Conspiracy of Fools (43 page)

Kaminski froze. Skilling almost never called him. And why now, on a Friday afternoon? Everyone in the building knew to stay away from Skilling by that point in the week, when he was invariably tired, frustrated, and abrasive.

“Yes, Jeff,” Kaminski said. “What can I do for you?”

There were going to be some changes, Skilling said. Kaminski’s group was moving out of RAC. They would no longer review transactions from throughout the corporation. Instead, they were being shifted into wholesale trading.

Kaminski was stunned. “All right. Can I ask why?”

“There have been some complaints, Vince, that you’re not helping people to do transactions,” Skilling said. “Instead, you’re spending all your time acting like cops.”

A pause. “We don’t need cops, Vince.”

“IT’S FUCKING RIDICULOUS!”

Cliff Baxter fumed as he sat in the back of Tony Mandola’s, staring across the table at Ken Rice and Amanda Martin. The three had gone out for lunch on this day in July 1999, hoping to rekindle the close friendship damaged by the now-ended affair between Rice and Martin. But since taking their seats at the restaurant, Baxter and Rice had been raging almost nonstop about some terrible happening at Enron.

Martin set down the menu. “What’s going on?”

“Haven’t you heard?” Baxter asked earnestly.

Martin held up her hands. “Hey, I work on the other side of the street now. No one talks to me anymore.”

Baxter shook his head. “Skilling has lost his fucking mind,” he grumbled. Martin waited expectantly, but Baxter said nothing.
Try again
. “What’s going on?” she asked insistently.

Baxter leaned back, flashing a fake smile. “Well, looks like Andy’s going to be general partner of his own partnership so Enron can take things off balance sheet.”

That was a surprise. Fastow was giving up the CFO job, after a little more than a year? Not a problem for Martin; she’d avoided Fastow since he threatened her a few years back. But a job change hardly seemed worth all the teeth gnashing.

“Great,” Martin replied. “When does he go?”

Baxter’s eyes narrowed, and Rice laughed.

“Oh, and
you’re
so smart,” Baxter said.

Rice just kept laughing. Martin was perplexed.

“Uh, okay,” she said. “Am I missing something?”

Baxter leaned in on the table. “He’s going to be the partnership’s general partner,
and
he’s going to be CFO.”

Martin looked from one man to the other. They were both staring at her expectantly. This had to be a joke.

“Oh, bullshit,” she said. “You can’t do that. It’s a conflict of interest.”

“Fucking ridiculous!” Baxter barked.

Rice laughed. “Yeah, you’d think.”

“Oh, come on, Ken,” Martin said. “It’s a conflict.”

Rice and Baxter answered together. “No, it’s not.”

“Says who?”

“The board approved it,” Rice said. “Skilling took it to the board, and the lawyers have signed off on it.”

“It’s just bullshit!” Baxter snapped.

Martin’s bewilderment deepened. The CFO of Enron was going to represent a partnership that was negotiating
with Enron?
The whole idea was just loony.

“Amanda, you’re an attorney,” Rice said. “Isn’t this a problem?”

“Well, I haven’t practiced in a while, but this is sort of Corporate Law 101” Baxter was in a rage. “This is the
worst
fucking decision that Skilling’s ever made! I don’t know what the fuck is wrong with him these days!”

“Are you sure they’re doing this?” Martin asked.

Baxter lowered his voice to a growl. “I went to Skilling and I told him he was making a fucking mistake. And he tells me he’s gone to the board and they’ve approved it. It’s a done deal.”

Martin brought a hand to her face. “This is frightening,” she said.

Baxter nodded. “Frightening,” he said softly.

“No,” Rice interrupted. “This is dangerous.”

Across town in Andersen’s Houston offices, Carl Bass was trying to absorb what he had just heard from his colleague Tom Bauer. “Oh, come on,” he said, a tone of bewilderment in his voice.

Bauer nodded. “Yup. They’ve set up this partnership to do business with Enron, and the CFO is running it.”

Bass could only shake his head. “That’s unbelievable.”

“I told Dave we should just tell them no and say we won’t do it,” Bauer said. “But I got overruled.”

This was going to be one hell of a Pandora’s box, Bass thought. It was Andersen’s job to audit transactions between clients and third parties, making sure that everything was arm’s-length, with no wink-and-nod agreements designed to pump up the value of low-grade assets. But with Fastow on both sides of the table, how could Andersen judge whether anything was arm’s-length? It was the same arm!

“You can’t audit this,” Bass said. “You can’t get inside Andy Fastow’s head and figure out if he’s doing an honest deal. It’s impossible! He’s on both sides of the equation. That should have stopped this idea right there.”

Bass quickly set to work digging for more information. One partner told him that it had been run to the top of the firm and approved.

The top of the firm
. That had to mean John Stewart, head of the Professional Standards Group. Bass called Stewart in Chicago to ask if he had endorsed it.

“Well,” Stewart said, “I wouldn’t say we approved. We raised a bunch of issues on certain transactions. But we never looked at the entire thing and signed off on it.”

Bass finished the call, lost in reflection. He didn’t have the authority to do anything about this. But he couldn’t help wondering, what kind of business executives would entertain, much less champion, such a terrible idea?

In Buenos Aires, a team of Azurix executives walked toward the administrative building for AGOSBA, its new water service. It had been weeks since Azurix won the company, bidding about twice the nearest competitor. But now, with the contracts signed, Azurix and its executives were firmly in charge. The team, led by John Garrison, head of South American operations, arrived at the door and strode inside.

Everything was a shambles. Computers had been pulled out of the wall and stolen. Filing cabinets were open, documents missing. The building had been looted.

In the days since taking control, no one at Azurix had thought to secure the offices. Argentine workers, fearful of losing the security of government employment, had rebelled against the privatization by wrecking the place.

After about an hour of assessing the damage, the executives realized that things were far worse than they had imagined when they first arrived. Stunned, Garrison headed over to the phone. He had to call Rebecca Mark in Houston right away.

“You’re never going to believe this.”

Mark, sitting in her office in Houston, could hear the panic in Garrison’s voice. “What’s the matter?”

Garrison answered slowly. “We don’t have a billing office,” he said.

“What do you mean, we don’t have a billing office?”

“We don’t have the computer system. We don’t have computerized records. We don’t have anything.”

This couldn’t be true. “You’ve got to be kidding me.”

“No, I’m not kidding,” Garrison replied. “Everything’s gone! We’re providing water to two million people and don’t know who they are. We can’t bill them!”

———

The numbers didn’t lie. Huge sums of money had flown out Enron’s doors since January, far more than had been budgeted. All for a hodgepodge of merchant investments, slapped together by deal makers in wholesale who were looking for something to tout come bonus time.

Cliff Baxter, who on July 1 had been appointed chief executive of Enron North America, the wholesale division, was still assembling a unit to stop bad merchant deals. And there were plenty that needed stopping—investments in paper companies, a Thailand steel mill, a fiberboard plant, an environmental services company—all businesses Enron knew next to nothing about.

On July 7, Enron’s top managers met in the Evergreen 1 Room at the Houstonian hotel. Sitting at one of three tables assembled into an open-ended rectangle, Fastow and McMahon laid out the sorry statistics. Enron had budgeted $1.1 billion for merchant investments in the first six months of 1999. But the company had blasted through $3.6 billion—or $2.5 billion more than planned.

Something had to be done with all those investments, particularly the bad ones. Fastow already had an inkling that the solution might lie in the special-projects group.

In the research unit, Stinson Gibner walked into Vince Kaminski’s office, a self-satisfied expression in his face.

“Guess what,” Gibner said flatly. “There’s a problem with the Rhythms hedge.”

Kaminksi looked up from his desk. “
Already?
They were just put in place a week ago!”

Gibner nodded knowingly.

“What’s the problem?” Kaminski asked.

The finance group didn’t know what it was doing, Gibner said. In the best scenario, the value of the put option in the hedge would move up by a dollar for every dollar lost in Rhythms’ share price. But Fastow and his colleagues had used a long-term put option. None of them seemed to be aware that the short-term prices of such puts moved less than the prices of the stocks that they hedged. So now, every time Rhythms’ stock fell a dollar, the put went up by only fifty or sixty cents. And the difference would have to be reported by Enron as a loss.

Kaminski chuckled. “Just confirms what we said. People who don’t know anything about hedging shouldn’t hedge.”

The two analysts knew that there weren’t many people at Enron who could fix the problem. Pretty much only the research unit.

“What do we do?” Gibner asked.

Kaminski sighed. “Well, I suppose we should be good corporate citizens and try to fix it for them.”

If nothing else, lunch was sure to be uncomfortable.

The four Andersen accountants took seats around the restaurant table. Three—Debra Cash, Tom Bauer, and Carl Bass—worked on the Enron account. The last was Gary Goolsby, a global risk partner from the Houston office. The three had asked Goolsby to lunch that day so they could lay out their concerns about their lead partner, David Duncan.

“I don’t know how else to say it, Gary,” Cash said. “Dave is just too close to the client.”

Enron already pushed hard for fast answers, Bauer said, and didn’t like to hear no. But none of the accountants had the sense that Duncan was conveying the risk of this assignment to the Enron audit committee.

“In that kind of environment, you can’t get too close to the client,” Cash said. “But Dave is out socializing with Rick Causey, playing golf with him. They go out together with their wives. He’s too close.”

Duncan seemed wrapped up in keeping Enron happy, the accountants said. They didn’t necessarily think his independence had been compromised, but feared that it could be.

Goolsby listened politely and told them to keep him posted. But he wasn’t all that worried. Keeping clients happy was Duncan’s job. To Goolsby, it sounded like he was handling things just right.

McMahon and Kopper waited in the mahogany-paneled alcove outside Fastow’s office. The next meeting of the Performance Review Committee was coming, and the three wanted to prepare. The idea was, by reviewing each employee at a pre-PRC meeting, they could present a united front at the real thing.

Fastow led everyone to a conference room, where they paged through notebooks stuffed with information about their teams. One at a time, they rattled off each executive’s accomplishments, working out what ratings they planned to recommend.

When Glisan’s name came up, Kopper ticked off five deals he had worked on in the last six months, including LJM. “These are deals only Ben could have done because of his accounting and finance background,” he said.

They all agreed that Glisan deserved a high rating. McMahon flipped a page and mentioned Bill Brown, who had been handling some of the company’s treasury operations. McMahon said Brown was involved in a number of very important deals.

Kopper huffed. “Oh, come on, Jeff, an associate could have done those.”

“Yeah, I have to agree,” Fastow said. “Those aren’t even close to the kind of things Ben is doing.”

This is ridiculous
. These two steered all the best deals to the darlings like Glisan, then complained when others didn’t do them. Maybe it was time to throw that out on the table.

“That’s part of the problem,” McMahon said. “Michael, you steal all the structured deals, anything that is the slightest bit flashy. But Bill could do those.”

“Oh no,” Kopper said. “He’s nowhere close to Ben.”

For several minutes, Kopper and McMahon debated the merits of Brown versus Glisan. The argument was resolved with Glisan rated category one, Brown category two. Another McMahon recommendation, Barry Schnapper, was also placed at two. Later they turned to Cheryl Lipshutz, another Kopper favorite. Kopper reviewed her work for the year so far.

“Cheryl should be rated with Ben as a one,” he said.

“No way,” McMahon shot back. “Bill and Barry are every bit as good as Cheryl. If you put her as a one, Bill and Barry should be up there, too.”

More back-and-forth. Fastow held up a hand. There had to be a compromise here, he said. The three hammered out an idea.

“Fine, that’s it,” Fastow said. “Ben’s our top guy. Then Cheryl, Bill, and Barry are close behind as twos.”

McMahon and Kopper voiced agreement. They had a deal.

The next day at the PRC, everything was playing out as planned. Kopper held up Glisan as the cream of the crop, recommending him as a one; Lipshutz was also excellent, he said, but placed her as a two. McMahon presented Brown and Schnapper—both category two.

Once all the names were on the table, the lobbying began. One executive went after Bill Brown, suggesting that he should be pushed down to make room for one of his own guys.