Conspiracy of Fools (61 page)

Skilling looked directly at Sutton and Rebecca Mark, who were sitting at the boardroom table. “I believe we have been misled about the values of these assets by the management of the international division,” he said, anger in his voice. “If Project Summer does not close, we need to very aggressively start selling them off piece by piece and shutting down the development business.”

Mark boiled. She had heard rumors that Skilling was up to something like this, so she had run her own numbers. All told,
her
calculations showed a 12 percent after-tax return. She had laid out her numbers for Lay days before, but now he was sitting there, saying nothing.

She spoke up. “I just want everyone to know that I disagree with Jeff’s presentation. I disagree with the numbers, and I think the returns are substantially higher than he’s presented.”

She wasn’t arguing against the sale of the power projects, she said; if they had better places to invest their capital, then they should go ahead and do it.

“I just want you to know that they are performing better than what you’ve been shown,” she said sternly. “But I’ll take that up separately with Jeff and Ken.”

She stopped speaking. The room was absolutely silent. No one asked her a single question.

Mark stood. “Unfortunately, you’ll have to excuse me,” she said. “I have another appointment.”

She strode out of the room. Sutton blinked, a look of shock in his face. He picked up the gauntlet. “Jeff, I truly believe you are overstating the situation,” he said.

Skilling’s face registered nothing but contempt. “These are the numbers, Joe.”

“Those are
not
the numbers. You are making a lot of extremely negative assumptions. Cash on cash, the returns on the international assets have been tremendous. Rebecca’s right, in the neighborhood of 18 percent, pretax.”

Cash on cash? Again?
“Joe, you’ve got to be kidding me!” Skilling snapped. “That’s not how return on investment is calculated! This is Finance 101!”

“Oh no,” Sutton said. “Those are the numbers.”

Finally, the fireworks ended. As everyone left, a few directors gathered with Lay. Pug Winokur expressed dismay, not at Skilling’s analysis, but at the tone and tenor of his presentation.

“I am just stunned that Jeff made those comments in front of the international group’s leadership and made them so personal,” Winokur said. “He was attacking their integrity and their competence.”

Lay agreed. The episode was out of character for Skilling, and that made them question the quality of his analysis.

“I think the real truth,” Lay said, “lies somewhere in the middle between what Joe and Jeff said.”

By August 11, Project Summer seemed all but finished. Cliff Baxter signed the agreement with the Badr El-Din group. A team of Enron’s executives began hammering out the press release. A list of 154 potential questions—and answers—was drawn up for the inevitable calls from analysts and reporters.

Ninety days, and the deal would close. When all was said and done, Enron would have four billion dollars in new cash. Skilling could almost taste it.

As the sale of the international assets came together, Azurix continued to fall apart. Rebecca Mark’s efforts at assembling a new strategy were a bust; repeatedly she had failed to deliver an effective plan for cutting back. The Azurix directors were tired of the battles, tired of the excuses. A new direction seemed necessary. Skilling dropped by to speak with Lay, to see if he was ready to accept the inevitable.

“We’ve got to call it quits, Ken,” Skilling said. “We’re not making the progress we need to make.”

Lay nodded solemnly. “I agree,” he said.

Lay steeled himself as he neared Rebecca Mark’s office on the tenth floor of Allen Center. He arrived in her doorway, looking somber. Mark had been expecting him.

“Ken, good to see you,” she said breezily.

He stepped across the limestone floor and took a chair. Mark sat directly across from him.

It was best to get right to the point. “Rebecca, you must know that things aren’t going very well here.” A beat. “I think that it’s time for you to resign.”

Mark said nothing as Lay rambled on about the contribution she had made to the company, about how she had raised the international stature of both Enron and Azurix.

“We really thank you for what you’ve accomplished,” he said. “But now it’s time for you to leave.”

Mark blinked, showing no reaction.

Eighteen years
. That was all she could think. Mark gave eighteen years to
Enron, gave Lay his international stature with her division. Now, she thought, he was making a bad decision, based on Skilling’s numbers. Skilling had made her look incompetent, and apparently it had worked.

“Ken, if that’s what you and the board want, then I accept that,” she began. “But I really think you need to take a look at the numbers we put together. Our performance in international has been better than Jeff says. Our performance here is very promising.”

Lay’s anger swelled. He had seen too much evidence of shaky financial analysis coming out of her teams. So much money had been wasted. He just wanted this to be over.

“Rebecca, that is not the issue here,” he said.

“Ken, I really think you need to take a look at our numbers,” Mark pressed.

Lay’s patience vanished. “Rebecca!” he snapped. “I don’t give
a fuck
about your numbers!”

Days later, just after eight on the morning of August 24, Rebecca Mark sat for the last time with the Azurix board. The summit was being held at Enron in a room on the fiftieth-floor mezzanine; Azurix couldn’t even host its own board meetings anymore.

Mark was the first to speak. “I disagree with your decision. I think it’s the wrong thing to do.”

No one responded.

“But the decision’s been made,” Mark said. “Before I agree to this, though, there are three things I require.”

Mark listed her demands quickly. Her bonus for the year, prorated. Input in the press release announcing her departure. And, if she ever returned to buy Azurix assets, a commitment that she would be taken seriously.

Skilling leaned in. “Tell me about this bonus.”

When another senior Azurix executive was terminated, Mark said, the company had given him a prorated bonus, based on the amount he had received the prior year.

Skilling snorted. “Yeah, but when he left, Azurix was still on budget.”

“I should be paid for the time I worked.”

“Okay,” Skilling retorted. “And this thing about buying assets. Are you asking for preferential treatment?”

“Of course not,” Mark said.

Pug Winokur, who was acting as chairman, glanced around the room. No more questions. “All right, Rebecca,” he said. “If you give us a moment, we’ll discuss it.”

Mark left the room. Skilling started right in.

“Paying her a bonus is absolutely incomprehensible!” he said. “We pay for performance. She should get nothing.”

The debate went on for several minutes. Winokur brought it to an end. “Look, Rebecca is not a wilting flower. This is a small amount of money, just to get this over with and make sure that she leaves quietly and that we can get back to business.”

Winokur’s argument won. The directors decided to pay Mark several hundred thousand dollars and send her on her way.

The day began by pushing out one executive. It would end with Skilling inviting hundreds more to join her. At ten, Skilling gathered executives from the international group to formally notify them that they would soon have a new owner.

“We intend to sell the international division,” he said. “The sale is basically complete.”

Until this moment, Skilling said, the international executives were bound by their agreements to Enron. But no more. Now they could negotiate with their new owner, and Enron would raise no objections, he said.

Skilling took some questions and described the outlines of the deal. After that, there wasn’t much more to say. He left the room and headed downstairs to his office.

Skilling felt almost giddy. Mark was out. And all the international executives, the ones always bugging him to crack open Enron’s wallet to pay for new projects, were all but gone, too.

Cliff Baxter dropped by with an update on Project Summer, and the two men went outside for a smoke.

Skilling kept smiling and shaking his head. “Man, I’m feeling good,” he said. “Feeling real good.”

Baxter took a drag on his cigarette. “Yeah,” he chuckled. “It all seems almost too good to be true.”

It was.

EARLY ON THE MORNING
of August 28, a team of transplant specialists wheeled an empty stretcher down a deserted hallway at the Cleveland Clinic. No patients were visible in the rooms as the doctors passed; instead, an entourage of Middle Eastern officials, there to attend the needs of one man, had taken over the floor. The medical specialists were cleared through security and ushered into an elegant suite where an elderly man lay surrounded by a virtual garden of fresh orchids and other expensive blooms.

The patient was Sheikh Zayed bin Sultan al Nahyan, President of the United Arab Emirates, ruler of Abu Dhabi, and the sixth-richest man on earth. As best as anyone knew, he was somewhere between seventy-nine and ninety-one years old; birth certificates weren’t in wide usage in the Arab world when Sheikh Zayed was born. Whatever his age, this day he would become one of the oldest kidney-transplant recipients ever.

The team wheeled Sheikh Zayed toward the operating room. The doctors could scarcely guess at the outcome; the sheikh was in decent physical condition, but there was no telling how, at his age, he would bear up under the ordeal.

One thing was clear. Sheikh Zayed, the man whose authorization was required for the investment of billions of dollars in Project Summer, would be out of commission for weeks, if not months, to come.

Three days later, Stuart Zisman, a lawyer in Enron’s wholesale division, was finishing a draft memo. He had been asked weeks before to examine Project Raptor and analyze the legal risks of the transaction for Enron. To do the job, Zisman had obtained data about the various assets that were going to be hedged with Raptor I.

Zisman didn’t like what he had seen. Most of the hedged assets were truly dreadful, the holdings most likely to lose value over time. In essence, Enron was entering into terrible merchant investments, then locking in marked-up values to avoid admitting the consequences of the company’s monstrous business decisions.

So Zisman pulled no punches. On the first page of his memo, he wrote the heading “Overall Book Manipulation.” He mentioned that at first he had believed Raptor would hedge investments of varying quality. “As it turns out,” he wrote, “we have discovered that a majority of the investments being introduced into the Raptor structure are bad ones.”

That, he wrote, “might lead one to believe that the financial books at Enron are being manipulated in order to eliminate the drag on earnings that would otherwise occur.” Zisman finished the memo and sent it to his bosses. He wouldn’t get the response he expected.

Even as Zisman prepared his memo, the hedging scheme had become far broader than most anyone knew. Raptor I and Raptor II were already up and running. Another vehicle had been presented to the board as Raptor III in August, and again the directors approved it. Despite the name, Raptor III wasn’t the third Raptor, it was the fourth. The real Raptor III had been created without board approval. And it was the most irrational structure of all.

The third Raptor was designed to help Enron hedge one asset—its investment in the New Power Company, a business Enron set up to sell electricity and natural gas to residential customers, both directly and over the Internet. New Power was about to go public, and executives feared its potentially volatile stock price would whipsaw Enron’s bottom line. So the third Raptor was used to lock in the New Power share price. Of course, to hedge, the third Raptor needed capital it could arguably use to repay Enron if the New Power shares fell in price.

The finance group found the capital they needed in the most unexpected of places: the New Power shares themselves. The stock being hedged was contributed to the third Raptor; again LJM2 was the outside investor, putting in thirty million dollars and getting back just under forty million dollars one week later, before any hedging took place.

Still, hedges are supposed to go
up
in value as the price of the stock being protected goes
down
. But here, Enron had taken the irrational Raptor structure to its absurd extreme. New Power shares were backing the hedge of New Power shares. There wasn’t even a pretense at economic sense.

But the Raptors would get still worse.

Negotiations between Enron and Joe Sutton were bogging down. If Project Summer went forward, Sutton wanted, at a minimum, his full severance, plus an extended contract in case the new company didn’t pay as much as Enron. Lay called the demands unreasonable. Sutton insisted he deserved to be rewarded
for taking a chance on new owners who, he contended, would walk away from the deal if he refused to join.

Frustrated, Lay finally called Badr El-Din personally. He opened by asking about the Emir’s transplant and the progress of the deal. Then he shifted topics.

“Dr. Amin, I need to know what the deal’s breaking points are,” he said. “We’re having a little difficulty negotiating Joe’s severance arrangement, and I guess I need to know if Joe is essential to this deal.”

“No,” Badr El-Din replied. “All things being equal, we’d probably rather have him than not have him. But other people are essential to the deal. Joe’s not.”

Then Badr El-Din mentioned something else. While Sutton was lobbying for an Enron severance, he was pushing Badr El-Din for a huge pay package, too. Lay thanked Badr El-Din and hung up. These shenanigans were the last straw. He discussed it with Skilling, and they agreed. If Sutton didn’t leave through Project Summer, Enron would force him out.

The anonymous letter from India had been making its way around the Enron building for days. Somebody, probably an employee, claimed an Enron executive was operating his own business out of the company’s India offices, using company copiers and computers, even its business contacts.