Kaminski folded his arms. Fastow hadn’t disappointed; the idea was ridiculous. Basically, Enron would make a massive bet on the timing of deregulation, with losses piling up until new rules came about. Then—if prices dropped—Enron would charge above market rates? What about customers who went bankrupt? Was Enron going to sue everyone who switched providers? And once Enron spent a few years ripping off its retail customers, how would the company renew its contracts or attract new business?
Before Kaminski could respond, a Fastow deputy spoke. “There is one problem with the idea,” the executive said. “We’re guaranteeing ourselves some pretty big losses in the first few years”
“That’s right,” Fastow nodded.
He glanced at Kaminski. “Vince, can you come up with a hedge that would offset losses in the initial years?”
Kaminski smiled to himself. How could a man like this be in charge of a business? A hedge could only offset declines in an asset’s value, not operating losses from a failing business. The only hedge for a money-losing business was a moneymaking business—and one of those certainly wasn’t going to be coming out of this meeting.
“If I could come up with such a hedge,” Kaminski said patiently, “I would say forget about having customers. We can all just make money by hedging”
The cell phone on Ken Rice’s belt rang as he walked through downtown Houston. He snapped it off its holder and pushed the answer button.
“I just got a call from Oejay Irkohay,” a voice said, sounding conspiratorial.
Rice laughed. It was Cliff Baxter, with news on the Portland General talks. In a faint stab at security, Baxter had taken to speaking in pig latin whenever discussing the negotiations over a cell phone.
Oejay Irkohay. Joe Hirko, Portland General’s CFO.
“Okay, Iffclay Axterbay,” Rice responded. “What did Oejay have to say?”
The talks had not progressed much in the weeks after the first meeting in Portland. What started as a discussion about vague cooperation had turned into a proposal for a formal joint venture. But that idea was floundering; there were too many technical problems, too many opportunities for each side to rip the other off. Writing an agreement that surmounted the mutual wariness seemed impossible.
Hirko wanted to get together again, Baxter explained, and make another stab at a deal. Rice agreed, and the negotiation teams scheduled a new meeting at a hotel in Laguna Niguel, California.
Once everyone arrived, the talks went round without resolution. After several hours of effort Hirko called for a break and left the room.
Baxter rubbed his face in frustration. “This is never going to work.”
“I know,” Rice replied.
A pause. “The only thing that’ll work is a full-out merger,” Baxter said. Rice nodded. “Let’s go ask Hirko what he thinks.” Baxter and Rice walked out of the conference room and found Hirko in the hallway.
“Look, Joe, I don’t think we’re going to get there on a joint venture,” Baxter said. “What about a merger?”
Hirko breathed in deep. “If anything is going to work,” he said, “it’s going to be a merger.”
Sherron Smith flipped through the pages of an investment presentation, her face tightening in disgust.
A former accountant, Smith had worked at Enron since October 1993, when she was hired to manage JEDI, Enron’s joint venture with Calpers. At first she had enjoyed Enron and her boss, Andy Fastow, who struck her as energetic and dynamic, with occasional touches of thoughtfulness. But over time, Fastow’s shortcomings as a manager had alienated her. That year he had even failed to show up at the semiannual Performance Review Committee meeting, where managers pushed to get bonuses and promotions for their staff. As a result, Smith had come away with a disappointing fourteen-thousand-dollar bonus and a simmering anger toward Fastow. She had even considered quitting.
Then, salvation. Fastow moved to retail. Rick Causey, Skilling’s favorite accountant, took over, and her world brightened. Causey was a friendly, doughy man who had already promised to get raises for Smith and her colleagues. The change rekindled her good feelings for Enron.
Her job, put simply, was to act as JEDI’s gatekeeper. Executives around Enron were always looking for JEDI to invest in their deals. But too many proposals were fanciful—badly thought out, badly structured, or just plain bad.
When deal makers made a sloppy presentation to Smith, she savaged them. She delighted in shocking people with uncomfortable truths—about anything at all, including herself. The knock on Smith was that she tried too hard to be one of the boys—so long as the boys were truck drivers and longshoremen. Her foul mouth at meetings was legendary, and this day, no one expected things to be any different.
Smith closed up the presentation, staring hard across the table at the executives who brought it to her.
“What the fuck is this?” she snorted. “This thing looks like a circle jerk to me.”
Smirks all around. Sherron was just being Sherron.
“Sherron, I know you’ve got strong opinions, but there’s a lot of value—,” one of the executives began.
“Oh, come on,” Smith interrupted. “Let’s not sit around blowing each other, okay?”
On one side of the table, a couple of Smith’s colleagues, Shirley Hudler and Bill Brown, listened to the exchange and winced. They respected Smith but thought her salty approach to business discussions damaged her.
Oh, God, Sherron, Hudler thought. Shut up.
The deal team pushed hard for Smith to change her mind. Smith countered with responses about the problems with the transaction; her arguments were strong. The case for doing the deal crumpled.
Smith quashed another proposal—but, as always, at a price. Her colleagues whispered that her coarse language was undermining her credibility, that her penchant for one-upmanship was giving her the reputation as someone who wouldn’t listen. If she didn’t stop, if she didn’t learn how to play nice in a corporate setting, if she didn’t learn to be more of a team player, they had no doubt that Sherron Smith’s future at Enron would be bleak.
None of her colleagues could have imagined that Smith would be one of Enron’s few executives to emerge from the company in high stead, known worldwide under her then-married name as Sherron Watkins, the Enron whistle-blower.
Lea Fastow’s voice almost purred over the phone line. “So, Ray,” she said, “I hear you’re looking for a job.”
Over at Citibank’s office in Houston, Ray Bowen cradled the phone to his ear and smiled. “Oh, really,” he replied. “Is that what you heard?”
It was amazing how fast word traveled. Bowen, a hulking man whose size belied a soft-spoken, almost unflappable demeanor, had been considering a career change for only a short while. After almost a dozen years in banking, Bowen had won respect both from bosses and from clients, like Enron. But he had grown tired of Friday-afternoon phone calls about some other corporation going through some other crisis. He wanted control of his life, control of his weekends, time with his family. That meant chucking the banker’s life and finding work on the corporate side. He had already put out a few feelers when the call came from Lea, Enron’s assistant treasurer.
“I never thought you’d leave Citibank,” Lea said.
“I’m on a plateau. I’m bored.”
“Well, don’t go anywhere without talking to us.”
Interesting. “Have anything in mind?” Bowen asked.
“There are some good opportunities here. You know, Andy’s off doing this new group.”
Lea spelled out the details. Retail, a new Enron venture. Revolutionary stuff. Shattering old concepts.
“Okay,” Bowen said. “If he’s interested, I’ll talk”
The interviewing started almost right away, and Bowen liked what he heard. The retail group struck him as dynamic, cutting-edge. Fastow might be a problem; he seemed to surround himself with yes-men, and Bowen tended to speak his mind. But the possibilities at Enron seemed too good to pass up. Bowen�
�s pay and title wouldn’t compare with Citibank, but the chances for advancement made up for the sacrifice. He decided to take the risk.
Bowen arrived for his first day in late February 1996. The retail offices were nothing much to look at, just desks in different quadrants of a large room. When Bowen walked in, Fastow was at a desk on the northwest side.
“Hey, Ray!” he called out. “How you doing?”
Bowen greeted his new boss and made his way to a desk across the room. Over the next few minutes Fastow’s secretary, Bridget Maronge, provided him with a collection of electronic gadgetry—a cell phone, a pager, a laptop. Bowen was surprised. At Citi, he had purchased his own personal technology; here, it was provided before anyone asked if it was needed. Wasn’t anybody watching expenses?
“Umm … I already have a cell phone,” Bowen said softly.
“Well, we already bought it,” Maronge replied. “You might as well take it”
Bowen sat at his desk for a few hours, fiddling with his computer and not quite sure what he was supposed to be doing. Around noon, Fastow approached.
“Hey, Ray, you want to go out to lunch?”
“Sure,” Bowen said, standing. “I’d love to.”
Bowen gathered his things and followed his new boss. Partway across the room, Fastow turned to him.
“I wanted to get together, Ray, because I wanted to tell you what’s been going on,” Fastow said. “We’re not quite as far along as I may have led you to believe.”
Somehow, Bowen had suspected he wasn’t getting the full story from Fastow. But now it was too late to do anything about it; he had already cut his ties to Citi.
“This is really just a start-up, Ray,” Fastow continued. “And we haven’t figured it all out yet. But we gotta get there fast.”
What did that mean? For the next few days, Bowen tried to find out, interviewing colleagues and examining records. The answer was disquieting. There was no cohesive strategy; people were off talking to ad agencies about marketing, running around scouting up deals, all without bothering to figure out what the division was trying to achieve.
Word got around the office about Bowen’s questioning. Before the week was out, Gustav Beerel, a young Harvard MBA working in the division, dropped by Bowen’s desk.
“I’ve been doing some analysis about our business,” Beerel said. “I wanted to see what you think.”
Beerel laid out a sheet of paper crammed with numbers. “Okay,” he said. “Let’s just walk through this. I think you’ll see the problem pretty quickly.”
The numbers were ballpark, but they told a damning story: The average retail customer paid about sixty dollars a month for electricity, with two-thirds of that covering fixed costs—expenses that couldn’t change. That left one-third, or twenty dollars, related to the purchase of fuel or electricity, plus whatever profit there was. Even assuming Enron could buy the commodities for ten percent less than competitors, those savings didn’t translate into much—just two dollars of average savings per month.
“Would you take the chance of switching to some unknown electricity provider for two dollars a month?” Beerel asked. “That’s the issue we’re facing.”
Bowen stared at the data, reality hitting him hard.
“The numbers don’t work,” he said softly.
Fastow appeared pasty-faced and anxious as he signaled for his troops to gather round. In recent days, his nervous tics had grown more pronounced: his speech was laced with a rising number of whistles, he pulled more often at his collar while craning his neck, his eyes widened with panic. Time was running out, and he needed his staff’s help.
As everyone straggled over, Fastow sat on a desk, trying awkwardly to project a casual look. “I’ve got a meeting coming up with Skilling,” he said. “And we’ve got to knock his socks off. We’ve got to come up with a great story for what we’re doing in our business plan.”
The executives squirmed. There was no business plan.
“When do we have to get this done?” one asked.
Fastow flashed a smile. “Next week”
The staff members glanced around at one another.
The group went into action. Fastow and about a half-dozen members of his senior team took over an interior conference room on the twenty-fifth floor. Ideas were scribbled on a whiteboard, market studies assembled, research plans sketched out. Amid the feverish preparations, the conference table filled with reams of paper as everyone struggled to convey a message that no one quite understood.
Nowhere in the report being assembled did anyone suggest that the division’s mission might be flawed. Bowen took Fastow aside and mentioned Beerel’s dire findings. Maybe, he suggested, they should be in the report.
Fastow shook his head. “Gustav is full of shit,” he said. “Don’t believe everything you hear from him.”
Discussion over. Bowen stepped back to the table, convinced Fastow simply didn’t want to face—or didn’t think Skilling wanted to hear—retail’s real challenge.
The final report measured less than an inch thick. Half an hour before his meeting, Fastow was in his recently completed office, hefting the document in his hand. It felt insubstantial. He was terrified; Skilling was expecting a lot from this presentation, and Fastow couldn’t shake his fear that he was missing the target. He closed the report and walked into the main room. All eyes were on him.
“Okay,” he called out. “I’m off to see Skilling”
“Good luck, Andy,” someone shouted back.
With copies of his report in hand, Fastow walked down to the elevators. Inside, he pushed the button for twenty-seven, where he had to change elevator banks to reach the thirty-third floor. There, he approached Skilling’s modest-sized, glass-encased office and leaned in the open doorway.
“Jeff?”
“Hey, Andy. Come on in.”
Fastow stepped inside, heading to a small conference table. Skilling came around from his desk and joined him. “Okay,” Skilling said. “What you got?”
Without a word, Fastow slid a copy of his report across the table. Skilling leafed through it. Words with boxes around them. “Sales and Marketing.”
“Profit Projections.” Numbers floating all over with no explanation where they came from. Page after page of gobbledygook.
“Okay,” Fastow began. “Well, we’ve taken a look at the business opportunities for our division and have assembled some profit projections—”
“Andy, this is junk,” Skilling interrupted. “You can’t build a business off something this general.”
“Well, I think this is the concept of our strategy.”
Skilling tossed the pages onto the table. “Andy, there’s no plan here! How many people do you need to hire? What office space are you going to get? Which customers are you going to call on? I mean, how exactly do you make the profits in the profit projections?”
“This is how we calculated it …”
“Andy, come on! That’s just stupid. There’s a lot of stuff you don’t know when you start a business. You may not know the outputs, but you sure can know the inputs.”
Fastow swallowed, his face flushed.
“You have to understand how many telephones you need,” Skilling continued, an edge still in his voice. “You have to know which customers you’re gonna call. How frequently are you gonna call on them? And for God’s sake, what’s the pitch? What’s the business proposition? You can’t have a retail business if you don’t know what you’re selling. You’ve got to give me the plan”
“It’s here,” Fastow protested, holding up the report.
“No, it’s not, Andy! I need details. I need to understand how you’re going to go about this. You can’t just put a few numbers and boxes on a piece of paper and tell me that you’re done. You’re not an idiot, Andy!”
A pause. “Look, Andy,” Skilling said, “I can tell you’re frustrated …”
“Well, I’m not sure what you want.”
Oh, man, Skilling thought. Thi
s was bad. Fastow seemed to have a mental block. How could a guy put together complex financing deals but not understand basic business?
“Okay, Andy,” he said. “You need to figure out specifically what it is you’re going to do. You’ve got to make a compelling case to me that you have all the pieces in place and that we should fund this.”
“Okay.”
“So sit down with your people again and get them to articulate what they’re going to do. Then come back next week and we’ll talk about it again”
There was a moment of silence. Fastow couldn’t shake the feeling that his career had just imploded.
“All right,” Fastow said, standing. “I’ll take another run at it”
Fastow plodded out the door. Skilling could tell the meeting had devastated him, but there was no sugarcoating the situation. Enron had built plenty of businesses, and the plans for them usually followed the same basic outline. But not Fastow’s. The guy didn’t know where he was going. Maybe this little trip to the woodshed will help him straighten out, Skilling thought.
Out in the hallway, the elevator arrived, and Fastow climbed on. He wasn’t ready to head back to the office yet. He needed to clear his head, maybe walk around.
What am I going to do?
About an hour later, the elevator doors opened on twenty-five, and Fastow wandered out, heading back to his office. In the center of retail, he saw the crowds of employees gathered, waiting for the results. They studied his face for any suggestion of what had happened. Nothing. His expression, his demeanor, everything was just neutral.
Fastow surveyed the room, then made his way to his office. Inside, he tossed the report on his desk and flopped into his chair. He sat silently, un-moving, staring at the walls. There was a knock at the door.
“Yeah?” Fastow said.
Bowen peeked inside. “What happened?”
“It was okay.”
Oh, sure. “Come on, Andy. You can’t just ignore everybody out there and not tell them what happened.” Fastow closed his eyes.
“It didn’t go well, Ray,” he said. “I’ve never talked to Skilling like that before. He was pissed.”
Conspiracy of Fools Page 14
