One thing developing nations needed was energy—cheap, plentiful, reliable energy. If they hoped to lure other forms of development, if they just hoped to provide for their growing populations, they needed energy before just about anything else, which meant more pipelines, more power plants, more everything. In the early 1990s, Enron predicted that worldwide power plant requirements would grow by a staggering 560,000 megawatts over the next decade. Government development agencies such as the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank were willing to loan money to fund big energy projects, as were the big banks, which meant that companies like Enron had to invest only a tiny sliver of their own capital to get a project off the ground. Wall Street analysts talked about the potential for 30 percent returns on equity, about triple what U.S. pipelines were earning.
In the gold rush that followed, all kinds of companies raced in to stake their claims. And the projects were massive. In 1994, for instance, General Electric announced that it had teamed with financier George Soros to invest $450 million in power projects abroad; GE said the figure could eventually exceed $2.5 billion. In 1996, when Bolivia auctioned its state oil and gas company, some two dozen foreign companies bid. More often than not, the winning company took the initial up-front risk, with plans to extract some quick profits by selling off pieces to other buyers once the project was under way. In some ways, that was prudent business: it was a way to diminish the risk. Yet that kind of business plan was predicated on the belief that someone else would always be willing to pay a higher price. On Wall Street, this is known as the greater fool theory.
So while Mark may have been handed a division without any assets, she did have the wind at her back. And there was no doubt what she was expected to do:
plant the flag for Enron in as many developing nations as she could. Mark’s team quickly put together a string of flashy, first-of-their-kind deals. One of the earliest took place in late 1992, when Enron bought a 17.5 percent stake in Transportadora del Sur, a pipeline in southern Argentina that the government was privatizing. By early 1994, Mark also had power plants in the Philippines, Guatemala, and Guam and had struck deals to build plants in India and the Dominican Republic. Within the next few years, her team was busy laying a pipeline in Colombia (where Enron had to hire hundreds of soldiers to guard workers against guerrilla attacks), constructing a plant in China, and evaluating opportunities from Indonesia to Yemen. Enron also announced grand plans to develop enormous gas fields in Mozambique, lay a pipeline to South Africa that would feed a multibillion-dollar steel plant there, and construct a power plant in Vietnam.
Mark was particularly excited about South America, which she (along with everyone else) thought was bursting with opportunities. “I want to conquer Brazil,” she told a Brazilian energy consultant in 1993. Pumping abundant Bolivian gas into perennially power-starved Brazil, where it could fuel new electric plants, was always thought to be impossible. By the mid-1990s, Enron had orchestrated the start of construction on a $2 billion pipeline that stretched 1,875 miles, from Santa Cruz, Bolivia, across swampy bayous and craggy mountains to Porto Alegre, Brazil. Just as Wing had done at Teesside, Mark positioned Enron not as the low-cost option but as the solver of the unsolvable problem.
Indeed, for years the specter of John Wing hovered over Mark’s operation. He had given Enron its great Teesside triumph; now she was determined to come up with projects that were even bigger and better than his. Wing had established extraordinary autonomy. So did she, not showing up for staff meetings run by her nominal superiors, Kelly and White, and taking her business issues directly to Ken Lay, who was board chairman of Enron Development. Wing liked to hire can-do ex-military types. So did she. Oh, and one other thing: for the first few years Rebecca Mark raced around the globe looking for projects to build on behalf of Enron, John Wing did the same thing with his new Enron-backed business. Mark’s former lover was now her competition.
It was almost comical the way the two of them spent the next several years bumping into each other all over the globe, as they tried to lay claim to this country or that on behalf of Enron. Government officials would meet with one, then the other, and have no idea who was actually supposed to be representing Enron. The result was chaos. “It was a free-for-all,” recalls one former executive. In 1992, when the Wing Group announced that it was jointly developing Turkey’s first private power plant with Enron Europe—run by Wing’s former deputy Bob Kelly—Mark was irate. “The world isn’t that big,” she complained to Lay, telling him that he needed to make decisions on territory. Lay’s response was classic Lay: everyone should just get along.
The conflict came to a head around 1994 in Shanghai. The Wing Group had just won a letter of intent from a nearby provincial government for a major power project. Wing’s staff had heard rumblings that Mark’s group was also sniffing around. Mark, who was in the city to give a speech, had no idea that Wing had just laid claim to China. Just before lunchtime, she appeared in the lobby of the Portman Shangri-La Hotel, where she and her team spotted some members of the Wing Group, who were staying there.
The encounter quickly escalated. “Ken told us we’ve got China!” “No,” replied Mark, “He told me I have China!” “Nobody hit anybody,” remembers one combatant, “but it was ugly.” Wing’s group and Mark’s team continued to battle in the coffee shop, racing back and forth to the lobby pay phones to call Houston. By the end of the day, Mark and Wing had both reached Lay. His decision? They could both proceed. But from that point on, Rich Kinder was assigned to help divvy up the world on a monthly basis. A year or so later, Wing decided that the emerging markets had become so overheated that building projects there no longer made economic sense, and he exited the business.
By the mid-1990s, Enron Development was viewed internally as an enormous success, and Rebecca Mark was widely acknowledged as the woman who had made it all happen. Her charm, her drive, her knowledge, and, above all, her optimism made her a fabulous marketer, far better than Wing. “She was able to convince people of things that no one else could, because she believed them,” says a former executive. Many of her employees worshiped her, in no small part because no matter how hard they worked, they knew she was working harder. At one point, she was traveling 300 days a year while still trying to be a mom, racing from the Far East to Houston to attend her children’s school plays. Glowing profiles—a woman doing this?—ran constantly. The head count at Enron Development, which had about 25 people when Mark began, grew to 10,000.
And in 1996, Rebecca Mark got her reward: she became the new CEO of Enron International, leapfrogging both Kelly and White. EI, as it was called within Enron, encompassed all of the developing world as well as Kelly’s former territory in Europe. Mark now ran more than a dozen pipeline and power-plant projects costing billions of dollars, with even more in the works. She was indeed controlling her own destiny.
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Yet under the gleaming surface, there were problems at EI, problems that got only worse over time. Mark, who at first ran and reran numbers to make sure her deals made economic sense, became sloppy, says one person who worked with her closely. Because she was tearing all over the world trying to juggle a million balls, important details fell through the cracks. And while Enron International executives loved putting deals together, the business had a flaw that was endemic to Enron: no one felt responsible for managing the projects once they were up and running. Mark’s developers saw their role as getting the deal done: “We are in the business of doing deals . . . this deal mentality is central to what we do,” Mark told an interviewer for a Harvard Business School case study. Indeed, Enron treated Mark’s division almost as if it were an outside development team whose job was simply to find deals. Mark and her deputies couldn’t commit Enron’s money without approval. But Enron itself had no great interest in managing projects because its emphasis was also on deal making. And because the developers were trying to do so many deals, in some quarters Enron got a r
eputation for dropping the ball. “Enron could talk a good game, but they didn’t deliver,” says a former Big Oil CEO. “Big Oil, we don’t operate that way. If you say you’re going to do something, you do it.”
To make matters worse, Enron International was an incredibly expensive business to run. It often took years to land a project, years during which teams of developers had to fly back and forth across the globe and live abroad for weeks at a time. Among the developers, a belief took hold that the time it took to manage expenses just wasn’t worth it. No one ever thought about where the cash would come from to pay for it all. “People treated Enron like a bottomless trough for a long time,” says a former EI executive. Mark, for her part, would insist that she cared about keeping costs under control, yet she herself got a reputation for spending a fortune when she traveled. Local teams would shudder when her jet touched down, dreading the huge amounts their project would be charged for a short meeting.
One of the core ideas behind Mark’s business was that most of the money for the projects it put together would come from non-Enron sources, from bank loans to governments, say, or investments from companies hankering to get in on the emerging-markets gold rush. That would keep debt off Enron’s balance sheet and put a minimal amount of Enron’s own capital at risk. But in the rush to do deals, that wasn’t always the case, and Enron often ended up guaranteeing some or all of the debt, at least for a time. For the Subic Bay, Philippines, plant that Enron was developing, the company guaranteed all $105 million in debt; on a second Philippines plant, in Batangas, Enron guaranteed 25 percent of the principal and interest on a $50 million loan. In addition, Enron provided tens of millions of dollars in letters of credit to support cost overruns. One executive remembers that on one project, the banks had a list of conditions that, once they were met, would eliminate the need for an Enron guarantee. But no one at Enron bothered to meet the conditions and thereby get rid of the guarantee.
Then there was the question of what happened to the large sums spent on proj-
ects that didn’t go forward. Here was an early example of Enron’s willingness to stretch accounting rules. The money Enron poured into projects that never were built—and such a failed deal could soak up tens of millions—was supposed to be written off. In Vietnam, for instance, one accountant says that Enron spent some $18 million trying to build a power plant, only to see the project canceled. Yet Enron International often booked such costs as an asset on the balance sheet, in what came to be known around the company as “the snowball.” Usually the rationale was that there was no official letter saying the project was dead, so therefore, officially, it wasn’t. Rich Kinder had a rule: the snowball had to stay under $90 million. But it eventually ballooned to over $200 million.
A second problem: the assumptions Enron made to justify its deals assumed that nothing would ever go wrong. Of course, the banks financing the deals were making the same assumption; this was a mania, after all. But building energy projects in poor countries—often run by dictators and where capitalism was still a new concept—was absolutely fraught with peril, and it was absurd to believe that everything would play out according to plan. Things went wrong all the time. Who could say for sure that a plant in the wilds of Brazil that wasn’t even supposed to be operational for years would ever generate the monster profits Enron was anticipating? What if there were cost overruns? What if Brazilians couldn’t afford the cost of the new energy? What if the government decided to nationalize the project? With every emerging-markets project, there were a million what-ifs.
Take the Dominican Republic, where Enron had invested $95 million to own 50 percent of a barge-mounted plant off Puerto Plata on the northern coast. It turned out that the Dominican Republic wouldn’t pay for the power. The plant was next to a hotel called the Hotelero del Atlántico; the prevailing winds blew soot from the plant onto the guests’ meals, blackening their food—and not in a stylish way. The winds also blew garbage from nearby slums into the plant’s water-intake system. For some time, the only solution was to hire men who paddled out to the intake valve in boats, where they would push the garbage away with their paddles. In 1995, the hotel sued, alleging damages and loss of customers. For Enron, the deal was a complete bust; through mid-2000, the company had collected a pathetic $3.5 million from its $95 million investment.
In part, the rush to do deals was a natural outgrowth of Mark’s personality. Her inherent optimism led her to push forward where others might have at least hesitated. Over time, naysayers in her operation were relegated to lesser roles. People who worked for her say she trusted her gut far more than any spreadsheet, as she would tell anyone who tried to say no to her by citing a project’s questionable numbers. As Mark saw it, she might make mistakes from time to time, but that wasn’t necessarily a bad thing because all the motion and activity would lead to something better. One former Enron International executive calls some of EI’s exploits “a triumph of chutzpah over common sense.”
But the most poisonous explanation for the mad rush to do deals was money, not the money Enron would make but the money the developers would make. What one former international executive calls the “fatal flaw” in the business was the compensation structure. Developers got bonuses on a project-by-project basis. The developers would calculate the present value of all the expected future cash flow from a project. This was also the model the banks used to lend money. When the project reached financial close—that is, when the banks lent money but before a single pipe was laid or foundation was poured—they were paid.
No wonder the developers were so eager to move on to the next deal; they had no financial incentive to follow through on the one they’d just completed. And the money they stood to make was stunning, amounting to some 9 percent of the project’s total value. In other words, if the developers estimated that the project would ultimately bring Enron $100 million, the developers took home $9 million. In a sense, they were paid on the basis of mark-to-market accounting—just like the traders in Skilling’s group.
It was crazy. Kinder had come up with this scheme in an effort to avoid giving direct equity in projects to the developers, as John Wing had had with Teesside. Wing’s deals usually required that his projects return a certain percentage, and his payouts took place over years. Thus Wing and his team wouldn’t get their full payout unless the project actually worked.
But under this new pay arrangement, the only thing that mattered was making the deal happen. The more deals Enron International did, and the bigger they were, the richer the developers got. The system encouraged international executives to gamble without risk. The deeper problem, one that emerged in later years, was that no one was held responsible for the operation of a project, yet it was the operation that produced the real money. (Around 1994, Kinder changed the compensation structure; the developers were paid 50 percent at the financial close, the rest once the project was operational.)
Why were Lay and the board so eager to spend shareholders’ money on risky projects around the globe? In part, it was because the international business played to their own desires. The board loved the idea that Enron was providing power to people who desperately needed it. So did Lay, who was always looking for ways to increase the use of natural gas. It also gave him the perfect opportunity to employ such luminaries as Henry Kissinger and James Baker as consultants, sending them to such far-flung locales as Kuwait and China to open doors for Enron. And Lay loved meeting heads of state. “Ken had no international stage to play on until we created one for him,” says one former executive.
There was another reason for Lay’s unwillingness to apply the brakes. Although Mark has always disputed this, Lay had a blind spot about Enron’s glamour girl. Lay, who sometimes accompanied Mark on her global jaunts, saw her at her best: marketing. He took great pleasure in the glowing press clips she generated. Acutely conscious of appearances, he loved having a female star in a male business. Lay always wanted to cheer on his favorite employees, not say no to their proj
ects. “Ken had pets,” says one former Enron board member. “And Rebecca was one of them.”
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For all its problems, the international business would be remembered differently today if just one deal had turned out differently. Indeed, all of Mark’s other failures and successes are dwarfed by a single project, a project that was supposed to be her Teesside but instead made Enron controversial years before its bankruptcy.
In Dabhol, India, about a hundred miles south of Bombay on a remote volcanic bluff overlooking the Arabian Sea, sits an enormous modern power plant. On one side of a fence is a decrepit third world village, awash in grime and poverty. On the other is this thing, this gleaming monstrosity that dwarfs everything around it. The plant was the largest-ever foreign investment in India and it was supposed to be Enron’s first step in a grand, $20 billion scheme to reshape India’s energy sector. Instead, it is a white elephant. And critics such as the novelist Arundhati Roy, who called the Dabhol project “the biggest fraud in India’s history,” have seized upon it as the ultimate symbol of the failure of globalization. An Indian Wall Streeter says, “I’ve never been to another country where every single person hates one company.”
Investing in India was Enron at its most contrarian. India’s energy sector has always been run by the government and is a bureacratic quagmire. All power is sold through state electricity boards, most of which totter on the edge of bankruptcy because so much power is either stolen or given away to farmers. The boards can’t raise rates because India’s politicians don’t want to ask its citizens to pay more for power. When Enron first thought about building a plant in India, the country’s foreign reserves were dwindling and Moody’s, the credit-rating agency, had just downgraded India’s debt. Enron’s own strategic planners had put India on the top of a list it compiled of countries the company should avoid. But Ken Lay liked to say that the company made its money by going where the strategic planners said not to go. So, naturally, Enron went to India.
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron Page 15
