The Smartest Guys in the Room

Cast of Characters

Our Values

Introduction

1. Lunch on a Silver Platter

2. “Please Keep Making Us Millions”

3. “We Were the Apostles”

4. The First Prima Donna

5. Guys with Spikes

6. The Empress of Energy

7. The 15 Percent Solution

8. A Recipe for Disaster

9. The Klieg-Light Syndrome

10. The Hotel Kenneth-Lay-a

11. Andy Fastow’s Secrets

12. The Big Enchilada

13. “An Unnatural Act”

14. The Beating Heart of Enron

15. Everybody Loves Enron

16. When Pigs Could Fly

17. Gaming California

18. Bandwidth Hog

19. “Ask Why, Asshole”

20. “I Want to Resign”

21. The $45 Million Question

22. “We Have No Cash!”

Epilogue: Isn’t Anybody Sorry?

Illustrations

Authors’ Notes and Acknowledgments

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THE SMARTEST GUYS IN THE ROOM

Bethany McClean and Peter Elkind are Fortune senior writers. McLean, a former investment-banking analyst for Goldman, Sachs, lives in New York City. Her March 2001 article ‘Is Enron Overpriced?’ in Fortune was the first in a national publication openly to question the company’s dealings. Elkind, an award-winning investigative reporter, is the author of The Death Shift. He has written for The New York Times Magazine, the Washington Post and Texas Monthly. He lives in Arlington, Texas.

Cast of Characters

Jeff Skilling—President and chief operating officer. Served as CEO from February to August 2001.

Cliff Baxter—Jeff Skilling’s chief deal maker and trusted confidant. Briefly served as CEO of Enron North America.

Tim Belden—West Coast power trader who figured out how to game the California market.

Arthur and Robert Belfer—father-son Enron directors and New York-based investors.

Louis Borget—CEO of Enron Oil. Went to jail as a result of Enron Oil scandal.

Ray Bowen—Enron finance executive. Became treasurer after Ben Glisan was fired.

Ron Burns—Former CEO of Enron’s pipeline division. Briefly co-CEO with Skilling of Enron Capital and Trade Resources (ECT).

Rebecca Carter—Enron’s corporate secretary and Skilling’s second wife.

Margaret Ceconi—Former GE manager who joined Enron Energy Services (EES). Later tried to blow the whistle.

John Duncan—Enron director and chairman of the board’s executive committee. Gave Lay his first job as CEO.

Mark Frevert—Longtime Enron executive. Became vice chairman in the last months.

Ben Glisan—Fastow’s structured-finance accounting whiz. Became Enron treasurer.

Wendy Gramm—Enron director and former chairman of the Commodities Futures Trading Commission. Wife of U.S. Senator Phil Gramm of Texas.

Rod Gray—Rebecca Mark aide. Worked at both Enron International and Azurix.

Kevin Hannon—Former Bankers Trust employee who became Ken Rice’s deputy at Enron North America and Enron Broadband.

John Harding and Steve Sulentic—Louis Borget’s direct superiors at Enron during Enron Oil scandal.

Joe Hirko—Former Portland General CFO who served as co-CEO of Enron Broadband with Rice.

Kevin Howard—Enron Broadband finance executive who worked on Project Braveheart.

Robert Jaedicke—Enron director, and chairman of the audit committee. Former dean of the Stanford Graduate School of Business.

Vince Kaminski—Head of Enron’s Research Group. In-house skeptic of Fastow’s deals.

Rich Kinder—President and chief operating officer before Skilling. Left to start Kinder Morgan.

Michael Kopper—Fastow’s top deputy and investor in Chewco partnership. Later left Enron to run Fastow’s LJM partnerships.

Mike Krautz—Enron Broadband finance executive who worked on Project Braveheart.

John Lavorato—Greg Whalley deputy. Later became head of trading in North America.

Mark Lay—Lay’s son, who worked for the company and later joined a company that did business with Enron.

Robyn Lay—Lay’s stepdaughter, who once had an Enron jet deliver her bed to Monaco.

Sharon Lay—Lay’s sister, whose Houston travel agency got most of its business from Enron.

Charles LeMaistre—Enron director and chairman of board compensation committee. Former president of the University of Texas M. D. Anderson Cancer Center.

Kathy Lynn—Worked for Fastow at Global Finance. Later employed by Fastow’s LJM partnerships. Investor in Fastow deal.

Kevin McConville—Head of Enron’s Industrial Group. Every deal his group made went sour.

William McLucas—Wilmer, Cutler & Pickering lawyer, special counsel to Enron.

Jeff McMahon—Enron’s corporate treasurer until replaced by Glisan. Became CFO after Fastow was fired.

Thomas Mastroeni—Treasurer of Enron Oil under Borget. Pled guilty in the Enron Oil scandal.

Jordan Mintz—General counsel for Fastow’s Global Finance division. Pressured Fastow to give up the partnerships.

Kristina Mordaunt—In-house lawyer, served as general counsel of Global Finance and Broadband division. Made $1 million on a $5,800 investment in one of Fastow’s deals.

Mike Muckleroy—Executive who bailed out the company during the Enron Oil scandal.

Lou Pai—Skilling lieutenant who headed early trading operation. Later CEO of EES.

Ken Rice—Key member of Skilling’s inner circle. CEO of Enron Wholesale and, later, Enron Broadband Services.

Joe Sutton—Rebecca Mark’s longtime deputy. Took over Enron International after she left.

Beth Tilney—Enron executive and Lay confidante. Married to Merrill Lynch investment banker Schuyler Tilney.

John Urquhart—Enron director. Former executive vice president at General Electric.

Lord John Wakeham—Enron director and former British secretary of state for energy. As government official, approved Teesside.

Pinkney Walker—economics professor at the University of Missouri. Lay’s first mentor.

Charls Walker—Enron director and top Washington lobbyist. Pinkney Walker’s brother.

Sherron Watkins—Global Finance executive. Wrote whistle-blowing letter to Ken Lay.

Greg Whalley—Head of the trading operation in late 1990s. Became president and COO after Skilling resigned.

General Tom White—Enron international executive. Later Pai’s number two at EES. Became secretary of the army in the George W Bush administration.

Anne Yaeger—Global Finance employee who left to work for the LJM partnerships. Investor in Fastow deal.

THE ACCOUNTANTS

Carl Bass—member of Andersen’s Professional Standards Group. Chief Enron skeptic in the firm.

WALL STREET AND THE BANKS

David Bermingham, Giles Darby, and Gary Mulgrew—NatWest bankers who allegedly conspired with Fastow to steal millions that belonged to the bank.

Jim Chanos—Short seller who runs the hedge fund Kynikos Associates. Early short seller of Enron stock.

Donato Eassey—Analyst with Merrill Lynch. Replaced John Olson after he was fired.

Richard Grubman—Short seller who runs the hedge fund Highfields Capital Management. Early short seller of Enron stock.

Curt Launer—Enron-friendly analyst with Donaldson, Lufkin & Jenrette and, later, Credit Suisse First Boston.

James (Jimmy) Lee—Head of investment banking at Chase Manhattan Bank. Named vice chairman when Chase bought J. P. Morgan.

Robert Rubin—Member of the office of the chairman of Citigroup. Former treasury secretary in the Clinton adminstration.

Marc Shapiro—Vice chairman of finance and risk management at Chase Manhattan Bank. After the merger of J. P. Morgan and Chase, became a vice chairman of J. P. Morgan Chase. Longtime acquaintance of Lay’s.

Schuyler Tilney—Merrill Lynch investment banker. Firm’s primary contact with Enron and Andrew Fastow.

Rick Walker—Chase Manhattan (later J. P. Morgan Chase) banker, served as key contact with Enron.

THE JOURNALISTS

John Emshwiller and Rebecca Smith—Wall Street Journal reporters who exposed Fastow’s partnerships in October 2001.

Jonathan Weil—Wall Street Journal reporter who raised question about mark-to-market accounting in September 2000.

THE ACQUIRERS

Our Values

RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don’t belong here.

INTEGRITY: We work with customers and prospects openly, honestly, and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.

COMMUNICATION: We have an obligation to communicate. Here, we take the time to talk with one another … and to listen. We believe that information is meant to move and that information moves people.

EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.

Introduction

On a cool Texas night in late January, Cliff Baxter slipped out of bed. He stuffed pillows under the covers so his sleeping wife wouldn’t notice he was gone. Then he stepped quietly through his large suburban Houston home, taking care not to awaken his two children. The door alarm didn’t make a sound as he entered the garage; he’d disabled the security system before turning in. Then, dressed in blue jogging slacks, a blue T-shirt, and moccasin slippers, he climbed into his new black Mercedes-Benz S500 and drove out into the night.

At 43, John Clifford Baxter, the son of a Long Island policeman, had made it big in Texas. Before quitting his job eight months earlier, he had served as vice chairman of a great American corporation, capping a decade-long career as the company’s top deal maker. Baxter was rich, too—thanks to a generous helping of stock options, a millionaire many times over. But as he cruised the empty streets of Sugar Land, Texas, Baxter was drowning in dark thoughts. Always given to mood swings, he had become deeply depressed in recent days, consumed by the spectacular scandal that had engulfed his old company.

Everyone seemed to be after him. A congressional committee had already called; the FBI and SEC would surely be next. Would he have to testify against his friends? The plaintiffs’ lawyers had named him as a defendant in a huge securities-fraud suit. Baxter was convinced they were having him tailed—and rummaging through his family’s trash. Then there was the media, pestering him at home a dozen or more times a day: Did he know what had gone wrong? How could America’s seventh-biggest company just blow up? Where had the billions gone? No one, at this early stage, viewed Baxter as a major player in the company’s crash. Yet he took it all personally. In phone calls and visits with friends, he railed for hours about the scandal’s taint. It’s as if “they’re calling us child molesters,” he complained. “That will never wash off.”

Desperate to get away, he’d spent part of the previous week sailing in the Florida Keys. Sailing was one of Baxter’s passions. For years, he’d decompressed floating on Galveston Bay aboard his 72-foot yacht, Tranquility Base. But he’d sold the boat several months earlier. When Baxter returned from Florida, his doctor prescribed antidepressants and sleeping pills and told him to see a psychiatrist. He’d called the shrink’s office that day to make an appointment. But when the receptionist explained that the schedule was booked until February, Baxter hung up—he wasn’t going to wait that long.

Less than 48 hours later, at about 2:20 A.M. on January 25, 2002, Baxter stopped his Mercedes on Palm Royale Boulevard, a mile and a half from his home. It was cloudy and a bit chilly that evening by Texas standards—about 48 degrees—but the sedan was tuned to an interior temperature of precisely 79. An open package of Newport Lights sat in the center console, a bottle of Evian water in the cup holder. Baxter’s black leather wallet lay on the passenger seat. Baxter parked the car in the middle of the street, with the doors locked, the engine running, and the headlights burning. Then he lifted a silver .357 Magnum revolver to his right temple and fired a bullet into his head.

Seven days later, Cliff Baxter’s friends from Enron gathered to mourn. The Houston energy giant’s collapse into bankruptcy had already become the biggest scandal of the new century. Baxter’s death had stoked the media bonfire and tossed a fresh element of tragedy into a bubbling stewpot of intrigue. Enron’s influence ranged widely—from Wall Street to the White House. So feared was this company, so powerful were its connections, so much was at stake that there was open speculation Baxter had actually been murdered—the target of a carefully staged hit, aimed at silencing him from spilling Enron’s darkest secrets. The rumblings had forced the Sugar Land police department to treat an open-and-shut case—Baxter had even left a suicide note in his wife’s car—like a capital-murder investigation, requiring DNA testing, handwriting experts, ballistics studies, and blood-spatter tests.

The Texas memorial service took place after Baxter was buried in a private ceremony in his hometown on Long Island. He was laid to rest in a plot he had secretly purchased there just a few weeks earlier, in the throes of his deepening funk. An Enron corporate jet—a remaining vestige of the company’s imperial ways—flew Cliff’s family and a few others east for the funeral.

Now it was Houston’s turn. The precise location of the service—the ballroom of the St. Regis, the city’s swankiest hotel—remained a secret until noon that day, at the insistence of Carol Baxter. Cliff’s widow was bent on avoiding the press. She blamed reporters’ intrusions for pushing her husband over the edge. So the 100 hand-picked guests who pulled up to the valet-parking station on this Friday afternoon had been summoned by furtive phone calls just two hours earlier.

For 90 minutes, those who knew Baxter—family members, fellow “boat people” from his beloved yacht club, and Enron friends—heard warm stories about his gentler side. There were images of Cliff with his family, Cliff sailing, Cliff fronting his rock band. Baxter was a gifted musician. When police found his body, there were two guitar picks in his wallet. Everyone left the service with a compact disc of his favorite songs, prepared with the help of J. C. Baxter, Cliff’s 16-year-old son. The opening track was perhaps Cliff’s favorite: a bouncy pop tune called “Perfect Day.”

It was a tragedy layered on tragedy, but there wasn’t much talk about the company’s Icarus-like fall among the former Enron executives thrust together again that afternoon. This wasn’t the time for such grim shoptalk; what’s more, their lawyers had pointedly instructed them to avoid such conversations. Ken Lay, Enron’s founding father, was conspicuously absent. At the insistence of the company’s creditors, he had finally yielded his job as CEO and chairman just two days before Baxter’s death; Lay sent his wife, Linda, to attend the service instead. Enron’s deposed chief financial officer, a onetime whiz kid named Andrew Fastow, was missing, too; he and Baxter had fought bitterly.

But former chief executive officer Jeffrey Skilling—once touted as a brilliant visionary and the man who shaped Enron in his own image—was very much in evidence. Baxter had been his closest confidant at Enron, the nearest thing Skilling, who kept his own counsel, had to a sounding board. Widely feared during his reign at Enron, known for his unflinchingly Darwinist view of the world, Skilling spent the service in tears.

In the months after Cliff Baxter’s memorial service, Jeff Skilling could often be found in an otherwise empty hole-in-the-wall Houston bar called Muldoon’s, downing glasses of white wine. A short, fit man of 48 with slicked-back hair and cool blue eyes, Skilling typically appeared in faded jeans, a white T-shirt, and a two-day growth of beard. This is where he came to brood over what had happened at Enron—often for hours at a time.

More than anyone else, Skilling had come to personify the Enron scandal. Part of it was his audacious refusal, in the face of a dozen separate investigations, to run for cover. Alone among Enron’s top executives summoned before a circuslike series of congressional hearings, Skilling had ignored his lawyers’ advice to take the Fifth and defiantly spoken his piece. The legislators were convinced that Skilling had abruptly resigned as CEO of the company—just four months before Enron went belly up—because he knew the game was over. But Skilling wouldn’t have any of it. At the time he quit, he insisted, he believed Enron was “in great shape”; he had left for “personal reasons.” The nationally televised testimony was vintage Skilling: articulate, unapologetic, and prickly. He didn’t hesitate to lecture, even scold, U.S. senators.

“Enron was a great company,” Skilling repeatedly declared. And indeed that’s how it seemed almost until the moment it filed the largest bankruptcy claim in U.S. history. Fortune magazine named it “America’s most innovative company” six years running. Washington luminaries like Henry Kissinger and James Baker were on its lobbying payroll. Nobel laureate Nelson Mandela came to Houston to receive the Enron Prize. The president of the United States called Enron chairman Lay “Kenny Boy.” Enron had transformed the way gas and electricity flowed across the United States. And it had bankrolled audacious projects around the globe: state-of-the-art power plants in third world countries, a pipeline slicing through an endangered Brazilian forest, a steel mill on the coast of Thailand.

As Skilling saw it, Enron had fallen victim to a cabal of short sellers and scoop-hungry reporters that triggered a classic run on the bank. Privately, he would grudgingly acknowledge occasional business mistakes—including one, the failure of Enron’s broadband venture, that cost the company more than $1 billion. Yet Skilling remained remarkably unwilling to accept any personal responsibility for the company’s demise. “You’re not going to find one memo where Skilling said, ‘Fuck with the numbers,’ ” he told a friend. “It isn’t there.” He was reluctant even to pronounce judgment on Fastow, his handpicked finance chief, who—the U.S. Justice Department alleged—had not just done a lousy job as CFO but stolen millions and collected kickbacks right under Skilling’s nose. What happened to Enron, Skilling insisted, was part of the brutal cycle of business life. “Shit happens,” he liked to say. Enron was a victim.

Unfortunately for Skilling, no one else believed that. Enron, which once aspired to be known as “the world’s greatest company,” became a different kind of symbol—shorthand for all that was wrong with corporate America. Its bankruptcy marked not merely the death of a company but the end of an era. Enron’s failure resonated powerfully because the entire company stood revealed as a sort of wonderland, where little was as it seemed. Rarely has there ever been such a chasm between corporate illusion and reality. The public scrutiny Enron triggered exposed more epic business scandals—tales of cooked books and excess at companies like Tyco, WorldCom, and Adelphia. Enron’s wash swamped the entire U.S. energy industry, wiping out hundreds of billions in stock value. It destroyed the nation’s most venerable accounting firm, Arthur Andersen. And it exposed holes in our patchwork system of business oversight—shocking lapses by government regulators, auditors, banks, lawyers, Wall Street analysts, and credit agencies—shaking faith in U.S. financial markets.

Yet Skilling continued to plead his case with a compelling arrogance. At different times, before different audiences, he could be self-righteous, self-pitying, sarcastic, profane, even naive. Sometimes, he was all of these things at once. Periodically, he’d launch into an extended rant: about the media, about politicians, about the aggressive tactics of government prosecutors (“Welcome to North Korea”). The investigation was “a travesty,” Skilling declared. “It makes me ashamed to be an American.”

Even after the bankruptcy filing, he continued to exult over the innovative ways in which Enron went about its business. In an industry built on brawn, Enron prided itself on being a company that ran on brains. And Enron was smart—in many ways, too smart as it turned out. Just as he had when Enron was riding high, Skilling labeled ExxonMobil a “dinosaur”—as though it didn’t matter that the oil giant was thriving while Enron was nearly extinct. “We were doing something special. Magical.” The money wasn’t what really mattered to him, insisted Skilling, who had banked $70 million from Enron stock. “It wasn’t a job—it was a mission,” he liked to say. “We were changing the world. We were doing God’s work.”

In the public eye, Enron’s mission was nothing more than the cover story for a massive fraud. But what brought Enron down was something more complex—and more tragic—than simple thievery. The tale of Enron is a story of human weakness, of hubris and greed and rampant self-delusion; of ambition run amok; of a grand experiment in the deregulated world; of a business model that didn’t work; and of smart people who believed their next gamble would cover their last disaster—and who couldn’t admit they were wrong.

In less combative moods, Skilling reflected on his plight. “My life is fucked,” he said. He would tear up as he spoke about what building Enron had cost him: he had destroyed his marriage, ignored his kids. “People didn’t just go to work for Enron,” Skilling would tell acquaintances. “It became a part of your life, just as important as your family. More important than your family. But at least I knew we had this company.”

Skilling was seeing a psychiatrist and taking antidepressants. “I view my life as over,” he said during an extended dark spell. Before his funk eased, in the months after Baxter took his own life, Skilling openly mulled over whether his friend had done the right thing. “Depending on how it plays out, it may reach a point where it’s not worth sticking around,” he said. “Cliff figured out how it was going to play out.”

Bethany McLean and Peter Elkind