Conspiracy of Fools (58 page)

The Forney Perpetual Loop, as the in-and-out trades came to be known, was only one of the schemes cooked up by Enron’s traders to exploit the California power market.

They all had cute names. One, Death Star, involved submitting fake transmission schedules that showed lines would be overloaded; Enron would then be paid for “reducing” congestion by removing scheduled power it never meant to send. Another, Fat Boy, was a variation on that theme but allowed prices to drive up in anticipation of the coming fake congestion. With Get Shorty, Enron pledged to line up backup reserves while in fact doing nothing, under the assumption that the reserves would never be needed. And Ricochet was another variation of the Forney Loop.

Together, the schemes were methods of collecting money from California for services that would never be provided. But there were clear benefits to Enron, which still held a large position that would gain millions if California prices rose. Coupled with the deep structural flaws in the California electricity system—one that allowed for a massive mismatch between demand and available supplies—the market was in perfect position for utter disaster.

The first day of calamity was only weeks away.

The unofficial word was finally out: Glisan was in line to be Enron’s new treasurer. Fastow had pushed his candidacy hard, and both Skilling and Lay had endorsed it. If the board approved, Glisan would have the job.

The prospect left Ray Bowen anxious. Glisan was so young; Bowen
worried he might unwittingly become Fastow’s dupe. It only seemed appropriate to warn him. Glisan was working in his small office when Bowen tapped on the door. Bowen ventured inside, offering his congratulations.

“You’ll do a great job,” he said, hoping the words were true. “But I’ve got some advice for you. Be your own man. Don’t let people define you as Andy Fastow’s boy.”

Glisan pondered that. “Yeah, well, I realize I’m not so well known around the company, so I’ve got to get to know people better,” he said finally.

Bowen just listened.
Was I speaking in tongues?
Glisan seemed not to have understood his fairly blunt message.

“Well,” Bowen said, “then go around the building, do a little road show for yourself. Go see everybody.”

Let’s try again
. “But be your own guy. Don’t let them think you’re just somebody who does what Andy says.”

Bowen’s tone was serious. “Ben, you’ve got to know, Andy’s not the most popular guy here. I don’t think he’s somebody you want to completely hitch your wagon to.”

Glisan blinked, looking bewildered. “Gee, you know, Ray,” he said, “Andy’s been really good to me.”

“Fine. But the guy plays hardball. So you’re going to want to watch your head.”

“I don’t know, Ray,” Glisan replied. “I haven’t seen any of that.”

He shrugged. “Andy’s just been really good to me.”

On April 28, wire transfers for more than twenty million dollars arrived in Citibank account 4079-8061, in the name of a Fastow partnership, LJM Swap Sub. Much of the cash—from Enron and Swap Sub—was then transferred to an account at Chase, this one in the name of the Southampton partnership.

The Southampton scheme was finally paying off. With those transactions, Fastow and his selected friends—Kopper, Glisan, Mordaunt, and a few others—had gained the cash that had been conned out of the investors in LJM1. But they weren’t alone. Days earlier, Fastow’s British co-conspirators—the Greenwich NatWest bankers—had invoked their rights to become partial owners of Southampton. Almost $7.4 million was wired that day to the bankers’ Bermuda account.

After confirming the wire transfer, Fastow telephoned a number in Toronto, where Gary Mulgrew, one of the three bankers, was waiting. “Congratulations,” Fastow said. “You guys just made seven million dollars.”

———

His hand resting on the boardroom table, Fastow took a read of the directors on Enron’s finance committee. Their meeting had been droning on for a while as McMahon took them through his last presentation as treasurer. Then Pug Winokur called on Fastow to present his report.

“Before I do,” Fastow began, “I’d like to take a moment to introduce Ben Glisan.”

He glanced over at Glisan, who nodded a greeting to the committee. “The management of Enron is recommending Ben to succeed Jeff McMahon as company treasurer,” Fastow continued. “Ben has demonstrated himself to be a brilliant and exceedingly valuable member of our team.”

Fastow laid it on thick, and afterward the committee gave its unanimous approval. Glisan thanked the directors and promised to do the best job he could. Fastow took the floor again and began his official report. Several minutes in, he looked at the directors. “That leads us to an update on the transactions conducted with LJM2,” he said.

The fund, he said, had been an all-out win for Enron. Combined with LJM1, he said, it had contributed almost $230 million in profits and more than $2 billion in cash flow, not to mention the investment-banking fees that were saved.

A director asked how much the LJM deals were distracting Fastow from his duties as CFO. “The time I am committing is negligible,” he replied. “I am personally devoting no more than three hours a week to them.”

Three hours, and all those profits! The directors beamed with delight. “Now,” Fastow said, “we’ve been working for months on a project involving LJM2 that we believe will take us to the next level. We call it Project Raptor, and Ben Glisan has been the point man on that.”

Using a four-page PowerPoint presentation, Glisan launched into his pitch. This would be a variation of the Rhythms hedge, Glisan said, only this time to protect Enron against future losses from an array of merchant investments. He spelled out the terms: Enron stock shifted into Talon, outside cash coming from LJM2.

“Under the deal, LJM2 will be entitled to a 30 percent annualized return, plus fees,” Glisan said. “Enron will receive 100 percent of any returns beyond that.”

Glisan said nothing about the forty-one million dollars that LJM2 would receive before hedging began, guaranteeing a blockbuster return. Still, he was frank about Raptor’s limitations.

“Raptor does not transfer economic risk,” he said. Instead, it simply moved any big swings in the value of Enron’s investments off the books.

While the directors seemed to be listening, few grasped the full import of
what Glisan was saying. A handful of questions later, they unanimously approved Raptor.

That same day, final instructions went through to distribute the cash from Southampton. At about the time that Glisan was meeting with the board, a clerk at Chase entered wire instructions into the computer. In an instant, $1,040,744 moved from Southampton’s Chase account to account number 3714-9242 at Charles Schwab, owned by Glisan. An identical sum was wired to an account held by his co-investor Kristina Mordaunt.

Fastow had transformed two Enron executives—including his new treasurer, a man with power to block his wheeling and dealing—into millionaires.

A bell sounded in Saugus High School in California at noon on May 22, but students were not changing classes. School officials were being notified that, under their agreement with state utilities, the power had to be shut off. Lights and air-conditioning went dead. Students kept working in their dim, sweltering classrooms.

For days, California had been roasting in an unseasonable heat wave, with temperatures blasting past one hundred degrees in many areas. Demand for air-conditioning had drained power reserves dangerously low. On this day, the California Independent System Operator, which managed the grid, declared a stage-two emergency, forcing customers like Saugus to shut off power or pay massive fines.

The California energy crisis had begun.

Antiques and portraits from another era decorated the corner suite at the Ritz-Carlton Montreal, where Robert McCullough was working. It was the next morning, May 23, and McCullough, head of his own energy-consulting firm in Portland, was on his cell phone, trying to learn details of the strange power crisis hitting the West Coast.

McCullough was in Montreal for an international symposium of electrical utilities but knew the real industry epicenter that day was in California. Much of the world seemed to be taking the state’s emergency in stride; the news hadn’t even made the front page in Los Angeles. But to McCullough, the previous day’s events were the chest pains that foreshadowed a massive heart attack.

It was May
, for heaven’s sake; summer hadn’t even begun. McCullough had always believed that the new system in California was rickety, but this was worse than he had imagined. Prices were already spiking; this was going to damage a lot of his clients, not to mention the state’s economy.

As the morning wore on, McCullough learned enough to fuel his suspicions that something was drastically wrong. Somebody, he decided, had to be manipulating the market, driving up prices for profit. He was sure of it.

Later that day, McCullough was on a conference call with Paula Green and Mike Sinowitz, both with Seattle City Light. Washington State had shared in California’s problems the previous day, although no emergency had been declared. What was going on? McCullough asked them.

“Well,” Sinowitz said, “if the prices are high, that just means there’s a lot of demand.”

Not good enough. “Mike, what’s your demand?”

“Not very high.”

“So therein lies the question,” McCullough replied. “Why are prices so high if there’s not a lot of demand?”

He could almost hear Sinowitz’s brow furrowing.

June 1. Only thirty days left until Enron had to take Merrill Lynch out of its investment in the Nigerian barges—the deal that had helped Enron hit earnings at year-end.

But there was a problem. The accountants at Andersen had never been told about Fastow’s guarantee, and there was nothing about it in any of the paperwork. After all, the guarantee might have led Andersen to nix the original deal as not a real sale at all. So if Enron bought the barge interest back now, would Andersen get suspicious?

One executive on the deal, Alan Quaintance, was wrestling with that problem and sent an e-mail to other executives asking for help. He explained Enron had convinced Andersen that Merrill was making a long-term investment in the barges, and now had to come up with a reason why the company was working to take Merrill out of the deal.

“I need help formulating this story,” Quaintance typed, “if it is even possible.”

Boxes and lines filled the whiteboard in a conference room over in the offices of Azurix. Rebecca Mark was at the board, delivering a lecture to two McKinsey consultants, Ron Hulme and Suzanne Nimocks.
This
was the idea, the one that would salvage the company, the story that would turn Wall Street around on its opinion of the company.

The door opened, and Amanda Martin walked in; Mark had just called and asked her to join the meeting. For several minutes, Mark continued her lecture, laying out the vision.

Mark checked the time. “Okay, I need to catch a plane to New York. Amanda, can you explain these boxes?”

She looked at the McKinsey consultants. “Then you guys think about it and get back to me in a week on how we can present this to the analysts and get them fired up.”

With that, Mark swept out of the room. Everyone who remained behind looked at each other. And then smiled.

“So,” Nimocks said to Martin. “Can you tell us how this works?”

Martin opened her eyes wide and took a deep breath. “Why don’t you tell me first what she told you?” she said.

Ron Hulme laid his head down on the table and started laughing. The other two joined in for five minutes.

“Okay,” Martin finally said. “We need help.”

Glisan had barely settled into his new office when an old deal reared its head: the proposed Chewco buyout.

Months before, McMahon had suggested that Enron purchase Chewco—the half-owner of JEDI that was controlled by Kopper—to minimize the administrative difficulties. But he had proposed a deal that would have given Chewco no more than one million dollars in profit. When Kopper and Fastow pushed for ten times that, McMahon had pulled the plug.

Now McMahon was gone, and his replacement—just enriched by Fastow and Kopper—wasn’t likely to make the same kind of waves. The buyout went through. It would take a year to close, but Kopper would receive his ten million dollars. And then the cash would go to Fastow.

Skilling studied the draft report regarding the possible sale of the international projects. The numbers were terrible, worse than he had imagined. Could this stuff even be sold? He had no idea what to do.

Amanda Martin was with a few friends at La Griglia when her cell phone rang. She spoke for a minute, then started to stand. “Sorry, I have to go,” she said.

Skilling, she explained, wanted to see her right away.

Later that evening, Martin waved her hand, brushing away the swarming mosquitoes outside Skilling’s house. It was past 9:30, and she had arrived minutes before to find Skilling outside, on the telephone and surrounded by wine bottles. He held a finger to his lips, telling Martin to be quiet. His demeanor on the call was smooth, debonair. He gestured, offering her a glass of wine.

Skilling hung up. His calm facade vanished. Tears welled up. He looked like a frightened little boy.

“You’re my friend,” he said suddenly. “You’ve always been my friend. I miss you. I really miss you.”

Martin was taken aback. She had been pushing Skilling for months to get her out of the mess at Azurix. He could have brought her back to Enron, but didn’t. She’d told him before that she didn’t think he knew how to be a friend. But now that he was drunk and rambling, he was trying to be.

“You look good,” he said suddenly. “Have you been working out?”

“No, Jeff,” she replied. “I’ve just been running around with the kids.”

“I’ve been working out. Can you tell?”

Sure, Martin said. Skilling blinked, and the tears emerged again. “You’ve got to make Azurix work, Amanda,” he said. “Promise me you’ll take care of that problem.”

Martin slapped at a mosquito. “I can’t, Jeff,” she said. “There are real problems.”