CHAPTER 5
Guys with Spikes
He wasn’t a consultant anymore. Jeff Skilling was now a hard-charging executive in control of a fast-growing division at a company in the midst of dramatic change. He was hiring people by the bushelful, negotiating their pay, overseeing their progress. He was expanding his empire and posting profits that were increasing every year (thanks, at least in part, to mark-to-market accounting). He was turning his ideas into reality.
Not all of Skilling’s ideas were about transforming the natural-gas business, though. He also had very clear ideas about how to build an organization, what to look for in people, and how those people should be rewarded. At McKinsey, Skilling had always felt that he’d been part of a true intellectual meritocracy, and that’s what he strove to instill at Enron Finance. He wanted to create a place where raw brains and creativity mattered more than management skills and real-world experience, where young MBAs were free to chase a pipe dream with company millions (even behind their boss’s back), where generating profits was rewarded not just handsomely but fabulously, and where those who failed to measure up would be quickly cut from the herd. If it all sounded very Darwinian, well, that was the point. Skilling believed that greed was the greatest motivator, and he was only too happy to feed it. “I’ve thought about this a lot, and all that matters is money,” Terry Thorn, an Enron managing director, recalls Skilling telling him. “You buy loyalty with money. This touchy-feely stuff isn’t as important as cash. That’s what drives performance.”
Skilling had other ideas, too. He used to say that he liked to hire “guys with spikes.” By this, he meant that if an executive had a singular narrow talent—a spike—Skilling was willing to bring him into Enron and lavish him with money, no matter what his other shortcomings. Egomaniacs, social misfits, backstabbers, devotees of strip clubs: Skilling didn’t really care about their foibles so long as they had a skill he needed. Nor did it much matter to him whether they were team players. “Jeff could care less whether people got along with each other,” says one of his early hires. “In many cases, he felt it was better if they didn’t get along, since it created a level of tension that he believed was good for helping people come up with new ideas.” A former trading executive adds: “Jeff always believed pitting three people against each other would be the quickest way to assure the best ideas bubbled to the top. He wanted them to fight.”
They were all smart, of course; that went without saying. “Every person around Skilling was exceptional in one way or another,” says a former longtime executive. “Did they have the skills to run a very complex business? Ha!”
Which offers up the problem: no company can prosper over the long term if every employee is a free agent, motivated solely by greed, no matter how smart he is. No company can function if it only hires brilliant MBAs—and sets them against each other. There is a reason companies value team players, just as there’s a reason that people who get along with others tend to do well in corporate life. The reason is simple: you can’t build a company on brilliance alone. You need people who can come up with ideas, and you also need people who can implement those ideas and are well compensated for doing so.
The pure meritocracy Skilling thought he was installing was, in fact, a deeply dysfunctional workplace. That was hard to see in the early days, when the place felt vibrant and heady and exciting and they all were working so hard that they didn’t have time for anything else. But over the years, as the business became more established, the sense of excitement waned and the dysfunction became more evident. The very qualities Skilling prized—the opportunity for creati-
vity to run wild, the mixture of brains and hubris, the absence of gray hair and structure—turned Enron Finance into a chaotic, destructive, free-for-all. Over time, as that culture infected the entire company, Enron began to rot from within. But that came later.
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Jeff Skilling liked to say that he was presiding over a start-up, going so far as to declare that “other than Microsoft, we were the largest start-up company in the last 20 years.” Never mind that Enron had roots that went back to the early days of the gas pipeline business; indeed, even Skilling’s own division wasn’t as much of a start-up as he liked to think.
In 1991, Lay and Kinder merged Skilling’s Enron Finance with something called Enron Gas Marketing, the part of the company that sold natural gas to wholesale customers. The move made perfect sense, since much of the work done by Skilling’s traders consisted of buying and selling natural-gas contracts that would allow the company to fulfill its obligations to those same customers. The merger gave Skilling a nice built-in profit stream as well as additional staff. Then, a year later, he was handed one of Enron’s prized assets, the intrastate Houston Pipeline, which piped gas to the many industrial sites on the Gulf coast. This also gave Skilling access to ready profits while providing important competitive intelligence for his traders. The growing business was soon renamed Enron Capital and Trade Resources, ECT, as everyone at Enron took to calling it.
What is true is that Skilling acted as if he were operating a start-up, instituting rules and practices that were often at odds with the rest of Enron. On the thirty-ninth floor of the Enron building, where ECT was housed, Skilling’s disciples—known internally as Skillingites—were remarkably disdainful of the company that employed them. “We had the authority to do anything and everything we wanted to do,” recalls one early arrival. “We thumbed our nose at any personnel policies that the rest of Enron had.” ECT had its own compensation system: it gave fat bonuses to employees at a time when that sort of thing just wasn’t done in the energy business. Everyone got Wall Street–style titles, such as managing director. Traditional offices were torn out, replaced with cubicles and glass walls. Instead of pursuing engineers from the University of Nebraska and Texas A&M, Skilling recruited MBAs from Wharton, the University of Texas, and Harvard. Over time, people from less prestigious schools were made to feel as if they didn’t measure up.
As a boss, Skilling was intensely loyal to his inner circle, and those who came through for him in the early 1990s could later do no wrong. He gave them mind-blowing piles of cash and stock options. As Skilling rose to the top of Enron, he took his chief lieutenants with him, and they assumed key roles as corporate officers. Thanks to Skilling, they left Enron with millions of dollars, in some cases, tens of millions. Yet Skilling never demanded the same kind of loyalty in return. He forgave those who strayed or screwed up, who manipulated or even betrayed him as long as they remained useful. In 1992, despite objections from some of his staff, Skilling even hired Kevin Hannon, the junior Bankers Trust executive who erased the trading desk’s computer files.
The man who offers perhaps the starkest illustration of what Skilling valued in an employee was an executive named Lou Lung Pai, the key architect of Enron’s trading operation who was later placed in charge of several other key Skilling initiatives. Pai, who carefully measured his words, was viewed as an enigma by his coworkers and as a terrible man to cross. More than anyone else, he became the instrument of Skilling’s will. Publicly, Skilling touted him as “my ICBM.” But Enron executives knew him for something else as well: his longtime infatuation with strippers. A married, middle-aged father of two, Pai maintained an ongoing secret relationship with an exotic dancer he’d met during one of his frequent visits to topless bars.
Few other American corporations would have tolerated Pai’s antics, inside or outside the office. Indeed, several times Skilling contemplated firing Pai in his first years at the company. But once he proved himself on the trading desk, Pai became untouchable. Skilling gave him complete freedom to run trading as he saw fit, and no matter how much he abused his colleagues or underlings, he almost never reined him in.
Born in Nanjing, China, Pai came to America at the age of two, and grew up in College Park, Maryland, where his father was a math professor at the University of Maryland. Pai went to the same school, earning a master’s degree in e
conomics, and even worked for a few years as an economist at the Securities and Exchange Commission. He came to Enron in 1986 from Conoco, where he’d labored in obscurity. Pai was 44 when Skilling hired him in 1990, and he emerged as the top man on the tiny trading desk after the ugly split with Bankers Trust. Everyone at Enron agreed that Pai was smart; indeed, one former executive calls him “the most incisive businessman I’ve ever met.” He also had a keen eye for trading talent.
But his real genius was a certain brutish political skill. Pai was Enron’s fiercest corporate warlord. He made short work of the executives who had been placed over him. He took credit for others’ achievements, ridiculed adversaries behind their backs, undermined them in front of colleagues, and simply ignored orders that he didn’t like. “Lou was extremely good at eliminating everyone in his way,” says one longtime ECT executive. Adds an early trader who worked for Pai: “It became apparent that you don’t mess with Lou.” And a third: “If you got in the way of Lou’s agenda, he’d get rid of you.” Once Ken Lay convened an off-site employee conference where the featured speaker was Stephen Covey, author of the management best-seller The Seven Habits of Highly Effective People. “Throw that away,” Pai told a colleague whom he spotted with a copy of the book. “Buy Sun-tzu’s The Art of War.”
Pai served as the human template for the trading culture at Enron. He saw things in black and white. “Lou was the purest character I ever met because it was always about one thing: money,” says a longtime Enron trader. Colleagues were struck by Pai’s unerring instinct for pocketing the most personally from every financial opportunity. Years later, when Enron spun off a shaky new business that Pai chaired, one senior colleague made a point of buying shares merely because he figured that Pai, who owned a hefty stake, would figure out a way to reap a windfall.
Strip clubs were Pai’s other passion. Topless bars had long been part of the old all-male oil-and-gas culture, and Houston was a breeding ground for their latest incarnation: upscale gentlemen’s clubs with a veneer of polish and private VIP rooms, where a big spender could buy lap dances while sipping Dom Pérignon. In the early 1990s, some gas industry deal makers still entertained out-of-town customers at such places. But Pai wasn’t there just with clients; he could be found there regularly after work, hanging out for hours at Rick’s Cabaret, the Men’s Club, or Lipstick. One early ECT colleague recalls jetting to Dallas with Pai for an industry conference then heading straight from the airport to a topless bar. “We didn’t even go to the convention,” he says. “The only thing Lou wanted to do was go to a strip joint.” Pai dropped so much money on the strip-bar scene that there was gossip he owned a piece of one of the clubs. In truth, much of the entertainment was courtesy of Enron shareholders. A group of traders could easily run up a thousand-dollar tab at Rick’s, and they routinely charged their outings to their Enron expense accounts.
One evening, Pai joined an Enron group for a bachelor party at Lipstick. At about 2 A.M., as everyone was preparing to clear out, an unmarried member of the group asked Pai his secret: how did he keep his wife from smelling the dancers’ scent on his clothes?
“That’s easy,” Pai explained. “I go to a gas station, and rub some gasoline on my hands, and it kills the perfume.”
“If you do that, Lou,” someone shot back, “doesn’t your wife think you’re fucking the gasoline attendant?”
The entire table fell silent in horror; Pai wasn’t someone to trifle with. But Pai finally let his usual poker face curl into the hint of a grin—“Heh . . . heh . . . heh”—and everyone breathed a sigh of relief. But not for long: when the trader was transferred to Calgary, many assumed it was Pai’s doing.
Around 1995, Lay, responding to complaints from a female employee, finally issued a memo announcing that Enron would no longer pick up the tab at topless bars. “When that memo came out,” recalls a former ECT executive, “the trading floor went completely quiet. There was a pall for two days.”
Pai kept expensing his excursions for months, until he finally received a rare personal scolding from Skilling. “Well, it’s the old gas business,” Pai protested.
“It’s not part of the new gas business,” Skilling replied.
Like all those in Skilling’s small inner circle, Pai operated with his boss’s unquestioning support. “Lou could do things that Jeff didn’t like to do,” says a longtime colleague. “Lou had no problem telling people they had stupid ideas.” For years, the prickly Pai even treated Ken Lay’s son, Mark, an early ECT employee (and an undistinguished performer) with undisguised disdain. Ken Lay complained to Skilling, agitating for Pai’s head. But Skilling refused to serve it up. “If he’s gone, I’m gone,” Skilling told the Enron CEO. So Lay backed off.
But why? Why was Skilling so loyal to Pai, so willing to allow his greed and poisonous tactics to shape the culture of ECT? Skilling’s response was simple: he left Pai alone because he always got the job done. But among Skilling’s top executives, there were other theories. One was that Skilling liked having someone like Pai around, that he prized his blunt methods and the conflict they created. Another theory was that Skilling felt he had to give Pai a wide berth because he was a star performer and because he had the loyalty of the traders. “I think he became afraid of Lou, because of the power he had as the man who controlled the trading operation,” says a former ECT executive. “He didn’t want to do anything because they were making money.”
Nor was Pai the only one who seemed to have his way with Skilling. Traders and deal makers alike came to realize that it was easy to hold up Skilling for a raise or a bigger bonus or more options: all they had to was threaten to quit, and Skilling would give in to their demands. Later, when Enron was flying high, the press portrayed Skilling as a Master of the Universe, in control of everything at the company. But the insiders always knew better. As smart as he was, he could be taken advantage of. And take advantage they did.
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The day would come when the trading operation became enormous, when it posted the biggest profits in the company and when virtually all business activity at Enron revolved around the giant trading floor. But in those early years, it
wasn’t like that at all. In the beginning, the traders were their own small division, trying to build a business from scratch.
Their transformation from a support group to a powerful profit center was cemented by a key Skilling decision. Pai had originally been in charge of the financial traders, which then made up a small portion of the trading business. Skilling expanded his purview to include all the traders who actually handled the logistics of moving natural gas through pipelines for physical delivery. This meant they were now responsible for getting the gas to customers as well as using financial instruments to manage the price risk from the long-term sales contracts that Enron’s marketers were negotiating. This gave Pai and his traders a wealth of intelligence about what was going on in the marketplace, information no other company’s trading desk could match.
The traders became critical inside Enron. In effect, trading sat in the middle of the gas-sale transaction, between two groups of commercial deal makers. On one side were Skilling’s gas bankers, busy offering financing deals to producers to lock up long-term supply. This group was headed by Gene Humphrey, Skilling’s first hire, who had come from Citibank. On the other side were the marketers, who made big deals with utilities and industrial buyers of natural gas. Both kinds of deal makers were called originators, but in the early years, it was the marketing originators who got all the glory. Whenever ECT signed a long-term contract with a customer, it could immediately declare the profits for the entire deal on its income statement, thanks to mark-to-market accounting. In addition, Ken Lay’s strategic goal was to create new markets for natural gas, and that’s precisely what these originators did with their deals.
From the moment Enron Gas Marketing was put under his aegis, Skilling began pushing the originators to do something spectacular, to pull off a deal the likes of which n
o one had ever seen before in the natural-gas industry. The Holy Grail was a big deal with a power-plant developer, someone who would agree to build a plant that would buy gigantic amounts of gas.
And in January 1992, the Grail was found: Enron announced that it had agreed to provide the entire gas supply for a new 1,000-megawatt plant in upstate New York. Enron convinced the plant developer, Sithe Energies, to use natural gas instead of coal, but that wasn’t what made it so important. As big as the Brooklyn Union deal had been three years earlier, the Sithe contract was of a different scale entirely. Enron would supply Sithe with 195 million cubic feet of gas per day for 20 years, an extraordinary amount for an unheard-of term. The estimated value of the gas: $3.5 billion to $4 billion. As Skilling saw it, this was his group’s “bell-cow transaction,” the one that made everybody stand up and pay attention. Both inside and outside the company, people were agog at what Skilling had pulled off.
The Sithe deal had ramifications that went well beyond its sheer size. For years, Sithe helped Enron meet its aggressive profit targets. Using mark-to-
market accounting, Enron began booking profits even before the plant started operating. It kept booking profits from Sithe well into the late 1990s by restructuring the deal on multiple occasions when the company was scrambling to meet its quarterly projections. Later, the deal’s complex machinations backfired, producing a huge liability that Enron never fully disclosed. But that was far in the future.
The Sithe deal was the ultimate proof that Skilling’s big idea was working. He had said that his new creation would allow Enron to land giant deals, and now the company had one in hand. He had said that Enron could supply huge amounts of gas on a long-term contract, and now he’d committed to do just that. To make Sithe work, Enron bought gas from dozens of locations and laid miles of fresh pipeline into the plant from Canada. And the traders were suddenly engaged in seeing to it that the Sithe supply never faltered and the price risk was managed; indeed Sithe jump-started the trading operation like nothing that had come before it. “In the beginning, we needed physical supply to trade,” says Amanda Martin, who began working for Skilling in 1992. “We had to originate transactions to give the traders something to play with.” It was a logistical triumph, proof that Enron could deliver on a huge long-term gas supply commitment.
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron Page 12