It would be like a bank, Skilling said, but instead of taking in and sending out money, Enron would traffic in gas. Producers would be depositors, gas customers would be borrowers, and Enron would be rich. To attract the business, he said, Enron would need a marketing division, but from there everything should come together.
“Rich,” Skilling said. “What if I told you that I can construct a twenty-year contract, right now, at $2.20.”
Kinder stood back. “You’re fucking kidding me.”
“No, I’m not fucking kidding you.”
It was one of those rare eureka moments. Industrial customers were having enough trouble obtaining twenty-year contracts, and finding one at less than four dollars per thousand cubic feet was thought to be impossible. A guaranteed fixed price from Enron of just over two dollars would bring every customer to the company’s doorstep.
“If that’s true,” Kinder said, “then we will own the power-generation market in North America.”
Skilling beamed. “Yep,” he said, nodding.
Word of some gangbuster new McKinsey idea crackled through Enron, and soon everyone wanted to hear the details. Within days, a group of about twenty Enron executives gathered in conference room 49C1 for their own briefing from Skilling. Most were ready to give up much of their afternoon; typically, McKinsey reports ran on for as long as a hundred pages and took hours to review.
Once everyone was seated, Skilling stepped forward and placed a single transparency on an overhead projector. It was a more professional version of his original scribbles.
“The concept is pretty simple,” Skilling began, launching into his analysis. After about twenty minutes, he stepped away from the projector.
The room was silent.
“That’s it?” Kinder asked. He had been expecting a beefed-up presentation this time.
“Yeah, that’s it.”
Kinder nodded. “Okay, let’s go around and see what everybody thinks.” To one side, Jim Rogers Jr., head of the interstate pipeline operation, waved a hand. Kinder nodded his way.
“Yeah,” Rogers said. “I’ve got to say, that’s the dumbest idea I’ve ever heard in my life.”
Skilling’s face fell.
“Who’s going to do this?” Rogers continued. “Why is somebody going to sell at those prices? Why will customers come to us? That’s not our business.”
Rogers’s scorn unleashed a torrent of doubts and criticism from other executives in the room. Skilling had failed to take a proper account of the take-or-pay contracts, they said; worse, it forced Enron to be responsible for maintaining a market for gas, making its pipelines almost beside the point. It just wouldn’t work.
The meeting ended, and Skilling, downcast, followed Kinder to the elevator for the fiftieth floor. Kinder pulled out an unlit cigar, chewing it as the doors opened. He pushed the button for fifty.
“Rich, I’m sorry,” Skilling said. “I thought it was a great idea, but I guess it came up short.”
Kinder pulled the cigar out of his mouth. “As soon as I heard Rogers say it was the dumbest idea he’s ever heard, I knew it’s exactly what we need to do.”
The elevator doors opened, and Kinder walked out into the hallway, again clenching the cigar in his teeth.
“Put a team on this,” he growled. “Make it happen.”
The Gas Bank was an instant success—and failure.
After months of pulling together the logistics, Enron set up its new gasmarketing division. Kinder and Skilling flew around the country, delivering sales pitches to big industrial customers. Many were wowed by the idea; obtaining a predictable price for a clean-burning fuel was a factory owner’s dream, even at above the current market. In less than two weeks Kinder and Skilling lined up multiyear contracts for more than a billion dollars of gas.
Then, problems. Despite the demand, gas producers weren’t eager to offer a supply. Gas was selling at low levels, and drillers had always survived on faith that prices would rise in the future. Why lock in low prices today, they argued, for gas being used tomorrow? But Enron executives didn’t want to abandon the customers they had rounded up, so they temporarily tossed some of the Gas Bank’s founding principles. Instead of locking up gas at a fixed cost, Enron purchased fuel on the open market—a gamble, since a price rise could force large losses. Enron won that initial roll of the dice; prices held steady.
The hot concept needed tinkering, and Skilling plunged into the task. A breakthrough came during a meeting with Kaiser Aluminum and Chemical Corporation. Kaiser wanted a five-year fixed-price gas contract for a Louisiana aluminum plant, but Enron had no gas in the state. The fuel, Skilling said, would have to come from Texas, adding thirty cents to the price. Kaiser nixed the idea as too expensive. Then, as everyone was leaving, Skilling had a thought. Why did Enron even need to deliver gas? “Wait a minute,” he said. “Sit down.”
Skilling asked the Kaiser executives some questions. They could already obtain gas in Louisiana, right? Yes, by purchasing it off of a Texaco pipeline.
“So let’s do this,” Skilling said. Kaiser would buy from Texaco. But Enron would guarantee that Kaiser would never pay more than $2.50 for every thousand cubic feet. If prices climbed, Enron would deliver gas to Kaiser in Texas at $2.50, which Kaiser could then sell at the higher price. If prices fell below $2.50, Kaiser would pay Enron the difference. Rather than agreeing to actually deliver fuel, Skilling was proposing that Enron be paid for assuming the price risk. Kaiser jumped at the proposal.
Over time, Skilling and his team were even able to solve their gas-supply problems. The recalcitrant wildcatters perked up when Enron came to the table with something they needed: loans. After years of turmoil in the energy markets, banks had tightened the purse strings on exploration and drilling. So, with Skilling’s urging, Enron offered the financing that the banks withheld in exchange for access to fixed-price gas. Yet another new division, Enron Finance Corporation, was set up to provide the credit.
By late 1989, the Gas Bank was carrying matched orders on its books between five customers and five suppliers. Now Skilling was ready to add the final tweak that would send his idea into the stratosphere. What Enron had created was, in truth, nothing more than a predictable future flow of cash, not much different from a mortgage or a bond. And for more than a decade, Wall Street had been pooling such cash flows together and trading them. Why, Skilling asked, couldn’t the cash flows from the Gas Bank be traded, too?
Almost imperceptibly, Skilling’s innovations were transforming Enron into a radically different beast. This company of pipelines and rigs, populated by rugged leathernecks with dirty fingernails, was grabbing on to intangible concepts of risk, attracting buttoned-down investment bankers with manicures. The changes were transforming the very nature of Enron, but few people inside or outside the company recognized it.
Late that year, Skilling figured his work was done and headed back to his office at McKinsey. Enron, he thought, was on the precipice of greatness. Then the Gas Bank began falling apart. Except with Kinder, the idea still generated little enthusiasm among Enron’s top ranks; it just seemed too foreign. Skilling watched with dismay as his program languished from indifference. Repeatedly, he visited Kinder, by then company president, and pounded his desk, saying Enron was squandering its one great opportunity.
“You guys have got to get going on this,” Skilling raged. “Somebody else is going to figure this out, and right now you’ve got a huge head start”
Kinder agreed, but also understood that Skilling was the only one with a personal stake in seeing the Gas Bank succeed. So in December 1989, he approached Skilling with a proposal: join Enron. Skilling dismissed the offer out of hand. The previous summer he had been elected a McKinsey director; he was on the track for great wealth. It seemed ridiculous now to take a flier on Enron.
But as the months wore on, Kinder—and then Lay—came to believe that the great idea was destined to fail without Skilling. Finally, in early 1990, Lay ran out of patien
ce. He headed to Kinder’s office and announced that Skilling had to be persuaded to take charge of the effort.
The timing was perfect. By then, Skilling had glimpsed his future at McKinsey and didn’t like the view. He had recently joined the partner election committee and had grown frustrated with the meetings. Nothing ever changed; nothing was ever resolved. At one meeting, Skilling listened in dismay as the head of the German office mouthed the same arguments he had made months before.
Skilling scowled and crossed his arms. Ten years from now, I’m going to be sitting in this same room, listening to these same guys saying exactly the same things.
Despite the money he was making, despite the respect he commanded, Skilling was bored. He wanted a new challenge, a new vista, something to make his future more than just a repetition of his past.
At the peak of Skilling’s dissatisfaction, in April 1990, Kinder called. This time Skilling jumped at the chance. This was his challenge. He would be at the forefront of redefining American energy markets—maybe the international energy markets. That night he discussed the idea with his wife, Susan. With their third child on the way, he feared she would resist, but she said she would support whichever path he chose. The pay would be less—something Skilling glossed over—but Kinder had suggested Enron might give him a piece of the business. If his project worked, Skilling could become very rich; if not, joining Enron could turn out to be professional suicide.
On June 11, 1990, his wife went into labor, and he drove her to St. Luke’s Episcopal Hospital. After six hours his second son still had not arrived, and Skilling wandered into the hallway. He tracked down a pay phone and called Kinder. He was ready to finalize everything, Skilling said, and the two men haggled through the last details of the contract. Skilling would be chairman and chief executive of the division Enron Finance. His annual salary would be $275,000—a huge pay cut—but he would be granted his ownership stake in the division.
“Okay,” Skilling said. “That’s it. We’re done.”
The call ended, and Enron’s newest hire returned to his wife’s side.
———
Exactly one month later, on July 11, a line of black limousines eased out of the wooded campus of Rice University near downtown Houston. The cars moved northeast, passing tens of thousands of people on Main Street who were cheering, waving placards, and releasing hundreds of yellow balloons. It was one big celebration of Houston and of its special visitors, the leaders of the industrialized nations, there for the World Economic Summit.
In one limo, President George H. W. Bush watched through the passenger window. It was a glorious moment, a reward for the gamble he had taken pushing his adopted hometown as a summit site. At the time, Houston had still been struggling with the image of a weakened giant, knocked on its knees by the oil crash. It had failed in its bid for the national political conventions, large parts of the city were dirty, and its people were demoralized. But this week Houston sparkled. It had even parlayed a heat wave to its advantage with a new slogan for the summit: “Houston’s Hot.”
Bush could only smile. For months, planning had been at the brink of disaster. So in January, with seven months to go, Bush had phoned his friend Ken Lay and asked him to take charge, joining another Houston businessman, George Strake, as summit co-chair. But Bush had made it clear that the success or failure of the event rested with Lay.
In turning to Lay, Bush was reaching out to a man who had slowly become a friend over many years. Lay had been a Florida supporter during Bush’s first presidential run in 1980, but had really become part of the inner circle through his ties with other Bush associates. He had been longtime friends with Robert Mosbacher, a Texas oilman who was now Secretary of Commerce. Lay also had a close relationship with Jim Baker, the Houston lawyer who served as Bush’s most trusted adviser. Lay solidified his connections to Bush in 1988, when he hosted one of Bush’s first big fund-raisers for his successful presidential bid.
After Bush assumed the presidency, Lay had cultivated his relationship, often sending letters of support and playing roles large and small in the Administration. With the friendship blossoming, no one on the White House staff was surprised when Bush chastised them for failing to deliver a letter from Lay directly to the Oval Office. Lay was welcomed as a guest in the White House family quarters, where he had met with Bush, urging him to locate his presidential library in Houston; when Bush leaned toward another choice, Lay had traveled to the Dallas office of the President’s oldest son, George W, to lobby the family. Young George had greeted Lay warmly but cautioned that the decision would be made by his parents. Still, President Bush appreciated his friend’s effort and told him so during personal visits.
By the time of the summit, Bush had come to consider Lay a go-getter who could take charge of the big event. With little more than the force of will, Lay and his team had recruited some fifty-two hundred volunteers to clean up Houston, removing three million pounds of trash. Buildings were painted, flowers and trees planted, logos designed, traffic patterns altered. Now, with the meetings wrapping up, there was this—this seemingly impromptu celebration of the city and the summit. Bush could not have been prouder.
The procession of limousines pulled up to the George R. Brown Convention Center on the other side of town. One at a time, the world’s leaders emerged from their cars—Bush, Margaret Thatcher from England, Helmut Kohl from Germany, François Mitterrand from France, and on and on. Inside, the dignitaries congratulated Bush on what they had just witnessed. That warm outpouring on Houston’s streets, Bush was told, had been nothing short of miraculous.
Later that afternoon, the world leaders traveled to the “Thank You Houston Celebration,” held on the campus of the University of Houston. Thousands of people gathered in front of a sprawling stage that held bleachers for VIPs. Plenty of entertainers were on hand, including the singers Randy Travis and Marilyn McCoo and the actress Jaclyn Smith. But the stars of the evening were Bush and his powerful guests. Just after seven, the crowd broke into sustained applause as the procession of cars carrying the dignitaries pulled behind the stage.
A Secret Service agent popped open a limousine door, and George and Barbara Bush emerged, the President in a brown suit with a maroon tie, the First Lady in a dark blue dress with her trademark pearls. Ahead, they saw a large tent where everyone scheduled to be onstage—whether performing or watching from the bleachers—was supposed to gather. Waiting inside the doorway beside his wife, Linda, was Ken Lay, wearing a seersucker jacket with a red tie.
Bush beamed; this was his first chance that day to speak with Lay. The two men shook hands eagerly.
“Mr. President,” Lay said.
“Ken, I’m overwhelmed,” Bush said. “Our guests were incredibly impressed and were really left with a positive image of Houston. I can’t tell you how thankful I am.”
“Thank you, Mr. President,” Lay replied. “Everyone in the city worked very hard to make this happen.”
Barbara Bush approached Lay and spoke softly in his ear. “Ken, I really appreciate you taking all this on. You really bailed George out.”
The Lays escorted the Bushes around, introducing them to volunteers. Bush took a moment to speak with George Strake, Lay’s co-chair, and Fred Malek, the summit director. Finally, an aide announced it was time to head out on the stage. Everyone had been assigned a place on the bleachers, the aide announced, and they needed to line up in the order they would be seated. The aide approached Lay.
“Mr. Lay,” the aide said, “you’re between the President and the First Lady.”
Lay was astonished; the President’s gesture could not have been more generous. He walked to his spot behind Bush and struck up a conversation as they waited.
“Did you see anything we missed or should have done differently?” Lay asked. Bush smiled. “No, Ken. We keep looking for glitches, and we haven’t found any.”
With the line formed, everyone strode onto the stage. The crowd burst into renewed applause. At
7:13, as the cheers continued, Bush stepped up to a podium. Lay remained in his seat next to Barbara on the bleachers.
“Listen, Barbara and I really want to come over and say ‘thank you’ to all of you,” Bush said. “To Ken Lay and George Strake and Fred Malek and so many others. I am so very, very grateful—and so is Bar.”
It had been three historic days, Bush said, for Houston and the world. And it had all happened because of the town’s hard work. “So, in short, you’ve shown the world what Houston hospitality is all about,” he continued. “And you made this Houstonian very, very proud of his hometown tonight. Thank you all very, very much.”
Cheers again, louder than before—for Bush, for the summit, for Houston. It was as if the town were basking in the respect that had been so elusive for a decade. Bush headed back to the bleachers, shaking Lay’s hand again.
“Just wonderful, Ken,” Bush said. “Just wonderful”
It was a day that, years later, would be remembered as a turning point. The day Houston emerged from its years of desperation. The day a deep appreciation for Lay spread through the city. And the day the world realized that Enron and its chairman had acquired some very influential allies.
A little more than two weeks later, on August 1, Jeff Skilling started his new job at Enron—and hit the place like a hurricane. He arrived with fixed ideas on organizing and running his business, but a lot of those plans ran headlong into the company’s calcifying bureaucracy.
Out went the rows of offices on the edges of endless corridors. Instead, Skilling pushed to build a central work area modeled on a trading room. Any surviving offices would have glass walls so that everything in the division would be visible to everyone. The ideas appalled the people in charge of Enron’s office standards—the Building Nazis, Skilling took to calling them—but he got his way.
Conspiracy of Fools Page 7
