We are appreciative of our many colleagues in journalism who broke fresh ground in reporting on Enron, notably Forbes’s Toni Mack, who was asking tough questions back in 1993 and was generous with her friendship and counsel a decade later; freelance writer Harry Hurt; Texas Monthly’s Mimi Swartz; Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts, and E. A. Torriero of the Chicago Tribune, for their excellent four-part series on the fall of Arthur Andersen; Peter Behr and April Witt, for their early five-part series on the demise of Enron in the Washington Post; and the Houston Chronicle’s Tom Fowler and Mary Flood, who overcame the hometown paper’s coziness with Enron’s hierarchy to dig into the story. University of San Diego law professor and author Frank Partnoy offered early insights into Enron that were very helpful. The work of Wall Street Journal reporters Rebecca Smith and John Emshwiller made them players in the Enron tale. In the postbankruptcy period, the New York Times, led by Kurt Eichenwald, blanketed the story, covering dozens of angles. We also want to acknowledge the work and generous encouragement of Times business writer David Barboza and Washington correspondent Rich Oppel.
Amid much finger pointing in the nation’s capital, several congressional committees did yeoman work. The U.S. Senate’s Permanent Subcommittee on Investigations, through its detailed reports and hearings on Enron’s incestuous relationship with commercial and investment banks, shed considerable light on dark corners of the Enron tale. We are grateful for the assistance of the committee and its staff, including Elise Bean, Robert Roach, and Mary Robertson. The Senate Committee on Governmental Affairs produced enlightening work on the watchdogs that didn’t bark—government regulators, Wall Street analysts, and credit agencies.
Our stalwart agent, Liz Darhansoff, served as a fierce negotiator, sage critic, and fervent advocate. Our editor, Adrian Zackheim, instantly understood how a complex business story could make a gripping tale and was with us all the way. We’d also like to thank Will Weisser, Mark Ippoliti, Alex Gigante, David Hawkins, and Bonnie Soodek.
Finally, we owe our greatest debt to our loved ones.
Bethany’s parents, Helaine and Robert McLean, while far removed from the specifics of Enron, added their wisdom to the age-old human elements of the story. Her sister Claire McLean offered constant words of encouragement and perfect company for the occasional shoe-shopping break. Bethany’s husband, Chris Wilford, kept a glass (or two) of wine waiting long into the night. And Barolo provided a constant reminder of what it really means to be a bulldog.
David Elkind, Ellen Duncan, and Mary Clare Ward aided this project in untold ways. Laura Elkind, Peter’s wife, did double duty, offering insightful editorial suggestions and tending bravely to the home front (Stephen, Landon, George, Adele, and Sam) while enduring long absences and late nights of writing with remarkable patience, support, and grace.
To all of them, we are especially grateful.
—Bethany McLean and Peter Elkind
September 2004
CONTENTS
Foreword by Joe Nocera
Authors’ Notes and Acknowledgments
Cast of Characters
Our Values
Introduction
CHAPTER
1. Lunch on a Silver Platter
2. “Please Keep Making Us Millions”
3. “We Were the Apostles”
4. The First Prima Donna
5. Guys with Spikes
6. The Empress of Energy
7. The 15 Percent Solution
8. A Recipe for Disaster
9. The Klieg-Light Syndrome
10. The Hotel Kenneth-Lay-a
11. Andy Fastow’s Secrets
12. The Big Enchilada
13. “An Unnatural Act”
14. The Beating Heart of Enron
15. Everybody Loves Enron
16. When Pigs Could Fly
17. Gaming California
18. Bandwidth Hog
19. “Ask Why, Asshole”
20. “I Want to Resign”
21. The $45 Million Question
22. “We Have No Cash!”
23. The Pursuit of Justice
Afterword
Index
CAST OF CHARACTERS
Ken Lay—Founder, chairman, and CEO of Enron.
Jeff Skilling—President and chief operating officer. Served as CEO from February to August 2001.
Andrew Fastow—Chief financial officer.
Rebecca Mark—CEO of Enron International and later of Azurix.
Jim Alexander—CFO of Enron Global Power and Pipelines (EPP).
John Arnold—Enron’s young trading superstar.
Ron Astin—Vinson & Elkins lawyer.
Cliff Baxter—Jeff Skilling’s chief deal maker and trusted confidant. Briefly served as CEO of Enron North America.
Tim Belden—West Coast power trader who figured out how to game the California market.
Arthur and Robert Belfer—father-son Enron directors and New York–based investors.
Louis Borget—CEO of Enron Oil. Went to jail as a result of Enron Oil scandal.
Ray Bowen—Enron finance executive. Became treasurer after Ben Glisan was fired.
Ron Burns—Former CEO of Enron’s pipeline division. Briefly co-CEO with Skilling of Enron Capital and Trade Resources (ECT).
Rick Buy—Head of Risk Assessment and Control division (RAC).
Rebecca Carter—Enron’s corporate secretary and Skilling’s second wife.
Rick Causey—Chief accounting officer.
Margaret Ceconi—Former GE manager who joined Enron Energy Services (EES). Later tried to blow the whistle.
David Cox—Enron Broadband Services’ chief deal maker.
Wanda Curry—Enron accountant who dug up problems at EES.
Dave Delainey—Executive who took over EES from Lou Pai.
Jim Derrick—Enron’s general counsel.
Joseph Dilg—Vinson & Elkins lawyer.
Bill Dodson—Michael Kopper’s domestic partner.
John Duncan—Enron director and chairman of the board’s executive committee. Gave Lay his first job as CEO.
Jim Fallon—Trading executive who took over Broadband after Ken Rice left.
Lea Fastow—Andy Fastow’s wife and former assistant treasurer at Enron.
Mark Frevert—Longtime Enron executive. Became vice chairman in the last months.
Ben Glisan—Fastow’s structured-finance accounting whiz. Became Enron
treasurer.
Wendy Gramm—Enron director and former chairman of the Commodities Futures Trading Commission. Wife of U.S. Senator Phil Gramm of Texas.
Rod Gray—Rebecca Mark aide. Worked at both Enron International and Azurix.
Mark Haedicke—General counsel, Enron North America.
Gary Hamel—Management guru who touted Enron.
Kevin Hannon—Former Bankers Trust employee who became Ken Rice’s deputy at Enron North America and Enron Broadband.
John Harding and Steve Sulentic—Louis Borget’s direct superiors at Enron during Enron Oil scandal.
Joe Hirko—Former Portland General CFO who served as co-CEO of Enron Broadband with Rice.
Forrest Hoglund—CEO of Enron Oil and Gas.
Kevin Howard—Enron Broadband finance executive who worked on Project Braveheart.
Ron Hulme—Lead McKinsey & Company partner on the Enron account.
Robert Jaedicke—Enron director, and chairman of the audit committee. Former dean of the Stanford Graduate School of Business.
Vince Kaminski—Head of Enron’s Research Group. In-house skeptic of Fastow’s deals.
Bob Kelly—John Wing deputy.
Rich Kinder—President and chief operating officer before Skilling. Left to start Kinder Morgan.
Louise Kitchen—Trading executive who implemented idea for Enron Online.
Mark Koenig—Enron’s head of investor relations.
Michael Kopper—Fastow’s top deputy and investor in Chewco partnership. Later left Enron
to run Fastow’s LJM partnerships.
Mike Krautz—Enron Broadband finance executive who worked on Project Braveheart.
John Lavorato—Greg Whalley deputy. Later became head of trading in North America.
Judith Lay—Lay’s first wife.
Linda Lay—Lay’s former secretary and second wife.
Mark Lay—Lay’s son, who worked for the company and later joined a company that did business with Enron.
Robyn Lay—Lay’s stepdaughter, who once had an Enron jet deliver her bed to Monaco.
Sharon Lay—Lay’s sister, whose Houston travel agency got most of its business from Enron.
Charles LeMaistre—Enron director and chairman of board compensation committee. Former president of the University of Texas M. D. Anderson Cancer Center.
Kathy Lynn—Worked for Fastow at Global Finance. Later employed by Fastow’s LJM partnerships. Investor in Fastow deal.
Kevin McConville—Head of Enron’s Industrial Group. Every deal his group made went sour.
William McLucas—Wilmer, Cutler & Pickering lawyer, special counsel to
Enron.
Jeff McMahon—Enron’s corporate treasurer until replaced by Glisan. Became CFO after Fastow was fired.
Nancy McNeil—Lay’s secretary and Kinder’s second wife.
Amanda Martin—Enron executive who later joined Azurix.
Thomas Mastroeni—Treasurer of Enron Oil under Borget. Pled guilty in the Enron Oil scandal.
R. Davis Maxey—Masterminded Enron tax-avoidance schemes.
Jordan Mintz—General counsel for Fastow’s Global Finance division. Pressured Fastow to give up the partnerships.
Kristina Mordaunt—In-house lawyer, served as general counsel of Global Finance and Broadband division. Made $1 million on a $5,800 investment in one of Fastow’s deals.
Mike Muckleroy—Executive who bailed out the company during the Enron Oil scandal.
Cindy Olson—Head of human resources.
Lou Pai—Skilling lieutenant who headed early trading operation. Later CEO
of EES.
Mark Palmer—Enron’s head of corporate communications.
Ken Rice—Key member of Skilling’s inner circle. CEO of Enron Wholesale and, later, Enron Broadband Services.
Richard Sanders—Head of litigation for Enron North America.
Mick Seidl—Enron president during Enron Oil scandal.
John Sherriff—Whalley deputy and head of Enron Europe.
Susan Skilling—Jeff Skilling’s first wife.
Joe Sutton—Rebecca Mark’s longtime deputy. Took over Enron International after she left.
Beth Tilney—Enron executive and Lay confidante. Married to Merrill Lynch investment banker Schuyler Tilney.
John Urquhart—Enron director. Former executive vice president at General Electric.
Lord John Wakeham—Enron director and former British secretary of state for energy. As government official, approved Teesside.
Pinkney Walker—economics professor at the University of Missouri. Lay’s first mentor.
Charls Walker—Enron director and top Washington lobbyist. Pinkney Walker’s brother.
Chris Wasden—Azurix executive.
Sherron Watkins—Global Finance executive. Wrote whistle-blowing letter to Ken Lay.
Greg Whalley—Head of the trading operation in late 1990s. Became president and COO after Skilling resigned.
General Tom White—Enron international executive. Later Pai’s number two at EES. Became secretary of the army in the George W. Bush administration.
John Wing—Launched Enron’s international business. Built Teesside.
Herbert (Pug) Winokur—Enron director, former Pentagon official.
David Woytek—Enron auditor during Enron Oil scandal.
Anne Yaeger—Global Finance employee who left to work for the LJM partnerships. Investor in Fastow deal.
THE ACCOUNTANTS
Carl Bass—member of Andersen’s Professional Standards Group. Chief Enron skeptic in the firm.
Joseph Berardino—CEO of Arthur Andersen.
David Duncan—Lead Arthur Andersen partner on the Enron account.
James Hecker—Andersen partner who penned “Hotel Kenneth-Lay-a.”
John Stewart—Head of Andersen’s Professional Standards Group.
Nancy Temple—Andersen lawyer.
WALL STREET AND THE BANKS
Ron Barone—Analyst for PaineWebber and later UBS Warburg.
Dan Bayly—Merrill Lynch’s global head of investment banking.
David Bermingham, Giles Darby, and Gary Mulgrew—NatWest bankers who allegedly conspired with Fastow to steal millions that belonged to the bank.
Jim Chanos—Short seller who runs the hedge fund Kynikos Associates. Early short seller of Enron stock.
Carol Coale—Prudential analyst. Viewed as authoritative voice on Enron.
Donato Eassey—Analyst with Merrill Lynch. Replaced John Olson after he was fired.
Anatol Feygin—J. P. Morgan Chase analyst.
David Fleischer—Goldman Sachs analyst.
Robert Furst—Merrill banker who worked with Schuyler Tilney.
Scott Gieselman—Goldman Sachs investment banker.
Rick Gordon—Head of Merrill Lynch’s energy investment banking group.
Richard Gross—Analyst with Lehman Brothers.
Richard Grubman—Short seller who runs the hedge fund Highfields Capital Management. Early short seller of Enron stock.
Curt Launer—Enron-friendly analyst with Donaldson, Lufkin & Jenrette and, later, Credit Suisse First Boston.
James (Jimmy) Lee—Head of investment banking at Chase Manhattan Bank. Named vice chairman when Chase bought J. P. Morgan.
Andre Meade—Commerzbank analyst.
Ray Niles—Analyst with Schroder & Company and later Citigroup.
John Olson—Analyst with Sanders Morris Harris. Longtime Enron skeptic.
Mark Roberts—Short seller who operates a firm called Off Wall Street.
Robert Rubin—Member of the office of the chairman of Citigroup. Former treasury secretary in the Clinton adminstration.
Marc Shapiro—Vice chairman of finance and risk management at Chase Manhattan Bank. After the merger of J. P. Morgan and Chase, became a vice chairman of J. P. Morgan Chase. Longtime acquaintance of Lay’s.
Schuyler Tilney—Merrill Lynch investment banker. Firm’s primary contact with Enron and Andrew Fastow.
Rick Walker—Chase Manhattan (later J. P. Morgan Chase) banker, served as key contact with Enron.
THE JOURNALISTS
Peter Eavis—Reporter for Thestreet.com.
John Emshwiller and Rebecca Smith—Wall Street Journal reporters who exposed Fastow’s partnerships in October 2001.
Harry Hurt III—Wrote skeptical 1996 story about Enron for Fortune.
Toni Mack—Wrote skeptical 1993 story about Enron for Forbes.
Jonathan Weil—Wall Street Journal reporter who raised question about mark-to-market accounting in September 2000.
THE ACQUIRERS
Chuck Watson—CEO of Dynegy, Enron’s crosstown rival.
Steve Bergstrom—President of Dynegy.
OUR VALUES
RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here.
INTEGRITY: We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.
COMMUNICATION: We have an obligation to communicate. Here, we take the time to talk with one another . . . and to listen. We be-
lieve that information is meant to move and that information moves people.
EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we
can really be.
—From Enron’s 1998 Annual Report
INTRODUCTION
On a cool Texas night in late January, Cliff Baxter slipped out of bed. He stuffed pillows under the covers so his sleeping wife wouldn’t notice he was gone. Then he stepped quietly through his large suburban Houston home, taking care not to awaken his two children. The door alarm didn’t make a sound as he entered the garage; he’d disabled the security system before turning in. Then, dressed in blue jogging slacks, a blue T-shirt, and moccasin slippers, he climbed into his new black Mercedes-Benz S500 and drove out into the night.
At 43, John Clifford Baxter, the son of a Long Island policeman, had made it big in Texas. Before quitting his job eight months earlier, he had served as vice chairman of a great American corporation, capping a decade-long career as the company’s top deal maker. Baxter was rich, too—thanks to a generous helping of stock options, a millionaire many times over. But as he cruised the empty streets of Sugar Land, Texas, Baxter was drowning in dark thoughts. Always given to mood swings, he had become deeply depressed in recent days, consumed by the spectacular scandal that had engulfed his old company.
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