The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

by Bethany McLean

  The next big deal was a landmark event for Enron. In 1993, the California Public Employees Retirement System (known as CalPERS) agreed to put $250 million in cash into a new off-balance-sheet investment partnership that Enron would run. For its 50 percent stake, Enron would contribute $250 million of its own stock. The money would be used to make energy-related investments (which is indeed what it did over the course of the next four years). With an investment portfolio of $130 billion, CalPERS is the largest public pension fund in the country and it is also among the most respected institutional investors in the world. A CalPERS imprimatur isn’t quite on a par with Warren Buffett’s deciding to put money into a company, but it’s pretty close. Enron touted the partnership in press releases, and internally there was enormous pride in what the deal represented. It meant that Enron was finally joining the big leagues.

  The partnership was called JEDI. Officially, the acronym stood for Joint Energy Development Investments. But it was also a sly nod to the Star Wars films; the man who devised the partnership was a Star Wars devotee, a finance executive named Andrew Fastow, whom Skilling had hired three years earlier. Though Skilling was enamored of him, Fastow hadn’t yet made much of an impression on the rest of Enron.

  With the financial piece in place, nothing could stop ECT, and nothing did. By 1996, in its sixth full year of existence, Skilling’s division made $280 million before interest and taxes, more than 20 percent of Enron’s earnings. Trading was rapidly becoming the company’s biggest profit center. At the same time, Skilling was firmly established as the company’s resident genius.

  “Everyone believed what he said because he hadn’t been wrong,” recalls one ECT executive. “It was death if he raised his voice. He was brilliant at asking questions. He made people feel inadequate. People spent days getting ready for a meeting with him.” When Skilling stepped out for a stroll in the trading room, the word went out as though Elvis were in the building: “Jeff’s on the floor!”

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  • • •

  Skilling himself later spoke of his days building ECT as his favorite time at Enron, the time when he had the most fun. But among those who worked for Skilling, fun was one of the last words they would associate with him.

  Everyone in those years worked brutal hours, which took an inevitable toll, and no one worked harder than Skilling himself. Ever since he was a teenager, Skilling had been a workaholic, with little time for idle chitchat or variation in his routine. In his years at McKinsey, he arrived every day at 7 A.M. and ate breakfast—Twinkies and a Diet Coke—at his desk. Lunch was always the same: ham and cheese on white bread with mayo and a bag of Cheetos. He worked until about 8 P.M. on weekdays and came into the office every Sunday afternoon.

  In 1990, Skilling had negotiated his move to Enron while his wife was in labor with their third child, reviewing drafts of his employment contract in the hospital labor-and-delivery room between Sue’s contractions. After he arrived at Enron, he worked even harder. “I’d wake up at three o’clock in the morning in a cold sweat and say, ‘What have I done?’ I was working like a fool, an absolute fool,” he later told friends. “It was fun, but it wasn’t good for you.” One Friday afternoon, Skilling bumped into gas-marketing executive Dan Ryser, who explained that he was hustling out to coach his kids’ soccer team and get his mind off business. “What do you do to get your mind off the business?” the executive asked. “Nothing,” Skilling responded.

  Skilling built a vacation home in Utopia, in the Texas Hill Country. He relished his visits there partly because the four-hour drive from Houston gave him time to think about work. One weekend in 1995, while rock climbing there Skilling fell 20 feet and seriously hurt his ankle. A local doctor told him that he could do nothing: the ankle was so badly mangled that Skilling needed to go to a big-city hospital for surgery. Scheduled to leave the next day on a four-day trip to Germany, Skilling bought a set of crutches and hobbled onto the plane. The surgery took place a month later; reassembling his ankle required a bone graft, two pins, and three screws. Skilling later looked on his decision as “setting an example for the organization: things need to get done.”

  Inevitably, Skilling’s family bore the brunt of his work habits. In the mid-1990s, with his marriage on the rocks, Skilling approached Lay and the Enron board for their approval of a last-ditch attempt to patch things up with his wife Sue. He would work half time, two weeks on the job, two weeks off, and spend the rest of his time trying to work things out at home. Ron Burns, an Enron pipeline executive, would serve as co-CEO to help run ECT. Skilling changed his title to managing director and accepted the 50 percent pay cut demanded by Kinder; he envisioned acting much like a management consultant, letting Burns handle the day-to-day operations. The Enron board thought the arrangement odd but approved it.

  As a manager, Burns was everything Skilling wasn’t. He motivated people not by throwing money at them but by taking an interest in their lives and making them feel appreciated. He had exquisite people skills. As one ECT employee put it, “He could fire you and you’d feel good about it.” Though Burns lacked Skilling’s crackling intelligence, he had the kind of practical management skills that most companies treasure—and that Skilling never had. He also had little tolerance for the kind of outrageous behavior and free spending that Skilling routinely indulged, or for guys with spikes. “He was the human part of the team,” says an old ECT hand.

  So naturally the arrangement was doomed. Part of it was that Skilling’s marriage was too far gone to be saved. Part of it was that rather than valuing Burns for his management skills, Skilling viewed him as an intellectual lightweight and was openly dismissive of him. “Ron doesn’t get it,” he would tell his inner circle. Taking his cue from Skilling, Lou Pai began a campaign to undermine Burns.

  In August 1995, Burns resigned to become president of the Union Pacific Railroad. Skilling, who had returned to work full time, assumed, once again, the title of chairman and CEO of ECT. Then he plucked one of his inner circle to be ECT’s new number two: Lou Pai.

  CHAPTER 6

  The Empress of Energy

  Until the mid-1990s, most people who had heard of Enron had no idea who Jeff Skilling was. To the outside world, the person who was Enron, who had a reputation for turning impossible concepts into glittering realities, was not Skilling. It was Rebecca Mark. When she stepped off Enron jets in remote spots in third world countries, she was welcomed like a celebrity and surrounded by throngs of reporters. Mark was a high-profile woman in a very male industry at a time when building power plants and pipelines across the globe was thought to be one of the most glamorous, profitable businesses ever, a little like the Internet in the late 1990s. And she reveled in it, embraced it with every fiber of her being. “In her ambition, her drive, and her tenacity,” says a former Enron executive, “she was truly spectacular.”

  Mark, who was put in charge of something called Enron Development upon Wing’s departure, not only kept her former lover’s legacy of ferocious independence; she furthered it. Her team’s offices were in downtown Houston—but across the street from Enron’s headquarters, not in it. The decor was all glossy wooden furniture and expensive Oriental rugs, a dramatic contrast to Skilling’s stark modernism. Mark’s fiefdom had its own compensation system, one that would make her incredibly rich regardless of the ultimate success of her projects. It had its own books, its own accounting system, and its own risk-management system. And it had its own culture, where the ex-military guys she liked to hire sought to outdo each other at parties featuring elephants, motorcades, and belly dancers, and where Mark herself once came roaring in on the back of a Harley to the beat of “Eye of the Tiger.”

  It’s actually one of the more stunning things about Enron that Mark’s international business and Skilling’s trading business could coexist within the same company. Skilling wanted to figure out ways to separate energy from the hard assets needed to produce it; Mark’s business was nothing but hard assets. Trading was all
about hedging away risk and quickly capturing profits. International development, where it could take a decade to recoup your money, meant taking on uncontrollable risks—everything from natural disasters to popular uprisings—and living through the inevitable trauma that comes with constructing a giant power plant in inhospitable territory. “Foreign direct investment,” says a former executive in Mark’s group, “is a matter of faith.” That was anathema to Skilling. “We were absolutely on opposite ends of the spectrum,” he once acknowledged. “Put us both in a room and we’d start screaming at each other.”

  Within Enron, it was obvious early on that Mark and Skilling were on a collision course. The contempt they had for each other’s business was well known, and there was—and still is—a bitter divide between those who worked for Skilling and those who worked for Mark. Both have always insisted that their rivalry was a business issue, not a personal one. But for them, business was personal. Mark and her deputies thought that Skilling was a financial manipulator who wasn’t capable of running a real, dirty-fingernails business. Skilling saw his rival as someone who was so busy jetting and glad-handing and playing the Enron glamour girl that she couldn’t be bothered to understand the numbers. She snowed people, he believed. “Harvard Business School doesn’t teach you accounting or finance,” Skilling once said about Mark. “They teach you how to be convincing.” Mark, in turn, came to believe that Skilling would go to any lengths to sabotage her. In time, she was proved right, not that she didn’t give him plenty of ammunition.

  Perhaps part of the problem was that, in many ways, they were very much alike—and not just because they were the same age and had Harvard MBAs. They both came from modest midwestern backgrounds. They had both been brought up to believe in the virtues of hard work, which, as adults, they took to extraordinary lengths. They were both driven to succeed. And they both believed they were creating new worlds, where anything was possible. Both also wrapped their business goals in the lofty language of idealism. Skilling loved to say that in trying to create a new kind of energy company, Enron was doing “the Lord’s work.” Mark struck a similar tone in talking about her business. “We are brought together with a certain amount of missionary zeal,” she told Harvard for a case study. “We are bringing a market mentality and spreading the privatization gospel in countries that desperately need this kind of thinking.”

  Mark and Skilling also have this in common: both are blamed for Enron’s downfall—by ex-employees, by outside observers, and by each other. Mark’s critics contend that the shockingly poor performance of the assets she built stripped Enron of its financial strength and that, in being so richly rewarded for building those assets, she looted the company along the way. Nor is the harsh criticism limited to those from Skilling’s side of the company. “Ego-driven empire-building,” is how one former international employee describes Mark’s tenure. Mark “worked very hard at self-promotion,” says an early executive. “She had a lot of drive and personal ambition, but I’m not sure it was always directed toward the company.” And this, from the former CEO of a major oil company: “The failure of Enron before all the accounting scandals can be seen in the results overseas.”

  • • •

  The first comment people make about Skilling invariably involves his brains. With Mark, the first thing people mention is her looks. That’s partly because

  she operated in the all-male energy industry and partly because the world can still be a sexist place. But it’s mostly because of Mark herself. She happily played up her physical attributes, which included long blond hair, big brown eyes, and a dazzling smile. At Enron, she viewed her outfits—usually high

  heels and short skirts—as part of the show. Forbes writer Toni Mack once noted that Mark would sometimes change clothes as often as three times a day. “High finance with a touch of theater,” Mack called it. Mark unapologetically viewed being a woman—a smart, charismatic woman—as a way to “get privileges

  that other people don’t get, and . . . audiences that others could never hope

  to achieve,” as she told one reporter. Her gender was not an obstacle to be

  overcome but an advantage. As she liked to put it, “I’ll take all the advantages I can get.”

  The image of blatant opportunism that such a quote conveys doesn’t really do Mark justice. Yes, she was opportunistic, but she was also genuinely charming—all down-home warmth, not big-city glamour—with a gift for remembering personal details and a girlishness that put people at ease. Mark had a way of talking that made listeners feel as though they were being taken into her confidence. “If you meet her and she turns on the charm, you’ll be absolutely reduced to mush,” says a former Enron executive who is not a fan. It’s easy to see how those who worked for her could believe that anything was possible.

  Mark’s defining characteristic, though, was her optimism. She always had faith in herself, faith that the world was a place where she could make things happen, and faith that no matter how bad things seemed, all would work out just fine in the end. In her many interviews, she was so upbeat that she sounded positively sappy: “We were taught to believe that if you worked hard enough at anything, you could accomplish it,” she told one reporter. “Many times the biases against women are those of our own creation,” she told another. “If you approach people thinking that you’re not going to be discriminated against, most often you’re not.” This wasn’t just pap she fed the press; it was what she really believed. One of her favorite books was Paulo Coelho’s The Alchemist, essentially a fable about the good things that happen if you follow your dreams.

  Born Rebecca Pulliam, the second of four children of devoutly Baptist parents, Mark grew up on a farm in the small community of Kirksville, Missouri, about 150 miles east of Kansas City. Just as Ken Lay used to talk about his upbringing in moralistic terms, so did she. The farm, she later said, was where she learned the importance of hard work and where she got her first understanding of business. Even as a child, she preferred what is usually considered man’s work—mucking out stalls, for instance—over, say, sewing. Mark was a good student, and like her siblings (not to mention Ken Lay and Jeff Skilling) she put herself through college. She spent her first two years at William Jewell College, a private Baptist school near Kansas City, before transferring to the Baptist-run Baylor University in Waco, Texas.

  Mark did not leave the farm intent on going into business. On the contrary: she dreamed of becoming a clinical psychologist and earned a BA in psychology in 1976. She took an internship working with juvenile delinquents, but it was not a happy experience; the job simply didn’t mesh with her natural optimism. She later described it as “personally depressing—the antithesis of everything I learned growing up: that you can control your own destiny.” What drew her to business was precisely her sense that it was an arena where she could control her destiny, where her willingness to work hard and dream big could pay off. By 1977 she had a master’s in international management from Baylor.

  By an odd coincidence, Mark ended up working in the same place that Skilling did after college: Houston’s First City National Bank, where she began her business career as a commercial-lending officer. As she has pointed out, Skilling was upstairs operating in the rarefied world of portfolio theory while she was down on the floor making loans. That is to say, she was getting her fingernails dirty. (It was also during her stint at First City that she met and married an Arthur Andersen consultant named Thomas Mark.) In 1982, she joined the treasury department at Continental Resources, an energy company that was bought by Houston Natural Gas in 1985 shortly before the InterNorth merger. She ended up working in Enron Cogeneration, where she desperately wanted to prove that she could work just as hard as the guys and where she learned, as one of her colleagues put it, to never “melt into the shadows.”

  • • •

  By 1991, Rebecca Mark felt that her time had come at Enron. The Teesside deal had been completed, it was a triumph for all concerned, and she believed she�
�d been a big part of it. She’d gotten her Harvard MBA. She was free of John Wing, who had been removed by Lay and the board from his Enron empire, lucrative consulting contract in hand. Her relationship with Wing, she believed, had toughened her up. She believed that she deserved to replace Wing as head of Enron Power, and she fervently hoped that Lay and Kinder would agree.

  Much to her dismay, they didn’t. Instead, they decided to carve up Enron Power into three divisions: Europe, the United States, and an emerging-markets business called Enron Development. Mark got Enron Development. The only problem was that Enron didn’t have an emerging-markets business: Mark had been handed a division without a single asset and with only a handful of employees. And that wasn’t the only indignity. Instead of reporting directly to Lay, she was told that she would be reporting both to Bob Kelly, who was put in charge of Enron Europe, and Tom White, the new CEO of Enron Power. Mark was furious at the decision; years later, it still rankled. When someone once mentioned the success Skilling had in building his trading operation, she scoffed. Unlike him, she replied tartly, she “didn’t start off with the largest gas-pipeline system in the United States.”

  Emerging markets: in the early to mid-1990s, there was no more seductive siren call in all of American business. Developing nations, long overlooked by Western corporations, had enormous populations and tremendous needs. Their governments were becoming more open to free-market ideas and to the notion that Western investment could help generate jobs and improve standards of living. Many governments were even privatizing state-run enterprises. Banks were salivating over the prospect of loaning billions to third world development projects.