strolled past statues of Chinese lions as he climbed up the steps to the Peninsula hotel. Inside, he headed to the lobby lounge. He spotted Kelly Kimberly, an Enron public-relations executive who had been sent ahead to explain Lay’s holdup. Beside her was Dr. Amin Badr El-Din, whose proposal to purchase all of Enron’s international assets seemed to be picking up steam.
It was July 18, 2000. Lay was in New York for multiple meetings that day, but this could be the most important. He shook Badr El-Din’s hand. “Dr. Amin, sorry I’m late. We were delayed in landing.”
“Not a problem, Dr. Lay. It’s good to see you.”
Lay thanked Kimberly, and the two men repaired to the Adrienne restaurant upstairs.
“I wanted to let you know this is a very serious project for us,” Badr El-Din said. “We are convinced we can add a lot of strategic value to many of these assets.”
“Well, Dr. Amin, that is very good to hear.”
“The money is basically already committed,” Badr El-Din continued. “Now it is just a matter of finishing up the due diligence and trying to get the deal done.”
Sweet words, but Lay was not quite seduced by them. At that point, there was no way to know if Badr El-Din would bail Enron out from its billions of misspent dollars or simply prove to be another false hope.
High above Times Square that same day, Sumner Redstone was in his fifty-second-floor office, oblivious to its breathtaking views of the Hudson River and New York City skyline.
Redstone, the billionaire chairman of Viacom, had heard minutes before that his next visitor, Ken Lay, was in the building meeting with Mel Karmazin, the company president. Redstone had good feelings about the upcoming meeting. A few months back, Viacom’s publicly traded subsidiary, Blockbuster, had struck a deal with Enron to provide video-on-demand to retail consumers. The twenty-year exclusive contract hadn’t been disclosed yet, allowing Blockbuster to wrap up other negotiations with the movie studios. Now everything was ready to go, and Lay was in town to help with the big announcement.
When Lay arrived, Redstone escorted him to the office.
“Ken, this is wonderful,” he said. “I’ve been worried about Blockbuster. The returns haven’t been what we hoped. But this could really provide some excitement and give them a strategy that’ll help protect the franchise.”
Lay was just as enthusiastic. “Well, if Blockbuster needs excitement, this will bring it,” he said. “It’s a wonderful setup, a winner for both of us.”
Neither man knew that, even as they spoke excitedly of their future together, the twenty-year contract was months from collapse.
Enron would hit Wall Street’s earnings estimates for the quarter. But that was it. Nothing special.
So the week before the earnings release, some Enron executives got together to scour the books for more profits to squeeze out. They soon found their quarry—the prudency reserves. Enron held back on reporting millions in income from its energy trading to ensure the bottom line only included profits that it actually expected to make once all the trades closed. There was certainly some money there.
Millions of dollars were released from the reserves into income. Now Enron could report thirty-four cents a share for the quarter, beating the Street’s estimate by two pennies.
“Welcome to the Enron Corporation second-quarter earnings-release conference call.”
Sitting at a table surrounded by top executives, Skilling listened as the operator finished the introductions for the quarterly phone call with Wall Street analysts. He was still feeling demoralized, but knew that he had better mask his mood. No one would understand why he felt so tortured on a day the company’s earnings seemed so good.
“Thank you very much and good morning to everyone,” Skilling began. “We had another outstanding quarter in each of our business units and continue to be very excited about the developments across the company.”
He described how each business line was meeting or exceeding expectations. “I’ve been with the company, in one form or another, for eighteen years, and I’ve never seen the company in better shape,” he said. “Our core markets are just absolutely moving from strength to strength.”
With that, Skilling opened up the call for questions. David Fleischer, the analyst who covered Enron from Goldman Sachs, was the first up.
“Great quarter, Jeff,” he began. “Don’t slow up.”
The furnace in California showed no signs of cooling. With temperatures soaring, the power shortage had grown from a temporary nuisance into a full-blown crisis.
Throughout July, prices in the wholesale market bumped up against the state’s price caps of $750 a megawatt hour; in response, the state reduced the caps. Still, utilities were paying more for power than they could charge retail customers, most of whom paid fixed rates. Most, but not all. Some cities, like San Diego, let their rates float with the market, and the only direction was up. Electricity bills soared; some residents burned them publicly.
The turmoil forced California’s governor, Gray Davis, to act. On August 2—a day of another stage-two emergency—he received a report from the Public Utilities Commission that Californians had paid one billion dollars more in June and July than in the comparable months the year before. Power-plant construction needed to be fast-tracked, the report said, and that same day Davis ordered faster approvals.
Another section of the report also caught Davis’s attention. It concluded that there was “enough evidence” of questionable trading behavior to warrant an investigation. Davis forwarded the information to the state’s attorney general, Bill Lockyer, whose staff was already on the case. Weeks before, they had opened the first investigation into possible manipulation in the California electricity markets.
That day, rows of Mercedeses, Lexuses, and other pricey cars jammed the streets outside of the Four Seasons Hotel in Philadelphia. A frustrated doorman shouted at a driver to make room for the luxury autos boxed in by the traffic.
The Republican National Convention had come to town, and the excitement was palpable. The party faithful were there to nominate George W. Bush as their candidate for President, and to ratify his recent choice for Vice President, Dick Cheney. Like most political conventions, the event was wall-to-wall parties, celebrating the Republicans themselves and the big-ticket donors whose money had made the campaign and the convention possible.
Just before 10:30, Ken and Linda Lay emerged from the lobby. Outside, they stood beside an eight-foot fiberglass elephant, its trunk raised in a salute. The statue was a replica of the image on a gold-and-black badge pinned to Lay’s suit coat. It was the logo of the Regents, the 137 Republicans who had each contributed or raised at least $250,000 for the Bush campaign.
An official shuttle picked up the Lays and a handful of the other Regents, whisking them to the Philadelphia Convention and Visitors Center for an audience with Bush, Cheney, and their wives. The shuttle stopped at an entrance on Twelfth Street, and the Regents were escorted to room 102A. The Bushes and Cheneys were waiting in a receiving line.
The Lays walked down the line, shaking hands. Governor Bush smiled when he saw them, taking Linda’s hand and giving her a light kiss on the cheek. Ken Lay did the same with Laura Bush. Lay shook the governor’s hand eagerly.
“Congratulations, George. We’re all very proud of all the success of your campaign.”
Bush smiled warmly. “Well, Ken, we couldn’t have done it without all the help from people like you and Linda. You’ve really made the difference for us.”
After about thirty seconds, the Lays moved on to the Cheneys. The couples greeted each other like old friends.
“The rising generations of this country have our own appointm
ent with greatness. It does not rise or fall with the stock market. It cannot be bought with our wealth.”
From behind a large lectern on the main stage at the Republican National Convention, George W. Bush was giving his acceptance speech. His delivery was almost deadpan, with few smiles or gestures. But every applause line left the party faithful enthralled.
Above the stage, Ken Lay listened attentively, sharing in the excitement of the crowd. Around him sat family and work associates, gathered in what was being called the Enron box. Their seating spoke to their influence; the box was dead center in the auditorium, with Lay in the front row, one of the best seats in the house.
Bush’s speech ended, setting off bedlam. Confetti and balloons rained down as the stage filled with politicians and Bush family members. Lay stood, applauding.
If Bush pulled this off, Enron’s voice in Washington was sure to be even stronger. Lay couldn’t help but feel that the next few years would truly be a golden era.
By all appearances, Project Summer, the sale of Enron’s overseas assets, was moving toward success. But Skilling’s mood was heading noticeably lower.
The problem, as far as Skilling was concerned, was Joe Sutton. Under the terms of the emerging deal, Sutton would head the new company and take the division’s employees with him. That left Sutton hopelessly conflicted; he was pushing for every advantage. He wanted Enron to inject more cash into the new entity; he wanted Badr El-Din to leave it relatively debt-free.
By August, the outlines of a deal had been prepared. The Middle Eastern investors would assign the assets a value of $7.1 billion and purchase an 80 percent interest, with the rest staying with Enron. Expenses included, it translated into a loss from book value, but Skilling was ready to take the lumps. Now, he thought, it was time to teach Enron’s directors a lesson about their mistakes. Maybe then he could drive every remnant of Rebecca Mark’s businesses out of Enron once and for all.
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