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

by Bethany McLean

  Skilling (left) and Fastow share an exultant moment.

  Fastow at the dinner table.

  A midrace lunch break (Skilling is standing in background; Fastow is standing in foreground).

  Skilling (left) catches some sun after a day on the race course.

  Ken Rice gets nine stitches. He wiped out on his bike, putting his tooth through his lip.

  Rick Causey, Enron’s chief accounting officer, pushed Arthur Andersen hard to see things Enron’s way. (Gamma)

  Rick Buy, the head of Enron’s risk assessment and control department, agonized over his inability to stop bad deals. (Gamma)

  Longtime Enron executive Amanda Martin says that the company managed to anger virtually all of its big customers. The word was out, she says: “Don’t do business with Enron. They’ll steal your wallet when you aren’t looking.”

  Greg Whalley was the only one who could control the unruly traders. He became Enron’s president when Skilling left the company. (Landov, Bloomberg News)

  Skilling and Fastow were among those who built enormous houses with their Enron wealth. Skilling moved into his 8,120-square-foot house just before he quit Enron. (Michael Stravato, Gamma)

  Fastow’s house was still under construction when he was indicted. (Pat Sullivan, AP)

  Ken Lay in better times: (left) at a company celebration in 1998 and (bottom) with his wife Linda at an Alexis de Tocqueville Society reception in early 2001.

  (Left: GettyImages; bottom: Dave Rossman, Gamma)

  Federal Reserve Chairman Alan Greenspan received the Enron Prize for Distinguished Public Service from Lay in November 2001, less than three weeks before the company filed for bankruptcy. (David J. Phillip, AP )

  Even before she wrote her memo to Lay in August 2001, Sherron Watkins told an Enron friend, “Andy and Causey are going to jail.” (Steve Liss, Gamma)

  Fastow and his wife Lea leave the courtroom in May 2003 after she was indicted and he was charged with new offenses. (David J. Phillip, AP)

  Laid-off Enron employees wait outside company headquarters on December 3, 2001, the day after the bankruptcy filing. (David J. Phill ip, AP)

  Skilling on a break during his combative appearance before the Senate Commerce Committee in February 2002. (Robert Trippett, Sipa Press)

  INDEX

  The page numbers in this index refer to the printed version of this book. To find the corresponding locations in the text of this digital version, please use the “search” function on your e-reader. Note that not all terms may be searchable.

  Abib, Osmar, 163–64, 371

  ABN Amro, 164

  accounting, 132, 141–42, 165, 230, 261, 328, 361, 397, 406–7, 409, 411–12, 413–14, 416, 419

  EBS and, 289–90

  fair value, 129, 308–9

  fraud, 354–59, 406

  historical-cost, 39–40

  mark-to-market, 39–42, 45, 60, 66, 78, 92, 94, 127, 131, 158, 181, 218, 227, 296, 303, 305, 318–20, 388, 411,

  413

  problems with, 95, 96–97

  rules and procedures of, 155, 157, 184, 264, 293, 295, 357

  scandals, 71, 390

  see also Arthur Andersen; GAAP

  Adelphia, xxiv, 413

  Adlong, Shannon, 382–83

  Africa, 339, 350

  Alchemist, The (Coelho), 72

  Alexander, Jim, xiii, 95

  Alkhayat, Hamd, 121, 124

  Allario, John, 122

  Allied Signal, 182

  Allison, Herbert, 235

  Al-Waleed, Prince, 391

  American Centurion, 340

  American Council for Capital Formation, 146

  American Enterprise Institute, 87

  American Express, 340

  American Fork, 293

  American Heart Association, 146

  America Online (AOL), 319

  Amnesty International, 81

  “analyst capture,” 235

  analysts:

  credit, 236–39, 323, 353

  Enron meetings for, 176, 179–80, 242–44, 284, 314, 320–21, 323, 345

  natural-gas, 232

  securities, 155, 230–35, 236, 237, 240, 243–44, 296, 320, 326, 331, 348–49, 353, 368, 387, 393, 396, 407

  Andersen, Arthur, 143–44

  Andersen Consulting, 144–45

  Antioco, John, 291–92

  Apple Bank, 17, 18, 19, 20, 21

  Apple Computers, 230

  Arab oil embargo, 1

  Argentina, 74, 252–53, 257

  Arkansas Teacher Retirement System, 202

  Arnold, John, xiii, 219, 223–24, 283, 304, 339, 397, 398

  Arthur Andersen, 73, 94–95, 116, 124, 161

  annual energy symposium of, 241

  consulting arm of, 144–45

  demise of, xxiv, 406

  on EES, 184, 300

  Enron and, 19, 20, 141, 143, 145–49, 157–59, 162, 168, 169, 176, 207–9, 239, 295–97, 305, 307, 316–18, 354, 356, 358, 381–85, 393, 406–7, 416

  Enron accounting restatement and, 363, 368–69, 383–84, 393, 394

  Enron employees from, 153–54, 169, 323, 354, 355, 362

  firmwide strategic advisory council of, 147

  on LJM, 190, 197, 361, 393

  obstruction-of-justice conviction of, 406–7

  Professional Standards Group (PSG) at, 148, 190, 295, 318, 323, 363, 382

  reputation of, 143–44

  scandals involving, 145, 147, 357, 381

  Art of War, The (Sun-tzu), 58

  Aspen, Colo., 423

  Astin, Ron, xiii, 166

  Atlantic Water Trust, 249, 253

  attorney-client privilege, 382

  Avici Systems, 290, 308, 354

  Ayers, Judith Diane, see Lay, Judith

  Azurix, 90, 113, 124, 246–63, 285, 313, 341, 368–69, 373, 374, 387, 399, 417

  collapse of, 318

  IPO and stock of, 251–52, 253, 254, 256, 258

  backup credit lines, 379, 386

  Badum, Jim, 176

  Bahía Blanca, 257

  Baker, James, xxiv, 79, 423

  Baker Hughes, 402

  Baldwin United, 319–20

  Ballentine, James, 341

  Ballmer, Steve, 313

  bandwidth on demand, 286

  bandwidth trading, 110, 188, 243, 244, 284, 286–87, 290

  Bank of America, 81, 343

  Bankers Trust, 39, 42–43, 57, 58, 115

  banking crisis, Texas, 36

  Bank One, 167

  Baptist Church, 86

  Barclays, 168–69

  Barone, Ron (PaineWebber/UBS Warburg analyst), xvi, 85, 292, 325, 348

  Barone, Ron (S&P analyst), 238

  Barrington, Brian, 124

  Bartiromo, Maria, 219

  Barton, Joe, 173

  Bass, Carl, xvi, 295, 297, 316–18, 363

  Bauch, Billy, 294

  Bauer, Tom, 169

  Baxter, Carol, xxii

  Baxter, Cliff, xiii, 38, 64–66, 105, 122, 210, 215, 228, 249, 260, 299–300, 313, 315, 343, 390

  concerns about Fastow of, 152, 163, 333, 356

  departure of, 333–34, 349, 350, 361, 380, 397

  at Enron North America, 207, 213

  as mergers and acquisitions specialist, 64

  as negotiator, 107–8, 109, 262

  Pai’s problems with, 65, 66, 228, 302

  suicide of, xxi–xxiii, xxv, 408, 418

  Baxter, J. C., xxii–xxiii

  Bayly, Dan, xvi, 208–9, 411

  Beard, John, 18, 19, 20

  Bear Stearns, 321

  Bechtel, 81

  Belden, Tim, xiii, 264, 266, 269, 271–76, 278–79, 282–83, 300, 309, 339,

  413, 420

  guilty plea and deal of, 413

  Belfer, Arthur, xiii, 13

  Belfer, Robert, xiii, 13, 199

  Beowave geothermal energy facility, 268

  Berardino, Joseph, xvi, 147, 317

  Bergstrom, Steve, xvii, 391–92, 395
, 402

  Berkowitz, Sean, 419, 421–22

  Berlin, 254

  Bermingham, David, xvi, 194–96, 365, 384

  Bienenstock, Martin J., 390–91

  Biochemical Research Foundation, 86

  Blachman, Jeremy, 169, 359

  Black, Don, 304

  Blackstone Group, 405

  Blockbuster, 291–94, 296–98, 368

  Blodget, Henry, 231, 234

  Bloomberg News, 340

  Bobcat, 308

  Bolivia, 74, 75, 203

  bond market, 30

  Borget, Louis, xiii, 16–24

  Bossidy, Larry, 182

  Boston Beer Company, 47

  Bowen, Ray, xiii, 394, 398, 404

  Bowen, W. J. (Jack), 6–10

  Braveheart, see Project Braveheart and Enron Broadband Services

  Brazil, xxiv, 75, 77, 203, 258, 259, 366

  Brewer, Lynn, 264

  British Petroleum, 391

  broadband, see Enron Broadband Services

  Brobeck Phleger, 274, 276–77

  Bronson, Phyllis, 386

  Brooklyn Union, 34

  Bruin Interests, 90

  Bryan, Lowell, 66

  Bucharest, 254

  Buenos Aires deal, 252–53, 254, 257,

  313

  Buffett, Warren, 67, 391

  bull market of 1990s, 132–33, 143, 150, 229, 231–32, 234, 318–19, 326–27

  Burns, Ron, xiii, 69, 100

  Bush, Barbara, 423

  Bush, George H. W., 86, 423

  Bush, George W., xxiv, 86, 302, 313, 426

  Lay and, 87–88, 89, 173–74, 411

  Bush, Jeb, 254

  Bush family, 365

  Bush Pioneers, 88

  business press, 230

  BusinessWeek, 225, 281, 313, 350

  Butler, Bill, 217

  Buy, Rick, xiii, 115–18, 130, 141, 181, 194, 313, 316, 346, 362, 363, 399

  on LJM deals, 192, 193, 197, 199, 203, 205, 305, 307, 311, 328–29, 361

  buy ratings, 233, 234, 348, 371

  cable television industry, 287

  Cactus, 67, 132, 138

  California, 248, 345

  attorney general’s office in, 274

  energy crisis in, 271–83, 300–301, 316, 327, 335–36, 338, 352–53, 373, 413, 416

  energy deregulation in, 174–75, 176, 264–83, 327

  as growth market, 10, 11

  California, University of, 178

  California Power Exchange (Cal PX), 266, 268, 269

  California Public Employees Retirement System (CalPERS), 67, 127, 132, 168, 176, 190, 316, 383

  California Public Utilities Commission (CPUC), 265, 266, 274

  California State University, 178, 183

  calls, 37, 231

  Calpine, 283

  Cambridge, Paul, 388

  Campbell, David, 240, 244–45

  Campsie Limited, 194, 196

  Canada, 61, 254

  Canadian Imperial Bank of Commerce (CIBC), 202, 293–95, 410

  Cancún, 254

  capacity contracts, 38

  Carpenter, Michael, 395

  Carter, Rebecca, xiii, 124, 307, 310, 327, 345, 347, 348, 350, 358

  Cash, Debra, 362

  cash flow, as finance basic, 150

  Castleman, Kent, 203

  Causey, Rick, xiii, 127–28, 141–43, 172, 299–300, 313, 325, 347, 357, 362, 367–69, 374, 415, 416, 419–20

  as chief accounting officer, 172, 317–18, 393

  Duncan’s friendship with, 146–48, 369

  LJM deals and, 195, 197, 199, 200, 204, 205–7, 209, 307, 309, 311, 328, 330, 355, 361

  on Project Raptor, 323–24

  Cavuto, Neil, 253

  Cayman Islands, 194, 310

  CCC Information Services, 135–36

  Ceconi, Margaret, xiii, 180, 182–83, 303–4, 345–46, 358–59

  Center for Financial Research and Analysis, 231

  CEO Magazine, 239

  CFO Excellence Award, 154

  CFO Magazine, 154, 250

  CFTC (Commodities Futures Trading Commission), 96, 224

  Channel Islands, 21, 159

  Chanos, Jim, xvi, 319–21, 325, 326, 331, 348–49

  Character Education Partnership, 86

  Charles, Prince of Wales, 48–49

  Chase Manhattan Bank, 116, 159, 160, 162, 164, 165, 251

  EES and, 178

  LJM and, 200–203, 310, 311

  merger with J. P. Morgan of, 159

  see also J. P. Morgan Chase

  Chemical Bank, 162

  Cheney, Dick, 87, 280

  Cheney, Lynne, 87

  ChevronTexaco, 392–93, 394–95

  Chewco, 168–70, 189, 330, 364, 383–84, 393

  Chicago, Ill., 419

  Chicago City Gate, 38, 40

  China, 74, 75, 109, 240, 259

  Chinese Wall, 233–34, 375

  Choctaw, 157

  Christian Coalition, 174

  Churchill, Winston, 133

  CIA, 45, 221

  CIBC (Canadian Imperial Bank of Commerce), 202, 293–95

  Cisco, 93

  Citibank, 60, 162

  Citigroup, 96, 159, 160, 162–65, 244, 380, 385, 387, 395, 402, 407, 410, 427

  LJM transactions and, 202, 205, 230

  in Project Nahanni, 157

  in Whitewing transaction, 155–56

  Civil Service Commission, U.S., 6

  Clinton, Bill, 82, 96

  CNBC, 125, 219, 231

  coal, coal trading, 1, 10, 36, 225

  Coale, Carol, xvi, 102, 244, 347, 359

  Coalition for Jobs, Growth, and Competitiveness, 87

  Coca-Cola, 95

  Coelho, Paulo, 72

  coffee futures, 226

  cogeneration (cogen) projects, 46–48

  see also Teesside power project

  collateralization, 168

  Colombia, 74

  Colwell, Wes, 413

  Commerce Department, 385

  commercial paper, 378–79

  Commerzbank, 235, 321

  Committee on Governmental Affairs, 270

  Commodities Futures Trading Commission (CFTC), 96, 224

  commodities trading, 16, 22, 27, 30, 37, 38, 65, 207, 225, 409

  Compaq, 86, 182

  Compass Bank, 343

  Condor, 355–56

  Congress, U.S., 159, 162, 172, 173, 231, 238, 345, 407, 408, 416

  natural gas regulation in, 8–9

  Congress Party, 81

  Conoco, 1, 57

  Continental Airlines, 153

  Continental Bank, 135–37, 140, 141

  Continental Resources, 73

  Contrarian Investor, The, 319

  Cooley, Denton, 423

  Cooper, Steven, 155

  Coopers & Lybrand, 153–54

  corporate ethos, 133

  corporate whistle-blowers, 358

  Covey, Stephen, 58

  Cox, David, xiii, 290–92, 297–98, 334–35

  CPUC (California Public Utilities Commission), 265, 266, 274

  credit derivatives, 226, 340–41, 349

  Credit Rating Agency Reform Act, 426

  Creditex, 341

  credit-rating agencies, 154, 155, 156, 161–62, 230, 236–39, 250, 312, 341, 366, 394–95, 403

  credit ratings, 236–37, 373, 380

  Credit Sights, 238

  Credit Suisse First Boston (CSFB), 159, 163–64, 179, 194–96, 202–3, 234, 235, 244, 341, 348, 353, 371, 407

  Croatia, 258, 260

  Crowley, Larry, 175

  crude oil futures, 16

  Cuiabá, 203, 206, 259, 330

  Curry, Wanda, xiii, 299–300, 301, 303, 304

  Cutler, Stephen, 410

  Dabhol project, 79–83, 94, 102, 260, 315, 340, 342, 353, 366, 373, 399, 409

  Darby, Giles, xvi, 194–96, 365, 384

  DASH (deal-approval sheet), 115, 117

  Davis, Gray, 277, 279

  D
ean Witter Reynolds, 102, 104

  Dear, Leigh Anne, 146

  Death Star, 269–70, 274, 275, 276, 282, 335

  debt, as finance basic, 150

  debt analysts, 237

  deep-discount bonds, 30

  Deffner, Joe, 161

  Delainey, Dave, xiii, 218, 228, 276, 302–4, 308, 359, 404, 413–14, 421

  DeLay, Tom, 87

  Deloitte & Touche, 390

  Delta, 159, 160

  DeMauro, David, 183

  Democratic party, 85, 88

  DePelchin Children’s Center, 98

  deregulation, 8–9, 13, 27, 33, 48, 85, 88

  in California, 174–75, 176, 264–83, 327

  Lay as advocate for, 2–3, 172, 175, 240, 265, 267, 278, 281, 327

  of retail electricity, 172–78, 180

  state-by-state, 173–74, 176–77, 180–81

  derivatives, 37, 39, 42, 158, 323

  derivatives-pricing models, 192

  Derrick, Jim, xiii, 344, 357, 358, 366, 376, 402

  Deutsche Bank, 229, 244, 388

  DeVille, Mike, 195

  Dickson, Glenn, 184

  Dietart, Jeff, 233

  Dilg, Joseph, xiii, 357, 360–61, 366

  Dodd-Frank Wall Street Reform and Consumer Protection Act, 427

  Dodson, Bill, xiv, 153, 167, 169, 197, 384

  Dominican Republic, 74, 78, 95, 259

  Dominion Energy, 47–48

  Donaldson, Lufkin & Jenrette, 156, 159, 165, 202, 232

  Door, 3

  dot-coms, 121, 271, 318, 372

  Doty, Rob, 395, 398

  Dow Jones, 319, 354

  downgrading of stock, 102, 235, 348, 374–75, 394–95, 400, 401, 403

  Drexel Burnham Lambert, 17, 95, 224

  Driscoll, Michael, 270

  DSL service, 292–93, 295

  Duke, 277, 345

  Duncan, David, xvi, 146–48, 176, 190, 193, 295, 317–18, 324, 362–63, 368–69, 374, 381–83, 406

  Duncan, John, xiv, 10, 13, 343, 376, 408

  Durst, Robert, 419

  Dynegy, 105, 220–23, 241, 267, 268, 277, 280, 283, 319, 409, 410

  Enron’s proposed acquisition by, 391–405

  stock of, 395, 397, 401, 402

  Dynegy Direct, 223

  earnings-per-share numbers, 232

  Eassey, Donato, xvi, 235, 244, 313, 348

  Eavis, Peter, xvii, 331

  eBay, 222

  EBS, see Enron Broadband Services

  EBS Content Systems, 293–94

  Economist, 240, 256

  EC Outlook, 343–44

  ECT, see Enron Capital and Trade Resources

  Ecuador, 252

  Edison Electric Institute, 230

  EES, see Enron Energy Services