OCTOBER 24, 2001—HOUSTON, TEXAS
Ken Lay settled into his black Mercedes 600 SL, easing out of his reserved parking space at the Huntingdon condominiums. From the lot’s entrance, he turned right onto Kirby Drive, the tree-lined road that served as a main thoroughfare through River Oaks, Houston’s wealthiest and most prestigious neighborhood.
The eight-year-old convertible cruised past the mansions bordering the street, homes that testified to the financial success of the city’s oilmen and corporate barons. Many estates peeked out from behind manicured shrubs and wrought-iron gates, or were far from the road on a ridge sloping down to the Buffalo Bayou. But Lay made no effort to peer beyond those veils of privacy. As Houston’s most influential businessman, he had already been welcomed in most every River Oaks mansion that might interest him.
The neighborhood’s elegance melted into Allen Parkway, a winding stretch of road that offered the most direct route downtown. Ahead, the morning sun was a blazing orange ball, rising behind a glittering glass-and-aluminum tower that defined the architectural rhythm of Houston’s skyline. It was the headquarters of Enron—his Enron—the once-obscure pipeline company that in a matter of years had been transformed into a politically connected energy colossus. Enron was now at the epicenter of Houston’s life, a ubiquitous player in everything from the city’s politics to its sports teams. But for locals, the sprawling giant would probably just always be known as Ken Lay’s company.
Lay lowered his car visor and glanced at the dashboard clock. Shortly before seven, early for his commute. But already he knew this would not be a normal day. His company was under attack; Lay was sure of it. Stock traders who had bet that Enron’s share price would fall were whispering rumors— no, lies—about his company. The Wall Street Journal was publishing a drumbeat of articles suggesting Enron had played games with its finances. It infuriated him.
They just don’t understand.
By all rights, Lay shouldn’t even have been stuck with the mess. He had stepped down as chief executive the prior February, handing the reins to his handpicked successor, Jeffrey Skilling, the brains behind Enron’s spectacular growth. With market power came world influence, and—as Skilling’s profit machine rumbled along—Lay had emerged as a confidant of presidents, a media celebrity, and, at least in Houston, a household name. When Lay bowed out, he was celebrated as a man of vision who got things done. By year’s end, he was supposed to be ensconced in a new job at Kohlberg Kravis Roberts & Company, the buyout firm, basking in the glory of the empire he had left behind.
Then, with almost no warning, Skilling had up and resigned. Just like that, only months after winning the job. Lay had suspected for weeks that something was wrong with his successor; he had even quietly told a few Enron directors that Skilling seemed emotionally overwhelmed by his new responsibilities. Still, he had never imagined the man would just leave. The bombshell had left Lay with little choice. He contacted KKR’s principals, passing up their offer, and headed back to his old post.
But nothing was the same. Inside Enron, Skilling’s departure unleashed a torrent of anger and demands for change; outside, it fanned suspicions that there were some terrible secrets harbored within the company.
Rapidly, the press had lit into the company’s chief financial officer, Andrew Fastow, criticizing him for holding a second job as manager of investment funds that did deals with Enron. The allegations of a conflict of interest angered Lay; he had listened to Fastow reluctantly take on the additional responsibilities, just to benefit the company. And it had. The Fastow funds provided partners that knew Enron’s business, that could transact deals quickly. As far as Lay was concerned, Fastow had gone the extra mile for Enron and now was getting tarred for his loyalty.
We had every protection in place. We disclosed it all. They just don’t understand.
Lay turned in to the Allen Center Garage, parking one space from the walkway to the Enron building. He hurried to the company’s sleek metallic lobby, approaching a security checkpoint installed after the September 11 attacks. Holding up a magnetic card, he hesitated until the green light flashed, and then pushed past to the elevator.
The huge, mahogany-paneled reception area on the fiftieth floor was quiet and empty. Lay strode through, past a multicolored statue of an elephant colleagues had acquired on one of their many trips to India. Using a card key, he released an electronic lock and pushed open the heavy wooden door to the executive offices. He saw Rosalee Fleming, his assistant, busy at her desk.
“ Morning, Rosie,” Lay said.
“ Good morning, Ken. Andy Fastow called a few minutes ago. He said that he needs to meet with you urgently.”
“ All right. Let him know I’m here.”
Lay slipped off his suit jacket as he walked into his office. He pressed a panel in the wall, popping open a hidden closet, where he hung the jacket. Lay pulled out his chair, but before he could sit, Fastow appeared in the doorway.
“ Good morning, Andy,” Lay said.
Fastow nodded. “We need to talk, Ken.”
“ Well, come in. Sit down.”
Fastow shuf?ed toward a circular conference table bolted to the office floor. Lay reached inside his desk drawer and touched a button, sending a radio signal across the room to a release in the door. It shut automatically.
As Lay took his seat, he glanced across the table. Fastow looked awful, showing the strains of the last few days. Usually, he was neatly coiffed, everything about him fresh and tailored. But today his face sagged, his brow furrowed. He looked as if he hadn’t slept most of the night.
“ I’ve got some information I need to share with you,” Fastow said. “Last night Ben Glisan met with some of the bankers, and they told him that they couldn’t proceed with a loan to us so long as I was chief financial officer.”
That was grim news. Glisan, Enron’s young treasurer, was a devotee of Fastow. If he couldn’t persuade the bankers to do business with the man, no one could.
It was a difficult moment. Lay had been fighting for days to keep Fastow in his job, fending off efforts by the company’s new president, Greg Whalley, to oust him. Lay respected Fastow, and the board almost revered him; he couldn’t just fire his CFO because of a few nasty newspaper articles. But this was different. If bankers wouldn’t do business with him, Enron itself was in peril.
“ You know, Andy, we talked about this possibility,” Lay said. “Certainly the board and I have been very supportive of you, both publicly and privately. But we’ve also said that if you ever lost the confidence of the financial community, we would have to rethink the whole thing.”
Fastow nodded, his eyes downcast.
“ So I need to call a board meeting and see what they think we ought to do,” Lay said. “I’ll do that as soon as I can, because, obviously, we’ve got a lot going on.”
Fastow was silent. “Well,” he said finally, standing as he spoke, “thank you for meeting with me, Ken.”
It pained Lay to watch Fastow trudge out of the room, back to a desk they both knew he would soon be vacating. Lay was certain that in no time, the squall about Enron would pass, but by then, it would be too late to save the career of this talented young executive. Fastow would be a victim. It just wasn’t right.
Lay had no idea that Fastow had failed to tell him the most devastating news of all—news he wouldn’t learn for years to come.

At almost that very moment across town, Ray Bowen was standing naked in his upstairs bathroom, checking the shower temperature with his hand. As he lifted his foot to step inside, the telephone rang. In the bedroom, his wife answered the line and put the call on hold.
“ Hey, Ray!” she called. “It’s Jeff!”
This couldn’t be good, not at this hour. His boss, Jeff McMahon, head of Enron’s paper-market business, would only call this early with a problem. And Bowen knew Enron’s recent chaos had created plenty of those. Wrapping a towel around his waist, he stepped into a toilet room where he had installed a Panasonic phone system.
“ Hey, Jeff. What’s up?”
“ It’s bad, man,” McMahon said. “The shit really hit the fan last night.”
Bowen listened in disbelief as McMahon told the ugly story. Enron had reached the precipice of collapse. The markets for the billions of dollars in day-to-day credit that large companies need—to pay salaries, to meet obligations to vendors, to keep the lights on—had shut out Enron. The institutions that ponied up the cash in short-term loans known as commercial paper no longer believed the company was worth the risk. The marketplace—that living, breathing entity whose judgment its executives hailed as infallible—was passing its harsh, unemotional verdict: Enron could not be trusted to survive the week.
“ How...how can that be?” Bowen stuttered.
“ Don’t know, but that’s what I’m hearing.”
McMahon paused. “I think that’s it,” he said. “I think they’re going to fire Andy today.”
No kidding. Fastow had so mismanaged the books that nobody trusted Enron with an overnight loan? Of course he was gone. And if Lay let sentimentality get in the way of that obvious decision, then Whalley would pull the trigger.
“ So what’s the plan?” Bowen asked.
“ I need your help. Whalley wants you and me to come in and help him figure it out. Can you be there by eight?”
Fifty-five minutes later, McMahon was in the offices of his division on the fourth floor of Enron’s new building when he saw Bowen hurrying toward him.
“ What do you think?” McMahon called out.
“ We’ve gotta draw down the revolvers right away,” Bowen replied brusquely.
The revolvers. The billions of dollars in standing lines of credit that Enron had available from its major banks. That was disaster money, the financial equivalent of a nuclear fallout shelter. And Enron needed it now.
The two men hustled to the fiftieth floor of the main Enron building. They headed to Skilling’s old office, where Whalley had recently set up shop. A few others were already gathered there. Whalley’s door was closed, and his secretary told the men they needed to wait.
“ Greg’s meeting with Andy Fastow,” she said. Minutes passed. Finally the doorknob clicked and Fastow emerged, flashing a nervous smile. Whalley pushed past and took command. “Okay,” he said. “We’re meeting upstairs. Go on up, and I’ll be there in a few minutes.”
The men rode a small internal elevator to the mezzanine level and made their way to a tiny conference room, crowding around an oblong table. Fastow and McMahon—who had long treated each other with an antipathy bordering on contempt—drifted to the seats farthest away from each other. Fifteen minutes later, Whalley blew into the room.
“ Okay, let’s get going,” he said as he took his seat. “Let’s start with the organization first.”
Whalley shot a look at Fastow, pointing at him.
“ Andy,” he said rapidly, “as we discussed, you’re no longer CFO, effective right now.” Fastow’s face fell. “Wait . . .” Ignoring Fastow, Whalley swept his arm across the table, pointing at McMahon.
“ Jeff, you’re now CFO of this company.”
What was that? McMahon wasn’t sure he heard Whalley correctly. He was chief financial officer? Just like that? “Excuse me?” McMahon said. “I’m CFO?” “Yes, you’re CFO.” McMahon glanced across the table. Fastow was shaking his head, looking
shocked.The moment was surreal.
Are other companies like this? You get promoted and the guy you replace gets fired, all in front of everybody?
“ Wait a minute!” Fastow sputtered, anger in his voice. “That was not my understanding of the deal!”
Whalley held up a hand. “Andy, I don’t have time for this. I don’t know your arrangement; I don’t know the legal stuff. You get with Ken and work it out. But you’re not CFO. That decision’s made.”
That was it. Whalley turned away from Fastow.
“ Okay, Jeff, commercial paper. What should we do?”
“ Well,” McMahon said, “I need to assemble a team to figure out where we are. But I think there’s a good chance we’ll need to draw down the revolvers.”
Bowen jumped in. “People, from my experience, if a company has a cash crisis, it either draws its revolvers immediately or gets ready for the banks to come in and find lots of reasons to delay sending the cash.”
The group tossed around the idea. Fastow shook his head, leaning forward in his chair. “Wait a minute, Ray,” he said, looking at Bowen. “I really disagree with you. I think drawing down the revolvers will send a terrible message to the market.”
Fastow pressed a forefinger against the table.
“ You do this,” he said forcefully, “and people are going to think there’s really something wrong at Enron.”

Three hours later, Fastow sat in a rich leather chair at the credenza behind his desk, typing an e-mail to his wife, Lea. They had planned to have lunch together that day, but now that was impossible. Too much needed to be done; he had to get some things settled. He finished typing his apologies to Lea and hit the “send” button.
Fastow pushed back from the credenza and stood. Ken Lay appeared in his office doorway, his face stern.
“ I need to talk to you, Andy,” Lay said.
“ Okay, Ken. Come on in.”
Fastow touched the button on his remote, closing his office door, while Lay sat at the conference table. As Fastow joined him, Lay eyed the man he had trusted for so long. In the hours since their first meeting that day, he had learned new information, disturbing details that had made Lay question his steadfast confidence in Fastow. But no matter. The problem was out of Lay’s hands now.
“ Andy, I just left a meeting of the board. And based on the information you provided this morning, the board decided that we can’t continue with you as CFO. We’ve decided to put you on a leave of absence and make Jeff McMahon the new chief financial officer.”
Fastow didn’t flinch. Lay was surprised; no one had bothered to tell him that Whalley had already delivered the news with far less formality.
“ I understand,” he said.
Before Lay could speak again, Fastow plowed ahead.
“ We need to work out a severance agreement,” he said.
Lay shook his head. “We’re not ready for that, Andy.”
“ It won’t take long. I won’t be unrealistic. I know I’m entitled to nine or ten million dollars. But I think for three or four million, we can all agree that I’m leaving and I’m not going to be a problem.”
What? Was this some kind of threat?
“ Andy, we’re not doing it that way,” Lay said. “First of all, there’s a lot I need to do other than negotiate your severance. But I also need the board involved.” Fastow leaned in, his voice above a whisper. “Well, let’s just have a handshake on something now, you and me, just so it’s done.”
Lay almost recoiled in disgust.
“ No, Andy. We’ll talk about it in a few days, but right now we’re not going to do anything.” Lay didn’t wait for a response. He rose to let Fastow know that the meeting had ended. “Andy, I think the sooner you exit the building, the better,” he said. “I’m sorry about what’s happened, but it’s necessary. Obviously, I wish you and Lea the best.”
Lay strode out of the room, con?dent he had done the right thing. With Fastow going, he felt a tinge of hope that Enron would soon right itself. Still, the news he had learned at that day’s board meeting, coupled with Fastow’s sordid scheming for a secret severance, left him shaken.
Had his chief financial officer, a man he had trusted implicitly, really been a snake all along?

OCTOBER 27, 2001—MIAMI BEACH, FLORIDA
The jazz guitarist shuf?ed toward the front of the small stage at the Jazid club, easing into a sensual blues solo. The bar was woody and intimate, illuminated by long-stemmed candles resting on a handful of marble-topped tables. On this night the place was packed, the crowd swaying to the rhythm of each soulful riff.
On one side of the room Jeff Skilling sat at a crowded table, downing a glass of white wine. None of the revelers spoke to him; none seemed to recognize him as someone who, weeks before, had been CEO of one of America’s top companies. And none realized that on this night, he was deteriorating, a man approaching a nervous breakdown.
There’s no way out of this.
Skilling ran it through his mind. Enron, his company—for years, his life—was imploding. Other traders were refusing to do business with it. Capital was evaporating. Confidence was shattered. Regardless of Lay’s happy talk about its prospects, Skilling knew his baby was dying.
Oh, fuck! There’s got to be something. Got to be. Outside equity, find investors. How? No time. Talk to the banks. Look ’em in the eye, tell them you’ll pay them back. Shit! It’s too late. Should have had the planes headed to New York last week. Fuck! Why aren’t they doing anything?
He breathed deeply. Again and again, he walked through Enron’s maze of financial problems in his mind, hoping to find some means of escape he had overlooked. But the answer was always the same. Enron was gone. It couldn’t be saved.
Skilling wiped a hand up his cheek, smearing a tear. Fatigue shadowed his red-rimmed eyes. He picked up his glass, then glanced at a passing waitress.
“ One more,” he told her. “Pinot Grigio.”
Rebecca Carter, Skilling’s longtime girlfriend and recent fiance, sat next to him with a growing sense of alarm. The two had met at Enron, and had both left the company in August. For weeks, things had been wonderful; Skilling had spent time with his kids, did some traveling. Just the day before, the couple had come to Florida to visit a friend. But with Enron’s sudden troubles on his mind, Jeff was coming apart. Carter had never seen him drink this much. What was it now? Eight glasses? Ten? She reached out and touched his shoulder.
“ Jeff, can we please just leave?”
“ No.” He didn’t even look at her.
“ Jeff . . .”
“ No.”
“ Jeff, you need to stop drinking.”
“ No.” Skilling was stone-faced, un?inching.
The wine kept coming, as many as ?fteen glasses. Skilling sat stock-still, tranquilizing his frayed emotions, growing angry. He was thinking of the ones he blamed for the troubles. It was the international division, he thought. They were the ones who wasted billions on lousy projects. They were the ones who tied up Enron’s capital. Skilling tossed them out when Enron stock was soaring; the longtime international chief, Rebecca Mark, had made tens of millions of dollars selling her shares.
I kicked them out and saved them, he thought bitterly. They destroyed Enron’s wealth, and I made them rich.
Hours passed as Skilling veered between despondency and fury. Finally he’d had enough.
“ Let’s get out of here,” he said suddenly, grabbing Carter’s hand.
Skilling stumbled out to the street, and Carter wrapped an arm around him, struggling to hold him up in the crisp October evening. The couple brushed past crowds as they staggered down Washington Street toward their hotel. With each tormented step, Skilling fell deeper into incoherence.
“ It’s going down,” he mumbled rapidly, his voice hollow and detached. “It’s going down.” Carter tugged at his arm to keep him moving, astonished. “Jeff, come on. You’re talking about Enron.”
“ It’s all going down . . .”The words trailed off.
For ten minutes they lurched along, until the elegant Delano Hotel loomed ahead, its gleaming white facade serving as a beacon. Carter maneuvered her ?ance up the terrazzo steps and into the hotel’s high-ceilinged lobby.
“ Come on,” she said. “Let’s just go to bed.”
Skilling jerked away from her.
“ No fucking way,” he growled.
He stumbled across the lobby, collapsing on a sofa. Catching sight of the bar in the back, he motioned for a waitress to bring him a drink. Carter sat next to him, closing her eyes as he downed another glass of wine. Finally, she gave in to her fury and frustration.
“ Damn it, Jeff!” she said, standing up. “This is stopping right now! You’re not going to kill yourself tonight.We are going upstairs and we’re going to bed.”
Chastened, Skilling placed his wineglass on a table, following Carter meekly to the elevators. But his mind was churning. He had no control anymore. He was giving up.
Carter dragged him into their room, and Skilling fell onto the bed. Lying sideways, he sobbed uncontrollably. He tried to speak, but his words came out as gibberish; he pulled his knees into a fetal position. Carter brought her hands to her head. What the hell is going on?
“ Jeff, what’s happening? You’re scaring me.”
She sat beside him, stroking his back, murmuring reassurances that Skilling didn’t want to hear. Minutes ticked by, until finally he crushed the pillow.
“ It’s not going to be okay!” he shouted. “It’s all going down!”
He sat up, pushing Carter back as he moved.
“ Everything I worked for my whole life is gone, just destroyed! Everything is gone!”
Skilling shook his head, tears streaming down his face. The enormity of it all suddenly crashed down on him.
“You don’t understand what’s going to happen!” he cried in a raspy voice. “Everyone’s going to get hit by this! I’ll never be able to show my face in Houston again! I mean, just the impact on all the people. Everything I’ve worked for is cratering!”
Reaching out to him, Carter muttered some soothing words. Skilling breathed deeply and tried to think. It’s too late. His world was gone, he would be a pariah. Everyone close to him would be caught in the wreckage. Rebecca. He couldn’t marry her. He couldn’t.
Skilling pulled away, a look of terror in his face. He was wide-awake now, wild-eyed and breathing rapidly.
“ Rebecca, you need to go,” he said.
“ Jeff ...,” Carter said, reaching for him again.
Skilling recoiled. “Get the fuck away from me!”
Carter stood, astonished. “What?”
“ Get the fuck out of here! Get away from me!”
“ Jeff . . .”
“ Leave me alone! I don’t want to see you!”
Carter stared at her ?ance, her eyes welling up. Nothing, not a sound or movement, interrupted the moment.
Grimacing, Skilling stood and flailed his arms. “Get the fuck out! Go back to Houston! I don’t want you here!”
Hesitation. Carter shuddered, then silently turned to leave. The door clicked closed behind her. Skilling stayed motionless for a moment, then crumpled into the bed. He pulled his knees to his chest again, his body shaking.
“ Oh, God!” he wailed, crushing a pillow to his face.
It was the scandal that seemed to come out of nowhere, the scandal that changed everything. In the fall of 2001, the Enron Corporation—a politically powerful company whose business was only vaguely understood even by its own competitors—imploded, falling so far from its pedestal that its once-respected name transformed in a matter of weeks into shorthand for corporate wrongdoing.
The implications of the Enron debacle were so vast that even years in hindsight, they are still coming into view. It set off what became a cascading collapse in public confidence, sealing the final days of an era of giddy markets and seemingly painless, riskless wealth. Soon Enron appeared to be just the first symptom of a disease that had somehow swept undetected through corporate America, felling giants in its wake from WorldCom to Tyco, from Adelphia to Global Crossing. What emerged was a scandal of scandals, all seemingly interlinked in some mindless spree of corporate greed.
As investors ?ed the marketplace, terri?ed of where the next eruption might emerge, trillions of dollars in stock values vanished, translating into untold numbers of second jobs, postponed retirements, lost homes, suspended educations, and shattered dreams.
But nothing was quite what it appeared. The Enron scandal did not burst out, fully grown, from the corporate landscape in a matter of days. Across corporate America, widespread corner cutting, steadily falling standards, and compromised financial discipline had been festering for close to a decade. Warnings about funny numbers, about unrealistic expectations, about the coming pain of economic reality, went unheeded as investors celebrated corporations pursuing reckless or incomprehensible business strategies that helped their stock prices defy the laws of gravity.
It was in that environment, and only that environment, that the Enron debacle could emerge. It was not simply the outgrowth of rampant lawbreaking. The true story was more complex, and certainly more disturbing. For crime at Enron—and, no doubt, there was crime—was just one ingredient in the toxic stew that poisoned the company. Shocking incompetence, unjusti?ed arrogance, compromised ethics, and an utter contempt for the market’s judgment all played decisive roles. Ultimately, it was Enron’s tragedy to be filled with people smart enough to know how to maneuver around the rules, but not wise enough to understand why the rules had been written in the first place.
No single person bore responsibility for the debacle; no single person possibly could. Instead, the shortcomings of a handful of executives—along with a community of bankers, lawyers, and accountants eager to win the company’s fees; a government willing to abide absurdly lax rules; and an investor class more interested in quick wealth than long-term rewards—merged to create an enterprise destined to fail. But in the end, for all the mind-numbing accounting ploys and financial maneuvers that came to light in Enron’s wake, the underlying cause of the collapse was fairly simple: the company spent much of its money on lousy businesses. And the market exacted its revenge.
The repercussions were ugly. Arthur Andersen, the once-revered accounting firm, evaporated overnight as its role in the debacle led to a subsidiary scandal of its own. A President and members of his Administration, already struggling with a new threat to national security, found themselves on the defensive because of their close association with Enron. The new chairman of the Securities and Exchange Commission saw his dream job slip through his ?ngers amid the recriminations. And members of Congress, reacting to their constituents’ fear and anger, pushed through what proved to be the most dramatic revision since the Great Depression in the laws protecting investors.
This, then, is more than the tale of one company’s fall from grace. It is, at its base, the story of a wrenching period of economic and political tumult as revealed through a single corporate scandal. It is a portrait of an America in upheaval at the turn of the twenty-first century, a country torn between its worship of fast money and its zeal for truth, between greed and high-mindedness, between Wall Street and Main Street. Ultimately, it is the story of the untold damage wreaked by a nation’s folly—a folly that, in time, we are all but certain to see again.

EXCERPT TWO: THE BUSH INAUGURATION

On January 19, few of Enron’s top executives could be found anywhere near the company headquarters. Instead, they were getting ready for the big event that weekend—the inauguration of George W. Bush as forty-third President of the United States. By early that Friday, much of the senior management team was headed out to Houston Intercontinental, ready to stamp Enron’s imprint on the new Administration.

That morning, Lay stood beside his wife, Linda, outside the Enron hangar, watching a few black sedans approach. Lay stepped forward as one pulled up nearby. Former President George Bush and his wife, Barbara, got out of the car.
“ Mr. President, Barbara,” Lay said, “I’m so delighted this worked out. We’re just incredibly pleased you’re willing to share this time with us.”
Bush smiled. “Well, we’re pleased that you’re going to give us a ride up there.”
The Lays and the Bushes climbed aboard the Enron corporate jet and found their seats. Lay felt the moment; here he was, a onetime Missouri farm boy, with a front-row seat to history.T his weekend, a former President would be watching his son assume the same high office, and Lay would be witnessing the events through the family’s eyes. He commented to the Bushes how incredible it all was to him.
“ Well, it’s an honor for us to be able to do this, Ken,” Bush replied.
“ Absolutely, Ken, Linda,” Barbara Bush added. “We’re just honored you could share this time with us.”
The plane taxied out to the runway and was aloft in seconds. Lay chuckled; apparently planes carrying former presidents were cleared more quickly for takeoff.
Corporate planes clogged the skies over Washington, but the Enron jet landed immediately. The Lays and the Bushes stepped off. A stretch limo, complete with police escort, waited on the tarmac. Bush walked to the passenger door. The Lays looked around for their car.
Bush signaled to them. “Linda, Ken, come on, get in here. We’ve got to go.”
The Lays hesitated, then climbed in, ?guring they would get a lift to their hotel. As the car moved through Washington, the Bushes chatted about the first event, a Kennedy Center reception hosted by General Motors and its onetime top Washington representative, Andrew Card, who tomorrow would become White House Chief of Staff.
The car pulled up to the front of the arts center. Bush tugged on Lay’s arm. “Come in with us,” he said.
The Lays hadn’t been invited to the party, but they weren’t about to turn down a former President. Inside, Card rushed over to greet the Bushes, who gestured toward the Lays. Card thrust out his hand.
“Nice to have you here,” he said. “Delighted you brought the President and Barbara here with you.”

About that moment, Jeff Skilling and Rebecca Carter stepped out of a black Lincoln Town Car in front of the Library of Congress. Carter’s taupe evening gown ?uttered in the breeze as Skilling, in black tie, escorted her inside. They handed their invitations to security guards and passed through metal detectors.
The two milled about, chatting with industry executives. Suddenly, a staff person appeared, setting up a thin rope to hold back the crowds. Skilling and Carter were right against it.
The President-elect and his wife appeared in the entryway. Bush walked down the line of supporters, shaking everyone’s hand. He reached Rebecca Carter and smiled.
“ Mr. President,” she said.
“ Hey, how are you?” Bush replied, shaking her hand.
A woman shoved her way between Skilling and Carter, and Bush released Carter’s hand as he turned to greet the new arrival. Skilling glanced down and raised his eyebrows. Bush was on automatic pilot, his hand still drifting up and down beside Carter. Bush moved on, taking Skilling’s hand.
“ Mr. President-elect,” Skilling said. “Jeff Skilling from Enron.”
Bush’s smile widened. “Hey!” he exclaimed. “That’s a great company!”

The next day, a chilly rain soaked Washington, transforming large portions of the inaugural grounds into slicks of mud. As a biting wind blew, George Bush took the oath of office, then stepped up to the podium.
“ I am honored and humbled to stand here,” Bush said, “where so many of America’s leaders have come before me.”
On the great lawn in front of the inaugural platform, Skilling sat in a chair sinking into the ground. He was cold and uncomfortable. His clothes were wet, his cashmere overcoat ruined. Just before the inaugural, he had been in the office of Tom DeLay, the Republican congressman from Texas. He wished he had stayed there, and stayed dry.
He glanced at Carter, who was shivering beside him.
“ Isn’t this cool?” he said softly. “Aren’t you glad we gave money to the Bush campaign?”
Well, he figured, at least he wasn’t the only Enron executive who was miserable right now.

Nearby, Ken Lay brought a steaming cup of coffee to his lips, blowing on it lightly. He was sitting with his daughter Elizabeth Vittor in the warmth of Bistro Bis, the restaurant at the Hotel George in downtown Washington. From their linen-covered table, the two stared at the restaurant television, watching Bush deliver his inaugural address.
They had considered attending the inaugural, even had VIP tickets, but it was just too cold. Besides, Lay would see Bush at the White House soon anyway.
Minutes before ten o’clock the next morning, a driver from Carey car service stopped in front of the east gate of the White House. He lowered his sedan window as a guard approached. “Mr. and Mrs. Kenneth Lay,” he said.
From the back, the Lays watched as the guard first checked a list, then conducted a quick security inspection of the car. The gate opened, and the sedan pulled around the driveway. Staffers opened both passenger doors, and the Lays stepped out, holding hands as they walked inside. Leaving their coats with a checker, they walked down a hallway into the expansive first floor of the White House.
There was a huge brunch buffet, with eggs, sweet rolls, and muf?ns for the select group invited to share the new President’s first morning meal at the White House. Lay glanced to one side and saw former President Bush at a table with Barbara, enjoying brunch as some of their grandchildren ran along the floor nearby.
The new President’s selections for his Cabinet secretaries were scattered about the room: Donald Rumsfeld from Defense, Colin Powell from State, Tommy Thompson from Health and Human Services. Nearby, Lay saw Don Evans, his longtime friend who had just been elevated from the Bush cam-paign’s national finance chairman to the post of Commerce Secretary. He and Linda walked over.
“ Don,” Lay said, “congratulations on your selection. I know you’re going to do a great job.”
Evans smiled. “Thank you, Ken. And I want to thank you and Linda for all the strong support you gave George.”
Lay basked in the praise.

Minutes later, George and Laura Bush made their way through the hectic swirl of supporters on the main floor of the White House. They wandered into the West Room, shaking hands and accepting congratulations, then moved on to an adjacent parlor. Bush was chatting with some well-wishers when he noticed Ken and Linda Lay walking toward him. He excused himself and moved through the crowds.
“Kenny boy!” Bush exclaimed. “Welcome to the White House!”
Bush shook Lay’s hand and gave Linda a hug and a kiss.
“ I’m so glad you and Linda are here,” Bush said. “I really appreciate everything you’ve done for Laura and me, and for all the support you’ve given my campaigns.”
“ Well, Mr. President, we were proud to play a role.”
Mr. President? For Lay, it was such a strange thing to say. This was just good old George.

By noon, the White House brunch had begun to wind down, with most of the guests preparing to return to their lives. A White House staffer found the Lays, with word that former President and Barbara Bush were ready to leave. The Lays walked to an exit where they had agreed to meet before heading back to the airport together. The Bushes arrived, accompanied by the new President and Laura.
All the members of the Bush family hugged, making jokes about the hard part now beginning. The Bush parents headed out the door. The new President shook Lay’s hand.
“ Take good care of them, Ken,” he said gently.

EXCERPT THREE: The California Energy Crisis

In a meeting room down from his Washington office, Alan Greenspan, the Federal Reserve chairman, took a seat at the head of the conference table. To his left sat Lawrence Summers, the Treasury Secretary, and a few staffers. On the right was Gray Davis, the California Governor who had ?own in that day, December 26, to discuss his state’s power crisis with the country’s two most in?uential economists.
“ Mr. Chairman, Mr. Secretary, thank you for meeting with me. I’m hoping that we can find some solutions to the troubles facing my state. The thing is, if deregulation fails in California, it will fail in the United States.”
Greenspan placed his hand on a thick brie?ng book in front of him. He and Summers had met privately minutes before and decided to throw a splash of cold water on Davis. The man needed to understand there were limited answers to California’s problems, all of them unpleasant.
“ Truthfully, Governor, California hasn’t deregulated,” Greenspan said. “The state simply replaced one form of regulation with another. It’s become a system of central planning run amok.”
Summers joined in. “You have a fixed price set by the state for selling electricity to the public. But you have a variable, ?oating price when you buy electricity.”
“ That’s not sustainable,” Greenspan said. “The problem is your regulatory system. And there are a very limited number of solutions. But the first step is that prices for consumers are going to have to go up.”
Davis showed no emotion. “I really feel the problem is the energy producers,” he said. “They’re manipulating the markets and forcing up prices.”
“ They may be,” Greenspan said. “But that’s beside the point. That’s not causing the problem; that’s making it worse. The real problem is a supply-and-demand imbalance.”
Davis objected. There was plenty evidence, he said, that energy producers were withholding power from the market. Greenspan and Summers didn’t argue the point, stressing that it made economic sense for power to be with-held. The utilities weren’t making good on their bills already. With the utilities now careening toward bankruptcy, it would be folly for power companies to keep pumping electricity into the state without limits. It would just increase their exposure to the likely bankruptcies.
Gently, the two economists suggested that the state government hadn’t helped matters. By attacking power companies, accusing them of crimes and refusing to meet with them, Davis and other politicians had signaled an unwillingness to deal with the structural problems. In a market, perceptions could be as important as reality. Until California took a more realistic approach, power companies would continue to be reluctant to do business with the state.
“ Governor,” Summers said, “this is classic supply and demand. The only way to fix this is ultimately by allowing retail prices to go wherever they have to go.”
Davis’s face hardened. He didn’t like being lectured from the ivory tower. “Fine,” he said. “You two live in your world of economics, supply and demand and pricing.”
He leaned in. “Let me tell you about my world,” he said. “About California politics. About referendums, where anybody with enough signatures can take a ballot initiative to the voters and overrule anything that we’re doing.”
Greenspan and Summers listened as Davis laid out his political dilemma. The words made it obvious that the power problems in California would become much worse. Economics and politics were in conflict. And for now, politics would rule.

Two days later, a black sedan pulled to the front of the Ronald Reagan State Office Building in downtown Los Angeles. Ken Lay emerged from the back, followed by Steve Kean, his chief of staff and Enron’s government-relations specialist. They had interrupted their vacations for this quick trip to California to meet with Gray Davis.
Lay and Kean headed to the ?fteenth floor and were taken to the Governor’s conference room. After a couple of minutes, Davis came in and walked to Lay, who put out a hand.
“ Governor, I’m Ken Lay.”
“ Good to meet you, Ken.”
Davis sat at the head of the table, while Lay and Kean took seats on one side, across from a member of the Governor’s staff. “Governor,” Lay began, “as you know, Enron is a major participant in the California market. And clearly the state has some serious problems.”
Lay broached the next subject cautiously. He understood the politics and—Republican though he was—suggested that Davis shift the blame for all the troubles onto his Republican predecessor.
“ Governor, you didn’t cause this problem; you inherited it,” he said. “But you can solve it by giving the state true competition and consumer choice.”
The advice he gave could have come out of the mouths of Greenspan and Summers. Supply had to be increased and demand cut, he said. The market had to see the state was serious. Announce plans to build power plants, with temporary waivers from environmental regulations. Allow for pricing models that would result in lower costs during nonpeak hours. Then let the consumers feel the effects of higher prices, in order to change behaviors.
“ I can’t do that,” Davis said sharply. “I’m not going to raise rates.”
“ Governor,” Lay said, “it’s going to be very difficult to get consumers acting rationally if they’re paying five cents a kilowatt hour for electricity that costs twenty-five cents.”
If Davis took those steps, Lay said, prices would ultimately drop. Then the state could enter into long-term fixed contracts and never face this problem again.
Couldn’t happen, Davis said. And he couldn’t suspend the environmental rules. Voters wouldn’t stand for it.
The conversation dragged on. Davis tossed out a few ideas he was considering—orchestrating state takeovers of power plants, invoking emergency powers. Lay cautioned the market would react terribly to such moves, and again stressed that he had to address supply-and-demand issues. At the meeting’s end, Lay left con?dent Davis was ready to act decisively, one way or the other.

Cash ?ow. That was always Enron’s Achilles’ heel.
No matter how much it stitched together in mark-to-market earnings, it simply couldn’t force cash to appear. Sure, it borrowed plenty of money through the complex transactions known as prepays and reported those billions of dollars as cash from operations. But that just pumped up debt without taking care of the real shortfall.
This year, though, would be different. With energy prices in California so high, Enron’s trading partners were forced to put up huge amounts of cash as collateral—some two billion dollars by late December. The cash wasn’t really Enron’s to use; it was more like a security deposit, which the company would probably have to hand back in a few months.
Still, to the untrained eye, the collateral allowed Enron to appear ?ush. The company reported the two billion dollars as cash ?ow from operations. If Enron had to return the money when prices dropped, so be it. Its finance team would deal with that later.

Appearing stiff, Gray Davis stood in the Assembly chambers at the state Capitol, delivering his third State of the State address.
“ We will regain control over the power that’s generated in California and commit it to the public good,” he said. “Never again can we allow out-of-state profiteers to hold California hostage.”
Davis listed a series of hard-nosed solutions: forbidding generators from conducting unscheduled maintenance, making it illegal to withhold power from the grid, expanding his emergency authority, prosecuting evildoers.
“ The remedies I am proposing tonight are reasonable and necessary,” Davis said. “There are other, more drastic measures I am prepared to take if I have to.”
After all the advice from the free-market evangelists, Davis had chosen another path—all-out war.
Rick Causey’s voice was icy.

In Washington, Dick Cheney, the Vice President–elect, was on the telephone with Ken Lay.
Months of uncertainty had followed the November presidential elections, with the Bush and Gore campaigns fighting it out in court over the razor-thin margins of victory in Florida. Now, with Bush declared the victor, the Administration was assembling its Cabinet.
A number of candidates had already been selected—including Don Evans, the campaign’s national finance chairman and an old friend of Lay’s, to serve as Commerce Secretary. Lay himself had interest in one particular job, which was why Cheney was on the phone to Houston this day.
“ Ken,” Cheney said, “I’m sure you know, we’ve been seriously considering you for Treasury Secretary.”
Lay could already tell the news wasn’t good.
“ The President has decided that with he and Don Evans and I all from Texas, all from the energy business, things were getting too top-heavy. Nominating a fourth person that was in the energy business and from Houston would probably just create too many problems.”
“ Well, I certainly understand, Dick,” Lay replied.
Lay wasn’t all that disappointed, though. He didn’t lust for Washington. He was happy staying Enron’s chairman.

Usually, the final weeks of a presidential Administration are like the last days of high school. Nothing much gets accomplished as years of belongings are packed and people prepare for the next stage of life.
So by early January, with George Bush preparing to move into the White House, members of the Clinton Administration might have been expected to be kicking back. Instead, Treasury officials decided to take one last shot at fixing the California electricity mess. They tried to bring everybody together—the energy producers, the Secretary of the Treasury, the governor— for a final bargaining session.
But Davis refused to return to Washington and rejected efforts to meet halfway in Kansas City or St. Louis. Everyone, Davis said, needed to come to California, but the Clinton Administration officials declined.
Instead, this crucial meeting—the last chance for the Democratic governor to obtain help from a Democratic Administration—would be handled by conference call.
On January 13, a series of officials made their way down a hallway deep in the Energy Department. They were all dressed casually, not surprising for a Saturday. Summers, the Treasury Secretary, led the pack, followed by members of his department. Clinton’s National Economic Adviser, Gene Sperling, joined the group, along with an assortment of executives from some of the nation’s leading energy companies.
They arrived in a secure room filled with flashing monitors and high-tech communications devices designed for use in a national energy emergency. The government’s conference call with Gray Davis was about to begin.

About that same time, Ken Lay, Steve Kean, and Rick Shapiro, a company lobbyist, found seats around a conference table in Davis’s Los Angeles office. Lay greeted the other industry executives in the room, including Steve Bergstrom, the president of Dynegy, a top Enron competitor.
The video hookup with Washington was switched on. Larry Summers appeared, sitting at the head of the conference table in the Energy Department’s secure room. They could see Sperling from the White House, as well as the rest of the officials, staffers, and executives.
Everyone on the call was ready to get started, but the sound was left on mute. Governor Davis hadn’t arrived.

Minutes passed. In Washington, Summers fumed. He didn’t want to sacrifice the weekend with family waiting around for Davis to show up. He switched on the sound.
“ Do we know where the Governor is?” he asked.
A voice responded. “No, but he’s expected soon.”

Lay watched Summers on the video screen. The answer from the Governor’s aide had clearly annoyed him.
He turned to chat with some of the others at the table, then glanced back at the video screen.
Summers was gone.

After five minutes out of the room, Summers walked back in and switched on the sound. “Okay, anybody know where the Governor is?” he asked.
Again, no real answer.

Back in Los Angeles, Lay leaned toward Steve Bergstrom from Dynegy. “If the Governor doesn’t show up soon,” he said softly, “no matter what we talk about, this isn’t going to be a good meeting.”

After thirty minutes Davis walked into his conference room. Aides scurried to be sure that the sound was on.
“ Okay,” Davis said. “Let’s go.”
He offered no apologies or explanations.

Summers kicked things off, reviewing a series of recent recommendations. Long-term electricity prices needed to be stabilized, the market calmed, so California could enter into long-term power contracts. Announcing plans to temporarily suspend the environmental studies required to build a power plant would be a big step forward.
Some analysis had already been conducted, one industry executive said. The companies agreed that long-term prices could be locked in at just under seven cents per kilowatt hour. That was a little more than a penny above the current mandated retail price. A small rate hike, and the utilities could be back in financial health.

Davis looked straight into the monitor.
“ That’s all very interesting,” he said. “But as I said in Washington, I cannot agree to any rate increase. And no environmental waivers for the power plants.”
The energy executives spoke up. They had gone as far as they could. Lay suggested that they dig through the numbers to show how closely everything had been shaved.
On the television screen in Los Angeles, Larry Summers looked like he was about to jump out of his skin.

“Governor,” Summers said, fixing his eyes on the screen in front of him, “it appears to me that these guys have done a pretty good job figuring out what the markets will do if the political leaders in California make the tough decisions to get things stabilized.”
The numbers were close, and certainly would help circumvent disaster. “We have to do what’s doable,” he said, “and not just what we want politically.”
Lay watched Davis stiffen. This isn’t working.
“ The political reality is that I cannot agree to any rate increase or any environmental waivers,” Davis said. “We’ve got to find some other way to solve the problem.”
The answer should be price caps, Davis said. Just knock down the amount that the energy companies could charge. Some of the other state officials in the room agreed.
Summers’s voice rang through the room. “Price caps are just something temporary while we put together a bigger packet of reforms. It would distort the market.”
The Clinton Administration had allowed California to impose temporary caps, but it would be up to the Bush Administration to decide if those continued. And in the long term, Summers said, they were destructive, because they would push energy producers out of the California market.
The discussion meandered around the table. Neither side would budge. The attitude of some energy-industry executives was almost detached, as if they were indifferent to the prospect of a financial collapse in California.
About thirty minutes had passed. Then, without explanation, Davis abruptly left the room.

With Davis gone, the conversation continued for several minutes. Finally Summers spoke.
“ I see the governor hasn’t returned,” he said. “I think we should suspend the conversation until he does.”
Everyone sat in silence for ten minutes. Finally Summers stood, signaling for some of the industry executives to follow him to a nearby anteroom. Sperling from the White House and several Treasury aides followed.

Away from the camera, Summers lectured the energy executives. They couldn’t just shrug the crisis off as California’s problem. They needed to bend over backward to find a way out. Their business was on the line.
“ Do you guys understand the political reality?” Summers asked. “If you don’t agree to something that works for California, they are going to come at you with every political and legal gun blazing.”
Sperling agreed. “Without some arrangement, they have to come after you. You may think you’ve done nothing wrong legally. We don’t know. But they have to come after you.”
The executives objected. They had worked hard to make a deal work, they said, but the Governor refused to budge.
“ It doesn’t matter!” Summers snapped. “Regardless of whether it’s a bad system, or whether they need a price increase. They are going to dig into your companies, upward, left, and right. You’re going to be the demons.”
In fact, Summers said, if this was handled badly, the prospects for deregulation were going to dim. “The whole trend could go the other way,” he said.
One executive started to argue that California’s system wasn’t real deregulation.
“ You’re missing the point!” Summers shot back. “What state legislature is ever going to consider deregulation again if this problem isn’t solved?”

Davis hadn’t returned. Lay caught the eye of Bergstrom from Dynegy and signaled they should head out into the hall. They huddled outside the doorway.
“ This is really strange,” Bergstrom said.
Lay agreed. “You can’t make any progress when one of your principals keeps leaving the meeting.”
“ I’m not even sure it was worth coming.” Bergstrom shook his head. Maybe Davis just wasn’t serious. There was all this talk about him as a top contender for the Democratic presidential nomination in 2004; maybe he was just setting up a showdown with the Bush Administration.
“ Well, one thing’s for sure,” Lay said. “He’s got a better chance of solving this with these guys than he will with the Bush Administration.”

Davis returned about thirty minutes after he had left. Someone told Washington to find Summers, who was still lecturing energy executives off camera. A minute later, Summers returned. He took his seat, furious.
“ Governor,” he said sharply, “a lot of us here have given up our Saturday afternoon to make progress on this problem. Some of us have commitments tonight. We’re willing to keep working if we can make some progress.”
He pressed his hands against the table. “But if we can’t make any progress, we really shouldn’t waste time,” he said. “Let’s just decide now we’re not going to get this solved, certainly not in this Administration’s lifetime.”
Davis looked unruffled. “Larry, I really appreciate what everybody’s trying to do,” he said. “But I have made it clear from the beginning that I cannot and will not agree to any solution that increases rates to consumers in California or requires any type of environmental waiver.”
He glanced around the room. “And if all of you think that’s the only way we can solve this, then we might as well go in a different direction,” he said.
The solution was price caps, Davis said again.

In Washington, Summers launched into one final lecture about the evils of price controls. Then he threw in the towel.
“ I wonder if, in fact, it’s not best to decide that we are not going to solve this problem today, and let everybody go home to be with their families,” he said.
On the video screen, Davis appeared calm.
“ I think that’s right,” he said.
The meeting ended, and the video was shut off. Several officials gathered in the anteroom, frustrated and angry. They complained that Davis was too big a stumbling block, seemingly focused on just saving his political skin.
“ So if we get to the 2004 Democratic convention and this guy is a serious contender for President,” one Treasury official said, “which one of us is going to lead the ‘Anybody but Davis’ crowd?”


EXCERPT 4: BLOWING THE WHISTLE

Carl Bass shifted his feet nervously as he waited for an elevator on the ground floor of a Houston office building. It was March 2, a Friday, just weeks after he had been offered a new job to manage Andersen’s relationship with the SEC, a post that would have meant relocating to Chicago. Days before, he had finally declined, saying that he wanted to stay in Houston, handling accounting issues.
Then yesterday, another call. Gary Goolsby, a top partner in Houston, asked him to drop by. As Bass rode up, he couldn’t shake the feeling he was about to be ordered to Chicago. He stepped off on the thirteenth floor. Goolsby welcomed him warmly and whisked him to his office. There, his demeanor hardened, like a doctor about to deliver bad news.
“ Carl, I’m going to tell you something, and I’m going to tell you straight up,” he said. “Enron has a big problem with you consulting on their engagement.”
Bass’s mouth fell. He wasn’t on the Enron engagement. He was with the Professional Standards Group, work that in theory made him anonymous to the outside world. How did Enron even know what he was doing?
“ Who has a problem?” he asked.
“ Causey in particular thinks you’re caustic and cynical toward their transactions. It’s a big client-relationship issue, and, long story short, we’re not going to let you consult on Enron transactions anymore.”
The demands to sideline Bass had been swirling for weeks, and Andersen had tried, timidly, to fight them. But even the appeal to Causey from Joseph Berardino, Andersen’s new chief executive, had been to no avail. So Andersen caved. Standing up to Enron wasn’t considered a plausible option; the deep-pocketed client could shift its consulting business at the drop of a hat, leaving Andersen only the low-paying audit work. That was a risk that the Andersen partners were simply unwilling to take.
Bass, however, was flabbergasted. To his way of thinking, clients couldn’t boss accountants around like this. Accounting judgments were based on the rules, not the person. Bending to Enron’s demands was sure to have a chilling effect, maybe nudge Andersen partners to loosen up their interpretations. Then again, Bass figured that was what Enron wanted to achieve.
“Gary, I’m stunned,” Bass said. “If they don’t want me involved, that’s their call, I guess. But I can’t believe the firm is going along with this.”
“ We’ve attempted to talk to them—”
“ Gary, it shouldn’t be their call!” Bass retorted. “Them, of all clients. A
high-risk, maximum-exposure client! And we’re letting them dictate to us what our quality-control procedures should be!” Goolsby held up a hand. “Carl, I’m not telling you to quit. Maybe consider that SEC opportunity in Chicago.” Bass said he would think about it. Then he left.

The next morning in Galveston, music filled the Moody Gardens coliseum as a group of young girls broke into a competitive dance routine. Two of Bass’s daughters were performing that day, and he had driven the family down the previous afternoon for what was supposed to be a time of fun.
But as he sat in the auditorium, Bass could only stew. Something had shattered for him. Andersen had a storied history, a tradition, and central to that was its unwavering integrity. That Andersen would never have allowed Enron to have its way like this. That Andersen was gone. The tradition was dead. It tore at Bass.
So be it. He would not be party to the collapse of values. He would not let a client decide his fate. I’m just going to leave the group, he thought. Maybe leave the firm.
One way or another, he had to do something.

In his home office the next afternoon, a Sunday, Bass switched on his laptop and connected to the Andersen network. He was scheduled to speak the next day with John Stewart, a top partner in the OSG, about Enron’s demand. But first Bass wanted to tell his side of the story.
He opened an e-mail, addressing it to Stewart. “I know you did not ask me for this,” he typed. “But I believe you should at least have a version of what I know about this Enron ‘thing’ with me.”
He recounted all of Enron’s questionable deals in December—Braveheart, Fishtail, and of course the absurd forty-five-day Raptor guarantees. His involvement in these had been limited to communications with the Andersen partners, who were obviously blaming the accounting judgments on him rather than presenting the decisions as the firm’s opinion.
“ Once we conclude something, or render some advice, the engagement team should deliver that advice or conclusion as if it were their own,” Bass wrote. “It is after all the engagement team’s responsibility to sign the opinion—not ours.”
He typed for almost an hour. He hit the “send” button shortly before seven that evening.

John Stewart was a gentle man, not easily prone to anger. But the Bass affair had thrown him into a fury—at Enron, to be sure, but also at Andersen. He arranged a meeting with a number of senior partners in Chicago.
“ The behavior of the client in this instance has been unprofessional,” Stewart declared. “This should not have been allowed to happen.”
One senior partner, Larry Rieger, agreed to speak with David Duncan, but that went nowhere. Soon Stewart reached a new resolve. If Enron didn’t like what Carl Bass had to say, too bad. His was too fine a mind to ignore; Stewart was still going to consult him. But he’d do so on the sly, so that nobody at the company would know.

After months of work, Jordan Mintz had almost completed the memo summarizing his concerns about LJM.With a little more work, it would be ready for Causey and Buy.
First, he wanted to be sure his bosses knew what he was up to, so he forwarded a draft copy to Fastow. Then he briefed Derrick, the general counsel, as well as other Enron lawyers, telling them about his findings and promising to send them a copy of the final memo.
The writing was a measured, almost dry account of the LJM funds and the shortcomings Mintz had detected. Some dated back to problems McMahon had protested years before, like the fact that Enron allowed LJM staffers to work alongside the company’s own finance employees.
To fix the system, Mintz proposed an array of actions. More requirements that analysts explain why a deal was in the company’s interest. Better involvement by Skilling in reviewing transactions. And coordinated approval of deals by an in-house legal, accounting, and commercial staff.
On March 7, the day before Mintz planned to send out the final memo, he was working at his desk, trying to get out early for his son’s seventh birthday. Kopper appeared in his doorway. Before Mintz could say a word, Kopper stepped in, throwing Fastow’s copy of the memo at his desk.
“ What are you trying to do?” Kopper snarled. “Shut us down?”
Kopper stormed away, leaving Mintz behind, feeling a shiver of self-satisfaction. His little missive had apparently drawn some blood.

That same day, Vince Kaminski sat in his office, reviewing a stunning document. It left no doubt that Enron’s finance division could well be spinning out of control.
The decision the previous year to have a team analyze Enron’s company-wide risk was paying off. This document—written by the team leaders, Kevin Kindall and Li Sun—established a strong case that Fastow’s off-books partnerships had created an uncontrolled, unseen threat to Enron’s survival. The work was based on limited information, and more research was needed. But this effort had been undertaken without any real budget. Pushing it to the next level required money—and cooperation from the finance group.
Kaminski needed to get this in front of the right people and win their support so Kindall could finish the job. He had little concern about whether his team would get what it needed. Anyone could see that their findings so far were just a preliminary sign of a very large, very ugly problem.
On March 9, Kaminski and his analytic team dropped by Ben Glisan’s office for their scheduled presentation. Glisan led the group down the hall, where everyone took a seat at a conference table. Kaminski launched the discussion with the history of the analytic team and the rationale behind conducting a company-wide risk analysis. Then he turned the floor over to Kevin Kindall.
Glancing down at his report, Kindall went through his analysis. It was calm and reasoned, but painted a graphic picture of a finance division out of its depth, taking risks it did not fully comprehend.
Global Finance—through its structured deals—had entered into repeated arrangements where purchasers of assets could force Enron to take them back through what were known as total-return swaps. But nobody had any idea what potential damage these arrangements might cause in the future. No one kept a book on the swaps; basically, Fastow and his crew had no clear idea of how many there were or of the terms that had been created for them.
Then there were guarantees to purchasers that were issued by the finance division; again, no one kept track of them. The best estimate was that the finance group had put out some twenty-seven hundred corporate guarantees, without assessing the associated risks. It was like a bad housekeeper sweeping dust under the rug and forgetting about it.
There was another problem spelled out by Kindall, one Kaminski considered an emergency issue: Enron, a Fortune 50 corporation, had no idea of its cash position on any given day. No system was in place to track daily inflows and outflows for the whole company. What did exist, Kindall said, resulted in untimely reports from divisions, forcing Enron to borrow money unnecessarily, simply because no one knew if the cash was available. Disorganization was needlessly increasing Enron’s debt levels.

Still, the biggest risks were in the special-purpose vehicles, Kindall said, the off-books partnerships that had been the key to Fastow’s work.
“ We weren’t able to gain access to a lot of information,” Kindall said. “But what we could review pointed to the existence of huge risk exposures that Enron simply hasn’t fully analyzed and does not understand.”
Just two off-books entities, Whitewing and Marlin, created enormous hazards. Because of their structure, underperforming assets that the entities had purchased could lead to future liabilities for Enron, Kindall said.
Plus, the deals had been structured with “trigger events” involving Enron’s share price and credit rating. Basically, to make the entities more attractive to outside investors, Fastow and his team had made commitments on behalf of the company—to issue stock, assume debt, or otherwise take on new obligations—if Enron’s stock price or credit rating sank.
Of course, that was exactly the time that Enron shouldn’t be taking on such commitments. Issuing more stock when the stock price was falling meant that the price could fall even faster. It was like striking an agreement to hose down a house with gasoline if a fire started. To make the original deal sweeter for outside investors, Fastow had created a structure that could push the company toward collapse as soon as trouble started.
Glisan listened silently. He wasn’t all that concerned about the triggers in Whitewing and Marlin. Finance used them all the time; even the Raptors had stock-price triggers. He knew all about them.
Kindall flipped the page of his presentation. “We’ve assessed the likelihood of hitting one of those triggers. For example, we have a five percent chance of a credit downgrade in the next twelve months.”
Five percent. That struck Glisan as high.
“ But you have to understand, these are just the triggers we have located,” Kindall said. “There appear to be other triggers embedded in other vehicles as well.”
Those were hidden in documents that Kindall’s team hadn’t been allowed to review. The triggers appeared to have been assembled without regard to each other. Ultimately, they could all be activated in tandem, since they were all based on the same two factors.
“ It’s likely the occurrence of one trigger will push down the share price so far that we hit another one embedded in some other vehicle,” Kindall said.
He cleared his throat. Presenting doomsday scenarios was never easy. “In truth, it’s conceivable we could hit a cascading series of triggers, setting off a domino effect, where each trigger pushes down our stock price even more,” he said. “That would result in a massive decrease in the share price and lower our bonds to a junk rating.”
Everyone knew what that meant. Enron, as a massive trader, could not survive if its credit rating fell below investment grade to junk status. Other traders would shut the company out of the market, fearing it lacked the financial wherewithal to stand behind its commitments.
The Raptors only increased the danger level, Kindall said. He focused on Raptor I. “Already there are unrealized losses totaling hundreds of millions of dollars in Raptor. It’s conceivable that just the disclosure of those kinds of unrealized losses may force our stock price and credit rating down to an extent that we hit one of the trigger events and set off the domino effect.”
Kaminski spoke up. His group needed a budget to finish its project, to identify the full scale of the threat. Much work remained to be done: assembling a complete list of all the off-books entities, calculating the risks they contained, and creating a forecast of expected liabilities.
Kindall agreed. “We need to take each off-book vehicle and closely examine all of the assets in them.”
He paused. “Once we have that information, we would then be able to estimate the probability of ruin.”

It was all there.
In a single stroke, Kevin Kindall—an inconspicuous mid-level analyst relying on scraps of data—had exposed the financial rot eating away at Enron.
It had come to this: Enron, the supposed corporate success story of the last decade, had ignored—no, disdained—the basics of business, allowing them to slip away in its single-minded pursuit of profit. To executives richly rewarded for each newfangled deal, cash management was boring, not the cutting-edge stuff that let Enron be Enron. Closely tracking exposures was seen as an expense, not a moneymaker. The workaday business of business just didn’t have the kind of sizzle that won plaudits and praise. Buying insurance? A monkey could do that.
That was the culture that had flared in the high-money days of the 1990s and had since spread through Enron like wildfire. Now, with eerie precision, Kindall had predicted the scenario that would ravage the company in just seven short months. The disclosure of the Raptor losses. A market shock. A cascading collapse as Enron’s stock price blew through one trigger after another, pushing the company toward its ultimate demise.
It was as if an unknown engineer at the White Star Line had laid out the dangers of icebergs to the Titanic months before the great ship’s ill-fated voyage. There was still time. Changes could be made, disaster averted. The survival of Enron depended on the response of Ben Glisan, a man whose secret million-dollar profit from a partnership gave him plenty of reason to oppose letting anyone look too closely at Fastow’s dealings.

As Kindall wrapped up his presentation, Glisan skimmed the last two pages of the written report. The analyst was explaining how the recent Fortune magazine article had spelled out a series of dismal statistics for the company, which would be even worse if the “hidden Enron” in all of the off-books partnerships were included.
Glisan fliipped the pages closed. “Well, I appreciate all the work that went into this,” he said.“But there really isn’t anything to worry about.”
Nothing to worry about? Kaminski bridled at the brush-off. Kindall’s analysis portrayed a company that could be on the precipice, and simply not have the data to be aware of it. This might be a matter of life and death.
“ Ben,” Kaminski said, “we can’t know that without conducting a full analysis.”
Glisan smiled. “Vince, I was involved in designing almost all of these vehicles,” he said. “We know what the risks are. It’s not an issue.”
Kaminski pressed his point; more study was needed, he insisted. Glisan raised his hands, relenting a bit.
“ All right, Vince, I hear you,” he said. “I’ll go through this again and get back to you.”

The next morning at eleven, Glisan—now Enron’s only senior executive with the knowledge of the potential debacle the company faced—boarded a Continental Airlines flight with his family for a weeklong ski trip to Beaver Creek, Colorado, where they would be staying at the luxurious Villa Montane Townhomes. There he could relax, hit the slopes, maybe forget about work for a while.
Glisan never bothered to get back to Kaminski and Kindall about their analysis. And he also neglected to tell Lay, Skilling, or any of Enron’s directors about the terrifying warning he had just received.

Enron’s deal with Blockbuster was dead.
The skirmishes of the last few months had escalated into all-out warfare. Blockbuster complained that Enron had failed to provide the technology and access to customers that it had promised; Enron countered that Blockbuster wasn’t delivering quality content. By March, the recent contractual agreement forbidding either side from walking away had expired, and both were ready to call it quits.
In the days before the deal was called off, Lay was briefed on the troubled arrangement by David Cox, the primary negotiator. The movies secured by Blockbuster had been terrible, he said—lowbrow teen sex romps like Porky’s 3 and a bunch of how-to videos. As Cox described it, the celebrated Blockbuster relationship with movie studios was a bust. As the biggest player in video rentals, it had used its leverage to extract big studio concessions for its retail stores. The studios weren’t about to help Blockbuster build another business using their content, and several studio executives had quietly let Enron know that.
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 ?ne 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.

 

Excerpted from Conspiracy of Fools by Kurt Eichenwald Copyright © 2005 by Kurt Eichenwald. Excerpted by permission of Broadway, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.