It was also true that the ethos of many investment banks was not all that different from the essential Enron mind-set. The ethics of their deals with Enron were never much of a concern among the bankers. “In investment banking, the ethic is, ‘Can this deal get done?’ ” says a banker. “If it can and you’re not likely to get sued, then it’s a good deal.” In their internal correspondence, it’s almost impossible to find an instance of investment bankers’ worrying about the propriety of what they were doing. When they worried at all, they were concerned about the perception. An e-mail from the head of risk management for Citigroup’s investment banking division warned about one deal: “The GAAP accounting is aggressive and a franchise risk to us if there is publicity.” The deal was done anyway.
Fastow worked exhaustively to squeeze everything possible from Enron’s—and his own—relationship with the banks. This prerogative he guarded jealously, screaming at any Enron executive outside his fiefdom who dared to initiate contact with a bank without his permission. Baxter, in particular, chafed at this restriction; it was one of the key reasons for his animosity toward Fastow. Eventually both he and Dave Maxey, the hunter of lucrative tax deals, were allowed to call bankers without clearing it with Fastow.
In managing the banks, Fastow never missed an angle. He and his group knew how to hint that another had already agreed to do a deal, which of course made the bankers even more eager to land the business. He sometimes cast deal proposals as a “favor” that would be rewarded with more lucrative business later. He did not take no graciously. As CSFB banker Osmar Abib wrote after turning down an Enron deal: “I am about to . . . get my head taken off by Michael Kopper and Kathy Lynn at the charitable dinner tonight sponsored by Enron . . . we should all expect a blistering call from Fastow once he gets the feedback. . . .” And there was no mistaking that Fastow was the man they had to please. Skilling would sometimes drop in on meetings Fastow was holding with bankers, but he was mostly window dressing. His appearances, says one banker, were mainly meant to convey “I know the answer, and I’m right. I’m Jeff Skilling. And I’m Enron—are we all clear here?” (Skilling later told people, “I’m not particularly interested in the balance sheet. It seemed to be doing well. We always had money.”)
Fastow’s most aggressive tactic was his internal ranking of the 70 or so banks that did business with Enron. Fastow had his minions keep meticulous track of the number of deals each had done with Enron and how much they’d received in fees. The Global Finance team would look at the capital the banks had extended versus the investment-banking fees that they had earned. Enron saw the investment-banking fees not as the price for advice—Enron, after all, didn’t need advice—but as a return on the capital. Then he divided all the banks into three categories—Tier 1, Tier 2, and Tier 3—based on their willingness to do his bidding.
As a 58-page document prepared for a January 2000 internal “relationship review” meeting of Enron’s top finance executives describes it, the Tier 1 banks had to be willing to lend large sums to Enron “when needed,” be willing to “underwrite $1 billion in short period of time,” give Fastow ready access to their top executives, and have a relationship officer “capable of delivering institution”—in other words, someone who could make sure the bank didn’t say no to an Enron request. In return, says the document, “Enron will manage to a minimum 20% ROE.” Though Enron did not hold many people accountable internally, Fastow was like Rich Kinder when it came to the banks. At that same relationship review—which was an annual event—members of the Global Finance team discussed each bank’s performance, and whether the bankers had gotten the “previous message” about what they needed to do to enhance their relationship with the company. The session ended with cocktails.
Tier 1 status didn’t necessarily go to the biggest or most prestigious banks. The issue was explicitly how much you did for Enron—and how often you came through in the clutch. One banker recalls Fastow’s explaining just what it meant to come through for him: “Giving us credit when we need it, typically at quarter-end or year-end, when we need to sell assets. We’ll buy them back and give you a return on your capital.” So Morgan Stanley and Goldman Sachs—two of the most prestigious names on Wall Street, investment banks with conservative lending rules—sometimes found themselves consigned to Tier 3, with the likes of the State Bank of India. Meanwhile, little-known firms like West LB and ABN Amro were among the nine firms in Tier 1, right up there with Credit Suisse First Boston, Citigroup, and Chase Manhattan. Fastow conferred Tier 1 status as though it were something to be coveted, and he wasn’t shy about telling banks that weren’t in the top bracket what they needed to do to get there. “You guys have got to put up a little more capital if you want to make it to the big leagues,” a Tier 2 banker recalls Fastow telling him.
Every year, Tier 1 bankers (no spouses, thank you) got invited to join Fastow and his top lieutenants on an expensive jaunt to some fancy locale. This was their reward. On one outing to Miami Beach, a Brazilian-themed dinner for 60 featured performances by a quartet of Capoeira acrobats, a pair of carnival dancers, and hand-rolled cigars. The entertainment alone cost $13,000. At another Tier 1 outing, this one to Las Vegas, Enron rented a fleet of 15 helicopters to fly the bankers over a mountain for dinner at a Nevada vineyard, to see the casino strip lit up at night, and to the Grand Canyon for a picnic. The total tab for one of these annual outings ran as high as $130,000.
Fastow even expected the banks that got Enron’s business to contribute to his pet charities. A February 1998 Chase memo from Rick Walker, who was the relationship manager for Enron, reads: “In addition to our business relationships, Chase has endeavored to be supportive of the charitable causes sponsored by Enron and its executives. . . .”
Some bankers resented Fastow’s manipulations—and his constant browbeating—even as they scrapped for the company’s business. “Every once in a while, we had to step back and count to ten and say the client is the client, but . . .”
remembers one banker. “They’d beat the crap out of the lawyers, they’d beat the crap out of the investment bankers, they’d beat the shit out of the accountants. There’s zero loyalty to anything but that trade. It was hell doing business with them, but you had to because they were so big.”
There were also lots of whispers in the banking world that Enron consumed incredible amounts of capital, that the company was way overleveraged, that, as one internal Citigroup e-mail explicitly put it, “Enron significantly dresses up its balance sheet for year-end.” But despite the whispers—indeed, despite knowing far more than most people about what was really going on inside Enron—few bankers were willing to stop doing business with the company. They were hooked, too.
• • •
One of the things investment bankers get to do is invest their own money in deals they’re working on; it’s one of the sweeter perks of the job. That’s one reason the investment bankers from Donaldson, Lufkin & Jenrette were able to put up some of the equity when Enron was putting together the Osprey deal. And it’s why, over the years, investment bankers from Merrill Lynch and other Wall Street firms sometimes invested in Enron’s deals. Since Andy Fastow saw himself as running his investment bank within Enron, he wanted to be able to invest in Enron’s deals, too. Even though he was making, by the late 1990s, upward of $1 million in salary and bonus annually and had millions more in stock options, he wanted more. More than that, he felt that he deserved more.
This was not some belated itch Fastow suddenly needed to scratch. As early as 1995 he had approached investment bankers about setting up a partnership, with himself as its head, to buy Enron assets. The idea went nowhere. A few years later, Enron’s law firm of Vinson & Elkins called a meeting to discuss the possibility of allowing Enron employees to make investments in company deals after Fastow brought it up again. A lawyer named Ron Astin said that he didn’t think it was a good idea at all: such a partnership could appear to be a vehicle for favored employees and was likely to exac
erbate rivalries between business units.
Fastow pressed the issue. After all, he said, investment bankers did it. Astin countered that Enron wasn’t an investment bank; it was an energy company. He also told Fastow that if he insisted on pursuing the idea, he needed to get the explicit approval of both senior management and the board. Even so, he didn’t think such a partnership was appropriate given Fastow’s position as Enron’s top finance executive.
What Astin didn’t know—indeed, what almost no one outside a tiny circle of Global Finance executives knew—was that Fastow and several others were already investing in deals. One of the difficulties in setting up the off-balance-sheet vehicles Enron had come to rely on was finding that independent investor who would put up the 3 percent equity slice. And the more vehicles Enron set up, the harder it became. “Think about trying to raise equity and explain these deals on a true third-party basis,” says one former Global Finance executive. “There’s no way you could have done it.”
So starting in the early 1990s, the Global Finance team pulled together a small group of investors known internally as the Friends of Enron. When Enron needed to find that 3 percent equity investor, it turned to the friends. One friend was a real-estate broker named Kathy Wetmore, who had helped many Enron executives find their homes, including Fastow and Kopper. Another was a woman named Patty Melcher, who was a friend of Fastow’s wife, Lea. Fastow approached Melcher about investing in eight deals; she told the New York Times that she made investments ranging from $100,000 to $2 million in five deals. Of course, given the nature of their relationships with Enron executives, the “friends” were independent only in a technical sense. Though they made money on their investment, they hardly controlled the entities or the assets within them. Which, of course, was precisely the point.
In 1997, Fastow decided to take it one step further. That January, Enron bought a company called Zond, which owned some wind farms. Because wind farms provide alternative energy, they enjoy a legal status as qualifying facilities (QFs). QFs get certain government-mandated benefits, such as higher rates from electric utilities, which are required to buy power from them. However, those benefits disappear if the QF is more than 50 percent owned by a utility. In early 1997, Enron wasn’t a utility, but it was about to become one, because of its pending acquisition of Portland General.
From Enron’s point of view, the solution was simple: set up a special-purpose entity that would purchase Zond. That way, Enron would retain full control of the asset while the wind farms would be able to keep their government-granted benefits. (So much for the free market.) In May, Fastow and Kopper created two special-purpose entities known as the RADRs. The RADRs bought 50 percent of Enron’s wind farms for approximately $17 million, 97 percent of it a loan from Enron. This time, instead of turning to the friends, Fastow and his wife, Lea, supplied most of the required $510,000 in independent equity themselves—but they hid that fact. In May 1997, according to the government, Lea Fastow wired $419,000 to Kopper, who then funneled the money to two other investors, one of them also an Enron employee.
No one probed deeply enough to uncover this deception. In fact, no one probed at all. Fastow told Enron’s board that most of the money was a loan from Enron and that the transaction was “not a sale for book purposes”: Enron retained all the risks and rewards associated with the projects and retained an option to repurchase the shares. In other words, the board was informed that Enron was using the RADRs as a place to park the wind-farm assets in order to retain government benefits to which it wasn’t entitled. But according to the minutes of that meeting, not a single board member asked where the equity was coming from or challenged the transaction. The Federal Energy Regulatory Commission was given much of the same information but still approved the continuing QF status for Zond. (Later, Southern California Edison, which had to buy power from the Enron wind farms, complained that it was overcharged by as much as $176 million from July 1997 to April 2002.)
When investment bankers invest in a deal they’re working on, the cards may be stacked in their favor, but the deal isn’t rigged. The RADRs, though, were rigged; Fastow had seen to it that Enron guaranteed the RADRs a minimum return. In July 1997, the RADRs began to make distributions. According to the government, the investors of record paid Kopper, who in turn secretly paid Fastow, transferring, in late August, $481,850 from his Bank One account to a bank account in the name of Lea and Andrew Fastow. That represented an effective annual return on the Fastows’ investment of over 50 percent. To the government, these payments were kickbacks, pure and simple. But to Fastow, who operated within the warped world of Enron, they were just commissions. After all, he’d given others the opportunity to invest, so they owed him.
Over the next three years, according to the government, the RADRs generated about $4.5 million in proceeds, from which Kopper and his lover Dodson paid more than $100,000 back to Fastow and his family in increments that were always no more than $10,000 so that they could be classified as gifts. Fastow told Kopper that if anyone ever asked about the $10,000 transfers, he could explain them by saying they were close friends. The government also alleges that the Fastows did not report any of this money on their income tax returns.
That same year, Fastow and Kopper did a second, bigger deal that was remarkably similar in character. You’ll recall that years before, Enron had convinced CalPERS to invest in one of its first off-balance-sheet joint ventures, JEDI. By 1997, all the money in JEDI had been invested, and Enron urgently wanted CalPERS to set up a second fund. CalPERS was willing to do so only if Enron could find a buyer for its stake in JEDI. The two parties agreed that $383 million, which represented a 22 percent annual return for CalPERS, was a fair price. (This return later helped Enron convince others to invest in its deals.) But although Fastow and his team did look, Enron wasn’t able to find an outside buyer.
Once again, Fastow’s Global Finance came to the rescue by setting up a special-purpose entity to buy out CalPERS. It was called Chewco, named after the Star Wars character Chewbacca. Fastow first tried to persuade Jeff Skilling that Lea’s family should be allowed to put up the necessary 3 percent equity and that Fastow should be allowed to manage the partnership. But Skilling said it was “too messy.” So Fastow again turned to Kopper, whose involvement did not have to be disclosed publicly because of his lower rank, to manage the partnership and invest in it. The Enron accountant who worked on Project Chewco was Ben Glisan.
Skilling, who signed off on Kopper’s involvement, later said that he thought he had discussed it with the board. Although that’s not reflected in any board minutes, there is one sentence about Chewco in Enron’s 1999 annual report that implies that it wasn’t a secret: “In addition, an officer of Enron has invested in the limited partner of JEDI and from time to time acts as agent on behalf of the limited partner’s management.” Another Enron employee sent diagrams of the deal showing Kopper’s stake to Vinson & Elkins. And while there were no official announcements about Kopper’s involvement, there were plenty of whispers within the company about Fastow’s favoritism toward his top deputy.
The closing of the Chewco deal was sheer panic. CalPERS insisted that the deal close quickly, or it would demand more money. Kopper was scrambling to come up with the $125,000 he was supposed to invest—people later surmised that he was waiting for a distribution from the RADRs. Barclays, the large British bank that was supposed to provide the outside equity, was proving to be a difficult partner. Barclays didn’t want to put real equity into this deal. So Enron proposed what looked like a loan, although it wasn’t called a loan, but rather equity certificates. This alone probably should have disqualified Chewco for off-balance-sheet treatment. But then Barclays insisted that the loan be collateralized, meaning that nobody could claim that the equity certificates constituted money that was truly at risk, as accounting rules require. “It is implausible,” an investigator later concluded “that he [Glisan] (or any other knowledgeable accountant) would have concluded that Chewc
o met the 3 percent rule.” Yet Glisan signed off on the deal, as did Arthur Andersen.
What’s amazing, given the problems Chewco later caused, is what small sums of money were involved. Chewco’s final structure consisted of a $240 million loan from Barclays—a loan that was guaranteed by Enron—and a $132 million advance from JEDI. All that Fastow’s team needed to do was find $11.49 million in independent “equity” to meet the 3 percent threshold. Instead, of the required $11.49 million, most of the money came from Barclays, and it was backed up by Enron collateral worth $6.6 million. Kopper supplied the remaining $125,000, $100,100 of which represented reinvested proceeds from the RADRs, according to the government. On December 18, 1997, Kopper transferred part of his interest to Dodson, presumably in order to avoid the appearance that he controlled Chewco. They must have believed no one would ever look more deeply.
Even today, it’s murky who knew what when. Glisan later insisted that he did not know about the collateral or that Kopper was the only other outside investor. Others, however, say he was present in meetings in which it was discussed, and handwritten notes that investigators say were his cite Chewco’s “unique characteristics” as “extreme leverage . . . minimization of third party capital.” The form transferring the collateral into the reserve accounts was signed by an Enron executive named Jeremy Blachman, who had helped Glisan land his job at Enron. Blachman later said that he didn’t know the details. The Arthur Andersen partner who worked on Chewco, Tom Bauer, had been Glisan’s boss before Glisan moved to Enron. Bauer later said that he didn’t know about the collateral or about Kopper’s involvement, either. Although Ken Lay and several other board members later said they didn’t remember Chewco, the executive committee of the board approved it on November 5, 1997.
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron Page 29
