Conspiracy of Fools (92 page)

They spoke to Whalley, and he suggested someone who might be able to help. Fastow, accompanied by Glisan and Causey, stood beside his desk. Then he turned on the speakerphone and started dialing.

That evening, Jeff McMahon was wandering through his kitchen, exhausted. He had just gotten back from a business trip and was looking forward to hitting the sack.

The telephone rang. McMahon glanced at the caller ID.
Enron Corp. He
picked up the receiver and said hello.

“Jeff,” a detached voice said, “it’s Andy, with Rick Causey and Ben Glisan. Have you got a minute?”

McMahon was momentarily taken aback. This was an odd group of people to be calling him—and at home? Something bad was up. This wasn’t a conversation for the kitchen.

“Hold on,” McMahon said. “Let me pick you up on a different phone.” He pushed the hold button, then walked to his home study. He sat on a couch and reached for the line.

Fastow spoke. “Look, we’ve got an issue here, and we’re trying to get all the smart financial minds in the company to address it, to see if we can get any ideas.”

Okay, something is really wrong
, McMahon thought. Fastow giving him a compliment? Calling him a smart financial mind? No way. McMahon chuckled. “Well, you guys must be really desperate if you’re calling me
that.”

No one laughed on the other side.

“Okay,” McMahon said. “What’s up?”

Glisan leaned in to the speakerphone. “We were unable to roll the commercial paper today,” he said.

McMahon snorted derisively. Glisan, Mr. Wonderboy, the company treasurer, didn’t even understand the words he was using. Unable to roll the commercial paper? Couldn’t happen.

“Ben, obviously you didn’t mean you couldn’t roll it,” McMahon said. “You mean you weren’t able to issue as much as you wanted. That’s not a surprise in this market.”

McMahon’s statement was greeted with silence.

In Fastow’s office, no one knew quite what to say. Finally, Fastow spoke into the speakerphone.

“No, Jeff,” he said. “Ben’s right. We were unable to find any buyers for our paper.”

McMahon couldn’t speak. He couldn’t breathe.
No
buyers? How could that be? What the hell happened?

No one said a word for several seconds. McMahon rubbed his eyes. “Well, that is a major problem, isn’t it?” he said matter-of-factly.

“Yeah,” Fastow replied. “That’s why we’re calling to see if you have any ideas about this thing.”

This was stupid. If the commercial paper didn’t roll, there was only one option, McMahon thought. They needed to draw down the bank lines that backed the commercial paper. That was what they were there for. He told Fastow.

“I don’t like that,” Fastow replied. “I think that would show the market that we’re desperate.”

McMahon laughed. “Andy? Hello? We
are
desperate!”

———

After getting off the phone, McMahon ran the situation through his head. Fastow had asked him to come to a meeting the next morning. But he had to face the facts here. They weren’t going to
meet
their way out of this problem. They had to pull the bank lines.

Enron was on the precipice; it could go under. Fastow didn’t seem to understand the gravity of what was happening.

Greg Whalley
. Had Fastow told him what was happening? Or was he keeping it quiet in hopes he could weasel his way out of it? McMahon knew Whalley well, considered him a friend. He decided to call him at home, just in case.

“Listen, Greg,” McMahon said, “I just hung up the phone from Andy, Ben, and Rick—”

“Oh, they called you?” Whalley interrupted. “Good. I suggested they do that.”

Okay. That explains it
. “Are they right? We couldn’t roll the commercial paper?”

Yeah, Whalley replied. That’s what they had told him. “Well, you understand, Greg,” McMahon said, “this is a major liquidity crisis.”

Whalley sighed. “Yeah, I get that, Jeff. I get that.”

There weren’t a lot of choices, McMahon said, but they needed some brainpower behind this. He told Whalley that he was going to call Ray Bowen and bring him along in the morning. Bowen was a former banker and would be invaluable.

Fine, Whalley said. Bring Bowen.

The next morning, October 24, Whalley was in his office early when Fastow dropped by. Fastow had already let Lay know about the problems with the banks. Now he and Whalley needed to talk things through.

Whalley closed the door, and Fastow took a seat. Enron’s CFO looked dejected, almost at a loss for words. Everything had moved too fast for him. Fastow spoke first.

“I’m not sure I’m valuable to you as CFO anymore,” he volunteered. “The banks are very uncomfortable with me.”

Whalley’s face showed no reaction. “I agree,” he said. “I don’t think this is going to work.”

They were going to have to change things, Whalley said. Fastow said he could talk to members of his team, discuss it with McMahon, and they could figure out their next step.

Whalley nodded. He already knew what he was doing. He didn’t need Fastow’s input. The two stood, and Fastow headed to the door, with Whalley following. Fastow stepped out and saw McMahon, Bowen, and a few others waiting. He flashed a nervous smile. Whalley pushed past him.

“Okay, everybody,” he said. “We’re meeting upstairs. Go on up, and I’ll be there in a few minutes.”

Everyone headed to the elevator. Whalley walked briskly toward Ken Lay’s office. They needed to talk.

Whalley found Lay at his desk, showing no obvious signs of distress. Whalley offered no pleasantries.

“We’re getting rid of Fastow and replacing him with McMahon,” Whalley said simply.

“Wait a minute, Greg,” he said. “If you’re serious, we need to take it up with the board.”

Whalley had no patience for these formalities. The house was on fire, and Lay wanted to make sure everyone put on a topcoat and hat before running out into the street.

“We need to go to the board,” Lay repeated.

“You need to go to the board,” Whalley snapped.

Lay was beginning to regret ever having chosen Whalley as president and chief operating officer. “And what,” he said sharply, “am I supposed to tell them?”

Whalley gave Lay a grin. “Tell them they’re getting something new today. Either a new CFO or a new COO.”

Whalley arrived on the mezzanine, and events moved quickly. Without waiting for board approval, he tossed Fastow out as CFO and appointed McMahon, stunning both of them. From there, the conversation turned to drawing down Enron’s revolvers. Fastow objected, but no one listened.

In his first move as CFO, McMahon drafted Bowen as a deputy. Then the two executives assembled a financial SWAT team to sort out the company’s books. McMahon announced that he wanted the team over in the new building, on the fourth floor, in thirty minutes. That would soon be the site of the financial war room, where the new group would struggle to save Enron from collapse.

Bridget Maronge, Andy Fastow’s secretary, reached for the ringing phone.

“Bridget, it’s Jeff Skilling. Is Andy there?”

Skilling knew nothing about Fastow’s termination. He just thought the guy was getting a raw deal with all the publicity and wanted to buck him up.
Maronge put Skilling on hold and called for Fastow. He snapped up the telephone.

“Hello?”

“Andy, I’m so sorry.”

“Fuck,
you’re
sorry!” Fastow snapped back, his tone shocked. “This is just unbelievable!”

“What the hell happened?”

“I don’t have a fucking clue,” Fastow responded.

Well, Skilling asked, what was going on at the company? How were they trying to get on top of things?

“They don’t tell me what’s going on,” Fastow said. “Lawyers are running around all over the place. I’m just sitting here in the dark about everything”

There was a pause. Skilling was shocked by Fastow’s desolate state. “Andy, is there a problem?” he asked.

“There shouldn’t be a problem,” Fastow replied. “I just don’t get it. I don’t understand.”

Skilling could offer no advice. “Andy,” he said softly, “I just wanted to give you a call.”

In the war room, the dirty secrets of the finance group’s years of incompetence and mismanagement were just starting to spill out.

First, McMahon asked for a briefing on the commercial-paper market. How was Enron shut out so quickly? Tim Despain, an executive in finance, took charge of answering.

“We’ve been seeing the changes over the past number of days,” he said. “Last week we couldn’t issue thirty-day paper. We could only find buyers for two-week paper.”

It just kept falling from there, Despain said. By early in the week, the market was shunning everything but Enron’s overnight paper, meaning that investors only had faith that the company could repay its loans over twenty-four hours.

“Then,” Despain said, “last night, we couldn’t sell the overnight paper.”

McMahon gaped at the people in the room. “So you mean to say that over the past week, we’ve been seeing this train wreck coming,
and nobody did anything about it?”

Ten minutes later came another slap in the face.

“We don’t have any method for tracking our cash?” McMahon sputtered.

“That’s
impossible!
We’re a Fortune 50 company! We
have
to be tracking our cash!”

Bowen looked shaken. “Come on, guys. I mean, how can we manage our finances if we don’t track our cash?”

Despain looked at his new bosses with a stricken expression. “Ray, I’ve never … nobody’s ever asked us before to focus on it,” he stuttered. “Nobody ever said this was something they wanted us to do.”

McMahon sat back in his seat, lifting his eyes to the ceiling.
Oh. My. God
. This was Finance 101. Companies needed to track their cash to know when they were experiencing shortfalls, to know when they could pay their bills. It was the same reason that people
balanced their checkbooks!
If Enron didn’t know how much cash it had, it couldn’t know how much to draw down on the revolvers!

Apparently Fastow had always thought that Enron would have more than enough cash to spare. Nobody had any idea how much daily cash was collateral posted by trading partners and how much was being generated from business. Sure, the historical numbers could be pulled together over a few days. But Enron didn’t have that kind of time.

Okay, if Enron didn’t have a handle on its cash, then this SWAT team needed to look at when the bills were coming due. There was a lot of outstanding debt. All of it was going to mature at some point, and Enron would have to repay it. Right now, the company didn’t have a lot of sources of new cash to grab to meet any of its obligations.

Bowen pointed at Glisan. “Ben,” he said, “go get me the current maturities schedule.” That would let him know, day by day, when Enron was expected to repay debt.

Glisan leaned back in his chair and grabbed his chin. “I think I can get somebody to pull that together.”

The room went silent. Bowen’s mouth dropped. This topped everything he had heard so far. Glisan
thinks
he can get one? He doesn’t
have
one? They’re not tracking their cash, and they’re not tracking their debt maturities?

“Excuse me, Ben,” Bowen said. “Am I wrong, or aren’t you the corporate treasurer?”

Glisan bristled. “Yes.”

“What do you mean, you
think
you can get one?” Bowen shot back. “This is the current maturities schedule of the company! The current
fucking
maturities schedule! Go get it! You
have
to have a maturities schedule!”

But they didn’t. With all the focus on deals and earnings—with the finance group’s transformation into a profit center rather than a division to support the business—the workaday, boring details had been sloughed off.
No one had realized it, but as Fastow and his team churned out entity after entity—Raptor, LJM, Braveheart, and the rest—winning plaudits and bonuses, they had simply ignored the basics of corporate finance. Enron had been flying blind financially for years.

Glisan got on the phone for half an hour with executives in the treasury division, asking them to manually figure out when the money had to be paid. When they reported back to him, he called out numbers to McMahon, who scribbled them on a whiteboard. Then he added them up.

Okay. More than thirty billion dollars in debt. The amount of that Enron had to repay in the next twelve months was …

He totaled the numbers up in his head.
Ten billion dollars
.

And, as best as McMahon could tell, Enron had no means to pay it. It would either have to renegotiate with the banks, find more cash, or go bankrupt. He couldn’t imagine it could be much worse than this.

In fact, it was. In their rapid effort to cobble together a maturities schedule, Glisan and his team had overlooked debt that Enron owed. As daunting as the $10 billion appeared, it fell short of reality. By $2.6 billion.

McMahon turned to the group. “What else have we got out there?”

Well, someone replied, there’s the equity forwards, which Fastow had used to finance entities like the Raptors. Those still made up a real number on Enron’s books.

McMahon wasn’t worried. How bad could this be? “Okay,” he said, looking at Glisan. “Explain that.”

Glisan approached the whiteboard and began drawing circles and boxes. As he spoke, the construct grew bigger and bigger. McMahon couldn’t take it all in; he began trembling. Glisan was filling up the board.

“Ben, look, this is all very interesting, but what’s the bottom line?” he said. “Tell me the total obliga—”

“I can’t,” Glisan responded. “I can’t tell you until you tell me where our stock goes.”

What?
McMahon didn’t understand.

Glisan started scribbling different answers, showing how the amount Enron owed would climb as its stock price fell. The truth was beginning to dawn on McMahon.

“You’re telling me,” he said forcefully, “that there’s several billion dollars in this,
and that it’s not done?
It can
grow
if things get worse?”

Glisan turned. “Yeah.”