“Jeff,” he scoffed on hearing the idea, “you’re out of your fucking mind”
A deal involving at least seven parties? Laughable. It was hard enough to get two to agree on anything. Skilling’s vision might be shrewd, but it could never be implemented.
Undaunted, Skilling assigned Baxter and Rice to get out on the road and pitch the idea to utilities. They did—and came back empty-handed, just as Baxter had predicted. The utilities’ response had been blunt: they could handle their own business, thank you very much. They didn’t need some upstart coming in to tell them how things should be done.
Baxter and Rice reported the reaction to Skilling and tried hard not to roll their eyes as he railed about the stupidity of utilities executives.
For years to come, Rice and Baxter would joke about Skilling’s brainstorm. Funny or not, it revealed to them something essential about Skilling’s character: he might not always be right, but he was never in doubt.
The battle lines had been drawn.
The pitched competition between Jeff Skilling and Rebecca Mark was rapidly becoming almost mythic inside Enron. He thought her international projects were mismanaged and undermined the company; she thought his trading business nothing more than air and bluster.
None of the sniping was a secret; the two would fight each other face-to-face. But increasingly Mark was hearing criticism around the company that her projects were lousy, that her team never sweated the details, that they were all rushing to close the next deal simply to cash in on a big payday.
On some levels, Mark thought there was room for criticism; the setup was all wrong. Her team was charged solely with developing the projects, never operating them. If they were operators, too, her team could learn firsthand about what was needed on the front end for the deals to work. They would be less tied financially to just developing the next project. The pace of new projects would slow down, but Enron would improve operations.
After one deal closed, Mark went up to see Kinder. “Rich, I’m always hearing everybody bitching that we don’t have enough of a long-term interest in these projects,” she said. “Give us control of the operations. Then we’ll have a long-term interest.”
But that wasn’t what Kinder wanted. “You can’t possibly be developing at the rate you’re developing and run day-to-day operations as well,” he said
That was it. Developers would be paid to develop. Nothing else.
———
Following a short introduction, Fastow walked to the front of the Enron conference room. Around the room was a collection of Enron’s best and brightest—analysts who tore apart the company in search of excessive risks.
It was their job to play doomsayer, to run the numbers through complex mathematical models that showed the effect different events could have. Recently, one analyst had completed a report proving the obvious: because of the amount of profits from trading—which in turn relied on the willingness of others to strike multimillion-dollar transactions on the promise of payment—Enron was uniquely dependent on its credit rating, meaning a downgrade could set off a death spiral. Far-fetched, sure, but dreaming up that kind of scenario was why the analysts were paid.
Today, the analysts had gathered for one of their informal meetings with executives from other parts of the building, to get a better understanding about their businesses. This time Fastow was the featured speaker.
For twenty minutes, Fastow described his division’s deals. He showed charts spelling out the cash flow from them—oftentimes going from zero in the early years to fat sums in the later ones. Eventually he asked for questions.
“Yes,” one analyst began. “How do you manage your interest-rate exposure?”
Fastow shrugged. “I don’t have any.”
The room went uncomfortably silent. Fastow was wrong. Enron booked future cash flows based on their present value—basically, the net result of a multiyear investment expressed in current dollars. Interest rates were critical to that calculation. And apparently, Fastow didn’t grasp that.
The questions wound down, and Fastow departed. One of the analysts, Jeff Kinneman, broke into a smile. “That guy has already lost the company a few million dollars,” Kinneman said. “And he doesn’t even know it.”
The analysts cracked up.
“Ken, you’re not going to believe this!”
Amanda Martin stormed into Ken Rice’s twenty-ninth-floor office, keeping a tight rein on her fury. It was the fall of 1994, a time when suspicions were spreading inside Enron about deep, fundamental problems with some of the power projects. Few seemed to be producing their projected profits, and Kinder had shuffled responsibility for the North American plants to Rice’s electricity business, with Martin assigned to clean them up.
What she found appalled her. Plants had been built on a foundation of poor business judgments—overestimating demand, ignoring technical problems.
Even the plant in Milford, Massachusetts—the centerpiece of Rebecca Mark’s legend, the one built during her time at Harvard Business School—had been a debacle, constructed with assumptions of a growth in demand that never materialized.
With so many disasters, Martin began to question Enron’s compensation system for the plant developers. They received their bonuses when someone—a bank, a government—agreed to finance the projects, leaving them with no stake in their ultimate success. Could it be, Martin wondered, that developers put together deals that could be financed rather than projects that could work?
Now, on this day, Martin thought she had found the unsettling answer. Minutes before, she had been reviewing records from the plant in Richmond, Virginia, and stumbled across a consultant’s report. After reading it, she bolted from her desk, heading straight for Rice’s office.
As soon as Martin walked in, grim-faced, Rice leaned back in his chair and plopped his feet on the desk.
“What’s up, Mandy?”
“Ken, these people are outrageous,” she said. “I want to show you something on Richmond.”
“Okay,” Rice sighed. “What did they do now?”
Martin slid the consultant’s report across Rice’s desk. “Look,” she said, pointing at the page. “They knew this wasn’t going to work. They knew it and did it anyway!”
Rice skimmed through the document. Richmond, he knew, had been an embarrassment. The plant had been designed to provide extra electricity to the local utility, Virginia Power, whenever demand dictated. But the contract required the juice to flow in less time than it took for the plant to start running. As a result, the plant repeatedly violated its contract, costing buckets of money. Everyone wondered how such an obvious problem had been missed.
Now here, in black and white, was the answer: it hadn’t. A consultant had warned Enron that the contract requirements and technical constraints of the plant were not in sync. But nobody on the development team sent up a warning flare; instead, they hunkered down, got their bonuses, and left Enron stuck with the mess.
“You’ve got to be kidding me,” Rice said.
Martin laughed. The developer on the deal got a six-figure bonus for this, she exclaimed, and now was working on the big international deals.
A bulb went off in Rice’s head. Skilling would love to have something like this in his battle with Rebecca.
He stood up. “Come on. Let’s go talk to Jeff.” Skilling looked up from his desk when they arrived. “We want to show you something we found in the Richmond documents,” Rice said.
Again Martin turned to the relevant page and showed it to Skilling. He took a moment reading through it.
“This is unbelievable,” Skilling said softly.
“The thing in Milford was sloppy,” Rice said. “But this one to me is just blatant fraud.”
Skilling nodded, hiding his thoughts.
“But, Jeff, there’s a bigger problem,” Rice continued.
“What’s that?”
“These people can’t put together little plants in North America without messing it u
p,” Rice said. “Now they’re running around the world with a billion dollars to spend on big projects.”
Rice paused. “You gotta ask, how bad are those deals gonna be?”
By 1994, complaints about the dysfunctional arrangement in the international division’s development business had grown too heated to ignore. Those projects were eating up cash and having a significant impact on Enron’s balance sheet. The company’s ability to grow and protect its trading operation was being threatened by its overseas excursions. And capping it all, the exorbitant bonuses Enron paid the developers were enraging people throughout the building. Lay was dead set on expanding Enron’s presence around the globe, but Kinder wanted to bring the monster under control.
By that time, Amanda Martin had made progress on the domestic plants; maybe she should clean up the international ones, too. Kinder summoned her to his office.
“I don’t know what the hell international is doing,” he said. “That whole organization needs to be reeled in.”
“What do you see as the main problem?” Martin asked.
“We don’t know what we’ve got!” Kinder growled. “We pay millions in bonuses based on projections, and then end up with pieces of shit that don’t look like what we started with. I don’t know what Rebecca’s thinking.”
The company, Kinder decided, had to fix the overseas projects and shove them as far away from Enron as possible. Martin, he said, would head up a new division called Joint Venture Management, which would take control of some of the foreign projects. The second step was more complicated: Enron would transfer the plants to a new division, which would be spun off as a separate public company called Enron Global Power and Pipelines, or EPP.
Enron would still own just over half of the publicly traded shares but be able to treat sales to EPP as revenue.
Martin agreed to take on the job and organized meetings with the development teams. Downcast glances and uncomfortable silences punctuated every session as executives launched into cathartic confessions about their projects. Martin was horrified by what she heard.
China was a disaster in the making. Guatemala was an absurdity, with financial shenanigans that had all the appearances of illegal bribes to foreign officials—payments that, unknown to Martin, Enron was deducting from its taxes. Each story seemed worse than the last.
But it was the project in the Dominican Republic that left Martin’s mouth agape. The plant was on a barge, near a hillside of local slums that produced streams of garbage. The currents drove trash straight to the plant, right into the intake valve where water flowed in to keep the plant running. Rubbish of every sort—boxes, food, tricycles, animal carcasses—was repeatedly sucked in with the water, wrapping around the equipment. Jury-rigged flaps were installed over the intake valves, but to no avail. So now Enron employed local villagers to float on boats near the plant, using long wooden poles to push the trash away from the water intake. Without them there, the multimillion-dollar power plant couldn’t stay operational.
Not that it was making money anyway; the Dominicans weren’t paying their bills. The plant’s fuel contract had been negotiated with Enron itself, at a hugely profitable rate for the company. But high fuel costs drove up the electricity prices to the point where the Dominicans refused to open their wallets for the power. And somehow, no one at Enron thought to write provisions into the contract to ensure payment, such as a standard term requiring the Dominicans to post a letter of credit.
“All right,” Martin said. “Anything else?”
Well, one of the executives replied, there was this hotel near the Dominican plant, called the Bayside Inn. The plant had been built without anyone checking the prevailing winds—a problem, since its smokestacks belched out tons of soot. The wind carried the pollutants up a hill, where they showered down on the Bayside Inn and its guests. The hotel grounds were filthy, the rooms were filthy, even the food from its restaurant was covered with soot. The Bayside Inn promptly shut down and sued Enron for $200 million.
Martin rubbed her eyes. “Let me see if I understand this,” she said. “The place shut down because our soot was landing in their food, and now they’re suing us for the value of the entire flipping hotel?”
A sea of heads around the table nodded.
———
The slender, dark-haired man stepped onto Enron’s twenty-ninth floor, ready for his first day of work. Everything about him was pressed and neat, his clothes an ensemble of elegance that belied his love of quirky discount stores. Michael Kopper was eager to make a good impression. This was his moment, his chance to strike it big, working at Enron alongside Andy Fastow and Rick Causey.
Kopper had been hired almost by happenstance. Enron had been on the prowl for new executives and had found Kathy Lynn, a senior banker at Toronto Dominion. When Enron offered her a job, Lynn suggested bringing along Kopper, one of the brightest lights on Dominion’s structure-finance staff. Fastow himself handled the recruiting.
Kopper bristled with credentials; he was a twenty-nine-year-old graduate of the London School of Economics with a laser focus for negotiating deals. He was smart and cosmopolitan; he’d lived in London and New York and was well traveled.
At Enron his creativity shone through quickly. He proved adept at structured deals, and his star soon rose in the division. In negotiations he was sometimes a little too eager to play bad cop. Causey at times worried that Kopper didn’t know when to leave something on the table, to ensure that the deal got done.
But in his personal life Kopper was something of an enigma. He never forgot his roots in Long Island, or the times he had struggled to bring in cash. In his younger days he waited tables, and now often regaled colleagues over business meals with critiques of the restaurant staff’s performance. But in his early days at Enron, Kopper seemed surprisingly taciturn, almost withdrawn.
Whispers about Kopper started before his third month. Could it be, colleagues asked, that he was gay? By then, some of his colleagues had already learned that he was, but said nothing. Others were curious but didn’t really care one way or the other. At that point, Kopper was not in a long-term relationship and was far from eager to discuss his sexuality with his new colleagues. “Discretion,” he often told friends, “is the better part of valor.”
But over time, Kopper loosened up, allowing his personality to shine through; soon he had forged a close friendship with Andy and Lea Fastow. The anomalous relationship between boss and employee flourished, with Michael becoming Andy’s second voice, speaking for him when he wasn’t around. They worked deals together, dined together, and—when Kopper finally found a long-term relationship with William Dodson, a finance executive with Continental Airlines—double-dated.
The depth of their friendship was always something of a mystery, so years later their former colleagues could only guess when asked the obvious question: Was it Fastow who eventually corrupted Kopper? Or the other way around?
Thousands of Hindus packed an outdoor victory rally in Bombay, cheering and waving saffron-colored flags at a group of men on a makeshift stage. A small, owlish man with flowing white robes lifted his arms, sending the crowd into a frenzy. He was Bal Thackeray, a former cartoonist who now led Shiv Sena, one of India’s extremist nationalist groups. At first glance, no one would think Thackeray the type to inspire the masses. But on this day, March 14, 1995, he had led a coalition of Hindu nationalists to electoral victory in the state of Maharashtra, where Enron had begun constructing its giant power project.
Though Thackeray held no elected office, he was recognized as the man who would dictate the decisions of those who did; he would rule, Thackeray promised, by remote control. He spoke openly of his admiration for Hitler and spewed words of hate that whipped up the passions of a violent mob. Now his followers had secured power through appeals to nationalism and attacks on the ruling party’s deals with foreign corporations, particularly Enron.
Enron had handed the Indian people plenty of reason for opposition. The World Ba
nk had refused to finance the project, calling it ill conceived—too big, too expensive, and economically irrational. To fight back, Enron had launched a public-relations campaign, boasting of spending twenty million dollars to educate local officials about the project. While no one had evidence of impropriety, on the streets of India “educate” became a synonym for “bribe.” Then, weeks before the election, bulldozers had roared to life in Dabhol, flattening space for the plant. Locals were enraged, and the rhetoric of Thackeray and his followers grew more inflamed. If elected, the nationalists promised, they would push Enron and its plant into the Arabian Sea.
Now, thanks in large part to Enron’s blunders, the dangers highlighted by James Baker years before had materialized. Here was Thackeray, newly infused with power, standing before the cheering masses, promising to deliver on the commitments of the nationalist campaign.
“We will pick and choose the foreign investors we want,” Thackeray proclaimed. “Why do we need foreigners when we have so many resourceful Indian industrialists?”
The crowd exploded in cheers.
“We will first review Enron’s power plant in Dabhol,” Thackeray said. “We must make sure this project only serves to benefit our people.”
Enron’s big international project was on the chopping block. And no one at the company had seen it coming.
———
Skilling dragged himself out of bed, feeling lousy. It had been another night of restlessness, of wandering the house, jotting down ideas, knowing his life was falling apart. He felt awful. He was fat. Something had to give.
It was the spring of 1995, and Skilling was a man adrift. It wasn’t the office; that was going great. His gambit to push Enron into the wholesale-electricity business was already a roaring success. Skilling and Enron had become the champions of electricity deregulation, arguing that the calcified industry was ready to be shattered by competition. The whole effort was thrilling.
No, Skilling’s problems were personal. He and Susan had grown apart; the three children were the only thing they had in common anymore. Jeff was jamming more meetings into each day, traveling too much, spending time with clients in far-flung cities. Susan was a dedicated supermom, rushing from one packed schedule to the next. Their time together was spent competing over whose day had been more nerve-racking. The tenderness they had both once felt was gone. They were always angry and just plain tired.
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