Conspiracy of Fools

by Kurt Eichenwald

  “Hey, Karen,” he said, “I’ve got an opportunity for you to hit a home run with the CFO.”

  Just after lunch on January 8, 1999, much of Enron’s senior management made their way to the Highland Room on the second floor of the Four Seasons Hotel. They were there for the PRC, the ranking system advanced by Skilling as the best method to reward Enron’s top talent.

  The competition was intense. Rankings were one through five—ones being worthy of fat bonuses and big promotions, fives needing to get their act together or move on. Skilling believed the PRC prevented a single boss from impeding a subordinate’s career; and indeed, in the early days of the trading business, the process worked well, since everyone knew everyone. But as the concept expanded throughout the company, the PRC became all horse-trading and lobbying. In such an atmosphere, any employee without a boss’s strong support was guaranteed a substandard ranking, the very result Skilling had hoped to avoid.

  Executives gathered at a U-shaped table surrounding another table that was divided into five sections, one for each of the rankings. As the day wore on, small cardboard placards with employee names were placed in the sections, based on the recommendations of supervisors. Once the table was full, negotiations would begin. Only a set percentage could be at each level, usually meaning that some had to be moved down.

  The moderator, Rocky Jones from human resources, stood in the center of the room, calling out employee names for discussion. Jones picked up the next placard.

  “Jim Bouillion,” Jones said. “Who’s his sponsor?”

  Jeff McMahon, flipping through a three-ring binder, raised his hand. “That’s me,” he said.

  McMahon found his materials on Bouillion, although this was one case he could make by heart. Bouillion didn’t have a glamorous job, just an essential one. He purchased Enron’s insurance, making sure coverage was complete, negotiating the best rates, handling disasters. If a pipeline exploded, Bouillion was there. If the directors or senior managers were ever sued, it was Bouillion who protected them with liability insurance. McMahon thought he was top-rate.

  But the PRC didn’t. Bouillion had been at Enron for years, but time and again was passed over for promotion and never received much bonus. When McMahon started as treasurer, Bouillion had dropped by, explaining his situation. McMahon had promised to watch Bouillion’s work and—come January, if he was impressed—to go to bat for him at the PRC. Bouillion hadn’t let him down.

  McMahon found his one-page summary in the binder.

  “Okay,” he said. “He runs the risk-management group, basically his job is insurance coverage.”

  Citing statistics and other details, McMahon made the case for Bouillion but was soon losing his audience. Some yawned. There were no splashy deals here, no accounting maneuvers that created profits. Just insurance. No one cared. After two minutes McMahon wrapped up his spiel.

  “Okay,” Rocky Jones said, holding the cardboard placard. “Where would you put him, Jeff?”

  The key to the PRC. Don’t go too high, don’t start too low. “I would put Jim in the two category,” McMahon replied.

  Jones set the placard on the table’s second section.

  Hours later, all of the names for this session were on the table. As always, there were too many ones and twos.

  “Okay,” Jones said. “Some people have to move down.”

  McMahon knew this would be tough; there were plenty of names on that table of employees who had worked on fancy, eye-catching deals. They always got the attention. And sure enough, Kevin Hannon from wholesale soon went after Bouillion.

  “Now, that guy could move down,” Hannon said. “Look, I’ve got a guy there who did a trade that brought in millions. And what did Bouillion do? Buy insurance?”

  He glanced at McMahon. “I mean, I don’t know this guy, Jeff. But just listening, I’m sorry. He’s got to go down.”

  “Well,” McMahon said, “I disagree—”

  “Oh, come on, Jeff!” Cliff Baxter interrupted. “Would you take any of these other guys in this category and put them in that job?”

  “That’s apples and oranges, Cliff,” McMahon replied. “These guys can’t do Jim’s job. They don’t understand the industry; they have no expertise in it.”

  “But they can learn! These other guys are better because they’re flexible. They might even change it.”

  Other executives jumped in, voicing agreement. Buy insurance? A monkey could do that!

  Skilling took the floor. “I agree. I think we can be doing a lot more with insurance.” Maybe, he was suggesting, there were ways to make insurance a profit center. Possibly underwrite policies to other companies.

  “Well, Jeff,” McMahon responded, “this is a guy who has been there for the company, does a great job, and has been passed over time and again.”

  Skilling sighed. “Come on, Jeff. It’s insurance. This isn’t rocket science. This is not a top performer.”

  Done. Bouillion’s name was moved down to level three.

  By day’s end, Enron had chosen its priorities. Employees on the big deals—like the Wessex and Elektro financings—got promotions and bonuses. They were the ones who brought value to the company; they were the ones who defined Enron. Not some guy who just purchased insurance.

  It started in the most unlikely of places, the tiny Brazilian state of Minas Gerais, an area so little known that probably few at Enron had ever heard of it.

  On January 13, 1999, Itamar Franco, the governor of Minas Gerais, abruptly announced his state could not pay the fifteen billion dollars it owed the national government. Reporters pressed Franco: Brazil’s finances are so shaky, what about the impact this might have on world markets?

  “I am very worried,” he sneered, “about my shares in Hong Kong, New York, and Tokyo.”

  Others certainly were. Around the globe, currency traders scrambled to cash out of Brazil, dumping the real. Within twenty-four hours, the Brazilian government threw in the towel, announcing a devaluation of the currency. Sell orders flooded the floor of the Sào Paulo stock exchange. Twelve minutes after the opening bell, stock prices there had fallen ten percent.

  The collapse of the real—one day before the scheduled auction of the new stake in Elektro—saved Enron from wasting another $700 million. But its original gamble on Brazil could not be salvaged. In no time, Enron had lost more than half of its investment.

  Throughout the company, sheer terror. It seemed almost certain that Enron was going to have to restate the value of Elektro, knocking down reported earnings. Enron would look stupid—first it overpaid, then lost its shirt.

  The accounting team got to work. The rules were on their side here, they decided. They didn’t have to tell investors how much had just been lost through foolishness.

  Chandeliers of glittering pink glass loomed over the ballroom at Houston’s Four Seasons Hotel. It was approaching noon on January 21, and the Wall Street analysts in the room were getting hungry. For almost four and a half hours, they had been listening to presentations about Enron—and they had been impressive. Sure, there were some bumps in the road, like Elektro. But that was brushed off as one of those wrinkles to be expected from Enron’s daring strategy of expansion in the developing world.

  Finally, executives from the retail division wrapped up the last presentation. Skilling took the floor.

  “All right, I think we’re all about ready for lunch,” he said. “Now, this morning you’ve heard a lot about our energy divisions, but during lunch you’re going to see presentations about some exciting new businesses.”

  Skilling encouraged everyone to move to the ballroom foyer. There, china and glassware sparkled as light spilled from old-fashioned sconces on the walls. The analysts found their seats, and soon waiters began serving the first-course salads. Every sight, every sound spoke to the financial success of a company just drowning in profits.

  Rebecca Mark stepped to the front. There were exhilirating developments at Azurix, Enron’s water effort, she
told the assembled crowd. The company was in a perfect position to profit handsomely from the rapidly changing international water business.

  “This is a logical extension of Enron’s expertise developed in the worldwide energy business,” she said. “And with the acquisition of Wessex, we have the credibility and experience we need to move forward.”

  Half an hour later, it was time for Enron Communications to strut its stuff. Joe Hirko, now the unit’s chief executive, revealed that on that very day his division was introducing the Enron Intelligent Network, the dedicated delivery platform envisioned months before, using the InterAgent software from Modulus. With this network, he said, customers could select the quality of service they wanted based on the type of content they needed to transmit.

  Few of the analysts knew what the Enron executives were talking about. Water? Delivery platforms? These people were energy analysts. They covered pipelines and power plants, not water utilities or the Internet. Mark and Hirko could be touting recipes for disaster, and most everyone in the room would be hard-pressed to know. But none saw that as a sign that Enron’s executives might be past their own level of expertise as well.

  After all, why should water and broadband be any different from their other businesses? Didn’t everything Enron touch turn to profit?

  A trio of Bell helicopters cut southward along the shoreline of the Arabian Sea. Inside the aircraft, Enron’s directors watched as the streets of Mumbai gave way to tiny huts and villages, almost as if they had been transported from the modern era to the Middle Ages.

  It was February 10, just before 10:30. For the first time, Enron’s directors were headed for Dabhol to view construction at the giant power project approved so many years before. As the last vestiges of civilization disappeared, the muddy waters of Mumbai cleared; finally, there was nothing to see but overgrown landscape melting into the white sandy beaches that trailed the sea.

  Then—there it was. Steel and concrete merged in a vast entanglement of buildings, towers, and wires. The greens and browns of India’s countryside were overwhelmed by the blues, reds, and whites of the massive site. The helicopters circled before landing, giving a view of a housing area, crops of mango trees, a mobile medical unit, a hospital under construction. A man ran to a helicopter as the turning blades slowed, and threw open the door. “Welcome to Dabhol!” he shouted.

  The group was escorted to the on-site cafeteria and served a buffet lunch. After that, a plant manager arrived to give the directors a tour. They were dazzled.

  “I just can’t believe the size of this place,” mumbled Pug Winokur.

  Two hours later, they were back on the helicopters, returning to Mumbai. On board, they chatted excitedly about what they had seen. It was simply magnificent.

  That night in central Mumbai, the first evening stars were coming into view from the seventh-floor patio at Hotel Oberoi. There, Enron’s directors and managers mingled with crowds of Indian officials and businessmen beside an outdoor pool. As they chatted, darkness slowly transformed the gritty urban landscape into a sea of twinkling lights.

  Wandering through the crowd, Ken Lay, dressed in an open-collared shirt and slacks, exuded a robust energy. In recent weeks, he had been jetting around the globe but showed no signs of strain. It was as if hitting the road had infused him with the drive to tackle the next challenge. Lay ventured toward a microphone. The patio fell silent.

  “I just wanted to thank everyone for coming,” he began. “This evening is really in honor of the Enron board, and it’s a real treat for them to be here and to see what we and our business partners have accomplished.”

  Lay smiled. “So everybody enjoy yourselves, stay as long as you like, there’s plenty of food.”

  He walked back into the crowd amid a smattering of applause. Over the next few hours, directors buttonholed him, expressing awe at what Enron had accomplished. Who would have thought such a top-of-the-line plant could be plunked down in the middle of nowhere? It was, they told him, worth every penny of the billions Enron had spent.

  In his office, Jeff McMahon grabbed the phone as soon as his secretary told him Fastow was on the line.

  “Hey, Andy, what’s up?”

  There were no pleasantries.

  “I’ve decided to make Michael Kopper responsible for the private-equity fund we discussed,” Fastow said.

  McMahon sucked in a breath, speechless. Jakubik was on his way to Houston. He had already sold his London house, was moving his family. He had made the complex arrangements for his autistic son. What the hell was Fastow up to?

  “Andy, what are you talking about? We’ve just spent months getting Jakubik. What’s he supposed to do?”

  “Well, you’ll find some other thing for him to do in finance, won’t you?” McMahon struggled to collect his thoughts.

  “Andy, that’s not what we hired the guy for. He’s leaving investment banking for this. He doesn’t want to come here and issue bonds. He was going to create a fund, raise a bunch of capital, sell assets. That was the job!”

  “Well, I’ve decided to give the job to Michael.”

  McMahon held the phone tight. “I’m coming up.”

  He slammed down the phone.

  Five minutes and two elevator rides later, McMahon was charging down the fiftieth-floor hallway to Fastow’s office. He walked in without knocking.

  “Andy, I need to talk to you about this.”

  Fastow sat back. “Talk.”

  “You’ve got to reconsider. Jakubik has already quit his job; he’s in the middle of moving.”

  McMahon sat. Fastow stayed behind his desk.

  “This just doesn’t make sense,” McMahon continued. “Why Michael Kopper? Jakubik does this for a living. He’s raised lots of equity for structured finance. Michael has never done this. Why is he qualified?”

  “I’ve made my decision,” Fastow said. “This is what we’re going to do, and you just have to deal with it.”

  “Andy …”

  “Call Jakubik and take care of it. Blame it on me if you want.” McMahon laughed. “Damn right, I’ll blame it on you!” The meeting ended, and McMahon left. Fastow went back to work, irritation gnawing at him. He didn’t like his decisions to be questioned, certainly not by his own team.

  In River Oaks, Fastow parked in the lot at Tony Mandola’s Gulf Coast Kitchen. He popped open the door, waiting until Mike Jakubik emerged from the passenger side. Inside, the hostess escorted them to a table.

  It was February 15, Jakubik’s first day on the job, and he was eager to get going. McMahon had already told him something about Fastow asking Michael Kopper to start an equity fund, but the whole thing sounded vague. Jakubik wasn’t too worried; no company would recruit someone for a job, then hand it to somebody else.

  Once the orders were in, Jakubik cleared his throat. “Okay, Andy, I’m ready to get going. What first? Do we go meet with the business heads to talk about what we’re doing? Do I start with Skilling? What are your thoughts?”

  Fastow mumbled a few suggestions, nothing definitive. The guy’s demeanor struck Jakubik as odd—cool, distant. Not somebody he would enjoy working with. But Jakubik had dealt with lousy bosses in the past; he could live with Andy Fastow.

  He remembered McMahon’s cautionary words about Kopper.

  “Listen, I also need to know, what’s Michael Kopper’s group doing? McMahon told me about it, and I’m a little worried this is similar to what I’m doing.”

  Fastow shook his head. “Oh no, no, no. What Michael’s doing is totally different. Nothing like your job.”

  A fleeting smile passed over Fastow’s face. “You own the institutional investors,” he said. “They’re yours. Anything going on with those guys, you own.”

  What the hell are you talking about? Jakubik felt like he’d had the wind knocked out of him. That wasn’t the job they’d been discussing. Enron had already brought in somebody, Jim Timmins, to deal with institutional investors. Jakubik was supposed to be the equity-syn
dications guy. Was Fastow changing his job—on his first day?

  “Andy, that’s not what you hired me for. I’m supposed to be the equity-syndications czar. My group is named Equity Syndications! I’m supposed to get old investments off the balance sheet and make room for new ones”

  Fastow sipped his water. He said nothing.

  “What does it mean, I own the institutional investors?” Jakubik asked sharply.

  Fastow pulled his collar. “Well, anytime we want to bring in the institutional investors, you’re the guy.”

  Dear God. Jakubik was beginning to understand. He wouldn’t be structuring deals; he would be managing relationships with pension funds. Talking up fund managers, getting them information, holding their hands. That wasn’t what he did; he was an investment banker. And Enron waits to tell him until his job was gone, his house was gone, his kids were out of school?

  “Andy, hold on. Who’s doing triage up front? Who’s going to work with the business side, decide what to sell, decide what goes where?”

  Fastow looked at Jakubik evenly. “I’m not answering that. I’m telling you, you’re responsible for managing the institutional investors.”

  There was a moment of silence. “So you’re making me an investor-relations guy,” Jakubik said simply.

  Fastow reached for his water. “No, no,” he chuckled. “Don’t be ridiculous”

  An hour later, Jakubik stomped back into his new office. He grabbed the phone to call his wife, Nancy, who was still packing the family in London.

  “Hello?” she said.

  “Holy shit!”

  Nancy immediately recognized her husband’s voice. “Mike, what’s wrong? What happened?”

  Jakubik spoke slowly. “I have moved five-fucking-thousand miles to be an investor-relations jerk!”

  “Rebecca, there is no fucking way we are doing that!”

  Skilling, in a foul mood, glared at Rebecca Mark. It was about eleven on the morning of March 8, and Enron was days away from announcing plans to sell a huge chunk of Azurix to the public. For weeks, Mark had been pushing for every benefit and now wanted Enron’s commitment to send every opportunity it found in the water business to Azurix.