Conspiracy of Fools (31 page)

Not much later, Kaminski was at his desk in his twenty-ninth-floor office when Buy wandered in.

“Hey, Vince.”

Kaminski smiled. “Rick, congratulations on your promotion,” he said in a thick Polish accent. Whatever his thoughts, Kaminski was a model of civility.

“Thanks,” Buy replied. “But now that I’m chief risk officer, I think I need to buck up my understanding of options. Could someone go over option pricing with me?”

Buy didn’t understand options pricing?
In the complex world of derivatives where Enron did business, options were rudimentary. A chief risk officer was supposed to be at the top of his field, the guy everyone turned to for the answers, not someone who required on-the-job training.

Kaminski hid his horror behind a smile. “No problem,” he said. “I’ll arrange a few sessions for you.”

For the tutoring, Kaminski recruited Stinson Gibner, one of his best risk analysts. A day later, Kaminski and Gibner headed to the conference room near Buy’s office for the first lesson. Buy’s questions were surprisingly basic, so Gibner kept dialing back the sophistication. Finally, Gibner was reduced to scribbling down the definitions for the general lingo of options trading on a whiteboard.

A “put” is … A “call” is …

After about half an hour, Buy stood. “This has been helpful,” he said. “But I’ve got another appointment. Can we get together another time?”

Some time later, they gathered for the next lesson. Gibner picked up where he left off. After a moment, Buy held up a hand. “I’m sorry, I know we talked about this already,” he said. “But I need to go over it again.”

Gibner glanced at Kaminski, who showed no reaction. He turned back to the whiteboard and started writing.

A “put” is … A “call” is …

It was, by any standard, an unusual first date.

They went to a friend’s wedding, arriving separately so their colleagues from Enron attending the event wouldn’t gossip. At the wedding’s end, Skilling and Rebecca Carter each slipped out alone, agreeing to meet later over dinner.

Skilling’s divorce had gone through, and he had been feeling lonely. With most of his time spent at the office, it was unlikely he would find romance outside of Enron. Soon he began focusing attention on Carter, an Enron veteran who had held a range of positions at the company.

She grew up Rebecca Comeau in a strict Catholic home of five children and had worked ever since she was fourteen. She started as a waitress before moving on to other jobs, using the money to buy her own car, a Toyota. But
in her first year of college, she had a terrible accident and was thrown through the car windshield, tearing up her face and her knees. As soon as she was able, she went back to college; the onetime cheerleader now wandered the campus with huge red scars on her face, and found people taking her more seriously than they once had. Years of reconstructive surgery followed, but she never forgot the lesson.

After obtaining a degree in psychology, she married and pursued a master’s degree in accounting. By 1990, she had begun working at Enron, first on its financial filings, then in investor relations. When her marriage started falling apart, she asked for a less time-consuming job to give her more time for her young son. She was assigned to control risk in wholesale trading and gained a reputation for toughness that won her the nickname the Dragon Lady. Work again impeded on time with her son, so she moved on to dealing with the credit agencies. By then, she had attracted Skilling’s attention, and the two decided to have their first date at his secretary’s wedding.

Afterward, they went to dinner at Café Annie and over the meal found they enjoyed each other’s company. Perhaps, they both thought, this could be a relationship that would have some staying power.

As the end of the first quarter rolled around, the finance division was scrambling again. If nothing was done, Enron was going to miss its earnings projections. A little extra creativity was needed to close the gap.

Special projects took on the task. Ben Glisan, the accounting superstar who was a Fastow favorite, hit on the perfect idea—Chewco. The partnership had pulled Enron over the hump before, maybe it could again.

Under the original deal, Chewco had agreed to pay Enron an annual management fee of about two million dollars. Under the accounting rules, that fee could only be reported by Enron after it provided the services.

But what if …

What if, Glisan wondered, Enron and Chewco took, say, 80 percent of that fee and called it a “required payment”? Meaning Chewco had to pay, no matter what. Rapidly, the contracts with Chewco were rewritten to change “management fee” to “required payment.”

The amount Chewco owed Enron stayed the same. The terms of the transaction were identical. But since it was now
required
, Glisan argued, Enron could count the present value of the whole amount it would be paid over five years as a corporate asset. Then, thanks to mark-to-market accounting, most of that could be booked as income.

Glisan had found almost twenty-six million dollars in new profits, all by
changing two words. Everyone celebrated his genius. But the accounting again was wrong. And nobody noticed.

It felt good to be back in America.

Jeff McMahon—onetime Andersen accountant, longtime Enron executive—wandered through the finance division, leaning into various offices to greet old friends. He had worked in the London office for almost three years and was back in Houston for a visit with the bosses.

Blond and boyish, McMahon had been sent to Britain to handle accounting issues for Enron’s merchant and trading business there. At first he reported to Causey but soon found himself involved in finance, reporting to Fastow. He liked the setup; his résumé had lacked finance experience, and now he was qualified for a more high-powered job.

McMahon dropped by Fastow’s twenty-seventh-floor office. The two men, standing on either side of Fastow’s desk, discussed London and the challenges back home.

Fastow’s tone grew serious. “Listen, I haven’t been real happy with Bill Gathmann’s performance as treasurer,” he said. “There’ve been some screwups. I just don’t think he’s the guy for that position. I’m replacing him.”

McMahon just listened.

“So I was wondering,” Fastow continued. “Do you know anybody who might be interested in the job?”

McMahon’s eyes went wide.
Excuse me?
“Well, yeah,” he replied. “What about me?”

Fastow raised his eyebrows, as if the thought had never entered his mind. Why would somebody like McMahon want a job that was so, well, dull?

“Oh,” Fastow said, pausing for a moment. “I didn’t know you’d be interested.”

“Treasurer of a Fortune 100 company?” McMahon laughed. “I’d be very interested in that.”

Fastow turned the idea over in his head. “Well, okay. Let me bounce this off Skilling, and if it’s okay with him, yeah, let’s go ahead and do it.”

Shortly before noon in Houston, the gold-colored elevator doors opened, and John Ashcroft stepped onto the second floor of the Four Seasons Hotel. Ashcroft, a Missouri senator and future United States Attorney General, walked down the softly lit hallway toward the Livingston Room, one of the hotel’s larger meeting areas. Outside the room, he saw a smallish, balding man standing beside a reception table. Ashcroft smiled. It was Ken Lay.

“John, welcome to Houston,” Lay said as he approached Ashcroft. “I think we’ve got a good group of people here.”

Ashcroft thrust out a hand. “Well, Ken, I appreciate you doing this, getting this group together.”

It was April 7, and Lay was hosting a luncheon to raise money for Ashcroft’s anticipated 2000 presidential bid. The men met in 1992, when Ashcroft was Missouri’s governor and Lay was chairing the host committee for that year’s Republican Convention. They quickly found that they had a lot in common—roots in Missouri, sons of ministers, similar values. It only seemed right that when Ashcroft began exploring a presidential bid, he would turn to Lay to gain entrée to Houston’s big-money men.

At first, Ashcroft’s request had presented Lay with a quandary. He remained close with the Bush family, and now the former President’s son—George W., the Texas governor—was rapidly becoming the Republican Party’s perceived front-runner. Lay feared that if he hosted an Ashcroft fund-raiser, he risked alienating the Bush team.

So once Ashcroft approached him for help, Lay had asked for a few days to consider the situation. He had sent a message to Bush’s top political adviser, Karl Rove, explaining what Ashcroft wanted and asking if his participation would set anyone’s nose out of joint.

The reply came back quickly. The Bush team would love for Lay to host an Ashcroft fund-raiser. At that point, Ashcroft was attracting support among the Christian right. But of the most conservative politicians who might launch a campaign, Ashcroft seemed the least likely to catch fire. Sending money and support his way would only serve to keep it away from other—and potentially stronger—candidates. So with the secret go-ahead from the Bush campaign, Lay informed Ashcroft that he would be delighted to help out.

As the two men chatted, guests for lunch arrived, and Lay took a moment to introduce them to Ashcroft. Finally they headed inside and found their seats. After giving the guests some time with their food, Lay stood. He picked up a knife and tapped on a glass until everyone was quiet.

“We’re delighted to have John Ashcroft here with us,” Lay began. He told the crowd of their shared backgrounds, and detailed Ashcroft’s political history.

“So let’s give a warm welcome to Houston to Senator John Ashcroft,” Lay concluded as the crowd clapped.

Ashcroft walked to the podium. “I’m delighted that Ken agreed to host this event today.” He glanced toward Lay. “Like he said, we’ve known each other for years.”

———

The early-morning sky on April 17 was dark with a low cloud cover, creating an eerie vista through the windows of the fiftieth-floor boardroom. It was seven in the morning, and the finance committee of Enron’s board had gathered to hear the first presentation from the new CFO, Andy Fastow.

From a central position at the great table, a white-haired man surveyed the room. He was Herbert Winokur, known universally as Pug, the Enron director widely considered the savant on finance issues. For most directors, Winokur was a lifeline who could translate Enron’s complex financial dealings. Enamored with esoteric deals, Winokur naturally emerged a huge Fastow fan. He was seen as something of a mentor for Fastow; now Winokur couldn’t help but feel pride as he watched the young, newly minted CFO preparing to go through his paces.

Winokur brought the meeting to order and glanced over at Skilling. “All right, Jeff, why don’t you get started?”

“Thanks, Pug,” Skilling said. “Well, as you know, this meeting has been called to consider the sale of a new issue of Enron common stock.”

Skilling outlined the basics, then turned the floor over to Fastow. “Thank you, Jeff,” Fastow began. “There is a strong rationale to pursue this offering at this time.”

Fastow was delivering on the promise he had made to Moody’s to preserve Enron’s credit rating—but made no mention of that. Instead, he hailed the equity offering as an opportunity to give Enron more financial flexibility.

“The management is recommending Donaldson, Lufkin & Jenrette as lead underwriter,” Fastow said.

One director, Norm Blake, was surprised. Merrill Lynch handled much of Enron’s underwriting business.

“Why DLJ?” he asked.

Mark Koenig, the head of investor relations, broke in. “I can explain that.”

The directors liked the justification. Enron was getting tough. Fastow’s request to issue stock passed unanimously. Half an hour later, the whole performance was repeated for the full board. Again approval came easily. The meeting ended, Winokur stepped over to Fastow.

“Very nice job, Andy,” he said.

That evening, Fastow sat in the desk chair in his brand-new fiftieth-floor office. The place dripped of extravagance—mahogany paneling, a curved wall of windows, a private bathroom with black fixtures. Everything screamed that Fastow had arrived. And now, with the board behind him, he was ready to start playing hardball.

He reached for the phone and dialed the Houston office of Merrill Lynch. He was feeling comfortable and cocky. He was about to let the world know that Enron was changing the way it did business; it would reward its supporters and punish its detractors. Everybody needed to choose sides.

A few blocks away, Schuyler Tilney, a young investment banker who was one of the managers Merrill’s banking relationship with Enron, reached for the phone.

“Schuyler, it’s Andy Fastow.”

“Andy, how are you?”

Fastow was in no mood for chitchat. He wanted to strike hard. “Schuyler, I’m calling to let you know the board has approved going forward with the stock offering.”

“Great.”

“But Merrill’s not going to be lead manager,” Fastow continued. “In fact, you aren’t going to be co-managers.”

Tilney’s heart sank. Merrill was going to be shut out by Enron, his top client? He could scarcely believe it. Tilney was particularly close to Enron; his wife, Beth, had run corporate communications at Enron and was close to Lay. Weeks before, after telling Moody’s that Enron would do a stock offering, Fastow had consulted Merrill. The firm’s bankers had done preliminary work on the offer, even providing information Fastow had used in meeting with the board. The bankers had expected to get the plum—and lucrative—assignment of bringing the offering to market. But now Fastow was saying no dice.

Tilney kept a calm tone. “Well, Andy, you certainly have my attention. Can I ask why?”

“It’s John Olson, Schuyler.”

Olson—
again
. Olson was Merrill’s stock analyst on Enron. The previous July, he had cut his rating on the company, angering top executives. His past dozen reports had been neutral—or at best vaguely positive.
And he was proud of it
. He liked to boast that his main recommendation, Williams Company, delivered better returns than Enron. But investment bankers care more about fees than investor returns, and Enron was the cash cow, not Williams.