But they didn’t. With all the focus on deals and earnings—with the finance group’s transformation into a profit center rather than a division to support the business—the workaday, boring details had been sloughed off. No one had realized it, but as Fastow and his team churned out entity after entity—Raptor, LJM, Braveheart, and the rest—winning plaudits and bonuses, they had simply ignored the basics of corporate finance. Enron had been flying blind financially for years.
Glisan got on the phone for half an hour with executives in the treasury division, asking them to manually figure out when the money had to be paid. When they reported back to him, he called out numbers to McMahon, who scribbled them on a whiteboard. Then he added them up.
Okay. More than thirty billion dollars in debt. The amount of that Enron had to repay in the next twelve months was …
He totaled the numbers up in his head. Ten billion dollars.
And, as best as McMahon could tell, Enron had no means to pay it. It would either have to renegotiate with the banks, find more cash, or go bankrupt. He couldn’t imagine it could be much worse than this.
In fact, it was. In their rapid effort to cobble together a maturities schedule, Glisan and his team had overlooked debt that Enron owed. As daunting as the $10 billion appeared, it fell short of reality. By $2.6 billion.
McMahon turned to the group. “What else have we got out there?”
Well, someone replied, there’s the equity forwards, which Fastow had used to finance entities like the Raptors. Those still made up a real number on Enron’s books.
McMahon wasn’t worried. How bad could this be? “Okay,” he said, looking at Glisan. “Explain that.”
Glisan approached the whiteboard and began drawing circles and boxes. As he spoke, the construct grew bigger and bigger. McMahon couldn’t take it all in; he began trembling. Glisan was filling up the board.
“Ben, look, this is all very interesting, but what’s the bottom line?” he said. “Tell me the total obliga—”
“I can’t,” Glisan responded. “I can’t tell you until you tell me where our stock goes.”
What? McMahon didn’t understand.
Glisan started scribbling different answers, showing how the amount Enron owed would climb as its stock price fell. The truth was beginning to dawn on McMahon.
“You’re telling me,” he said forcefully, “that there’s several billion dollars in this, and that it’s not done? It can grow if things get worse?”
Glisan turned. “Yeah.”
McMahon looked over at Bowen. This was not the time for recriminations. They had to plunge forward.
“Okay,” McMahon said, “so what number do we put on the board? I don’t know the number to put.”
The room was silent. “Well,” Bowen said, “I guess we put the only number we know. The amount we owe now.”
Glisan wrote it down. McMahon shook his head. He couldn’t have made this up. Enron was in a death spiral.
“Wait,” Glisan said. “There’s something else.”
McMahon looked back at him. No … no more. But Glisan had now transformed. His attitude was like that of a government informant, casually ratting out his old colleagues.
Glisan started to explain. Enron had owned a company for years called Enron Oil & Gas, or EOG. It had spun the entity out as its own company some time before, holding on to a slug of its shares. That EOG stock, Glisan explained, had been used as capital in one of Fastow’s securitization deals. As part of that transaction, Fastow had committed Enron to make up for any losses in the value of EOG shares. Since then, EOG’s stock price had fallen. So now, Glisan said, Enron was obligated to make up the difference.
This confused McMahon again. Enron owned EOG shares back when he was treasurer. It had been unable to sell the stock because of restrictions when EOG went public. So the company had devised a bond deal. In it, investors purchased bonds that were exchangeable—one for one—with shares of EOG stock in the future. That allowed Enron to get the cash value of the shares without selling them. But of course, all those shares still had to be available for the investors who purchased the bonds.
So how could there be EOG shares in another Fastow partnership? They were already committed to the bond investors. Did Enron own other EOG shares that he didn’t know about? McMahon asked.
“No, it’s the same stock,” Glisan replied.
McMahon just stared at him. Did Enron buy back the bonds, then? Give the investors cash? No, Glisan replied.
“Well,” McMahon said, “where’s the stock from?”
“We just took those shares out and put them in this structure,” Glisan replied.
This wasn’t getting through. “Well, what are we going to pay the bondholders with?” McMahon asked.
“Oh,” Glisan said, “we’ll have to go to the market and buy EOG shares.” It was a shattering moment. Fastow not only used every asset that wasn’t nailed down to put together his deals; he had used one twice, leaving Enron on the hook to repurchase a gargantuan number of shares in its former division. McMahon did his best not to show any anger.
“Okay,” he said. “So how much does that mean we would owe at current prices?”
They wrote the number down on the board.
The chaos of Enron’s finances had at long last been laid out for everyone to see. A series of emergency groups were set up—one to come up with a way to track cash, another to reexamine the debt and figure out maturities. At 10:30, as McMahon struggled with what he recognized was a train wreck, the phone rang. His secretary let him know that Andy Fastow was on the line. McMahon picked up.
“Look,” Fastow said, “I just want you to know, if there’s anything I can do to help, you know I’m behind you. You know I’ve always been a big supporter of yours, Jeff.”
McMahon felt a wave of disgust.
Fastow kept talking. “I’m sure you’re going to be able to solve this crisis, and I’m here if you need anything.”
This was a moment for diplomacy. “Thanks, Andy,” McMahon replied. “I appreciate that.”
Seconds later, he hung up. He stared at the phone, shaking his head. “Thanks for nothing, Andy,” he muttered. “We’re in this crisis because of you.”
Forty minutes later, Ken Lay was meeting with the Enron directors. A few hours before, he had heard from Fastow about the problems with the bankers and now was making the case that Enron needed a new CFO. He had no idea that Fastow had already been thrown out of the job by Whalley.
“There are some serious questions about Andy’s current effectiveness,” he said. “We have bankers refusing to do business with us so long as Andy remains CFO.”
It would be best, Lay said, for Fastow to be replaced by McMahon. The directors began discussing that suggestion.
John Duncan jumped in. “I think I need to mention something,” he said. “Yesterday, Mickey and I spoke with Andy about Andy’s earnings from the LJM vehicles.”
The number was far higher than anything they had been led to believe, Duncan said. Fastow admitted receiving forty-five million dollars from LJM1 and LJM2. The words were numbing. Lay felt disoriented. There wasn’t much that anyone could say.
Norm Blake exploded. “That’s outrageous!” he shouted. “We’ve got to find out what that money was paid for!”
The stunned directors began discussing the issue. Blake broke back in. “We’ve got to terminate him,” he said.
The room went silent. Then Lay spoke. There was no doubt in his mind. Fastow had deceived him all these years.
“I agree with Norm,” Lay said. “My recommendation is that he has to be terminated.”
But it wasn’t so easy. Fastow’s contract had just been renewed. Enron needed specific cause to fire him. So Blake made a motion. It carried unanimously. Fastow was officially out as Enron’s CFO, placed on a leave of absence. McMahon was his replacement, effective immediately.
Things couldn’t keep going like this, Mark Palmer knew. The barrage of bad news was ki
lling the company. Every day the management team waited for the Journal’s call, to hear what was really happening in their own company.
Palmer consulted with Larry Rand, a public-relations expert with the firm Kekst and Company. Rand’s advice was strong: Enron should launch its own investigation, hiring top-flight lawyers to find out what Fastow had been up to all these years. Rand even suggested a name: Bill McLucas, former head of SEC enforcement, who was now a partner at the firm Wilmer, Cutler & Pickering.
The idea appealed to Palmer, and he brought it up with executives around the company. Nobody was interested. Things were bad enough already; they didn’t need another investigation on top of everything else.
Skilling.
He had called the day before, offering to come back to Enron. The management team had opposed it, but maybe Skilling’s return could calm the market’s waters, Lay thought. He persuaded Whalley to go speak with him, to take measure of the situation. The meeting was set up for that day at Skilling’s house. It would create too much of a flurry if he came to Enron at this point.
Whalley drove up in his Jeep to the wrought-iron gates outside Skilling’s new, multimillion-dollar mansion. He pressed a button on an intercom. Skilling’s voice came through, and the gate slid open. Whalley drove in, pulling to a stop on the circular driveway.
Skilling walked out of the house before Whalley emerged from the Jeep. “Greg,” Skilling said, “what the fuck is going on?”
“Jeff, this is bad. This is really, really bad.”
“What happened?”
Whalley shook his head. “Liquidity. It’s drying up.”
“What’s needed? Three?”
“Well, we think three-point-two.”
Big numbers. Enron needed $3.2 billion, or its trading business would die. This demanded fast action.
“We’ve got to be on the next plane to New York,” Skilling said. They had to sit down with the bankers—Chase, Citi, Credit Suisse, all of them.
“We’ve got to look these people in the eye and tell them that there’s not a problem, tell them we’ll pay them back, but that for now we need some money,” Skilling said.
“Yeah, we probably really need to do that.”
This whole situation had to get stabilized, Skilling said. “What’s this shit with Andy, anyway?”
Whalley pulled a face. “We’re firing him.”
Skilling was bowled over. “You’ve gotta be kidding,” he said. “That’s the dumbest thing. I mean, your CFO, you need to raise money, and you’re firing him?”
“Hey, I don’t know if he did anything wrong,” Whalley said. “But that’s beside the point.”
Why? Skilling wanted to know.
“Jeff,” Whalley said, “Andy was a really shitty CFO.”
Whalley returned to Enron as a convert. Skilling should come back. He told Lay, and the two decided to hold another management meeting to discuss it.
Skilling waited by the phone for an answer, but no one called. There isn’t time for this. We need to head up to New York tonight. Didn’t they know how urgent this was?
His impatience growing, Skilling called Whalley to find out what the holdup was. “Well, we need to discuss this among the members of the management committee,” Whalley said.
“What are you going to do? Put it to a vote?” Skilling asked sharply.
“Ken wants to have a management committee meeting.”
“Greg!” Skilling shot back. “We don’t have time! We have to get up to New York!”
Nothing could be done, Whalley said. Lay wanted a meeting.
In a hospital just outside St. Louis, Chuck Watson was looking for a pay phone. Watson, the chairman and CEO of Dynegy, Enron’s largest competitor, was in town tending to his mother, who was undergoing heart surgery. That morning, his people in Houston had sent word of market rumors that Dynegy, fearing an Enron collapse, was refusing to trade with the company. The stories weren’t true, but Watson knew that even the suspicion of such a development could cripple Enron. Sure, he wanted to beat Enron, but not by exploiting a panic.
He found a phone and pulled out his AT&T calling card. In a few minutes, he was on the line with Lay.
“Look, Ken, there’s some rumors out there about us not doing business with you,” Watson said. “You’ve got enough to worry about without having to spend your time on rumors. This one’s not true, and I would be happy to put out a statement saying so, if you’d like.”
“Thank you, Chuck,” Lay said. “We’ll probably make some sort of public comment on that.”
Lay’s tone was calm. Watson couldn’t help but think that the man would be a great poker player. “Well, okay, Ken,” Watson said. “If you want our help, let us know.”
It was an offer that would go much further than Watson could ever have intended.
The management committee stood firm. Skilling could not return. Once again his natural allies led the opposition. He had made his bed; let him lie in it.
“Okay,” Whalley said. “Then I guess we don’t do it.”
The Wall Street firms hardly knew what to do. Enron was flaming out; it looked like a company in its death throes. Investors in the stock should probably get out.
Then again, what if Enron pulled it out? What if it survived this war, then surveyed the battlefield to see who had backed the company when things looked dire? Who would get Enron’s investment-banking business then?
So some firms decided to split the difference. Publicly, they pronounced their faith in Enron, encouraging investors to buy or hold on. But privately, they notified their firms’ investment arms to steer clear of Enron shares.
The hypocrisy outraged some on the Street. Wade Suki, an associate analyst at J. P. Morgan Chase, sent an e-mail to members of the research division, pointing out that they were now advocating contrary positions.
“How has your rating helped clients?” Suki asked. “You’re telling me one thing, but clients a different story? Sounds a little shady to me.”
The analysts needed to take one position, Suki wrote.
“Strap it on, man!!!” Suki wrote. “Afraid to lose the banking business??? Are you an investment banker or an equity research analyst???”
John Riley, the senior Andersen partner appointed to oversee the unfolding problems with Enron, arrived in Houston that afternoon and telephoned David Duncan.
“Listen, John,” Duncan said, “it’s late. There’s no reason for you to come to the office now. Why don’t you just relax at the hotel and come by tomorrow morning?”
Fine. Riley agreed to come by early the next day.
Duncan and his team could continue their feverish shredding without worrying about watchful eyes.
Now, Sherron Watkins thought, she had a chance. With Fastow out and her buddy McMahon taking over, she could get a leg up on her career.
Almost as soon as she received the company-wide e-mail announcing the appointment, Watkins started typing a message to McMahon. In the subject heading of the e-mail she typed, “Your new CFO spot and the job I want.”
She offered her congratulations and immediately suggested that he get rid of Glisan, perhaps replacing him with Bill Brown. But she had another reason for writing.
“My issue, and I feel very strongly about this, is that I want to be on the crisis management team to determine how we save our trading franchise. I have clearly proven myself to be the only person at Enron that had the character, at great risk to my own career, much less personal risk, to go to Ken Lay and let him know what was going on here.”
By that point, others, of course, had begun criticizing the Raptors. But that just infuriated Watkins.
“I resent all these late comers joining the band wagon. It’s damn easy to make a statement now, when Ken has made the hard decision to unwind these deals and write them off.”
Mainly, Watkins typed, she resented being kept on ice, without the responsibilities she deserved.
“I hope to meet with Ken Lay soon,” she typed. �
�But I’d like to talk to you about my role in the ‘inner circle,’ because I firmly believe that I deserve it.”
Then she hit “send.”
From the war room, McMahon telephoned Lay’s office. Lay still seemed to believe Enron was just having a problem with bad press. He needed to let the boss know the truth.
“Okay, Ken,” he said, “here’s our position.”
Enron had more than thirty billion dollars in debt, McMahon said. Best they could tell, about ten billion of it was current.
“Frankly, we’re completely illiquid right now,” McMahon said. “We are at our lenders’ mercy.”
The only thing to do, McMahon said, was get lenders together and renegotiate the debt. They would have to get commitments from everyone not to make any rash moves; that would cripple Enron and hurt everybody. But just in case, he said, Enron needed to get advice from bankruptcy and restructuring specialists.
“So we’re going to need to start negotiating,” McMahon said. “We have to sit down with the banks.”
The line was silent for a moment. “Is it really that dire?” Lay said softly. More than thirty billion dollars in debt and almost no cash flow? “Yeah, Ken,” McMahon said. “It’s really that dire.”
McMahon called Whalley right afterward. “The only solution I see is that we sit down with the banks,” he said, “and get a workout.”
“Or a merger,” Whalley shot back.
A merger? “Yeah,” McMahon said, thinking about it. “Merge with someone with a much stronger balance sheet.”
“Yeah,” Whalley replied. “I’m working on that.”
Scores of e-mails were piling up in McMahon’s account. He noticed one from Sherron Watkins and clicked it open. He read it and went back to work. He was trying to save the company. He didn’t have time to worry about her career.
Late that night, the crowds were thin at Kenneally’s, an Irish pub on South Shepherd, ten minutes from the Enron building. Dark and dank, the bar hadn’t changed in two decades. A small collection of regulars were there, tossing back beers and devouring the bar’s fabulous pizza.
After midnight, McMahon walked in, followed by Bowen. It was late, and Whalley had called McMahon some time before, inviting him to stop by the pub to unwind.
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