It was an exciting prospect, but still it made Skilling a little nervous. What, after all, was Enron going to do with all those billions in cash?
Fastow wanted to know: what was everybody else paid at Enron? The information was locked up pretty tight. About the only person who knew—outside of Skilling and Lay—was Mary Joyce, a human-resources executive in charge of compensation. Maybe she would tell him.
One afternoon, Fastow dropped by Joyce’s office. He needed to see the compensation information for members of Enron’s top management committee, he told her.
Joyce looked at him skeptically. “I’m sorry, Andy. I’m not allowed to give that out.”
“Jeff said it’s okay. I need it for something I’m working on.”
Skilling approved this? That didn’t sound right. Joyce reached for the hone. “Well, let me call him and ask.”
She got through right away. “Jeff, I’ve got a question,” she said. “Should I
release compensation for members of the executive committee to anyone?”
Skilling laughed. “No! Why would you ask that?”
“I was just checking,” Joyce replied.
She hung up and looked at Fastow. “Sorry, Andy.”
Outside a terminal at Houston Intercontinental Airport, Ken Rice tossed a suitcase in his car, ready for the trip home. It was March 1, a Wednesday, and Rice was just back from the opening of Enron’s new London office. In minutes, he was out of the lot, driving onto Interstate 45.
His car phone rang. “Ken Rice.”
“Ken, hey, it’s David Cox.”
More business. Cox was one of Rice’s favorite deal makers in Broadband. If a transaction needed doing, Cox was the guy. His calls always meant something big was up.
“Yeah, what’s going on?”
“I’m in Dallas, been negotiating with Blockbuster Entertainment. I’m on the verge of closing a twenty-year exclusive deal with them for video on demand.”
What? Rice didn’t know what Cox was talking about. No one had mentioned a Blockbuster deal before. How fast had Cox put together this two-decade commitment?
“Think you better explain this to me,” Rice said.
The idea was simple. Enron and Blockbuster would form a venture to provide videos over a broadband network. Customers could choose from a library of films, place an order, and watch the video at home. No returns, no leaving the house. Enron would provide the network, and Blockbuster would secure the films through its studio connections.
It sounded promising. But, still, Rice was on Interstate 45. Couldn’t this wait? “You’re not ready to close this today, are you?”
“Yeah,” Cox replied, “we are.”
“Surely this can wait for a few days.”
“No, we want to sign right away.”
Rice understood. When somebody was ready to do a deal, dithering was always a bad idea.
Well, we can clean up things later if we have to. “Okay,” Rice said. “Let’s go for it.”
Later that week, two Greenwich NatWest bankers, Bermingham and Darby, flew to the Cayman Islands for the next step in their plan. The directors of Campsie Limited, a Caymans entity set up by NatWest to invest in LJM1, were meeting to consider the proposal to sell Swap Sub to a partnership controlled by Fastow and Kopper.
Darby made the presentation to Campsie directors on March 3. This new partnership—at this point called NewCo—had offered one million dollars for Campsie’s interest, which Darby called a fair offer. Bermingham, a director, urged the board to authorize formal talks.
The board approved the plan. And why not? Selling an asset for its value certainly wasn’t controversial.
The next evening in the Caymans, the soft rays of the setting sun lit up the horizon in streaks of gold and crimson. Bermingham was in a local restaurant, enjoying his dinner. With him was Fastow, there to keep tabs on the Campsie vote. It was a complicated deal, and lots could go wrong. Bermingham, Fastow said, needed to move quickly.
Skilling learned the basics from Greg Whalley, the executive now in charge of the wholesale-trading desk.
West Coast rainfall was down. The amount of hydroelectric power, generated by the flow of water, would decline. California imported hydro from Canada and Washington, and had not built new power plants in years.
In the meantime, temperatures were rising even as California was in the midst of an Internet-fueled economic boom. Demand for energy to keep its factories humming—and to cool the homes and offices of its residents—was about to explode, even as supplies shrank. And under the state’s two-year-old electricity program, rising costs wouldn’t dampen demand; most customers’ rates were locked in place.
“It’s a classic supply-and-demand mismatch,” Whalley said. “California is going to hit a wall sometime soon.”
“Okay,” Skilling said. “So what’s your plan?”
“We’re setting up a long position, a big one.”
A long position. Enron was setting up some trades that would allow the company to profit from rising electricity costs.
It sounded solid. “Great,” Skilling said.
The Swap Sub purchase was looking like a blowout winner. Maybe, Fastow and Kopper decided, it would be a good idea to let others have a taste.
Glisan was an obvious candidate. He’d spent plenty of time on LJM matters; his work had already enriched Fastow. Then there were people like Anne Yeager, who had helped negotiate the Sails deal. And Kristina Mordaunt, a lawyer who had worked on LJM1 and was now general counsel for Enron Broadband Services. Why not spread around the wealth?
Fastow sounded out Glisan, who quickly agreed to invest. Kopper headed over to Mordaunt’s office to talk. He went inside and closed the door behind him.
“An interesting opportunity has come up,” he said.
The Royal Bank of Scotland was taking over NatWest, and some of the bank’s managers were leaving, Kopper said. A few of them, including Gary Mulgrew, had approached them about buying part of the NatWest interest in LJM.
“So Andy and I came up with the idea of forming a partnership to purchase their interest,” Kopper said, “and were wondering if you might want to participate.”
Mordaunt was intrigued. “What kind of investment do you have in mind?”
“Under ten thousand dollars.”
Sounded reasonable. “Sure. I’d be interested.”
Kopper looked satisfied. “Great,” he said. “I’ll get back to you in a couple of weeks.”
He stood and left. The conversation that would destroy Mordaunt’s career had lasted all of two minutes.
What the hell is this? McMahon stared at the multipage deal-approval sheet in disbelief. The document, known internally as a DASH, had been sent to him for a sign-off, authorizing Enron to spend money for the transaction. But this was unlike any DASH that McMahon had ever seen; Enron was repurchasing something it had just sold to LJM2.
Under the proposal, Enron would buy back its stake in MEGS, the gasdistribution system that it had sold to LJM2 in December. Scarcely ninety days had passed; why buy it back? It would just cram another asset onto the bloated balance sheet—and of course give LJM2 a quick profit.
No one had done an analysis to demonstrate that this would be a good investment for Enron. It had all the earmarks of a sweetheart deal. Enron had booked cash flow and profits from the MEGS sale and now wanted to undo the deal? McMahon wasn’t signing.
But soon the pressure began—from Causey, from Fastow. The deal needed to get done, they told him. He finally relented but made sure to register his distaste. After signing the DASH, he jotted an addendum.
“There were no economics run to demonstrate that this investment makes sense,” McMahon wrote.
That same night at the Compaq Center arena in Houston, Neil Young, the rock icon, sat at a pump organ warbling “After the Gold Rush” slightly offkey. Nearby, his partners—David Crosby, Stephen Stills, and Graham Nash—listened to the solo as they stood among candles, Tiffany lamps, and p
alm trees scattered about the stage.
High above, McMahon and Baxter watched with their wives. This was the reunion tour for Crosby, Stills, Nash & Young, and neither McMahon nor Baxter had wanted to miss it. But they didn’t feel young enough to battle crowds on the floor. Listening to some sixties songs from a well-appointed skybox seemed a suitable, if ironic, compromise.
Baxter and McMahon stood in the back of the skybox, drinking as they peered down at the musicians’ bald spots.
“Guess we’re all getting kind of old,” McMahon said.
As they chatted, McMahon got to thinking about the MEGS deal and the other oddities of the last few months. Baxter was wise in the ways of Enron and was close to Skilling. Maybe he would have an answer.
“Cliff, I want to ask you a question,” McMahon said. “How much do you know about LJM?”
Baxter gave a derisive snort. “Probably more than you think. What’s up?”
“Why did the board waive this conflict?”
“Andy convinced them that in the long run, the company is better off to have these. Why? What’s your problem?”
“You can’t run a finance department this way. You have Enron people negotiating against other Enron people. And Andy is their supervisor, controls all the promotions and raises and bonuses, and he has an interest in the company Enron’s negotiating against. It’s just a mess.”
Baxter nodded. “I’ve got similar problems with it.”
“I’ve talked to Andy about fixing things, and nothing happens,” McMahon said. “So I’m thinking of just moving to another post internally.”
Baxter took a sip. “I’ll talk to Skilling. And before you do anything, you should talk to him, too.”
McMahon thought about it. Maybe that was a good idea.
The next day, March 9, the formal, written offer for Swap Sub was ready to go. Kopper sent it to Giles Darby at the Greenwich NatWest office in London. The terms were the same as those described days before in the Caymans; this entity, still called NewCo, would pay one million dollars for the share of Swap Sub owned by Campsie on behalf of NatWest.
“The principals are committed to working with you to rapidly conclude a transaction,” Kopper wrote.
The job offer to McMahon came out of nowhere.
Greg Whalley, Enron’s chief trader, called with news that they were starting another business. The idea was to apply Enron’s business model to a range of commodities—metals, paper, anything. Whalley would be chief executive of the new division and wanted McMahon to join him. “It’ll be fun,” Whalley said. “Come work for me.”
McMahon was unimpressed. The business didn’t have a name yet, this job had no title. He had already figured he was probably leaving Enron, maybe to take a job as CFO at some other company. But this? It didn’t sound right.
“I don’t know if it’s a good move for me,” McMahon said. “Maybe if I could be president.”
“I can’t make you president,” Whalley said. “But trust me, things will work out.”
McMahon thought about it. “Well, I guess I’m not happy where I am.”
Whalley laughed; McMahon had made it clear long ago that he wasn’t comfortable working for Fastow. “I know,” Whalley said. “That’s why I thought you’d be easy pickings.”
That same week, on March 15, Fastow was alone in his office when McMahon showed up for a scheduled appointment. Since speaking with Baxter, McMahon had agonized about what to do. Going to Skilling would be a virtual declaration of war. Before taking such a drastic step, he had to give Fastow one last chance to do the right thing.
“Andy, you’ve been promising for four months that you would take care of the LJM problems,” McMahon began.
He recounted the commitments Fastow had made—forcing employees to work for Enron or LJM2, finding office space, pulling LJM2 people out of Enron strategy meetings.
“You’ve done none of them,” McMahon said. “Not one.”
Not only that, McMahon said, but he was sure his bonus had been affected because of his battles against LJM2.
“That’s not true,” Fastow shot back.
“I’m just telling you how I feel, given my number.”
“I told you what happened there.”
McMahon decided not to mention that he knew about Kopper’s pay. “I know what you told me, Andy,” he said. “I’m just telling you my perspective.”
He took a breath. “Look, Andy, something’s got to happen here. Something’s got to change.”
Fastow scowled. “Well, I’m doing everything I can do. You just need to be patient. Just trust me.”
The meeting dwindled to an end, and McMahon headed to the elevator. By the time he got back to his office, he had worked himself into a fury. He walked over to his secretary.
“Get me on Skilling’s calendar for thirty minutes as fast as possible,” he said. “Just say it’s personal.”
That night, McMahon mentioned nothing to his wife, Margaret, until they were in bed, watching television.
“I’m doing it tomorrow,” he said. “I’ve got an appointment with Jeff.”
“Good. It’s about time.”
McMahon glanced over at her. “He may fire me.”
“Are you going to give him an ultimatum?”
“No. But I am going to say I have to leave my job. And he might not have another job for me.”
Margaret gave him a hug. “We’ll survive,” she said.
The next morning just after ten, Skilling stood beside Lay as a photographer snapped their pictures for an article in Fortune. They were more than happy to participate; already that year, in its annual rankings, Fortune had hailed Enron as America’s best-managed company, knocking General Electric from the number-one perch. This new article, one that would again be singing the company’s praises, would no doubt be the icing on the cake.
About that same moment, McMahon was at his desk, staring at a pad of lined paper. His meeting with Skilling was soon, and he was gathering his thoughts.
“Discussion Points,” he wrote near the top of the page. He thought for a moment. “Untenable situation.”
The notes just flowed, point by point, the months of anger finally finding release. At the bottom of the first page, McMahon listed possible alternatives to deal with the LJM situation. One point he wrote in capital letters: “WILL NOT COMPROMISE MY INTEGRITY.”
He underlined the words before flipping the page.
Skilling was at his desk when McMahon arrived just before 11:30, his pad of notes in hand.
“Hey, Jeff, come on in,” Skilling said. McMahon started to take a seat in front of the desk.
“Oh, come on!” Skilling said. “Let’s go sit at the conference table.”
Skilling brought a notepad with him and wrote down the name “Jeff McMahon.” He placed an elbow on the table and rested his chin in his hand.
“Okay,” Skilling said. “What’s up?”
McMahon glanced down at his notes. “I want to talk to you about this whole LJM thing,” he began. “I’ve got some real concerns about the conflicts of interest.”
Skilling didn’t nod, didn’t react. He seemed focused on every word McMahon was saying.
“I understand the notion, and I know the board approved Andy being the general partner. I’m not questioning that. My issue is how it’s being managed. It’s at the point where I can no longer manage the conflicts.”
The setup was affecting people’s behavior, McMahon said. LJM2 staffers were allowed to attend strategy meetings within Enron. People were feeling pressured to do deals that weren’t in Enron’s interest.
He alluded to Yosemite, when Fastow tried to get a million-dollar fee. There was pressure to accept terms that were wrong for Enron, and Fastow wouldn’t back down.
“Here’s the CFO of the company, a few weeks before bonuses are paid, telling me to close the deal under bad terms,” McMahon said. “I didn’t do it, we got it fixed and done right. But, man, that was major pressure.”
&n
bsp; And there was no doubt in his mind that he had paid a price for his efforts to look out for Enron. “I think my compensation’s been affected because of that,” he said.
Skilling listened but didn’t take a single note.
“I didn’t ask to be in this position,” McMahon said. “But now here I am, stuck in the middle.”
There had to be a solution, McMahon said. Either all the conflicts had to be fixed, or he needed to change jobs. “Those are the two options,” he said. “And I need something to happen pretty quickly.”
There was a second of silence. “Is that it?” Skilling asked. McMahon nodded.
Skilling stood, and McMahon followed. “Listen, thanks for coming up,” Skilling said. “It’s important for me to know that. And I’m glad you told me.”
They reached the doorway. Skilling opened the door.
“I’ve heard you loud and clear,” he said. “Trust me, I’m going to fix this. I’m going to fix this for you.”
In no time, McMahon was back in his office. He sighed; he hadn’t been fired yet.
Andy’s going to blow a friggin’ gasket.
———
Skilling walked back to his desk. He understood what McMahon’s concerns were; this was about compensation, about ensuring Fastow didn’t target him for doing right by Enron.
He knew McMahon had no reason to worry. That was the beauty of the PRC. Fastow was one voice out of twenty-three; if McMahon stood up for Enron, everyone would see it. He knew the PRC system was pristine; this was just a matter of appearances. Skilling was annoyed Fastow had allowed bad perceptions to fester, but he’d take care of that, too.
As for McMahon’s other worries, Skilling wasn’t worried. Where people worked, what meetings they attended—those were administrative issues. It would probably take a few days to work it out. But Skilling’s schedule was packed that day, and he was leaving the next morning for vacation with his kids. He didn’t have time to fix this.
Maybe Joe Sutton. He was vice chairman. He was supposed to help out on operations issues. Skilling would talk to him about it later that day.*
The same day, Darby and Bermingham from Greenwich NatWest were back in the Caymans for a Campsie board meeting. Darby provided an update about the formal offer and recommended accepting. The suggestion was approved.
Conspiracy of Fools Page 43
