“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.”
That, Lay said, meant that the oversight of the grid ought to go to federal regulators. “And we ought to have larger regional transmission grids, not so many chopped up transmission grids making coordination so difficult. Those chopped-up grids are used to give monopoly utilities first shot at their own markets and keep out competitors.”
“Well,” Cheney interrupted, “what part of the country are you getting the most opposition from?”
At about the same moment, “hold” music played as Wall Street analysts waited for Enron’s quarterly conference call to begin. An operator came on and introduced Skilling.
“I hope you all heard that music that was on before,” he said. “We’re all dancing here; it’s pretty good stuff.”
The numbers were sure to pump up the analysts—an 18 percent increase in earnings, a 281 percent increase in revenues. Skilling announced them with excitement in his voice. A number of other Enron executives were in the room, listening in. Causey was just one seat away. No one mentioned anything about the Raptor losses.
As Skilling spoke, Ray Bowen was down in his office, playing to the conference call over his computer.
“So in conclusion, first-quarter results were great,” he heard Skilling say. “We are very optimistic about our new businesses and are confident that our record of growth is sustainable for many years to come.”
Great. Great. Everything was great. The claim left Bowen uneasy. He was hearing rumblings in the company about troubles in Broadband, about the India project possibly being worthless. But everything was great.
In a conference room in another part of the building, Mark Palmer, the head of corporate communications, was also listening in on the call along with members of his department. Just in case something important came up.
Lay’s conversation with Cheney weaved through an array of issues, from supply questions to concerns about price caps in California. After thirty minutes, an aide reminded the Vice President of his next appointment.
Lay took the hint. “Dick, we appreciate your time,” he said, standing. “We wanted to be sure you heard firsthand what we’re thinking should be the priorities for your energy plan. And obviously, we want to keep in touch.”
Cheney shook his hand. “Well, we want you to,” he said. Before leaving, the Enron executives turned over a lengthy position paper. Then Cheney excused himself.
As Lay and his colleagues walked out of the White House, Colin Powell, the Secretary of State, was just arriving. Spotting Lay, Powell broke into a smile. The two had known each other since the first Bush Administration. “Hi, Ken,” Powell said. “Good to see you.”
Lay offered his greetings, and Powell mentioned that he was heading inside for a Cabinet meeting.
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“Well,” Lay joked, “maybe I’ll stand here for a few minutes and talk to the whole Cabinet.”
But he wasn’t going to let this opportunity slip away with nothing more than a wisecrack to show for it.
“Listen, Colin,” Lay said. “I may need to come see you or one of your senior people about the power project we have in India. We’re having some real problems there.”
Powell already knew about it. India had agreed to make good on any obligations owed under the power contract but was trying to wriggle out of the deal. Powell urged Lay to contact one of his deputy secretaries, Alan Larsen. “I’ll let Alan know that you’re going to call,” Powell said.
The short discussion gave Lay comfort. The Administration was foursquare behind Enron in its showdown with the government of India.
The conference call was dragging on, with Skilling still trumpeting the quarter’s performance. After that came the question period. It started predictably enough, with requests for information about run-of-the-mill operating matters. Then the operator called on the next questioner. “Richard Grubman, of Highfield Capital.”
As Skilling stared at the speakerphone, Mark Koenig, the investor-relations chief, began scrawling a note. Grubman asked what the balances of assets and liabilities were in the trading business at quarter’s end.
“We do not have the balance sheet completed,” Skilling replied. “We will have that done shortly.”
No sooner had he spoken than Koenig slipped him the note. Grubman, it said, was a short seller, one of the money managers betting that Enron’s share price would fall.
“I’m trying to understand why that would appear to be an unreasonable request,” Grubman responded, “in light of your comments about daily control of all your credits.”
Yeah, Ray Bowen thought. Good question.
Whoever this guy Grubman was, he was asking a key question. The balance sheet—and its lesser-known cousin, the statement of cash flows—would let investors know if Enron had enough money on hand to finance growth. It might give hints about how much of Enron’s earnings came from fancy accounting rather than the true generation of cash.
He hoped Skilling was ready with a good answer.
“I’m not saying we can’t tell you what the balances are,” Skilling replied. “We clearly have all those positions on a daily basis, but at this point we will wait to disclose those until all the netting and the right accounting is put together.”
The nonanswer annoyed Grubman. “You’re the only financial institution that cannot produce a balance sheet or a cash-flow statement with their earnings,” he said.
Skilling was furious. This guy was stirring up controversy, trying to talk down his company. “Thank you very much,” he said. “We appreciate that.”
“You appreciate that?”
Skilling glanced up, looking around at the others with him in the room. He wanted the last word. “Asshole.”
Palmer almost fell over. Did he hear that right? Enron’s chief executive had just called someone an asshole? On an open line? On an analysts’ call? He jumped out of his chair. He needed to get upstairs.
Bowen stiffened. Asshole? He called the guy an asshole? His phone rang. It was Billy Lemmons, a friend from Enron.
“Did you hear that?” Lemmons asked, laughing. “What do you think that means?”
“I don’t know,” Bowen said. “But I thought it was a good question.”
Upstairs, the conference call continued, with everyone in the room now jolted wide awake. Palmer rushed in while Skilling was taking a question from the analyst from First Boston. He slipped Skilling a note on a piece of yellow legal paper, saying he should apologize before getting off the line. Skilling read the note, then slid it under a pile of papers on the table.
Lay was still making the rounds in Washington when his phone rang. It was Steve Kean, who had just heard from Palmer. Lay was perplexed. He had just parted ways with Kean. What was the problem?
“Ken, since you’re meeting with a lot of people today, we thought you should know about the analysts’ call this morning,” Kean said. “Jeff, well, I don’t know if it was inadvertent or if he just said it.”
Kean was stumbling over his words, sounding uneasy. That wasn’t like him. “But Jeff, in response to a comment, called one of the analysts an asshole,” Kean said.
Lay was silent for a moment.
“Well, that’s not very nice,” he said finally.
The “asshole” comment hit the newswires and soon was all over Wall Street. Outside of Enron, reaction was bad. This just wasn’t appropriate behavior for a Fortune 50 company. Executives of Skilling’s rank had to deal with verbal potshots from short sellers all the time. Besides, Grubman’s sally barely qualified as harsh. How would Skilling hold up if the fire really turned hostile?
When Lay came back to Houston two days later, Skilling appeared in his office, hanging his head. Lay let him know that he could not lose control like that again. But the controversy didn’t end there. Some directors complained to Lay about the episode. Skilling acknowledged to friends that he had overreacted but defended the name-calling, saying that Grubman was trying to drive down Enron’s stock price.
Even so, the tempest he had created bothered Skilling.
He was being criticized. Again.
Wildly swinging, but ever increasing, prices of electricity in California were taking a toll on Enron’s trading desk. The traders were restricted by a complex formula that determined the maximum possible losses they could risk. The result was, if the possible loss grew, the traders might have to sell positions for cash even if they were making money. Now, the fluctuations in California were playing havoc with the formula, known as value at risk, or VAR. One perverse effect was that even if the traders stopped trading, they still might hit the risk limits.
Whalley called Skilling to let him know the dilemma. The directors would need to kick up the VAR limit by about 30 percent to maintain current positions, he said.
“No problem,” Skilling said. “I’ll take care of it.”
This was just administrative, Skilling figured. He telephoned Pug Winokur, the head of the finance committee.
“We’re going to need to make a request to the board for additional VAR,” Skilling said, giving the 30 percent estimate.
“Well,” Winokur said, “we’ll have to talk about this at the board meeting.”
Skilling paused. “What’s to talk about?”
“This is a significant increase,” Winokur replied.
“It’s just mathematical, Pug. It’s not a big deal.”
“Well, you’ll have to make the case for the board.”
Skilling didn’t argue and called Whalley to let him know what was up. Whalley was furious about the demands but said he would get a presentation put together.
Not long after, Lay appeared in Skilling’s office.
“I just got a call from John Duncan about you wanting to get a VAR increase,” he said. “What’s going on?”
John Duncan? Why was the head of the board’s executive committee calling Lay? “I don’t know what’s going on, Ken,” Skilling said. “I told Pug we were going to ask for an increase in VAR. It’s just a mathematical function, because of the increase in volatility.”
Lay sat down. “Well, there’s something else going on. I mean, the directors are all talking among themselves.”
This is ridiculous. “Ken, the position we have in VAR is just one-tenth of the risk we were taking in India. We’ve gone through hoops to tell them how VAR works. But they can approve a project in India in a twenty-two-minute phone call. There’s something wrong here.”
Skilling set his jaw. He knew what this was about. It wasn’t VAR. It wasn’t risk. It was him. The board was taking out its unhappiness on him, probably for that “asshole” comment. They were dinging him.
Billows of cigarette smoke wafted over the deck behind Rebecca Carter’s house. Night after night, she and Skilling had come out here as he
griped about his new job. He hated it—putting out fires while everyone scrutinized his every move. This wasn’t building a business, it was babysitting.
The market obviously didn’t like him. The stock price had been falling ever since he took over. And now—and now!—the board was coming after him. Maybe, Skilling thought, Lay was getting ready to stab him in the back and take over again. Hell, maybe Winokur had designs on coming in. He was spending lots of time with Fastow. And John Duncan! Skilling and Duncan had never hit it off.
“I don’t know,” Skilling said. “What’s Winokur’s objective? What’s Duncan’s? Where are they all coming from? And I think I see a shift in Ken’s attitude.”
Carter nodded. “Yeah, I kind of think so, too.”
That stopped Skilling short. “Why?”
“Well, the ‘asshole’ comment didn’t help you.”
As they talked late into the night, Skilling sank deeper into depression. “I don’t need this,” he said. “I really don’t need this. I’ve got plenty of money. I’ve got lots of things I’d rather be doing. Why am I here?”
Carter felt terrible. Skilling had wanted out in November, said so right on this porch, and she had pushed him to take over the chief executive’s job.
Skilling puffed his cigarette. He was sure his enemies at Enron were mounting a coup against him. It was obvious. The directors and Lay were planning to push him out. Well, he wouldn’t let them. He’d get them before they got him.
On April 30, Skilling sat on a stool in Carter’s kitchen, a pad of paper on the counter in front of him. He had come to a decision. He wasn’t having fun, the board was undermining him, his family was suffering. He was quitting.
Pen in hand, he considered how to write his resignation letter. Maybe something flowery, listing his grievances and complaints. No, that would look bad. Why kick them on the way out the door?
Maybe … maybe …
Dear Ken and the board of directors, Because you guys are a bunch of idiots and assholes …
No, no. He started writing. He scratched out a few words. Start again. “I hereby resign my position as Chief Executive Officer of Enron Corp.,” he wrote.
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