Conspiracy of Fools (79 page)

Tears welled in Carter’s eyes, and she wiped them with her hand. Then she smiled. “Yes,” she said. “I will.”

Skilling had a few days left and wanted Enron’s directors braced for everything. What if a disaster hit the world economy, something that shook companies around the globe? He needed analysis, numbers, something to show the board the company’s ability to withstand a shock.

He met with Rick Buy and one of his analysts, David Port, at 10:30 on the morning of July ll. They came in with a report showing the effects of various market disruptions. Skilling thought the assumptions too timid.

“Put some real liquidity stress on the portfolio,” Skilling said. “Take it much further than you ever have.”

Consider a global calamity, he instructed them. A huge nuclear meltdown, one that caused massive casualties. Imagine that, in the aftermath, public fears forced the overnight shutdown of the global nuclear industry.

“I want to know what kind of effect that would have on prices,” Skilling said.

Port laughed. “It would be
huge.”

“I know. But tell me what would happen here, how much liquidity we would need to ride it out.”

Buy and Port left Skilling’s office, eager to get started on this intriguing project. When they returned one week later, the news was good. Enron would only need a couple of billion dollars to survive, they reported.

Skilling was relieved. He had heard the reports from Fastow and Glisan showing that Enron had much more cash at the ready than that. So there was nothing to worry about. No war, no earthquake, no external threat could do Enron in.

No one thought to consider what might happen if, instead of a global calamity, Enron faced a far more plausible disaster. Like a credit downgrade, or the forced disclosure of the Raptor losses. Kaminski and Kindall had already done that analysis. And the terrifying results had been ignored by everyone who heard them.

Just before 1:30 on the afternoon of Friday, July 13, Ken Lay was working at his desk. It was his first day back in the office after a tough trip to Spain, Italy, and India, where he had delivered speeches and attempted, without success, to negotiate a resolution of the Dabhol fiasco.

Skilling walked in for a scheduled appointment. Lay greeted him, and they went to the conference table. Skilling brought out a pad of paper with a checklist on it and began running down several issues. It was pretty forgettable stuff. After ten minutes, Skilling set down his pad and looked at Lay firmly.

“There’s another item,” he said. “I’ve come to a decision that I need to share with you.”

His voice was flat. “I’ve decided I want to resign.”

Lay stared at him. “What?” he asked.

“I want to resign.”

Lay knew Skilling had been struggling with his new job. He had anticipated
that he might come asking for a sabbatical. But quitting? Maybe this was like that escapade a few years back, when Skilling was talking about working part-time. That passed; this might, too.

Lay placed his arm on the table. “Tell me more,” he said. “I’ve got to understand what you’re saying.”

There wasn’t a lot to it, Skilling said. “I’ve been thinking about this for a while. I’m concerned that the job is damaging my health. I’m facing enormous stress.”

Then there was his family, Skilling said. He still had young kids at home. His daughter was about to leave for college, his older son would be leaving a few years later. And he wanted to spend time with his younger son.

“So I’ve decided for health reasons and for family reasons that it’s best for me to resign.”

Lay barely knew what to say. He was supposed to start at KKR by year’s end, just months away. Did he have to walk away from that opportunity? Just to pick up after Skilling?

“Jeff, you know this is going to be a real shock to the board,” Lay said. “And obviously, from a personal standpoint, this isn’t something I wanted or expected to happen. I’ve kind of made plans for later in the year.”

Skilling didn’t respond.

“But more importantly,” Lay continued, “I’m concerned this could do some harm to the company, damage investor confidence. Is there any way I can talk you out of this?”

“No,” Skilling said. “I’ve thought about this really hard, and I believe this is the right thing for me.”

Me. The word grated on Lay. Not what was good for the company. What was good for Skilling. “Jeff, obviously I just got back from a grueling trip, and I need to reflect on this,” Lay said. “But I hope this weekend, you’ll get some rest and reflect on this and see if there is maybe some alternative we can come up with.”

“Okay, that’s fine,” Skilling replied. “But I’m pretty firm on my decision.”

“If he won’t change his mind, we need to think about what to do,” Lay said. “We need to think about timing.”

It was the next day. Lay was on the telephone with John Duncan from the board of directors, who was stunned by the Skilling bombshell—and perplexed. They should make every effort to change Skilling’s mind, Lay said, but if they couldn’t, they should move fast to contain the damage.

“If he’s going to leave, then probably the sooner the change occurs, the better,” Lay said.

Still, there was the matter of succession.

“Obviously, you can pick anyone to be chief executive that you want,” Lay said. “I’ve made plans for later this year, but given that my life has been committed to Enron, if you feel it’s best for the company for me to stay awhile, I would certainly give that serious consideration.”

Duncan bubbled happily in response. Of course if Skilling left, they would need Lay to step into the breach. That went without saying.

Lay hung up. His wife, Linda, was nearby, disappointment written on her face. She had been looking forward to her husband cutting back on his travel. Now the hectic pace would resume. Maybe even get worse.

“Jeff really let you down,” she said. “He let the board down, and he let the company down.”

She couldn’t understand how he could do this, she said.

“I just think it reflects great immaturity on Jeff’s part that he thinks he can just flip a switch like this,” she said. “He wants the job in February, and then in July he wants to give it back? What kind of behavior is that?”

Lay certainly couldn’t disagree.

Early Monday morning, Lay wandered down the hallway to Skilling’s office. His door was closed. Lay glanced over at Sherri Sera, Skilling’s secretary.

“Is he in a meeting or on the phone?” he asked.

“No,” Sera replied. “He’s fine. Just go on in.”

Lay clicked open the door, tapping on it as he entered. Skilling was at his desk, looking rested and at ease.

“Jeff,” Lay said as he walked in, taking a seat at the conference table, “get some sleep over the weekend?”

Skilling smiled. “Yeah, slept like a baby.”

The moment was uncomfortable. “Good,” Lay said. “So maybe you’ve decided to change your mind?”

Skilling shook his head. “Nope. Haven’t changed.”

Lay felt himself sink a little into his chair.

“Are you sure?” he asked.

The two bantered for several minutes. It quickly became obvious that yes, he was sure. He was leaving. It was, he repeated, the right thing for him and his family.

“And probably,” he added, “this is the best thing for the company, too.”

That set Lay back. “Why?”

Skilling shrugged. “Given all the problems and everything going on, I think people might be reassured by you coming back in,” he said.

Lay didn’t understand. “What makes you think that?”

“Well,” Skilling said, “certainly the stock price hasn’t performed well. Maybe by you stepping back in, it will restore confidence that obviously we’ve lost.”

Was
that
what this was about? Was Skilling taking the falling stock price personally, like some stock-market rejection of his leadership? Was he
that
thin-skinned?

“Jeff, that’s tough to say,” Lay replied. “I think there’s a very large risk here that it will further shake confidence. You haven’t been CEO very long, and for you to step down like this may not be perceived well.”

Lay paused. “The directors have a question, Jeff.”

“What’s that?”

Well, Duncan and Winokur both had the same concern, Lay said. “Do you know something we don’t know?”

The question surprised Skilling. “I don’t think so,” he said. Retail was fine, Skilling said, wholesale was ripping up the place. Broadband was troubled, but it had been folded into trading and might even eke out a small profit in a year. India—well, he said, he didn’t know much about India, because Lay was handling that.

“But listen,” he said. “I’ll talk to Causey, just to make sure he’s okay with everything. Make sure there’s nothing out there I don’t know.”

All right, Lay said. He’d appreciate that.

Fifteen minutes later, Skilling headed down the hall into Causey’s office and dropped into a chair.

“Rick,” he said, “I need to ask you. Is everything okay? Anything on the horizon that worries you?”

Causey thought for a moment. “No,” he said.

He stopped. “Well …” He paused. “The Raptors,” he finally said. “We’ve got some that are in the money, some that are out of the money.”

Skilling nodded. Some Raptors could meet their obligations; some were struggling. Okay, he understood that.

“That’s just a wash, though,” Causey continued. “No, I think things are about as good as they have ever been.”

Skilling stood. “Okay, thanks.”

He had the information he needed. Everything was fine.

Sherron Watkins watched carefully as two executives from retail drew a series of boxes on a whiteboard. It was the afternoon of July 30, and Jimmie
Williams and Javier Li were giving her a lesson about the Raptors. The more Watkins heard, the more horrified she became.

The Raptors were complicated to diagram, but all the lines and arrows did little to disguise their underlying problem: they did
nothing
. There was no real economic hedge here. Enron was simply using assets in one hand to protect the value of assets in the other. This whole construct was destined to collapse. Fastow, with LJM2, wasn’t assuming much risk; he owned just three percent of the total, as best as she could tell. The rest of the risk was being borne by Enron itself.

After the lecture, Watkins decided to find out more. She reviewed Enron’s filings for 2000 and saw a footnote suggesting that it avoided $500 million in losses through its use of the Raptors. This was unsustainable, and terrifying. Early in her career, Watkins had lived through the collapse of another employer that played fast and loose with the rules. She didn’t want to go through it again. She wanted out.

That week, Watkins started looking for another job.

MARK PALMER WATCHED ABSENTMINDEDLY
as the numbers above the door of the crowded elevator blinked steadily toward the forty-seventh floor. It was August 10, a Friday, and Palmer, Enron’s public-relations chief, was feeling relaxed. He had been out of the office for weeks, first on a fishing trip with his oldest daughter, then in California to extend an olive branch to local reporters. The West Coast electricity debacle had absorbed Palmer’s time for months, and he felt relief as the glare of bad publicity receded.

The doors opened, and Palmer made his way down the hall. Turning a corner, he noticed Steve Kean, his boss, at his desk looking distracted. Kean glanced up.

“Come with me,” Kean said. “I need to talk to you.”

He headed down the hallway toward a conference room. Palmer followed, his mind racing. Was he in trouble?

In the conference room, Kean plopped down at the table, perching himself on the edge of a black Aeron chair. He brought both hands up, rubbing the bridge of his nose. Then he laid his arms down on the table and looked at Palmer.

“Skilling is leaving,” he said.

The air blew out of Palmer’s lungs. He eased himself down onto the edge of the small round table, which immediately tilted and sent him tumbling into a chair.

He spent a moment gaining his bearings. “Why?”

“Personal reasons.”

“What, is he sick? What kind of personal reasons?” Kean’s face showed no emotion. “Personal reasons.”

“Jesus, we’ve got to do better than that.”

A moment’s thought. “When?” Palmer asked.

“We’re going to announce it Tuesday.”

What?
Doing this rapidly was public-relations suicide. Why the hurry? “Who’s going to take his place?”

“We don’t know,” Kean replied.

Palmer glanced at the floor. The only obvious candidate was Lay. But in recent years, he had become so out of touch, leaving things to Skilling. From Palmer’s experience listening to him speak with reporters, Lay’s information about Enron was usually years out-of-date. He was the world traveler, the glad-hander. He wasn’t up to
running
things. Not anymore. Certainly not without Skilling.

They needed to prepare the announcement, Kean said—and not at the office. Advance word could not leak out. This weekend, he said, they needed to get together at his house and write up a press release. Palmer agreed and promised to tell no one, not even his wife. He stood and wandered out of the room, heading to his desk. He was numb. He had been hoping for smooth waters. Now this.

This would certainly be one of his toughest weeks ever, Palmer thought. Soon, he was going to need everybody on deck—his secretary, the full support staff—ready to work hard.

Palmer passed a large conference room, where a tense meeting was being held. Elizabeth Linnell, an executive from Kean’s department, saw him and ran to the hallway. “I’ve got to talk to you,” she said urgently.

She dragged him into the meeting. Faces around the table gazed at him somberly. She sat Palmer down and looked him squarely in the eye. “Your secretary is stealing from the company,” Linnell said.

Palmer stared back at her. “
What?”
he asked sharply.

They couldn’t mention Skilling’s kids. Under any circumstances. Lay’s instructions, relayed from Skilling himself, were clear. He didn’t want his kids to think they were the reason he was leaving, even if they were.