Conspiracy of Fools (39 page)

Duncan pushed back one more time.

“Okay, tell you what,” Bass said. He would call Andersen’s top accounting experts in Chicago and ask them to review the deal one more time to see if he had missed anything.

He hadn’t, they reported back. Bass figured it wasn’t a big deal. The taxes owed were less than fifteen million dollars. Enron couldn’t possibly need profits that badly.

———

Bass stood uncomfortably in the anteroom outside Causey’s office. It was April 10, and in recent days Causey and Duncan had been down in Augusta, Georgia, watching the Masters Tournament. But they flew back early to meet Bass and hash through the tax issue one more time.

Causey called Bass into his office, where Duncan was already waiting. The three men wandered to the formal sitting area.

“All right, we all know why we’re here,” Causey said. “I’m going to lay out Enron’s position.”

Causey spoke for several minutes. He said nothing about the rules; instead, he talked about the financial outcome Enron wanted. Bass was unmoved.

“Sorry, Rick,” Bass said. “I’ve looked at this, Chicago’s looked at this. It is what it is.”

“Wait,” Duncan said. “Rick, I hear your point. So, Carl, what if you moved your position a little bit?”

Duncan explained how he thought Bass could compromise. Bass gaped at him. Duncan was supposed to represent the firm’s opinion, not try to broker a compromise.

This isn’t a negotiation, Dave. There’s an answer. I gave it. We’re done
. “So what if you did that? Do you think we could find a middle ground?” Duncan asked.

Did they not understand what accountants did? “No, Dave, there’s no middle ground. There’s an answer. The firm has put in its best people. And we have given the answer.”

Causey sighed, looking furious. “Okay, fine.”

The meeting broke up. As Bass left, anxiety welled in his mind.

God knows what these two are going to do now
.

The stock analysts covering Enron were excited by the numbers coming in from Rhythms. This, they knew, could mean big income. So during a conference call on April 13, one analyst asked Skilling if Enron was booking any profits from its Rhythms investment.

“You got us,” he replied. “No, we’re carrying that on our books right now at a value of about twenty-eight million dollars”

But if Enron hadn’t yet recorded the stock’s full value, he said, it hadn’t lost sight of the profit. “Just do the math. It’s worth, at close yesterday, about $406 million, and again it’s on the books at $28 million.”

Someone mumbled a price update in Skilling’s ear.

“Oh, it’s up another fifteen dollars,” he said, chuckling. “We’re trying to figure out how we deal with this thing”

———

The next day, at the governor’s office in the Austin Capitol building, George W. Bush took out a small white postcard embossed with his name. He picked up a felt-tip pen to write a quick note to his friend Ken Lay.

Lay and Bush had taken a few years to get to know each other, but the relationship had finally begun to bloom around 1994. That year Bush was battling then-governor Ann Richards for her job. Lay was also close to Richards but sided with Bush, shoveling almost thirty-eight thousand dollars into his campaign—three times what he gave Richards.

Since Bush had become Governor, his friendship with Lay had strengthened. Lay had been appointed by Richards to the Governor’s Business Council, and Bush had reappointed him in 1995. When Bush started testing the waters for a presidential bid, Lay stepped up early with campaign contributions. Bush often sent Lay small Christmas gifts and frequently received reading material and letters from him.

Recently, Lay had forwarded a
New York Times Magazine
article written by Thomas Friedman, the Pulitzer Prize—winning writer, about the importance and challenges of globalization.

Bush dated the note and started scribbling: “Dear Ken, Thanks for the Friedman article—I too found it very interesting. All is well.”

He signed the note “GW.”

At about 10:15 on April 19, Skilling wrapped up with Fastow and his team, reviewing the agenda for the next meeting of the board’s finance committee.

“Okay, guys, this looks fine,” Skilling said as everyone stood.

Fastow lingered behind. He had asked Skilling’s secretary to squeeze in a few minutes for a quick discussion. Skilling turned to him once everyone was gone.

“Andy, what’s up?”

“I’ve got an idea,” he said. “Anytime we do a complex transaction around here, we incur an incredible cost from all the investment-banking fees.” That Skilling knew; the fees were just killers.

“So what if I set up something, an independent investment fund where I was the general partner,” Fastow continued. “To the extent you guys want to, you could offer me assets, and I would probably be able to give you a better price, because I understand the assets.”

Skilling didn’t know it, but this was the third version of the equity fund. Jakubik, someone who would have far less of a conflict than the CFO, had already been sandbagged and pushed aside in favor of Kopper. Now Fastow was supplanting Kopper. With Chewco, Kopper was already way ahead on
the financial rewards from secret side deals. The numbers Kopper kept in the file on his laptop left no doubt this fund should go Fastow’s way.

With the fund, Fastow told Skilling, there wouldn’t be a need for investment bankers. That meant a higher purchase price and lower transaction costs.

“Well, yeah,” Skilling said. “But it’s got a conflict-of-interest issue.”

Fastow nodded eagerly. “Yeah, that’s true,” he said. “But the whole issue is, is it cheaper, are we getting more benefit to shareholders by doing it this way.”

Skilling thought about that. “Yeah, that’s right,” he said. “All right, go ahead. Look into it.”

The discussion lasted a minute or so; neither man even bothered to sit down. Ever so nonchalantly, the most destructive move in Enron’s history was under way.

“How the hell could you give away ten percent of the fucking company?”

Skilling glared across the table in the thirty-sixth-floor conference room at Ken Harrison and Joe Hirko, the Portland General executives now running Enron Communications. They stared back, unbending.

It was the morning of April 29, and Skilling had just discovered the unit’s dirty secret: its managers had been giving out large chunks of itself to new employees. Private stock options—essentially bestowing ownership in the division—had been distributed like paper. Such a move was commonplace in privately held high-tech start-ups, to attract top talent. But this was different; Enron, a public company, was paying for everything. Now a bunch of untested new employees owned a large part of an Enron division and had been lobbying to sell it to the public.

“So this is what all that IPO talk was about, so your guys can each make a quick fifteen or twenty million bucks!” Skilling railed. “This is nuts!”

“We think it makes sense,” Harrison continued. “You have to understand the way this business works—”

“It’s not gonna happen, Ken! You want to fight about this, I’ll fight it all the way to the board.”

Skilling leaned in, glowering. “We are not doing an IPO of this business. It can’t stand on its own.”

“We think—” Harrison began.

“You want our money, but you want separate governance so you can pass out stock options?” Skilling roared. “It ain’t gonna happen! It is
not
gonna happen!”

“Fine,” Harrison said. “We’ll take it to the board.”

But Skilling would win his battle in a matter of weeks. The directors decided
to keep Enron Communications as a core division and repurchase the stock options that had been distributed so casually.

It was going to cost Enron hundreds of millions of dollars to recover from this blunder. Now Skilling knew how he would use all those earnings magically created by Rhythms. If only they could figure out how to hedge them.

Fastow and a small band of supporters were already hard at work on figuring out how to safeguard the Rhythms treasure chest. The key would be Fastow’s new equity fund.

The outside fund could be the third party that provided Enron with a hedge against a price decline in Rhythms. It would offer what no rational investor could: an agreement to assume the risk of owning Rhythms. No financial firm would do that without being paid a fortune.

Of course, neither would Fastow.

Azurix needed a win.

Rebecca Mark’s water company was weeks from going public but still hadn’t done a big deal since Wessex the year before. Mark was already promising Enron-style profits—annual returns of 20 percent, twice as much as competitors. To pull that off, Azurix needed transactions. And now Mark thought she had found one.

It was called AGOSBA, an acronym for Administración General de Obras Sanitarias de Buenos Aires. A governmental body in Argentina was selling the rights to operate water services for six areas around Buenos Aires. In running the numbers, financial analysts at Azurix had calculated that the present value of the cash flows came in at about $333 million. Initially Mark and her team planned to bid between $321 million and $353 million for the deal, a range that almost guaranteed a healthy return.

But as the date of the Azurix IPO approached, their eagerness to trumpet a big acquisition prompted them to revise their offer up to more than $400 million. They justified the increase among themselves by extolling the virtues of the Wessex managers now at Azurix; they had no doubt that those executives could work magic in Argentina.

Mark and other Azurix executives took the matter to their board of directors, a group that included Lay, Skilling, Pug Winokur, John Duncan, and Joe Sutton. Amanda Martin, head of the Azurix division for the Americas, laid out the proposal. When she finished, Lay spoke up.

“We really need to win this one,” he said.

Winokur agreed. “It would be very important for the IPO pricing,” he said.

“You’re right, it is critical that we win this in order to have a good IPO,” Mark said. “So we would really like to see the board approve this number for our bid.”

Lay looked at Martin. “Amanda, will this number win?” Martin turned up her hands in a feigned shrug. “They’re sealed bids, we don’t know. But we’ve put as much juice into this as we can.”

“Where’s RAC on this?”

It was Skilling, pushing to know what Risk Assessment and Control—the group run by Rick Buy, the chief risk officer—thought of the planned bid. “We’re at the edge of RAC’s tolerance,” Martin said. Skilling pushed harder. “Have they approved this number?”

“This is the highest number they’ll approve.”

“What does Buy say?”

“He’s got warnings all over this,” Martin replied. “But he’s okay.” Mark picked it up from there. “Again, it’s important that we win this. It’s important this is approved.”

Hard to argue that point. In fact …

“Does it make any sense to push the bid price higher?” Lay asked.

They took every precaution to maintain total secrecy.

The Azurix bid for the Argentina project was not put on paper. Instead, it was loaded onto a laptop computer; no one could access the file without the password. Their phones in Buenos Aires were checked for listening devices. Azurix executives felt sure their big French competitors, Vivendi and Suez Lyonnaise des Eaux, would do anything to knock an American upstart out of the running.

On May 17, the night before the bid, an executive carrying the laptop was put on an overnight flight from Houston aboard an Enron corporate plane. The next morning, the computer was brought to the Azurix team working on the Argentina deal. The data were downloaded and examined.

$438.6 million
.

Under pressure from the Azurix board, the bid had been kicked up by about thirty million dollars at the last minute. The bid was placed in an envelope and hand-carried over to a government building in Buenos Aires, where bids were scheduled to be unsealed.

José Luis Vittor, a lawyer working with Azurix, watched as the officials opened up the envelopes and read the results. The process was complex; different companies were bidding for different portions of the water services. Vittor listened as the numbers were called out, calculating the differences between
what others were willing to pay and the Azurix offer. A horrible realization settled in.

Azurix had overbid—by twice the amount that anyone else in the industry was willing to pay. If profits were there to be found at such a lofty price, only Azurix could see them.

It was Brazil all over again. Only worse.

Rebecca Mark tracked down Ken Lay with the news.

“We won in Argentina,” she said. “We left some money on the table. But we’ll make it work”

Lay nodded, smiling.

“Congratulations,” he said.

Jim Timmins was back with his proposal for an equity fund. No one had told him yet that Fastow was already putting his own together, but that was the point. Fastow just wanted to take the best of whatever Timmins suggested.

Timmins called it Enron Equity Syndication Program, or Enron ESP. The company would raise about $400 million from five or six pension funds. Then Enron would put together deals and present them to the investors. Each would be allowed to pass on three opportunities before being replaced by another institution that wanted the chance to invest.

Jeremy Blachman, a finance executive, came back to Timmins with Fastow’s verdict. “Andy doesn’t like it. It gives the investors too much voting power.”

That was the point, Timmins said. The fund would be attractive because investors would have control over what investments were made.

“Andy doesn’t want to do that,” Blachman said. “He said come back with something else.”

Busy murals of blue and purple dominated the walls of La Griglia, an Italian grill in River Oaks popular among the city’s power elite. In a secluded corner on May 21, a Friday, Amanda Martin was eating lunch with Jeff Skilling. The food was good, but the conversation was unnerving.

Martin was terrified. Azurix was in trouble. It wasn’t just the ridiculous Argentina bid; the company wasn’t ready to go public. It had spent lots of money setting up offices around the world. It had signed a five-million-dollar lease on space in London, not to mention the hugely expensive Houston offices. The costs of circular staircases and limestone floors stacked up fast.