Lay listened with dismay. After all, the entire basis of the agreement with Blockbuster had been its supposed Hollywood contacts. But apparently no one from Enron had bothered to check by calling the studios. It was as if this twenty-year contract had been entered into on the fly.
Still, Cox was quick to assure Lay that all was not lost. Enron, he said, was developing its own Hollywood contacts. It would all work out in the end.
Perhaps. But that prospect didn’t change the fact that Enron’s twenty-year contract with Blockbuster would soon be terminated, just eight months after it was signed. Now its video-on-demand business would have no business partner, little content, and few customers. Yet, because of Project Braveheart, Enron would still have what really mattered to its executives: more than $111 million in reported revenues, enough for the broadband division to reach its financial targets.
The morning after the Blockbuster deal was canceled, Carl Bass was at his home office, surfing the Internet. He noticed a Reuters report on a news Web page.
“Blockbuster, Enron Broadband End Video-on-Demand Deal,” it read. He clicked on the story.
This could be bad. Bass knew that Enron had reported huge revenues from Braveheart, already a shaky deal. Not even Enron could argue a business with a name-brand partner was worth the same once the joint venture ended. Bass opened an e-mail and addressed it to John Stewart. He pasted a copy of the Reuters article in it, then typed a message: “I do not know if you knew of this yet.”
Stewart was on his computer at that moment and opened Bass’s e-mail. The Reuters report was disturbing, given the revenues Enron reported from Braveheart. In his reply, he typed that this was news to him.
“So what happens to the joint venture and the part that was securitized through an SPE to produce a material gain?” he typed.
———
That’s the sixty-four-dollar question, Bass thought.
He hit the “reply” button. “One would think (no direct knowledge since my phone no longer takes their calls) that there should be a loss reported,” he typed. “The ‘venture’ has now lost its value.”
A loss would never be taken. The collapse of the Blockbuster relationship, Enron executives argued, was a good thing. Its partner’s dicey relationship with movie studios had impeded the joint venture’s success. With Blockbuster out of the way, Enron was sure to sign the studios up even faster. Why, executives enthused, with Enron now fully in charge, Braveheart might even be worth more, not less, than was originally projected.
A week had passed, and Mintz still hadn’t heard back about his LJM memo. He asked his secretary to set up a meeting with Causey and Buy, and they agreed to get together a few days later. At the appointed time, Mintz arrived at Causey’s office. Buy showed up soon after, and the three took seats at the circular conference table. Mintz placed a copy of his memo on the table in front of him.
“Okay, Jordan,” Causey said, “it’s your meeting. What’s up?”
“Well, I wanted to find out what you guys are thinking about the memo,” Mintz said.
Blank stares. “What memo?” Causey asked.
Mintz felt himself deflating. They never read it.
“I wrote a memo about the policies and procedures on LJM and how they weren’t being followed,” Mintz said. “I included recommendations on how to fix the problems.”
Causey closed his eyes and nodded. “Oh, yeah.”
He stood and walked over to his desk, riffling through piles of papers. Buy looked evenly at Mintz.
“I didn’t bring my copy with me,” he said.
Causey started walking back to the table. “I can’t lay my hands on it right now,” he said.
Keeping up a tough front, Mintz suggested that he have Causey’s secretary run the copy he had brought through the Xerox machine. A fine idea, Causey and Buy agreed. Minutes later, everyone had a copy of the memo. Causey and Buy leafed through it. Their faces gave no sign of recognition.
“How do you want me to proceed?” Mintz asked, trying to end the awkwardness of the moment. “Should I just go through it page by page?”
Absolutely, they replied. Slowly, Mintz reviewed his concerns and recommendations. Causey and Buy repeatedly muttered words of approval, then encouraged Mintz to move on to the next topic. Mintz reached the last page.
“Now we have this screwed-up situation where these LJM people are on the twentieth floor,” he said. “And I want to be sure I have your support in getting them moved out.”
No question, they said. Mintz should get it started. They were behind him all the way.
Mintz was back in his office about ten minutes later. He slowly closed the door and walked to his credenza. He placed his copy of the memo there and just stared at it.
They hadn’t read the memo. Even when they heard about it, they could barely disguise their indifference. He had hoped they would be so outraged that they would set things straight. Instead, they had just patted him on the back, wishing him good luck in taking on his boss.
What a bunch of pussies, Mintz thought. I can’t believe these guys are senior executives with this company.
Riding an Enron elevator, Skilling glanced at one of the television screens embedded in the wall. The stock price flashed by and he almost winced. Below fifty-six dollars a share.
Just last August, Enron’s stock had hit an all-time high of more than ninety dollars a share. It had fallen steadily since. And today, March 21, it would hit a new fifty-two-week low.
No doubt, the 1990s were over. In just the last eight weeks, the value of telecommunications stocks had plunged—Level 3, Global Crossing, all of them—and a vicious cycle had begun. Many of those high-tech companies had financed their operations by selling stock; now, with no takers, the prospect of their collapse loomed large.
Enron was being hit every which way. The market knew about its India troubles, making investors skittish. That Fortune article—that Fortune article!—had started raising questions about the quality of its earnings.
Now the high-tech debacle was draining its shares of the value from Broadband. But as storm clouds gathered, Skilling put on a happy face. The shakeout was a good thing, he insisted, since less competition meant lower prices for network access. It also meant fewer businesses to trade with, but Skilling expressed no worries about that.
Still, there was another element to the stock-price collapse in Skilling’s mind. The real troubles had started about the same time that Lay was announcing his plans to leave. Each day’s new drubbing struck Skilling as the market’s vote on his elevation. Investors apparently wanted Lay, not him. They were giving him almost daily criticism of his performance. And Skilling hated criticism.
As the elevator whooshed along, an Enron employee interrupted Skilling’s thoughts. “Jeff,” the employee said, “what’s happening to the stock price?”
Skilling glanced over at the employee, then looked back at the television screen. “I don’t know,” he said.
How did things get to this point? By March 22, Fastow and the other executives in finance were struggling to answer that question and avert disaster.
The problem again was the Raptors. When they had been created, everyone pronounced them a stroke of genius. With Enron’s shares trading at close to ninety dollars at the time—and climbing—no one expected they would so quickly reverse course, so there were no concerns about the price trigger built into the structure. In essence, if Enron’s share price fell below fifty dollars, the stock meant to provide the Raptors with capital would effectively disappear. Back then, the trigger point seemed laughably low—-fifty dollars a share?
But today, the price was at fifty-five and falling. Worse, losses were still piling up from the collapse of values in the merchant investments hedged by the Raptors. Now there was a good chance that in a week or so, the Raptors could arguably have no capital. The hedges would vanish, and all those merchant-investment losses would come back.
To fix the problem, Fastow and Causey broug
ht in some top accounting minds. They came up with what they viewed as the perfect solution: if the Raptors needed more capital to hedge Enron’s investments, Enron would give it to them.
The two best Raptors would continue to be harnessed to support the worst. Then Enron would pump another twelve million shares of stock into the stronger ones. The deal was done on credit, with the two stronger Raptors pledging to pay Enron another $568 million sometime in the future. In essence, the finance group was doubling down, again, in its bet that Enron’s share price would rise. A price run-up would bail out the entire structure and allow the Raptors to make good on their obligations, eventually.
But this time the finance group sweetened the deal. They priced the new shares for the Raptors at forty-seven dollars each, a significant discount, since under the sale agreement the shares could not be hedged. The discount was run past Kaminski, who agreed on the valuation.
The price cut was standard fare, but the next step wasn’t. Once the deal terms were signed, Enron waived the requirement forbidding hedging. The shares—worth less because they could not be hedged—could now be hedged. And no one told Kaminski, whose pricing was used to justify the numbers in the deal.
Of course, to hedge, the Raptors needed a third party to take on the risk that Enron’s stock price would fall. They turned to Enron itself. Now, if the share price dropped, the company was obligated to make up the loss for the Raptors, which in turn were pledging to give Enron back its own money to make up for losses in the merchant investments. By any measure, the Raptors were a meaningless, laughable fraud.
After 3:30 on the afternoon of March 26, Ryan Siurek was in his office speaking with a colleague, Gordon McKillop. He had been working night and day on the Raptor restructuring, and the deal documents had finally been signed. He was exhausted and ready for a break. The telephone rang. “Ryan. Jeff Skilling.”
Siurek was shocked. He hadn’t expected Skilling’s call; he didn’t even think Skilling knew who he was. Unknown to Siurek, Causey had asked Skilling to send an “attaboy” the young accountant’s way.
“Listen,” Skilling said, “I just want to tell you how much we appreciate your hard work on the Raptor restructuring. It’s a really great transaction for Enron.”
Siurek muttered his thanks, and the two talked for a minute. From what Siurek could tell, Skilling had a working understanding of the deal.
In Washington, the heavyset, bearded man crossed Pennsylvania Avenue to the security booth at the northwest gate of the White House. A guard inside asked for his name.
“Harvey Pitt,” he responded.
Pitt, one of Washington’s most celebrated securities lawyers, was on the verge of achieving a career-long dream. Some time before, he had been contacted by the White House personnel office, inquiring if he would have any interest in serving as the new chairman of the SEC.
The son of a grocer and a seamstress, Pitt first attracted the attention of SEC officials during a moot competition in law school, and soon was working in the general counsel’s office at the agency. He stayed ten years, becoming the agency’s youngest general counsel, before moving on to become a top partner at Fried, Frank, Harris, Shriver & Jacobson. But he never lost interest in returning to the SEC—this time as chairman. Pitt wasn’t close to Bush; in fact, he’d never met him. But he knew this new President might grant him the post he coveted.
Security issued him an identification tag, and Pitt slipped it on. Minutes later, he was in the West Wing, being escorted to the Oval Office. Bush was waiting for him at the doorway. The two men shook hands.
“Mr. President, it’s an honor to meet you.”
Bush smiled. “Well, Mr. Pitt, delighted to meet you.”
A White House cameraman snapped a picture, then Bush showed Pitt to the sitting area. Cheney was there, along with a handful of other staffers. Pitt greeted them, but Bush quickly made clear this meeting was his.
“All right, Mr. Pitt,” Bush began. “Why do you want to be the chairman of the SEC?”
They spoke for half an hour. Pitt had prepared for this moment for years and had an array of ideas ready to go. The SEC could become more than what it was, he said, and he was the person to drive the agency toward that goal.
For one thing, he said, the SEC should become a real-time enforcer of the securities laws; too often, investigations languished for years. Moving faster would give investors confidence that the cop was on the beat. Disclosure was inadequate, too, he said. Investors mostly received historical information, with little explanation of where companies would be down the road.
Bush nodded, occasionally asking a question. Finally, he had heard enough. “Well, Mr. Pitt, thank you for coming,” he said. “We’ll get back to you.”
Again, handshakes all around. Minutes later, Pitt was on the street, walking back to his office. He felt good about the interview. This job could very well be his.
Late on the afternoon of April 2, Amanda Martin was in Skilling’s office, again asking to be pulled out of Azurix. There were other things she could do, she said. She had fixed the troubled North American power plants; she could take on the same responsibilities for the India project, she argued.
Skilling’s tone was distant. “I’m not sure it will work, Amanda. I’m getting a lot of resistance from Andy about you coming back.”
Fastow. It had been so many years since their battles began over that silly wind deal. Martin could scarcely believe Fastow was still carrying a grudge.
“But, Jeff, I don’t want to stay in Azurix,” she said.
“I need you there,” Skilling replied.
Everything about Skilling’s demeanor struck Martin as wrong. He seemed unsure of what he was doing. “Jeff,” she asked, “what’s going on here?” Skilling didn’t answer.
“You know, Jeff,” she continued, “every time I leave late at night, I go out to the parking lot and that whole row of cars of your lieutenants are gone. But your car is there. And I come in early in the morning, and no one’s arrived yet. But your car is there then, too.”
She leaned forward in her seat. “So what does it say right now about your organization that you’re working harder than the people who report to you?”
Martin waited to be shouted down. That would show her that Skilling still had the old fire in the belly. But he just sat there.
“The problem is, Rice, Pai, all your lieutenants, they’ve checked out; they’re not doing their jobs anymore,” Martin said. “You’ve made them too rich. They’ve got too much money. They don’t need to be here.”
Still no response. Martin plowed ahead. “And the next layer of people—Whalley, Delainey, and the rest—they’ll cut your throat if they thought it would get them to the feeding trough sooner. So what are you going to do?”
Skilling just looked at her with a sad expression, then silently glanced out the window. Finally, he looked her in the eye. “One thing about you, Amanda,” he said. “You always tell it the way you see it.”
He paused. “You’re most likely right,” he said.
What? Skilling never conceded a mistake. Never. He was so quiet, so resigned. He looked lost.
“I don’t know what I’m going to do,” he said softly.
A week later, on April 9, Skilling finished wandering around the building, dropping in on traders and deal makers. Now he was headed to a conference room to meet with his CFO.
Fastow was getting anxious. LJM’s deals with Enron had slowed to a trickle. With stock prices sliding, there was little available that promised good returns, even in a rigged deal. With one exception: Enron Wind, a renewable-energy division. Enron was already negotiating to sell it to a unit of UBS, the global financial firm, but Fastow wanted in, with LJM2.
In the conference room, Fastow explained all the benefits LJM2 could bring by bidding for Wind. Skilling was unimpressed. He was tired of LJM, tired of Fastow jabbering about it. They never spoke about Enron anymore, he thought gloomily. It’s always LJM, LJM, LJM.
“I don’t want a structured deal,” Skilling replied. “You want to make a bid as a stalking horse, that’s fine.”
A stalking horse? That meant LJM2 would be used just to force up the UBS offer. There was nothing in that for Fastow and his investors. “Wait, Jeff,” Fastow protested. “I think LJM can really bring some value to the table.”
They spoke for another twenty minutes. Skilling left the meeting confident he had gotten his point across.
Days later, on April 13, Mintz was at his desk, embarrassed as he worked on his latest trivial assignment. Fastow’s nanny had purchased a new car—a lemon—and now his boss had asked him to write a threatening legal letter to the car dealer. Head buried in paperwork, Mintz sensed someone’s presence. He looked up and saw Michael Kopper.
“Jordan,” Kopper said brusquely, “LJM2 is bidding on the wind deal. Do you know where things stand with UBS?”
What? In just two short sentences, Mintz’s worst fears about LJM emerged. The fund was elbowing its way in on Enron’s sale of an entire business? Not only that, but Kopper wanted to know what UBS was doing with its bid? No third party would ever get that kind of information.
“Michael, I don’t know,” he replied. “But I work for Enron. I don’t think that it’s right to be telling you how things are going with a potential competitor.”
Kopper started to speak. Mintz kept going.
“If you want to talk to somebody on the deal, call Lance Schuler, because he’s working on it,” Mintz said, doing nothing to hide his contempt.
Kopper’s eyes narrowed in anger. Mintz was pushing him off to Schuler, another lawyer? Giving him the brush-off?
Conspiracy of Fools Page 57
