Conspiracy of Fools

by Kurt Eichenwald

  Despite the project’s troubles, Enron decided to double its bet on India. The plant size was increased, from 2,015 megawatts to 2,184 megawatts, even while Enron agreed to cut $300 million from its original $2.8 billion budget. And no longer was the expensive, complex second phase simply an option. Instead, Enron committed to building it no matter what.

  Back in Houston, the revived deal was seen by the Enron board as a grand slam. The increased risk was barely considered; India was still sure to be a big winner. After all, the international division’s projections said so.

  The executives from international development trickled into a conference room on the mezzanine above the fiftieth floor. They rarely spent much time in Enron’s headquarters, instead passing their days in the division’s offices across the street in Allen Center. But on this day, guests from corporate wanted to attend their staff meeting, so they elected to gather in the executive offices.

  Everyone found a place, with Rebecca Mark on the far side of the room, ready to hash through recent and projected performance data in what was known as the QBR, or quarterly business review. Nearby, two executives from investor relations—Mark Koenig and Rebecca Carter—sat quietly, eager to hear the latest numbers.

  For Koenig and Carter, being in the room was something of a coup. The international development group had always jealously guarded its information; sure, developers agreed to turn over details of their projects, but they rarely followed through. Koenig and Carter had complained to Kinder about the secretiveness but didn’t expect much help; Kinder had trouble getting the numbers himself.

  There was a touch of buoyancy in the room as the last of the executives found their seats. “All right,” Mark announced. “Let’s get started.”

  The division was doing wonderfully, she told the assembled executives. Koenig and Carter took notes as Mark rattled off the financial details.

  For several minutes, Mark gave a rundown on how returns had been calculated on a particular project. Koenig and Carter sat quietly, trying hard to disguise their growing horror. Carter shot a glance at Koenig, distress in her eyes. Koenig tapped her under the table, warning her to keep quiet. He understood.

  The rates of return were wrong.

  Oftentimes, Enron received management fees and other payments for operating power plants—an additional source of revenue, separate from the cash generated by selling electricity. But Mark was treating the fees as if they were a return of a portion of Enron’s initial investment. Under such a calculation, the more the fees, the lower the capital investment, and in turn the higher the returns. It was a method wide of the mark, resulting in artificially large rates of return.

  Carter glanced around the room. No one was objecting. Oh, God, Rebecca, no! Carter thought. Somebody’s got to tell her she’s wrong. About an hour later, the meeting wound down. Koenig and Carter gathered their things and hustled out the door.

  “My God,” Carter said. “Mark, did she really …”

  “Yes. Yes.”

  Koenig pushed the button for the elevator.

  “But you can’t say anything, Rebecca,” Koenig said.

  “Mark …”

  “Rebecca, we’ll never be allowed back in their staff meetings again. You can’t say anything.”

  Carter shook her head. “Well,” she said, “we better not let her talk to investors with this kind of crap.”

  Christmas season, 1995. Time for the Fastows’ annual party and a stream of other Enron celebrations. But this season things felt far different from years before.

  The thrill, the sense of mission, had faded. No longer did the place seem fun-loving; the workday was a hazy, frenetic rush. Too many executives were tired and bitter. The department had gone through yet another one of its seemingly endless series of reorganizations, this time renamed Enron Capital & Trade. Skilling had suffered his near-breakdown over the summer. Fastow’s playfulness had given way to the honing of his sharp edges. The team mentality had died amid a torrent of backstabbing as executives competed for a higher rung on the corporate ladder. Somehow, the matchup had shifted from Enron versus the world to just Enron versus Enron.

  At a little past seven on the night of his division’s big party, Skilling puffed on a cigarette in his living room, waiting for Susan. Since abandoning his plans to work part-time, he had lost weight on a starvation diet and taken up chain-smoking. He felt better about himself, but life at home had deteriorated even more. He and Susan were barely speaking, at best going through motions of civility. Skilling wasn’t even spending time with his kids. Instead, he dedicated almost every available moment to work.

  He poured himself a glass of wine and lit another cigarette. It was time to go, but Susan still hadn’t come out of the bedroom. Thirty minutes passed. Forty-five. An hour. Skilling, by then on his third glass of wine, stewed in anger. Susan had never hidden her dislike of these holiday parties, but this year Skilling had taken on that problem weeks before. His people were important to him, he had told her; she was going to go to the party and be nice. Now, he felt sure, Sue was obtaining her silent revenge.

  Finally, past 8:15, Sue walked into the living room.

  “I can’t do anything with my hair,” she announced.

  Skilling ground out his cigarette.

  “Okay, fine,” he said. “I’m not going.”

  “Oh yes you are.”

  “No,” he said, standing. “I’m going out drinking.”

  Skilling headed to his car, and Susan followed. In silence, he drove over to Westheimer Road, near Loop 610, and pulled into a shopping center. He maneuvered toward Grotto, an Italian restaurant, and parked.

  “I’m going in,” he said. “I’m staying here.” Skilling shrugged. “Fine.”

  He climbed out and stalked inside the restaurant, heading straight for the bar. After a number of drinks he returned to the car, where Sue still waited. “Okay,” he said. “Now I’m going someplace else.”

  The scene from the Grotto repeated itself, with Skilling drinking as his wife waited in the parking lot. When he lumbered back, he was fairly drunk, and Sue was angry.

  “We have to go to the Christmas party,” she said.

  “No, I’m not going to let you go there and cause problems. I’m not going to let you screw that up.”

  “You have to go to the party.”

  Skilling gripped the steering wheel, rage and alcohol overtaking him. He closed his eyes for a second. Then he stared through the windshield, resolved. “Sue, I’ve had it. I’ve just had it.” He took a breath. “I want a divorce.”

  CHAPTER 4

  THE WHITE MAZDA NAVAJO turned onto an inclined driveway off Westheimer Road, heading toward the purple-and-white stucco facade of Armando’s Mexican restaurant. A valet watched the vehicle slow to a stop before hustling over to the driver-side door. Andy Fastow popped his seat belt and stepped out, handing over the keys as Lea emerged from the passenger side. He escorted her to the restaurant’s wooden door and swept inside.

  Minutes later, Ken Rice—with his wife, Teresa—pulled his red Porsche off Westheimer into Armando’s, hitting the sloping driveway with a thud; he winced as metal scraped asphalt. Leaving the car with the valet, the Rices strolled inside. Andy Fastow waved from the bar.

  It was January 1996, the first time the Fastows and the Rices had gone out together socially. Despite years of working in the same building, Rice and Fastow had only crossed paths a few times, and neither had come away with kind thoughts. Fastow considered Rice overindulged and overpaid, while Rice called Fastow an ambitious prick behind his back, a man who only invested time with colleagues if he thought they could help his career. But days before, Fastow had stunned Rice—and aroused his suspicions—by phoning with an invitation to dinner.

  The couples met in the bar; all four were dressed chic-casual, with plenty of sweaters and knit shirts. The men shook hands. Rice introduced Teresa, then greeted Lea; the two already knew each other from the office.

  “Listen,” Fastow
said. “They’ve got our table ready. You want to go over there?”

  The couples left the bar and found the hostess. On either side, diners crowded tables in two small annexes—one painted blue, the other red. The hostess ignored the side rooms, leading the couples through a dimly lit central area with a decor faintly reminiscent of a French château. Their table was alongside a wall; the wives sat on one side together, the husbands on the other.

  As the couples chatted, a waiter appeared. “Would you care for a libation?” he asked.

  It was the classic Armando’s pretension, but that, after all, was part of its appeal. There were orders for margaritas all around, and soon the table was loaded with drinks, baked chips, chicken enchiladas, and seafood.

  As they ate, the couples chatted about children. Lea had recently given birth to her first child and spilled out questions to Teresa, a pediatrician. Ken bragged about his three kids’ accomplishments, while Andy talked about his new son, Jeffrey—a name that had already led to jokes inside Enron about Fastow using his baby to kiss up to Skilling.

  The conversation turned to the office. Fastow had just started running the retail-electricity unit; Rice figured that Fastow had set up the dinner to pick his brain about the wholesale-electricity business he ran.

  “Hey,” Rice said, “how are things in retail?”

  Fastow broke into a smile. “Oh, just great. Really great. We’re really going out, taking on some big stuff.” Rice sipped his margarita.

  “We’ve got some really important challenges,” Fastow continued. “We’re trying to redefine how people buy electricity. We want to come up with ways to provide services that look nontraditional, that really open people’s eyes with how we differentiate our product.”

  Rice nodded, saying nothing. A bunch of marketing buzzwords. Not a good sign.

  “That’s what we’ve got to do,” Fastow went on. “We’ve got to come out with new and creative things.”

  “Okay,” Rice said. “That sounds good.”

  “Like take M&M’s.” M&M’s? The candy?

  Fastow’s words tumbled out excitedly. “M&M’s is now putting blue M&M’s in the bags, and they’re making a big deal out of blue just so they can sell more M&M’s.”

  Rice vaguely knew what Fastow was talking about. Mars, the maker of M&M’s, had just introduced a new color for the candy and had launched a big advertising blitz announcing its arrival. That was fine for a candy promotion, but what the hell did that have to do with selling electricity? Was Enron going to create new colors for it?

  “Okay,” Rice said. “I think that’s a creative marketing strategy for M&M’s, but what does it mean? What’s the analogy for electricity?”

  “I think we can come up with some products that really attract people’s attention like that.”

  Rice nodded, trying to hide his dismay. Fastow might be good at finance, but he sure didn’t understand commodities; there, price was everything. Rice decided to offer a little electricity primer before Fastow embarrassed himself in front of Skilling with all this talk of blue M&M’s.

  “Well,” Rice said slowly. “Okay. But I think the real key for the electricity consumer is that they’re interested in price and they’re interested in convenience.”

  Fastow stared at Rice blankly.

  “But consumers don’t know what their comparative costs are,” Rice continued. “Price signals aren’t in their hands. If you figure out a way to let consumers understand their costs, they could make intelligent decisions, and then you could compete on price.”

  Silence. Fastow blinked. “We’ve got other creative ideas, too,” he began, launching into a description of another marketing gimmick. Apparently, he hadn’t listened to a word Rice had said.

  Rice rocked back in his chair. Okay, I get it. Fastow liked Fastow’s ideas and didn’t care for what anyone else had to say. If this was how Fastow was going to run things, Rice figured, retail was probably doomed.

  Some time later, Fastow paid the bill, and the two couples headed back to the valet. The Rices’ car came around first; Armando’s valets tended to favor expensive vehicles, so the Porsche had been sure to arrive before the Fastows’ boxy, two-door SUV. The Rices thanked their hosts and piled into the car.

  Teresa waited until they pulled away before saying anything. She had noticed Fastow jabbering at Ken a lot and not listening to his responses. It struck her as odd.

  “What was that all about?” she asked.

  Rice held the steering wheel.

  “I have no idea,” he said.

  On the east side of downtown Portland stands the World Trade Center, a trio of buildings overlooking a promenade that opens to the Willamette River. A symphony of glass and concrete, the towers are the corporate epicenter for Portland General Electric, a utility that served Oregon and was pushing for the deregulation of electricity.

  On the morning of January 17, 1996, a cab carrying Cliff Baxter and Ken Rice pulled alongside the brick sidewalk in front of the trade center. The two hustled out of the car and headed for a covered walkway. Brilliant stretches of deep blue peeked past a lattice of glass and aluminum overhead as they walked through a wave of pedestrian traffic. Baxter and Rice arrived at Tower One and boarded an elevator for the top floor.

  This, they knew, was an important day for Enron’s electricity business. Once Skilling gave up his idea for a massive energy consortium, Baxter began seeking a more reasonable alternative, an alliance with a single utility. If Enron was going to be a player, the thought went, it needed such a relationship in the West, where the industry was being shaped by the expectation of deregulation in the giant California market.

  The hunt for a partner had been frustrating; too many utility executives seemed more interested in their golf games than in their corporate strategies. A bunch of nine-to-fivers wouldn’t fit the Enron mold. What they needed was a company pushing for change, on the leading edge. Portland General seemed perfect, if only its chairman and chief executive, Ken Harrison, could be persuaded to deal.

  The elevator stopped, and the Enron officials strode into Portland General’s executive offices, a place that dripped with a woody and conservative style common to utilities. Rice approached the receptionist.

  “Hi. Ken Rice and Cliff Baxter to see Mr. Harrison.”

  Fifteen minutes later, they were summoned into a conference room just off the lobby. Harrison was waiting at the large table, his back to an enormous picture window. Alongside him sat Joe Hirko, the company’s chief financial officer. Baxter and Rice said their hellos and found their seats.

  Rice took it from there, reminding everyone of the meeting more than a year earlier when they had discussed Skilling’s now-abandoned idea for an electricity consortium. The utility executives nodded and smiled; the silliness of that proposal didn’t need to be mentioned.

  “We still believe there’s a lot we could do together,” Baxter said. “We’re interested in talking about a formal strategic relationship with Portland General.”

  Rice set his arms on the table. “We’ve looked at your position in the market and what you guys are doing, and we think that we can bring in capabilities that complement what you’re doing, and vice versa.”

  The Enron executives pressed hard. Deregulation was a force that couldn’t be stopped, they said. Companies that prepared would flourish. Those that didn’t would flounder. Harrison and Hirko listened attentively, nodding.

  “We agree with you on the direction of the market,” Harrison said. “We’re already trading electricity; we know that area pretty well. But I think there are some things we should be doing together.”

  He smiled. “So let’s talk some more,” he said.

  The strategy session in Fastow’s retail group dragged on for hours.

  Weeks into his new job, Fastow had yet to devise a business plan for Skilling. His ideas were vague, flighty, unmoored to the practical details of the real world. On this day in early 1996, he and his top team thrashed through various p
roposals, scribbling notes on a whiteboard, trying hard to cobble together something.

  Fastow glanced through the room’s glass wall and saw Vince Kaminski walking by. Kaminski was Enron’s resident genius, a top risk analyst who had worked on Wall Street before coming to Houston. Now the Polish-born Kaminski was the man Enron most relied on to protect the company from unseen perils. When Enron held investments that could lose worth, it was Kaminski and his team of financial rocket scientists who concocted complex hedges, devices that—in the perfect world—went up in value as the price of the original investment declined. His advice, Fastow felt sure, would be an important part of any retail strategy.

  “Hey,” Fastow said, pointing to the hallway. “Get Vince in here.”

  Somebody pulled in Kaminski. He was soft-spoken yet excitable, a man who quickly assessed colleagues’ brainpower—and Fastow had never made it high on his list of high-voltage intellects. Long ago, when Fastow had incorrectly boasted that his business was unaffected by interest rates, Kaminski had concluded the man was a lightweight.

  Fastow stretched his legs under the table. “Vince, we’re putting together the strategy for retail,” he said, inadvertently punctuating every s sound with a slight whistle. “I wanted to see if we could get your input”

  “Of course,” Kaminski said. “What have you planned?”

  The whole idea was based on the inevitability of electricity deregulation, Fastow said. “When that happens, electricity prices are sure to drop.”

  Kaminski nodded solemnly, already recognizing the flaw in Fastow’s thinking. Electricity prices would go down under deregulation in theory. What if oil and gas prices spike upward? What if the deregulation is done badly? What if there’s a nuclear meltdown, sounding the death knell for that part of the industry overnight, creating power shortages?

  “Yes?” Kaminski said. Arguing was pointless.

  “So, we offer consumers long-term contracts, below current rates. Then deregulation happens, prices drop, and our contract price will be above the market price. We’ll make profits on the spread”