Conspiracy of Fools (22 page)

The technician examined the basement for five minutes and found no problems. Then he turned on his portable gas detector. He waited for a minute.

Nothing. No beep. No smell of gas in the basement. Everything was okay. The technician headed on his way, checking first with the office to give the all clear.

But the technician was wrong. A decade before, a consultant to Enron had identified problems with the training of the San Juan safety personnel, but little had been done in response. The gas company had been cited, year after year, for safety violations and was even sanctioned in 1994 for failing to fix the problem. The fine? Five hundred dollars.

Now all the problems were coming together. The technician had not been properly trained to use the gas meter. It could only read
changes
in the level of gas in the air; for it to work, it first had to be turned on in a place with no gas, then taken to where a leak was suspected. And unless the area was brimming with gas, it would be hard to smell. For safety reasons, companies add a chemical to natural gas to create its recognizable odor. But Enron’s unit in San Juan long ago stopped using sizable amounts of the additive.

Gas was leaking into the basement. But no one knew.

———

The diagram in Michael Kopper’s hand was one of hundreds churned out, month after month, by Fastow’s finance group. Boxes and names, lines and numbers. All depicting structured deals that juggled around assets—power plants, cash, whatever—so Enron could present its prettiest financial face to the world.

This one, though, was something new. Fastow and Kopper had spent weeks on a deal to help Enron dispose of its co-generation plants, the ones Amanda Martin insisted would create a huge loss when they were sold.

But Fastow and Kopper had another idea. They were going to use the accounting rules and sell the plants to an entity created by Enron itself. Three percent of its capital would come from outside investors; the rest would be a loan from Enron. The entity would pay full price for the plants, with no renegotiation required for the inflated gas contracts. No renegotiation, no losses. It was the type of deal that no true independent buyer would accept; all the benefits went to the seller, all the problems to the buyer. The finance group was creating its own little world, where buyers worked hard to protect the interests of sellers.

Kopper arrived in a conference room for a meeting with Martin’s deal team. They had already found a buyer, a company called Calpine, and weren’t all that eager to hear what Kopper had to say.

He walked in looking little like a banker. His suit was dark and mod; his hair was spiky, a new style for him. Over a few minutes, he presented the proposal to Mark Miles, who worked with Amanda Martin. It struck Miles as strange; there were lots of moving parts, all somehow resulting in Enron’s avoiding a loss. It didn’t make sense.

Miles took the proposal to Martin; she stared at it, trying to understand what she was seeing. Finally, she did.

“That’s bullshit,” she said.

The deal might look good in the reported financials, Martin said, but it was ridiculous. Enron would still have the risks of owning the things outright. The deal didn’t eliminate the loss; it just shoved it to the future, when falling gas prices might make it
bigger
. No matter what, at some point the high-priced gas contracts were going to have to be renegotiated. Fastow’s plan would increase Enron’s long-term exposure, all to avoid a quarterly loss.

Not only that,
the deal just smelled bad
. How could Enron sell troubled assets to some entity set up by the company, for a price no real buyer would pay? Irrationality usually doesn’t fly with the legal and accounting rules. Worse, the whole purpose of Fastow’s deal was to cheat the partnership that owned the plant. Sure, Enron owned half of it, but the other half was held
by Dominion Resources. Legally, Martin had to act in the partnership’s best interest. Doing Fastow’s deal would cost it huge sums in unnecessary fuel payments. She could be sued herself. Enron couldn’t just rip off its partners to avoid a loss.

“Mark, just let them know,” Martin said, “I don’t think this is the direction we should be going.”

The message was delivered. And in no time, Kopper returned, eager to argue his case. Martin was civil but didn’t trust Kopper. She considered him devious, somebody who would throw a fit if he didn’t get what he wanted. And this, she thought, was going to be one of those times.

For several minutes Kopper walked through the deal, explaining it step-by-step. “The accountants are going to sign off on this. The lawyers will approve. It will work.”

Martin didn’t buy it. “Michael, this is silly. It’s financial engineering versus a real deal.”

“Everybody likes this,” Kopper responded. “Andy took it to Skilling, and Skilling really likes this deal. Causey’s fine with it. This is the deal we should do.”

“Oh, come on, Michael,” Martin responded, pointing to the diagram. “What you’ve got there is a shell game.”

She tapped the page as she spoke. “What we’re putting together is a real sale. We don’t have to worry about what happens in the future. We’ve taken our lumps, and we’re out of the picture. Versus your way, where we’re half-pregnant.”

As the two kept talking, Cliff Baxter, who often wandered Enron’s hallways, walked in, returning from a cigarette break. He took a seat, listening to the debate.

“Remember our mandate here,” Kopper said. “Skilling wants to avoid a loss, not renegotiate the gas contract. We’ve created a vehicle that lets him do that.”

Baxter stuck out his chin. “Wait a minute,” he said. A barrage of questions followed. What do the accountants say? What do the lawyers say? How can that be?

A pause. “I don’t like this one fucking bit,” he said. “It’s not clean.” After another few minutes Kopper quit trying. He was going back to speak with Fastow, he said. They were having a meeting with banks tomorrow about this very deal, and they were going to move ahead on it. Then he left.

Martin and Baxter hung around for a few minutes. Martin argued her case, and Baxter agreed a real sale was the better deal; it was what was best for Enron. They felt confident that Fastow would come to accept that.

In late November 1996, Kinder sat among Enron’s directors in the boardroom, trying to disguise his fury.

The decision about Lay’s succession had come down to this—a private meeting with the directors. Kinder listened in disbelief as question after question signaled the board’s unwillingness to trust him with the company.

Can you lead the development of new businesses? Can you attract talent? Any chance that we could talk you into staying put for one more year? Maybe two more years?

Kinder fenced as best he could, but he was seething. Lead business development? Attract talent? Hell,
he
was the one who had pushed the creation of Enron’s trading and finance business.
He
had brought in Skilling and his bunch. All while Lay flew around the world, playing corporate ambassador with those mammoth international projects.
Kinder
was revenues;
Lay
was expenses.

Still, Kinder could tell he wasn’t persuading the doubters on the board.
Lay’s
board. Lay could make it happen if he wanted to. He had sandbagged Kinder two years earlier, promising to step aside—then nothing. And now he’d been double-crossed again. The meeting broke up, and Kinder, fuming, went to see Lay.

“How did it go?” Lay asked as Kinder walked in.

“Terrible, Ken! It was terrible.”

Kinder paced the room. “It doesn’t make any sense. Why are they having so much trouble signing off on me as CEO?”

Lay offered a few words of advice, and soon Kinder walked out. Not long after, Skilling came up and sat with Kinder, watching as his boss’s wrath escalated.

“That SOB is going to fuck me again,” Kinder growled. Skilling didn’t need more explanation. Kinder thought Lay had stabbed him in the back.

“Look,” Skilling said. “What do you want me to do? I’m willing to go, if that’ll help.”

Kinder fixed Skilling with a look.

“I will absolutely support you,” Skilling continued. “You can go to Ken and say, ‘If you don’t make me CEO, I’m leaving and taking Skilling with me.’ ”

The threat would be strong. But Skilling’s idea wasn’t Kinder’s style. If the directors wouldn’t give him what he wanted—
what he deserved
—so be it.

“No,” Kinder said softly. “That’s not necessary. Let’s just see how this plays out.”

The battle over the competing co-generation deals wouldn’t end. Martin and her team couldn’t understand. Why were Fastow and Kopper pushing so hard? Why did they care?

A summit meeting was held. Fastow and Kopper came downstairs, meeting with Martin and her deal makers. The two proposals were laid out.

“Your deal isn’t any good,” Fastow announced. “It doesn’t avoid the loss. Skilling wants us to avoid the loss. Our deal does that. We should stop arguing and give Skilling what he wants.”

With that, Fastow left. The meeting was over.

At 8:30 on the morning of November 21 in San Juan, the bell signaling the end of first period rang out at La Milagrosa School, across from the Río Piedras shopping district. Children gathered up their books and packs.

Across the street, next to the Humberto Vidal building, a technician with Enron’s San Juan Gas Company held his combustible-gas indicator up to a small hole his crew had just drilled in the pavement. The technician pumped a bit of air into the device and checked the gauge.

Twenty percent
. Way past the danger zone. The underground air was saturated with propane gas. He looked up at his crew and stepped forward onto a manhole cover.

That same second, five floors up in the Vidal building, an air-conditioning contractor conducting monthly maintenance touched a switch to start the cooling system. An electric circuit closed, and a five-ton air-conditioning unit in the gas-filled basement sparked to life.

The explosion was instantaneous and deafening. The first three floors of the building collapsed, falling into the basement. Store merchandise—underwear, sunglasses, a small doll smeared with blood—spewed into the street. The contractor was killed instantly. Outside, the gas technician was blown into the air. At the school, children screamed as shards of concrete and metal blasted through classroom windows. By the time the debris was cleared away, thirty-three people had died; sixty-nine had been injured.

Back in Houston, the Puerto Rican explosion sent Enron into crisis mode. Within a few hours Puerto Rican officials had zeroed in on a gas leak as the likely cause, and if they were correct, Enron’s subsidiary could well be
held accountable. The company set up a war room at the Houston headquarters, filling it with insurance professionals, lawyers, public-relations specialists, and operations executives. Nobody knew at that point if Enron was responsible, and a decision was made for the company to start its own investigation.

Suddenly David Haug, a project developer with the international division, phoned into the room, demanding to speak to somebody.

“Look,” Haug said. “I’ve got a deal under way to build a power plant in Puerto Rico. This thing is going to impact our ability to get it done. We just need to accept the blame and move on. We need to get my deal done.”

The room descended into a screaming match. Enron’s lawyers weren’t going to allow the company to just blindly take the blame. Haug fought back, yelling about his deal.

Over at the conference table, Mark Palmer, a newly hired public-relations executive, listened to the back-and-forth as he manned the phones. Haug hung up, and a number of people began bad-mouthing him and his project. It was a lousy deal anyway, they said. The prices were crazy; there was no telling if Enron would ever get paid. One of the golfers in the room called the proposal “a long putt”

Palmer didn’t get it. “So why don’t we just not do the deal if it’s lousy?”

One of his new colleagues looked at Palmer knowingly. He explained the compensation system for the international division, detailing how developers gained huge bonuses if the financing and other paperwork on a project was signed.

“So you’re telling me,” Palmer said, “it doesn’t matter if it’s a good deal, so long as it gets done?”

There were nods around the room.

On November 26, Enron’s directors reached their decision about the succession. Lay and Kinder would be offered extensions of their contracts. No one was under the illusion that Kinder would accept. After being informed of the vote, Lay sought out Kinder, finding him in his office.

“Rich, the board has met, and they considered the issues related to future leadership,” Lay began.

Enough. Kinder knew the result.

“They think you’ve done a fabulous job as COO,” Lay went on. “And they’d like you to continue in that position. They’re still not comfortable, at this point in time, with moving you up to the CEO’s job.”

Kinder looked calm and contemplative. “I’m disappointed. I think it’s a mistake. So it’s probably in everyone’s best interest that I leave at year-end.”

Lay watched Kinder carefully. He had expected that. “I’m sure the board will be disappointed,” he said. “They’d love to keep the team together.” Kinder shrugged. “It’s what I have to do.”

“I’m sorry it’s worked out this way, Rich,” Lay said. “You’ll be badly missed.”

Later that day, the fiftieth-floor receptionist peered over her desk, watching as Amanda Martin dashed from the elevator banks toward the security door leading to the executive offices. She released the electronic lock just before Martin darted inside, headed to see Kinder.

She had just heard the news. She adored Kinder and thought he had one of the best minds in the building. But there he sat at his desk, looking calm and relaxed.

“Rich, how could this happen?” she gasped as she walked into the room. “You are getting screwed!”

Kinder didn’t rise to the bait. “It’s just time to move on. This is how things worked out.”

“Oh, come on, Rich! This is wrong!”

“But this is how things are. It’ll be for the best.”