What's he building in there?
What the hell is he building in there?
It had taken Enron 16 years to go
from about 10 billion of assets to
65 billion of assets.
It took them 24 days to go bankrupt.
What the hell is he building in there?
This company collapsed so quickly and so entirely.
I mean it was into bankruptcy within a matter of weeks.
It just immediately had
all the makings of a gigantic scandal.
He's hiding something from the rest of us.
The fatal flaw at Enron
if there is one, you say it was pride
but then it was arrogance,
intolerance, greed,
So many of them were blinded by the money
that they didn't see that
they were sinking their own life boat
We have a right to know.
It just got hungrier and hungrier.
Sooner or later they were doomed to go off
that cliff at 90 miles an hour.
It's astounding that they got away with it for so long.
In reality, Enron was a house of cards.
What we didn't know was that the house of cards
had been built over a pool of gasoline
It all sort of became smoke and mirrors.
Committee will come to order.
This is a case of America's largest corporate bankruptcy.
The question here is what happened,
who was responsible for it happening,
and what can we do to prevent this sort of thing
from happening again.
I think the Enron story's so fascinating
because people perceive it as a story
that's about numbers.
That it's somehow about all these complicated transactions.
But in reality it's a story about people
and it's really a human tragedy.
On this date, at 2:23 am,
Sugar Land police discovered John C Baxter
located inside his vehicle
with an apparent gunshot wound to the head.
Ah... at this time there has been a suicide note located.
Sir, can you give us any indication whether
this was related to Enron's bankruptcy.
We do know that he was and Enron employee,
but as far as any other indications of why
he committed suicide, no we do not.
Mr. Skilling,
let me touch on something that's sort of sad
and that's of course the suicide of Cliff Baxter.
And you mentioned he was your best friend
in your opening statement.
Before he died,
did you have many conversations with him?
Yes.
And were any of them relative to Enron?
Yes.
There's no one that knew Cliff,
toward the end, that didn't realize that
he was heartbroken by what had happened.
And Cliff came over to my house
and he said 'They're calling us child molesters.'
He says, 'That will never wash off.'
But Mr. Skilling you don't believe that.
I don't believe what?
You don't believe that the press and everybody
calling Cliff Baxter or yourself or anybody
on the Board of Directors,
denigrating or tainting you,
you don't think it's accurate
is what you're saying to us here today.
I do not believe...
I did not do anything wrong that was not in the interest
In all the time that I worked for Enron Corporation,
it was in the interest of the shareholders of the company.
Ultimately, who was responsible for the downfall of Enron?
Only a few years ago,
Enron was the nation's seventh-largest corporation,
valued at almost 70 billion dollars.
Pundits praised the company as a new business model.
This trading floor was manned by America's best and brightest,
charting the futures of energy and power.
And high above each with a private staircase,
Ken Lay and Jeff Skilling
had built their own plush staterooms.
They were known as the smartest guys in the room.
Captains of a ship too powerful to ever go down.
In the Titanic, the captain went down with the ship.
In Enron, it looks to me like the captain first gave himself
and some friends a bonus,
then lowered himself and the top folks down in the lifeboat
and then hollered up and said,
by the way, everything is going to be just fine.
Like Skilling,
Ken Lay said he hadn't done anything wrong.
Could we have a word with you real quickly?
We're with CNN.
Really not this morning, thank you.
Beyond the financial issues,
some suspected a political conspiracy.
Enron had been the largest corporate contributor
to the first presidential campaign of George W. Bush.
This is not a political issue, it is a business issue.
You know Enron had made contributions to
a lot of people around Washington D.C.
And if they came to this administration looking for help
they didn't find any.
To say no help had is like,
'I did not have political relations
with that man, Mr. Lay.'
What about the fact that George W. Bush
calls Ken Lay, Kenny Boy?
That's my nickname for my husband,
which he overheard.
So it wasn't original, with the President?
It certainly wasn't.
According to published reports,
your husband earned about 300 million dollars in,
in compensation, in stocks
from Enron over the last four years.
What happened to all that money?
It's gone. It's gone.
There's nothing left.
This is the shredded evidence we got that came out of Enron.
We very quickly determined that the insiders had sold off
a billion dollars of their stock in the preceding several months.
Did you convert stock worth 66 million dollars?
I don't know, but...
I don't have the records with me...
Would that be surprising to you to learn that you did that?
No, that would not be surprising.
Mr. Fastow
got only 30 million in stock proceeds from Enron,
but he took another 30 million out,
with his side deals.
I think there was just an immediate sense of outrage
at Lay and Skilling and Fastow
when people realized how much they had profited,
and how completely artificial
the appearance of this company had been.
News of shredding at Enron raised more questions.
What answers were lost in the torn documents?
20,000 employees had lost their jobs.
$2 billion in pensions and retirement funds had disappeared.
Was Enron the work of a few bad men
or the dark shadow of the American dream?
Lay comes to the story of Enron from very humble roots.
My father was a Baptist minister and,
and he was ordained a Baptist minister
while I was very young probably two, three years old.
Ken Lay was a Baptist Preacher's son in a family
that had been poor all it's life
and he, throughout his life, worked several jobs as a kid
and clearly had in mind that things could be better...
and wanted things to be better.
He had a huge ambition to make wealth for himself.
He told a story later about sitting on a tractor,
dreaming about the world of business
and how different it could be from the way
things were for him and his family.
Lay was a PhD in economics and he became,
very early on, a real apostle for deregulation.
He was way ahead of the curve on this.
He was thinking about energy markets
that would be deregulated. And in particular,
the natural gas industry that was shackled by regulation.
And he pushed aggressively in Washington to change all of that.
In Washington,
Lay became part of a new crusade
to liberate businessmen from the rules
and regulations of government.
Government is not the solution to our problem.
Government is the problem.
The societies which have achieved the most spectacular,
broad-based economic progress in the shortest period of time
are not the most tightly controlled,
not necessarily the biggest in size,
or the wealthiest in natural resources.
No, what unites them all is their willingness to believe
in the magic of the marketplace.
The magic power of deregulation
pushed Ken Lay to found Enron in 1985.
Through a merger of vast networks of natural gas pipelines,
Lay thought Enron would be poised to take
advantage of the government's decision
to let gas prices float with the currents of the market.
Ken Lay had a view of deregulation
from the standpoint of all the money
that he thought could be made.
Ken Lay wasn't alone.
A couple of Texas oilmen shared his views
on how to get government out of the energy business.
I think they could sort of understand each other.
It was a professional courtesy
between a sidewinder and a timber rattlesnake.
Lay was closer to the father.
But while he was governor of Texas
George W. Bush was only too happy to
make phone calls for Ken Lay.
This absolutely has no precedent.
This is by far and away the most important,
major relationship of a Presidential family
with a single corporation in American history.
When Rich Kinder,
one of Enron's Executives, left the company,
Lay arranged for a video valentine.
Rich, I've... been asked to think of one thing
I could say to you on your departure from Enron.
It'd be this, 'Don't leave Texas.'
Rich, you have been fantastic to the Bush family.
I don't think anybody did more than
you did to support George and,
of course, in this stage of my life,
and Barbara's too, that's what really matters.
Your family and your friends.
Early on, George Bush, Sr.
Helped secure billions in government subsidies
for Enron International.
And he helped promote Lay as
deregulation's Ambassador-at-Large.
Enron is a company...
that deals with everyone with absolute integrity.
We want people to leave the transaction with Enron
thinking that they've been dealt with
in the highest possible way
as far as integrity and truthfulness.
He always wrapped himself in the cloak of moral rectitude.
But there was one episode, early on,
that raised questions about whether he was actually
walking the walk This was the Enron oil scandal,
also know as the Valhalla Scandal.
While you were at Arthur Anderson,
were you involved in an investigation
at a company called Enron Oil?"
Yes, I was.
The issue with the company in 1997
involved the misappropriation of moneys by two traders.
In 1987 two oil traders made bets for Enron
on whether the price of oil would rise or fall.
Oil trading is like gambling:
Sometimes you win, sometimes you lose.
But Enron Oil always seemed to win,
much to Ken Lay's delight.
I tried to explain to Ken Lay
the tremendous risk that you have in that market.
You can lose...
ten times your original investment.
A veteran trader, Mike Muckleroy,
was suspicious of Enron Oil's steady high profits.
Well this oil trading business had profits
that nobody could really understand and in fact,
that many of Ken Lay's lieutenants questioned.
They said this business can't be making
this much money legitimately.
Something weird is going on.
Something weird was going on.
The first hint came from an anonymous tip
about the president of the company,
Louis Borget.
Mr. Borget had taken some three plus million dollars
of corporate funds and put it in a personal account of his.
There were offshore accounts phony books
and a trail that led from the company's treasurer,
Tom Mastroeni,
to a mysterious Lebanese speculator no one could find:
M. Yass.
What name did you suspect that was?
My ass, you know.
And M Smart, well so that's Maxwell Smart.
I mean, these guys are playing games
Borget and Mastroeni were summoned to Houston.
First, they presented falsified bank records to Enron.
Then they admitted they had diverted company
profits to personal accounts.
It was brought to the attention of the Enron Board.
Auditors were brought in as well,
to look at the whole thing.
At the board meeting,
the auditors told Lay that Borget and his traders
were manipulating earnings destroying daily trading records,
and probably gambling way beyond their limits.
The next day we found out that
Lay's decision was to basically change nothing
as far as the operation's concerned.
And the reason he gave was that this was
the only part of the combined company
that was making any money and that he could not,
you know, kill the golden goose.
The traders weren't fired, or even disciplined.
Instead, Enron sent a telex to Borget:
Please keep making us millions.
Instead of reducing Enron's risk,
Lay encouraged his traders to gamble more.
But then their luck changed.
Two months later,
here I got this panic call that they had
drawn down 90 million dollars in the previous five days.
What we could do is just try and find out
what kind of guerilla we had loose up there.
Muckleroy hopped on the next plane to New York.
He knew Mastroeni had another set of books,
and he would do whatever it took to get them.
I basically stood over Tom
and I told him that one of two things was going to happen.
Either one of the trading partners
that was crooked with Borget
who was a German arms dealer was going to kill him,
or I was. I said 'I'll track you down
and find you no matter where you go.
And sooner or later, I'll get you.'
The next day, Mastroeni came in with the real books.
The traders had gambled away all of Enron's reserves.
By acting fast, Muckleroy bluffed the market,
and managed to save the company.
After Valhalla Ken Lay maintained that
he had been shocked that the traders
had gambled so recklessly.
But Ken Lay had known all along
about the risks that were taken.
He had seen the reports warning him
about the traders' behavior.
Since the fall of Enron, Ken Lay has said that
he can't be responsible for things
he didn't know about.
Sounds like what he said about Valhalla.
Do you believe that he didn't know?"
I can answer only for one. I can answer for Valhalla
because Ken Lay did in fact know about this thing.
Because I had told him myself.
The auditors adamantly told Mr. Ken Lay
that the two rogue traders should be fired.
Lay read the report and he read his budget
and estimated how much they, the two rogue executives made
and if they were fired what he could lose.
My conclusion was that this guy is a guy who puts earnings
before scruples rather than reacting
to the dishonesty right in front of him.
Mastroeni received a suspended sentence.
Borget was convicted of fraud, and spent one year in jail.
With his biggest moneymaker now behind bars,
Ken Lay had a problem:
Who could he find to make money for Enron?
Every year, every day,
every week you have to come up with new ideas.
Ken Lay saw in Jeff Skilling the guy who had the answer to
what the future of the natural gas business was supposed to be.
Ken Lay is also a guy who considers himself a visionary
and he liked other people he thought of as visionaries.
He liked people with big ideas.
And Jeff Skilling was a person with the biggest ideas of all.
Jeff Skilling's biggest single idea was find
a new way to deliver energy.
Rather than be bound by the physical flow of the pipeline,
Enron would become a kind of stock market for natural gas.
It was a magical new idea:
Transform energy into financial instruments
that could be traded like stocks and bonds.
So that was the one good idea.
In 1992 using that good idea,
we became the largest buyer and seller of natural gas
in North America.
Jeff was like the prophet.
He came in and said There's a whole new world out there.
Forget about this pipeline stuff,
you know the staid pipeline in the ground and...
gas in and gas out.
We can recreate this entire industry.
An attorney from Vinson & Elkins,
Amanda Martin was one of the first executives hired
by Jeff Skilling and became part of his inner circle.
The excitement was palpable.
You cannot imagine how proud we all were to be there.
And then, of course, we had a leader who imbued us
with a sense of confidence that if we were smart,
anything could be accomplished And then the bottom line
we began to make money.
And that in and of itself,
was a re-affirmation that this could be big.
Skilling saw the opportunity to build an industry new
and to start a business from scratch.
But he had one specific condition
that had to be met before he'd join Enron,
and it was that he be allowed to use
a certain kind of accounting known as mark-to-market.
Arthur Andersen signed off, and the SEC approved it.
I remember walking in and going 'What's going on? '
And Causey and everybody,
I mean every one was so excited and then came the champagne
and We had got Mark-to-market accounting treatment.
And I often think about how clear my memory was about that event.
And that was the beginning of a major cog
of the downfall ultimately of Enron.
Mark-to-market accounting allowed Enron
to book potential future profits
on the very day a deal was signed.
No matter how little cash actually came in the door,
to the outside world, Enron's profits could be...
whatever Enron said they were.
Very subjective.
And very... it left it open to manipulation.
And they were saying that we're going to sell
power out of this power plant in ten years
for X dollars per kilowatt.
And there was no way anybody could prove that
they could do it.
Well... Hey Reg.
Good morning. How are you?
Finally. Great. Good to see you.
Jeff. Good to see you. Todd, sit down.
We've been working hard on this
and we've really pulled out all the stops.
Look what we got. Origination...
We did 20 million last year,
I think we can do 120 million dollars this year.
Trading we did 10 million last year
we think we can do 64 this year.
This is the key.
We're going to move from
mark-to-market accounting to something
I call H, F, V
Hypothetical Future Value accounting.
If we do that we can add a kazillion dollars
to the bottom line.
Whoa! Jeff... alright! That sounds fantastic.
Oh Jeff, thank you. That's just supurb performance.
And you're going to go far, my boy.
Probably President of the company one day.
You think so? I think!
He really believed that the idea was everything.
And that when you came up with an idea,
you should be able to book the profits from that idea,
right away.
Because otherwise some lesser man was taking the profits
from the idea that some greater man
had come up with in the past.
When Jeff Skilling applied to Harvard Business School,
the professor asked him if he was smart.
He replied, 'I'm fucking smart.'
One of his favorite books was The Selfish Gene,
about the ways human nature is steered by greed
and competition in the service of passing on our genes.
At Enron.
Skilling wanted to set free the basic instincts
of survival of the fittest.
Jeff had a very Darwinian view of how the world worked.
He was famous for saying once in Enron's early years,
that money was the only thing that motivated people.
Skilling's notion of how the world should work
really trickled down,
and affected everything about how Enron did business.
He instituted the system know as the PRC,
or Perfomance Review Committee.
It required that people be graded from a one to a five.
And roughly ten percent of people had to be a five.
And those people were supposed to be fired.
Hence, this came to be know as 'Rank and Yank.'
I, personally, am convinced
that the PRC process is the most important process
that we conduct as a company.
I've never heard of a company yet
that would be successful terminating 15 percent
of their people every year...
just to satisfy the fact that the other employees
had to vote on them.
And so when you're being evaluated by that group,
you are getting direct communication from Ken and me
about what the objectives of the company are
and how you fit with those objectives.
It was a brutal process.
The ability for a 25 year old to go in
and to be reviewed and to be superior...
and as a consequence get a five million dollar bonus.
I don't think that's repeated in many places
in corporate America.
Our culture is a tough culture.
It is a very aggressive culture.
At Enron,
no one was more aggressive than the traders.
If I'm on the way to my boss's office
talking about my compensation.
And if I step on somebody's throat on the way
that doubles it?
Well, I'll stomp on the guy's throat.
You know, that that's how people were.
On the trading side we got to be the biggest,
baddest house in town.
And by necessity,
if you wanted to be in the market,
you had to deal with Enron.
Enron's traders were like the super powerful high school
clique that even the principal doesn't dare to reign in.
They had become the major engine of
at least reported profits at the company.
They took Jeff Skilling and Ken Lay's belief in free markets
and turned it into an ideology.
But they pitch it almost as a new economic religion.
Enron on-line will change the markets
for many many commodities.
It is creating an open transparent marketplace
that replaces the dark blind system that existed.
It is real simple.
You turn on your computer and it's right there.
That's our vision.
We're trying to change the world.
I think Jeff Skilling had a desperate
need to believe that Enron was a success.
I think he identified with Enron.
He proclaimed, at one point,' I am Enron'.
The other thing about people at Enron is,
a lot of them were former nerds and including Jeff Skilling.
He had been paunchy. He had big glasses.
He was losing his hair.
And Jeff Skilling one day kinda woke up
and decided to change himself.
And he started working out, lost a lot of weight.
But he really did remake himself
through sheer will and force of personality.
When Jeff got Lasik on his eyes, everybody at Enron got Lasik,
so nobody was wearing glasses.
I think Jeff Skilling is really a tragic figure,
in a classic sense of the word.
He's a guy that people describe as incandescently brilliant.
But he's also a guy who is radically different
than he at times portrays himself.
He's portrayed himself as somebody who has
very tightly-monitored risk. In reality, he's a gambler.
He gambled away huge sums of money before he was 20 years old,
by making wild bets on the market.
To Jeff Skilling, risk was glamorous.
He was a huge risk taker.
He actually talked about wanting to go on trips that
were so perilous that someone could actually die.
This manifested itself in trips that Jeff Skilling led
for a small group of friends and customers.
A core cadre of Enron guys used to go on
these wild adventures:
Andy Fastow would go; Ken Rice would go.
The trips were legend.
You know, we can sit and think about what strange insecurities
they were trying to overcome.
But it made them feel good as men.
And they took a particularly memorable trip to the Baja
twelve hundred miles of very rugged terrain in Mexico.
This is a trip where people crashed bikes.
Ken Rice was on the trip,
and he busted a lip and required a bunch of stitches.
People broke bones.
One guy flipped a jeep and almost got killed.
Those sorts of stories at Enron became legend.
And it fed the whole macho culture of the place.
Jeff Skilling had a way of describing people that he liked.
He said, 'I like guys with spikes.'
He liked somebody with something extreme about them.
Ken Rice was one of the Men with Spikes.
He was the salesman of the group.
Very amiable, fun, man's man.
And was the guy out selling deals to energy companies.
In the case of Cliff Baxter, the company's chief dealmaker
he was extraordinarily talented at just doing a deal.
But he was a manic depressive.
Baxter was a very bright guy,
very blunt would tell Skilling whatever
he thought was closest to Skilling, personally,
than anyone else in the company.
There was a guy named Lou Pai,
who was a key Skilling lieutenant;
helped build the trading business in the early years;
went on to run Enron's doomed
effort called Enron Energy Services.
What was the job of EES, as you ran it?
Ah, it was to sell energy services to end users,
industrial end users.
Lou Pai is the guy that Skilling
tapped to run the EES business.
Because this was,
this was so important to the company,
and to Skilling's future.
He called Lou Pai 'my ICBM.'
And Lou Pai dispatched his enemies
with incredible skill.
And if that meant leaving bodies behind him,
Skilling was certainly fine about that.
I'm not feeling anything.
Lou Pai was kind of a mysterious figure.
He was kind of like the invisible CEO.
For awhile he was located on the 7th floor.
And there's a long office.
And it was all glass-enclosed, and you would walk by there,
and it was just almost all the time it was empty.
Details didn't interest Lou Pai.
Only two things seemed to motivate Pai
money and a peculiar fascination with strippers.
For Pai, it was all about the numbers.
He was there every night after work
and he usually brought some of the traders along with him.
He spent quite a lot of money there as well.
Much of it charged to the Enron expense accounts.
There were rumors that he brought strippers up
to the trading floor.
Almost everyone knew the story.
The story is that because he's kind of a mild,
soft-spoken,
almost meek individual that maybe these...
these strippers didn't even believe he was the CEO.
So he took them up to his office.
And I guess they,
they put on a little show for him there.
One night he was at a club. And one of the guys said,
you know, Lou, all the rest of us are single.
You know, we don't have any problem.
But how do you keep your wife
from smelling the strippers' perfume on you?
And Lou said, 'oh, I've got a secret'.
He said, 'I stop in at a gas station on the way home.
And I spill a little gasoline on myself
and it kills the scent.'
So the other guy shot back, he said, 'but Lou,
doesn't your wife then think
you're fucking the gas station attendant? '
In the context of Lou Pai, everyone was horrified,
a pall fell over the table.
Because Lou Pai was not a man to trifle with.
Two days later, the guy who told the joke,
as Enron legend... has it,
was dispatched to Calgary, Canada.
Lou Pai lost all interest in running EES
as soon as the numbers got high enough.
I netted approximately a hundred million dollars.
I don't know if that number is accurate,
plus or minus 20 million.
He actually left Enron with more money than anybody,
250 million dollars,
because he sold all his stock in Enron
after he got a divorce from his wife,
in order to marry his stripper girlfriend,
who had had his child.
His exit from Enron was as mysterious as his presence there.
Just sort of one day,
we all learned that Lou Pai was no longer the CEO of EES.
Though Lou Pai flew away from Enron
with 250 million dollars,
the divisions he left behind
lost a total of nearly $1 billion.
But Enron managed to disguise that fact.
Lou Pai became the second largest landowner in Colorado.
It was the number.
It was always making those numbers,
and looking, you know, it was, to me,
the real mythology is high school mythology.
That, you know,
you wanted to be the most popular guy on Wall Street,
and you were gonna do whatever you had to do to stay there.
And Jeff understood those rules better than,
I think, anyone else.
Americans are making a lot of money in stocks.
The stock market soared to near record highs yesterday.
The stock market continued its bull run Thursday.
The Dow rose nearly 61 points.
Even the person with very little disposable income
all of a sudden began to play in the stock market,
because nobody could fail.
Because stock prices were just going up and up and up.
Another day, another record.
And the internet technology stocks,
just going wild.
Gained more than 100 points to close at 7895.81,
the highest finish ever.
It was a time where we had the biggest bull market
in the history of the world.
Ken Lay was right there, acting as a cheerleader.
Obviously our stock has been doing very well.
I think there's a fairly good chance
we could see the stock price double
again over the next year to eighteen months.
Enron mounted a campaign to capture
the hearts and minds of stock analysts.
The natural gas stocks include Enron...
We're never satisfied
and I don't want us to ever be satisfied
with the stock price. It should always be higher.
Enron posted a 30-percent jump in second-quarter profits,
as Web-based trading boosted its wholesale energy business.
The game was played on Wall Street in such
an established way throughout the 1990's.
As long as a company met or exceeded
the analysts' projections for quarterly earnings per share,
the stock went higher.
The game was called 'pump and dump.'
Top execs would push the stock price up
and then cash in their multi-million-dollar options.
People at Enron got paid, in large part, through stock.
Everyone had a huge stake in seeing the stock price go up.
And it was driven, very clearly,
by the profits every single quarter.
They were exceedingly conscious of that;
Skilling was, and everyone else in the company was.
They posted the stock price in the elevator.
You were surrounded by the health of the company;
what's the stock price doing?
We were consumed by it.
This company was fixated on its stock price
and fixated on a massive public relations campaign
to convince the investment community that they were new,
different, innovative;
almost heralding a new era of... of corporate enterprise.
Come work for us.
We encourage our people to do new things,
try new things, experiment step out.
We begin by attracting the kind of people
that are more comfortable in an environment of change.
You know when you work for Enron
you're gonna see the newest thinking.
You're going to see the newest markets opening up.
Enron on-line, a fabulous, fabulous story.
They were so good at their acting
that they convinced corporate America
that they were smarter than anyone else.
Alan, with our sincere thanks and admiration,
we are pleased and indeed honored to award you
the Enron prize for distinguished public service.
They continued to sell the company
as being a very stable place
where it could predictably increase profits
10 to 15 percent a year.
In fact, to get to those numbers Enron was doing
all sorts of questionable things;
taking enormous risks.
We like risk.
Because you make money by taking risk.
By all accounts, Enron was soaring.
But in reality, profits weren't going up;
they were headed in the opposite direction.
Enron had vast natural gas operations all over the world.
They had cost billions to build
and most were performing terribly.
But in other places in the world, in India,
great quarter and a great year in India.
Phase one of Dabhol is in operation generating power.
Phase two is financed and is under construction.
My experience indicated there were certain places that you
assiduously stayed away from.
And one of them, as an example, was India.
They built this power plant in India.
Nobody else would do that at the time.
They were terrified of investing in India.
Enron did it, and did it in a big way.
But Enron had failed to see something basic.
India couldn't afford to pay for the power
Enron's plant produced.
Now Dabhol is a ruin.
Though it lost a billion dollars on the project,
Enron paid out multi-million dollar
bonuses to executives based
on imaginary profits that never arrived.
Where was the real money going to come from?
Of course the pressure was enormous.
You had to come up with the next idea
that would break through.
Failure was not an option.
A flurry of buy-outs in the corporate world...
the biggest:
Enron announcing a buy out of Portland General.
The merger with PGE put Enron in the electricity business.
And Portland General's position on the west coast
gave Enron access to the newly deregulated market of California.
The merger, we think...
it uniquely positions us to ultimately
become the largest marketer of electricity and natural gas
at both the wholesale and retail level nationwide."
What brought all this on was the deregulation
they said that we would not survive,
unless we joined forces.
Enron, I'd never heard of 'em until they were gonna buy us.
They slid in here, and when they purchased PGE,
all the PGE stock became Enron.
Just went through, stamped every one of 'em.
I looked around me,
and all the guys that were buyin' all this Enron,
they were doublin' their money.
And that whole time since then, I put the maximum
I could into my 401 and savings.
Portland General, again, good earnings and cash flow.
It's what's they call on Wall Street a "trust me" story.
People that had been gas pipeline workers who
for decades kept all their money in the company
because they thought it was this traditional and,
you know, safe investment as it... as it had always been.
And it was... it wasn't anything close to that.
Should we invest all of our 401k in Enron stock?
Absolutely. Don't you guys agree?
Enron is a big winner today
One of the things that fascinated me was that
almost all of the Wall Street analysts
who covered Enron had buy ratings
or strong buy ratings on the company's stock.
Why were the analysts blinded to the company's deceit?
We relied on the information that was available at the time.
I trusted the integrity of the company's certified
financial statements,
and the representations of the company's management.
And we've been absolutely upfront with the analysts.
Jeff Skilling was the critical component
in creating the Enron illusion.
Time and time again when we had a question
to the sell-side analysts that they couldn't answer,
the response was, 'I'll give Jeff a call;
I'll run this by Jeff.'
By giving Jeff a call,
the analysts weren't 'analyzing' at all.
They were willing to believe virtually
anything Enron told them.
Most of the analysts right now have a target price on us
from a hundred to a hundred and fifteen dollars a share.
Any analyst who didn't buy the company line
became an enemy of Enron.
Enron's CFO, Andy Fastow,
had his eye on John Olson
one of the only analysts skeptical of the Enron story.
Enron loved analysts' strong buy recommendations.
Merrill was informed by Fastow,
either you get somebody who is on board with us as a strong
buy recommendation and loves us at the same time
or we don't do any business with you.
I knew that my days were numbered.
This is an abuse.
Merrill Lynch fired John Olson.
Soon after Fastow rewarded the bank
with two investment banking jobs
worth 50 million dollars.
Analysts were routinely getting large bonuses
from the investment banking departments to bring
in investment banking deals. Ah... once that happens,
you know, never was heard a discouraging word.
While Enron's stock kept rising,
its businesses kept losing money.
Looking at the soaring stocks of the dot-coms,
Skilling decided to take Enron into cyberspace.
We're now in the process of seeing
if we can create a bandwidth trading market.
Enron is using its knowledge of trading gas
to barter other forms of energy even space
on the information superhighway called bandwidth.
Ken Rice has worked at Enron for twenty years.
Enron has found a way to stay ahead of the curve.
From 7 PM to 7 AM we're paying for bandwith that
we are not using. Why?
Why?
One of our themes around here is to always be asking why.
Why something's done a certain way
or why it's not done a different way.
There's our market.
Why can't we sell the bandwidth to other companies?
Make it a commodity like a pork belly
Just last week Enron captivated Wall Street
with its bold move into broadband,
teaming up with Blockbuster to deliver movies on demand.
It was like being at a religious cult meeting.
People started jumping up from their seats,
with their cell phones and their Blackberrys,
running out to the halls to call their bosses.
One analyst summed up his recommendation
to investors in one word
Wow! Enron's stock soared 34 percent in two days.
And you can tell from the response of the stock market
that they like the strategy. It makes sense.
They announced that they had developed the technology.
It would be in test markets by the end of the year.
And the technology works.
The quality is great and the customers like this,
so we've made a lot of progress.
The truth was that Enron was just struggling
with the technology for video on demand.
The technology didn't work
and the deal with Blockbuster soon collapsed.
But with the magic of mark-to-market Enron
used future projections to book $53 million in earnings
on a deal that didn't make a penny.
By the end of the year 2000,
Enron was running out of ways to make
the broadband business look successful.
They'd tried every trick in the bag to try to create
the illusion of a business where there was none,
and the people who were working
there were getting increasingly desperate.
The executives started selling their stock.
By Enron's collapse, Ken Rice had sold 53 million.
Ken Lay had sold 300 million.
Cliff Baxter 35 million.
Jeff Skilling 200 million.
As the fraud is perpetuated,
all the various lies and artifices
begin to convince the ringmaster,
if you will, himself
that it's thi own bizarre reality.
That in fact, the fraud is the reality.
The perception is the reality.
As long as you can keep the perception going on,
it really isn't fraud.
You spoke about bandwidth trading,
what about weather options or futures?
How is that market developing?
Yeah, we have a market in weather.
When Enron announced its latest plan to trade weather,
people wondered whether it was good science
or science fiction.
Do the weather guys get punished here
if the weather is wrong?
I mean they predict wrong?
I don't know, do you have any whip marks on your back there?
Well, it's unfortunate. That's a good call.
Jeff, as time went on,
had a harder time admitting things were wrong.
And I have to believe that,
you know, when the lights went out at night,
he knew what was coming.
I would liken it to the Titanic,
when you've got a captain who's saying,
'maintain full speed'
and they bump into a couple of icebergs,
and then they still keep full speed going.
The captain of this ship, Enron,
he ignored all the warning signs.
And there were plenty of them.
And the captain of the ship was?
Kenneth Lay
It was one of the bloodiest days in Wall Street history.
Shares plummeted thirty one percent.
High tech stocks led Friday's fierce sell-off
This is really a great wake-up call.
Millions of nervous investors following
the huge drop on Friday. The Dow Jones
Enron was especially a big deal by the end
of the year 2000 because by then,
most Internet companies had already begun to fall,
and everybody on Wall Street was looking for the next big thing.
And here you had Enron,
which appeared to be this shining star
of a new-economy company.
Its stock price went up 90 percent in the year 2000,
and had gone up over 50 percent the year before that.
It was an it' stock on Wall Street
one of those companies that can seemingly do no wrong.
We were the poster child for the new economy.
We had this culture that had a lot of focus on
reminding us how good we were.
And as that culture emerged,
then we get to Fortune magazine telling us
we were the most innovative corporation in America.
Then we really began to feel good about ourselves.
Well, you all did it again.
Enron was just recently chosen, again,
for the sixth year in a row
in the most-admired-company survey
by Fortune magazine as the most innovative company in America.
Well deserved. Well deserved.
The sales pitch still sounded good.
But one investor saw something in Enron's numbers
that the stock analysts had missed.
By and large, the analysts admitted to us,
in person, 'it's a black box. You have to take it on faith.
'Who knows where the earnings come from?
They just pop out.
And all we know is, they're always good.'
And I kept pointing out, well,
yeah, isn't that the whole point of...
if the black box is there to fool you,
the numbers are always going to be good,
until they're not.
I'm not a beat reporter,
so I would have had no reason to look at Enron.
But Jim Chanos mentioned to me that I should take a closer
look at Enron's financial statements.
And it wasn't clear from Enron's financial statements that
there was fraud here.
But what was clear is that something didn't add up.
In March 2001, Bethany Mclean,
a reporter with Fortune magazine,
first raised questions about Enron's financial condition.
She asked a simple question
in the article that no one could seem to answer,
'how exactly does Enron make its money? '
You got very upset with her, didn't you?
I very specifically remember the telephone conversation
that I had with... the Fortune reporter.
She called up and started asking some very,
very specific questions about accounting treatment on things.
I am not an accountant. And I could not answer them.
He became really, really agitated.
He said that people who raise questions like this
were just trying to throw rocks at the company.
And that I was not ethical
because I hadn't done enough homework.
And if I had done enough homework,
I would understand how off-base my questions were.
Mr. Skilling, it appears as
if you were trying to bully someone
who was asking very basic questions about Enron.
I said... said to her
I have got six minutes left
before I have to be in a meeting.
And I can't get into the details.
And I'm not an accountant.'
And she said, 'well, that's fine.
We're going to do the article anyway.'
And I said, 'if you do that,
I personally think that's unethical.'
And then the next day...
Let me interrupt you. Our chief financial officer
and our chief accounting officer
flew to New York at Enron's expense, to sit down,
not with the editors,
but to sit down with the reporter on that story,
and help her understand the questions that she was asking.
And the next day we sat in this small,
dark, windowless conference room for about three hours,
going through the various aspects of the company's business.
And I'll never forget this.
When the interview was over,
the other two executives packed up
their things and had left the room,
and Andy Fastow turned around and looked at my editor and me,
and said, 'I don't care what you write about the company,
just don't make me look bad.'
And Fastow had good reasons for not wanting to look bad.
There were these partnerships that were run by Andy Fastow
that were doing business with Enron.
And these were disclosed
in the company's financial statements.
But I didn't mention them in the story I wrote,
because I thought,
well, the accountants and the board of directors
have said that this is okay.
So I must be crazy to think there's anything wrong with this.
The story I ran was actually pretty meek.
The title was 'ls Enron Overpriced? '
But in the end, I couldn't prove that
it was anything more than an overvalued stock.
And I was probably too naive to suspect that it was anything...
anything more than that.
And was her article critical?
Yes it was.
The Fortune magazine article that's out the headline is,
'ls Enron's Stock Overvalued? '
The gist of the article is that
Enron is sort of a black box...
which, sorry, it's true.
I mean, it's just difficult for us
to show people the specifics of how money flows through,
particularly the wholesale business.
The entire reason that this analysis
was done by Fortune magazine
is because Business Week had a favorable article
about Enron the week before.
And there's this competition with the news...
the news magazines have, where one says something good,
the other one has to come and find something bad.
So I think that was kind of the genesis of it.
So the criticism, I think, is kind of ridiculous.
When Bethany McLean at Fortune
started analyzing cash flows,
and she had this wonderful article saying,
'take a look at first quarter, second quarter, third quarter,
and end of year cash flows.'
There's a reason she didn't invest in Enron
'cause the financials didn't make sense.
But you have to be willing to say
that the emperor doesn't have any clothes.
And this emperor was pretty powerful.
We are going to unveil this morning
a new corporate vision.
Okay, you ready? One, two, three.
How's this?
It's really hard to know
when Enron first crossed the line into outright fraud.
But there isn't any doubt
about who the guy was who led them there.
It was a protege of Jeff Skilling's
by the name of Andy Fastow.
Andy Fastow was Enron's chief financial officer.
His job was to cover up the fact
that Enron was becoming a financial fantasyland.
Enron essentially was losing money on a cash basis,
year after year.
And yet it was reporting profits.
So it was defying laws of financial gravity.
And the way he was doing it
was with something called structured finance.
And the maestro of all that at Enron was Andy Fastow.
Andy was very young.
He was hired by Jeff Skilling probably before he was even 30
and he idolized Jeff Skilling.
And he certainly wanted to please the boss.
To please the Boss,
Fastow had to figure out a way to keep the stock price up
by hiding the fact that Enron was
thirty billion dollars in debt.
People pressured by the need to keep the stock price up
begin to cheat a little bit.
But then the next quarter comes along
and you have to cheat a little more to
do the new cheating to make up for the old cheating.
And before long,
you've created a momentum that now you can't stop.
Fastow created hundreds of special companies
to perform a magic trick...
prop up Enron's stock by making its debt disappear.
To outsider investors
it looked like cash was coming in the door.
In fact Enron was just stashing its debt in Fastow's companies
where investors couldn't see it.
It was black magic. It really was.
You were pulling some rabbits out of a hat.
They could bury debt; they could bury losses.
Many of the companies had exotic names:
Jedi, Chewco Raptors.
LJM was Fastow's most ambitious creation.
It would work magic for Enron
and it would allow Fastow to conjure
45 million dollars for himself.
Andy, in many ways,
was someone we all knew didn't have a strong moral compass.
It's almost like Jeff Skilling said,
'okay, we're hitting some troubled times.
Let's set up Andy so we can fill the earnings' holes
when we need to',
knowing that Andy would probably skim a little bit
off each transaction for himself.
There's a 'Body Heat' kind of angle to this,
you know, where Skilling is Kathleen Turner
and Andy is William Hurt.
You know, in the end,
he got suckered into helping all the executives
meet their earnings.
What I wish, I, you know, in retrospect?
I wish I'd never heard of LJM.
Is it your contention that you knew of it
and it was appropriate?
Arthur Andersen and our lawyers
had taken a very hard look at this structure
and they believed it was appropriate.
If the theory is that Fastow went rogue somewhere deep
in the jungles of Enron
and was the sole agent of the apocalypse,
I just don't buy it.
Skilling, Lay, and the Enron board
had signed off on Fastow's LJM funds.
They saw the benefits of letting Fastow
do deals with himself.
It is in Enron's best interest,
because Enron needs the capital, number one.
In a secret video tape that surfaced after the bankruptcy,
Fastow can be seen selling LJM