Conspiracy of Fools

by Kurt Eichenwald

  “How,” Pitt complained, “could someone write about what I said at the beginning of the speech without taking note of everything I said afterward!”

  Cutler listened, annoyed. The people in enforcement hadn’t known the speech was coming; if they had, they could have warned Pitt that he was about to leap into political hot water.

  “Harvey, even if you believe what you said, you can’t say it,” Cutler replied.

  “But it was taken out of context!” Pitt complained. “The rest of the speech explained what I meant.”

  Cutler looked at him patiently. “Harvey, in Washington you don’t get to utter the second sentence,” he said. “So you can’t say the first when you’re chairman of the SEC.”

  Once Duncan’s instructions had gone out to the full team, the slow trickle of document destruction that had begun a week before suddenly became a flood.

  And Duncan didn’t limit his orders to Houston. That day he called Andersen accountants in London and Portland who worked on Enron matters, letting them know to start complying with the firm’s document policy.

  In London, partners shredded volumes of documents related to Enron. But not in Portland. Given all the turmoil at Enron, the accountants there thought the idea of shredding records was crazy. They held on to everything.

  The fax from Bank of America arrived that same day. Lay’s decision in September to use his ten-million-dollar bonus to pay down debt had held off margin calls for a while. Now, with Enron’s share price collapsing, the banks were nipping at his heels again, demanding cash.

  In the fax, the bank said he had two days to meet the demands or it would take action. Lay and his advisers decided to pay back the Enron loan he had been carrying with company stock, then borrow from the line again, and use the cash to meet the margin call.

  Ray Bowen headed up to Whalley’s office to discuss the warning about Fastow he had given his boss in a voice mail the previous week. Whalley got right to the point.

  “Do you have specific facts that Andy did something wrong?” he asked.

  No, Bowen said. “I just know he’s a bad guy.”

  Whalley pressed in. He wanted Bowen to think. There must be something Bowen knew that he could use.

  “I just think he’s gaming the system,” Bowen replied.

  Whalley tossed up his hands. “Let me tell you, Ray, I’ve been speaking with the board, and they’re not going to do anything about Andy unless we’ve got specific facts.”

  He brought a hand up to his head. “They love him,” Whalley said. “They just absolutely love him.”

  The two sat in silence for a moment. Whalley stood.

  “Okay, get out,” he said.

  ———

  At a management committee meeting that afternoon, Lay brought up the proposal for Skilling’s return. To his amazement, Skilling’s acolytes, the people whose businesses he nourished, vehemently opposed the idea.

  It was Skilling’s idea to leave, they argued. And why? Because he was tired? Too damn bad.

  “He made his decision and caused us a lot of heartache and pain,” Dave Delainey said. “It’s just a bad idea. We’ve got a team. We’ll work through this.”

  Whalley agreed. “I think it’s going to confuse the market about who’s really running the company,” he said.

  Lay just didn’t understand it. How could these people be so disloyal to the man who made their careers?

  The conference call late that afternoon with Fastow was meticulously planned. Two directors, John Duncan and Mickey LeMaistre, had been selected to represent the board. Jim Derrick, the general counsel, had composed a script to make sure they asked the right questions. That way, the directors could finally learn how much money they had awarded Fastow by allowing him to form the LJM funds.

  LeMaistre was in Colorado, Duncan in Houston; Derrick ran the call, connecting them to Fastow. LeMaistre glanced down at a copy of Derrick’s script and began to read.

  “Andy,” he recited, “because of the current controversy surrounding LJM1 and LJM2, we believe it would be helpful for the board to have a general understanding of the amount of your investment and your return on investment in the LJM entities.”

  He posed the question: how much had Fastow made on each fund, including everything—salary, fees, profits from the investment? There was no wiggle room.

  Fastow’s tone was matter-of-fact. He’d made twenty-three million dollars on LJM1, he said. And another twenty-two million on LJM2. All told, forty-five million. LeMaistre felt his heart drop.

  “Incredible,” he scribbled on his script.

  And untrue. Fastow’s real take would later be found to be at least fifteen million dollars higher, making the total in excess of sixty million. All for two years of work on a job he had promised would take no more than three hours a week.

  It couldn’t be seen. It couldn’t be heard. But on that day, October 23, the financial underpinnings of Enron were snapping apart. The first person to catch wind of the problem was an executive named Tim Despain. Enron’s short-term loans in the commercial-paper market weren’t rolling over. Institutions were taking the cash from maturing loans and not buying new paper. This was what had happened weeks before, after September 11. But that had been a market problem. This was more serious; it was an Enron problem.

  Later, more bad news. Glisan had been working with some of Enron’s bankers, trying to secure a loan. There were no takers. So long as Fastow was CFO, they told him, the banks would have no faith that Enron was a worthy credit risk. The news devastated Glisan. He hurried to tell Fastow.

  Pug Winokur, head of the finance committee, was screaming at Greg Whalley. They had been speaking about the crisis at the company, and Whalley had suggested that perhaps it was time for Fastow to go.

  “Andy Fastow is going to continue as CFO of Enron until the board says otherwise!” Winokur yelled.

  Whalley’s response was calm. “Don’t misunderstand this, Pug,” he said. “This isn’t about me. Sure, get the board in to talk about this.”

  But there wasn’t much of a choice. “The banks,” Whalley said, “are already screaming ‘Anybody but Andy.’ ”

  For hours, Fastow and Glisan worked with the finance team, struggling to find a way out of the latest problem. But the markets, the bankers, everyone was steadfast. No one trusted Enron—or Fastow—with the money anymore.

  They spoke to Whalley, and he suggested someone who might be able to help. Fastow, accompanied by Glisan and Causey, stood beside his desk. Then he turned on the speakerphone and started dialing.

  That evening, Jeff McMahon was wandering through his kitchen, exhausted. He had just gotten back from a business trip and was looking forward to hitting the sack.

  The telephone rang. McMahon glanced at the caller ID. Enron Corp. He picked up the receiver and said hello.

  “Jeff,” a detached voice said, “it’s Andy, with Rick Causey and Ben Glisan. Have you got a minute?”

  McMahon was momentarily taken aback. This was an odd group of people to be calling him—and at home? Something bad was up. This wasn’t a conversation for the kitchen.

  “Hold on,” McMahon said. “Let me pick you up on a different phone.” He pushed the hold button, then walked to his home study. He sat on a couch and reached for the line.

  Fastow spoke. “Look, we’ve got an issue here, and we’re trying to get all the smart financial minds in the company to address it, to see if we can get any ideas.”

  Okay, something is really wrong, McMahon thought. Fastow giving him a compliment? Calling him a smart financial mind? No way. McMahon chuckled. “Well, you guys must be really desperate if you’re calling me that.”

  No one laughed on the other side.

  “Okay,” McMahon said. “What’s up?”

  Glisan leaned in to the speakerphone. “We were unable to roll the commercial paper today,” he said.

  McMahon snorted derisively. Glisan, Mr. Wonderboy, the company treasurer, didn’t even understand the
words he was using. Unable to roll the commercial paper? Couldn’t happen.

  “Ben, obviously you didn’t mean you couldn’t roll it,” McMahon said. “You mean you weren’t able to issue as much as you wanted. That’s not a surprise in this market.”

  McMahon’s statement was greeted with silence.

  In Fastow’s office, no one knew quite what to say. Finally, Fastow spoke into the speakerphone.

  “No, Jeff,” he said. “Ben’s right. We were unable to find any buyers for our paper.”

  McMahon couldn’t speak. He couldn’t breathe. No buyers? How could that be? What the hell happened?

  No one said a word for several seconds. McMahon rubbed his eyes. “Well, that is a major problem, isn’t it?” he said matter-of-factly.

  “Yeah,” Fastow replied. “That’s why we’re calling to see if you have any ideas about this thing.”

  This was stupid. If the commercial paper didn’t roll, there was only one option, McMahon thought. They needed to draw down the bank lines that backed the commercial paper. That was what they were there for. He told Fastow.

  “I don’t like that,” Fastow replied. “I think that would show the market that we’re desperate.”

  McMahon laughed. “Andy? Hello? We are desperate!”

  ———

  After getting off the phone, McMahon ran the situation through his head. Fastow had asked him to come to a meeting the next morning. But he had to face the facts here. They weren’t going to meet their way out of this problem. They had to pull the bank lines.

  Enron was on the precipice; it could go under. Fastow didn’t seem to understand the gravity of what was happening.

  Greg Whalley. Had Fastow told him what was happening? Or was he keeping it quiet in hopes he could weasel his way out of it? McMahon knew Whalley well, considered him a friend. He decided to call him at home, just in case.

  “Listen, Greg,” McMahon said, “I just hung up the phone from Andy, Ben, and Rick—”

  “Oh, they called you?” Whalley interrupted. “Good. I suggested they do that.”

  Okay. That explains it. “Are they right? We couldn’t roll the commercial paper?”

  Yeah, Whalley replied. That’s what they had told him. “Well, you understand, Greg,” McMahon said, “this is a major liquidity crisis.”

  Whalley sighed. “Yeah, I get that, Jeff. I get that.”

  There weren’t a lot of choices, McMahon said, but they needed some brainpower behind this. He told Whalley that he was going to call Ray Bowen and bring him along in the morning. Bowen was a former banker and would be invaluable.

  Fine, Whalley said. Bring Bowen.

  The next morning, October 24, Whalley was in his office early when Fastow dropped by. Fastow had already let Lay know about the problems with the banks. Now he and Whalley needed to talk things through.

  Whalley closed the door, and Fastow took a seat. Enron’s CFO looked dejected, almost at a loss for words. Everything had moved too fast for him. Fastow spoke first.

  “I’m not sure I’m valuable to you as CFO anymore,” he volunteered. “The banks are very uncomfortable with me.”

  Whalley’s face showed no reaction. “I agree,” he said. “I don’t think this is going to work.”

  They were going to have to change things, Whalley said. Fastow said he could talk to members of his team, discuss it with McMahon, and they could figure out their next step.

  Whalley nodded. He already knew what he was doing. He didn’t need Fastow’s input. The two stood, and Fastow headed to the door, with Whalley following. Fastow stepped out and saw McMahon, Bowen, and a few others waiting. He flashed a nervous smile. Whalley pushed past him.

  “Okay, everybody,” he said. “We’re meeting upstairs. Go on up, and I’ll be there in a few minutes.”

  Everyone headed to the elevator. Whalley walked briskly toward Ken Lay’s office. They needed to talk.

  Whalley found Lay at his desk, showing no obvious signs of distress. Whalley offered no pleasantries.

  “We’re getting rid of Fastow and replacing him with McMahon,” Whalley said simply.

  “Wait a minute, Greg,” he said. “If you’re serious, we need to take it up with the board.”

  Whalley had no patience for these formalities. The house was on fire, and Lay wanted to make sure everyone put on a topcoat and hat before running out into the street.

  “We need to go to the board,” Lay repeated.

  “You need to go to the board,” Whalley snapped.

  Lay was beginning to regret ever having chosen Whalley as president and chief operating officer. “And what,” he said sharply, “am I supposed to tell them?”

  Whalley gave Lay a grin. “Tell them they’re getting something new today. Either a new CFO or a new COO.”

  Whalley arrived on the mezzanine, and events moved quickly. Without waiting for board approval, he tossed Fastow out as CFO and appointed McMahon, stunning both of them. From there, the conversation turned to drawing down Enron’s revolvers. Fastow objected, but no one listened.

  In his first move as CFO, McMahon drafted Bowen as a deputy. Then the two executives assembled a financial SWAT team to sort out the company’s books. McMahon announced that he wanted the team over in the new building, on the fourth floor, in thirty minutes. That would soon be the site of the financial war room, where the new group would struggle to save Enron from collapse.

  Bridget Maronge, Andy Fastow’s secretary, reached for the ringing phone.

  “Bridget, it’s Jeff Skilling. Is Andy there?”

  Skilling knew nothing about Fastow’s termination. He just thought the guy was getting a raw deal with all the publicity and wanted to buck him up. Maronge put Skilling on hold and called for Fastow. He snapped up the telephone.

  “Hello?”

  “Andy, I’m so sorry.”

  “Fuck, you’re sorry!” Fastow snapped back, his tone shocked. “This is just unbelievable!”

  “What the hell happened?”

  “I don’t have a fucking clue,” Fastow responded.

  Well, Skilling asked, what was going on at the company? How were they trying to get on top of things?

  “They don’t tell me what’s going on,” Fastow said. “Lawyers are running around all over the place. I’m just sitting here in the dark about everything”

  There was a pause. Skilling was shocked by Fastow’s desolate state. “Andy, is there a problem?” he asked.

  “There shouldn’t be a problem,” Fastow replied. “I just don’t get it. I don’t understand.”

  Skilling could offer no advice. “Andy,” he said softly, “I just wanted to give you a call.”

  In the war room, the dirty secrets of the finance group’s years of incompetence and mismanagement were just starting to spill out.

  First, McMahon asked for a briefing on the commercial-paper market. How was Enron shut out so quickly? Tim Despain, an executive in finance, took charge of answering.

  “We’ve been seeing the changes over the past number of days,” he said. “Last week we couldn’t issue thirty-day paper. We could only find buyers for two-week paper.”

  It just kept falling from there, Despain said. By early in the week, the market was shunning everything but Enron’s overnight paper, meaning that investors only had faith that the company could repay its loans over twenty-four hours.

  “Then,” Despain said, “last night, we couldn’t sell the overnight paper.”

  McMahon gaped at the people in the room. “So you mean to say that over the past week, we’ve been seeing this train wreck coming, and nobody did anything about it?”

  Ten minutes later came another slap in the face.

  “We don’t have any method for tracking our cash?” McMahon sputtered.

  “That’s impossible! We’re a Fortune 50 company! We have to be tracking our cash!”

  Bowen looked shaken. “Come on, guys. I mean, how can we manage our finances if we don’t track our cash?”

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p; Despain looked at his new bosses with a stricken expression. “Ray, I’ve never … nobody’s ever asked us before to focus on it,” he stuttered. “Nobody ever said this was something they wanted us to do.”

  McMahon sat back in his seat, lifting his eyes to the ceiling. Oh. My. God. This was Finance 101. Companies needed to track their cash to know when they were experiencing shortfalls, to know when they could pay their bills. It was the same reason that people balanced their checkbooks! If Enron didn’t know how much cash it had, it couldn’t know how much to draw down on the revolvers!

  Apparently Fastow had always thought that Enron would have more than enough cash to spare. Nobody had any idea how much daily cash was collateral posted by trading partners and how much was being generated from business. Sure, the historical numbers could be pulled together over a few days. But Enron didn’t have that kind of time.

  Okay, if Enron didn’t have a handle on its cash, then this SWAT team needed to look at when the bills were coming due. There was a lot of outstanding debt. All of it was going to mature at some point, and Enron would have to repay it. Right now, the company didn’t have a lot of sources of new cash to grab to meet any of its obligations.

  Bowen pointed at Glisan. “Ben,” he said, “go get me the current maturities schedule.” That would let him know, day by day, when Enron was expected to repay debt.

  Glisan leaned back in his chair and grabbed his chin. “I think I can get somebody to pull that together.”

  The room went silent. Bowen’s mouth dropped. This topped everything he had heard so far. Glisan thinks he can get one? He doesn’t have one? They’re not tracking their cash, and they’re not tracking their debt maturities?

  “Excuse me, Ben,” Bowen said. “Am I wrong, or aren’t you the corporate treasurer?”

  Glisan bristled. “Yes.”

  “What do you mean, you think you can get one?” Bowen shot back. “This is the current maturities schedule of the company! The current fucking maturities schedule! Go get it! You have to have a maturities schedule!”