to a group of Merrill Lynch bankers.
He pitches them on the benefits of investing in a fund
that only buys assets from Enron.
Remember, I'm not sellling the assets to myself.
They own the assets. They're selling them to LJM2.
Fastow knew what kind of deal he was offering as Enron's CFO.
He could guarantee profits for LJM.
I think this is an extraordinary opportunity.
He has a sort of Cheshire Cat grin on his face as he talks
about all the ways that the fund is gonna profit.
And he talks about the informational advantages
that he is gonna have in his dual role as Enron's CFO
and as the head of these funds.
Isn't there a question of conflict of interest?
There is never any question that
I will be on both sides of the transaction.
I will always be on the LJM side of the transaction.
He was general partner of LJM, while at the same time,
being CFO of Enron.
You know, that's a whole 'nother ball of wax
when you want to talk about that conflict of interest.
Because no human being should be put in a situation where,
you know, every single transaction,
they decide whether they're looking
after Enron's best interests or their limited partners.
Because this LJM partnership existed
solely to do business with Enron.
As you would expect,
Andy as Chief Financial Officer of Enron,
is heavily banked, so to speak.
And as a result,
there are five or six of the name brand banks
who have stepped up and said they'll commit to this.
Commit they did. And why not?
Fastow was letting them gamble with Enron's chips.
Fastow was using Enron's stock
as collateral for a lot of these things.
They were betting their own company on the transactions.
With the prospect of returns
that would exceed two thousand percent,
96 individual bankers invested in LJM.
And America's major banks put up as much as $25 million each.
It's sort of the Who's Who of Wall Street:
JP Morgan Chase CS First Boston Citibank
Merrill Lynch, DeutscheBank...
These are some of the premier investment banks in the world.
It's hard for us to poke holes in this.
Good.
It's just amazing how skilled Enron
and Andy Fastow were at working Wall Street,
playing on Wall Street's greed,
in order to get money out of them.
To quote Lenin,
they were the investment bankers useful idiots.
As disturbing as Enron's own misconduct,
is the growing evidence that
leading U.S. Financial institutions
not only took part in Enron's deceptive practices,
but at times designed, advanced and profited from them.
The Enron fraud is the story of synergistic corruption.
There are supposed to be checks and balances in the system.
The lawyers are supposed to say no.
The accountants are supposed to say no.
The bankers are supposed to say no.
But no one who was supposed to say no said no.
They all took their share of the money,
from the fraud and put it in their pockets.
Enron paid its advisers well.
In 2001 the accounting firm Arthur Andersen
received one million a week.
Enron's law firm, Vinson & Elkins,
did nearly as well.
Everyone had their hand out at the table.
They were all being paid.
And as long as Enron continued,
they received their fees.
They were a part of the process.
So it's hard now to say,
'oh, we didn't know anything.'
Had we known then what we know now about Enron's practices,
we would not have engaged in these transactions with Enron.
The facts that we now have come to light about Enron,
however, were not known at the time.
I believe that the Citigroup professionals
involved with these transactions acted in good faith.
I'd like you here to look at one Citi email,
The email trail here is all too lurid.
Oh, for instance, one email I remember,
where the banker writes, 'Enron loves these deals.
They produce cash,
but they don't have to show the debt on the balance sheet.'
Now, a high school student can figure out that.
The banks were all knowing articipants in this wrong-doing.
Meryll Lynch assisted Enron in cooking it's books
by pretending to purchase an existing Enron asset
when it was really engaged in a loan.
The accounting sham involved the sale of an interest
in three Nigerian barges
Nigeria is a long way from Manhattan.
Yet for some reason,
toward the end of the fourth quarter in 1999
Merrill Lynch suddenly decided to buy
three Nigerian power barges from Enron.
Nigerian power barges have nothing to do
with Merrill Lynch's business.
It was a blatantly illegal transaction.
It was just taking the barges,
getting them off of Enron's books,
having Merill Lynch, if you will,
warehouse them for five months and then buying them back.
Mr. Martin, you... you've testified here today
that there was no guarantee. And you said that under oath.
Here's a document,
saying that the head of your whole division here
was going to confirm that understanding.
Over the year 2001,
Skilling became increasingly despondent.
He'd always been a moody guy,
but people who knew him said he became
just increasingly volatile.
Show up for work unshaven, looking blurry-eyed.
And I think it was the battle of holding these
two totally disjointed thoughts in his mind at...
at the same time.
One is Enron a super-star company
and the other of feeling like it was all crumbling away.
The first cracks in Skilling's public image
appeared in a conference call with
analysts in April, 2001.
And then Jeff Skilling took questions.
And about mid-way through the session...
there was a question.
It was sort of aggressively wondering out loud
why it was that Enron,
as a financial services company in effect,
could not release a balance sheet
with its earning statement,
like most financial institutions do.
You're the only financial institution that can't produce
a balance sheet or a cash flow statement with their earnings
Well, you, you...
Well, thank you very much. We appreciate it, asshole.
And then quite audibly
you could here Skilling say asshole!
And then he said, 'asshole'.
As I understand it, you called him an asshole.
And this just caused unbelievable
amounts of consternation all across Wall Street
because people thought,
'A Fortune 500 CEO losing it like this,
calling publicly an investor an asshole? '
If I could go back and redo things,
I would not now, have used the term that I used.
Mark Palmer, Enron's chief PR guy,
Even ran a note up to Skilling, telling him to apologize.
And he just took the piece of paper
and tucked it under the pile of papers on his desk.
And afterwards,
Enron's traders who had erupted in cheers
when Skilling called this guy an asshole made him a sign.
It was a play off Enron's motto
'Ask Why' and the sign said 'ask why asshole.'
My personal feeling was that Jeff looked at the numbers
and he knew that we were in a massive hole.
It was the only time that I saw him truly,
truly worried about keeping the stock price up.
And he just kept saying to me,
'I don't know what the hell I'm going to do.'
The broadband business was in complete meltdown.
And there were all sorts of other problems
that Jeff Skilling as the company's Chief
Operating Officer was wrestling with.
And in the middle of all this,
Ken Lay walks in Jeff Skilling's office holding up
fabric swatches for the new G5 45 million dollar corporate
jet he wanted to buy.
And he said to Jeff,
asked him a very important question,
'which of these cabin configurations
do you like best, Jeff? '
While Ken Lay was stressing over the corporate jet,
EES was headed for a crash landing.
Facing 500 million in losses,
Lou Pai's top leuitenant, Tom White,
wondered how EES could show a profit
by the end of the quarter.
One of the things that was always a strange
occurrence at Enron was
for weeks before a quarterly report
we would be under the impression that
we weren't going to make our numbers.
But then somehow, miraculously,
we always made the numbers, and then some.
But then a question was asked to Tom White,
'how is it that we made the numbers? '
And his answer was, 'One word, California.'
The first clues to Enron's new strategy
hit California with a jolt.
It started at Noon rolling across the state.
Sacramento, San Francisco, Beverly Hills,
Long Beach, San Diego
Twenty six thousand miles of California power lines.
Enough to circle the Earth.
But for the second day in a row,
not enough electricity for America's largest state,
and the world's sixth largest economy.
The first thing we heard about this energy crisis is well,
our lights are going to go off in the middle of winter
when we're using half the electricity
we normally use during the summer.
The Bay Area got hit by not one,
but two rolling blackouts.
We only need twenty eight thousand
to thirty thousand megawatts in December.
We have an installed capacity in California at the time
forty-five thousand megawatts.
Plenty o' power to meet our electric demand.
Of course, we had blackouts in December.
The people who control California's power grid
say once again they're worried about having to blackout
the Northern half of the state.
When the rolling blackouts started hitting California
there was definitely a lot of excitement in the air.
It was something new.
It was something that hadn't been encountered before.
It was, 'how is this event going to
effect the price of power? '
Control's rotating attitudes are being implemented.
I knew.
I knew that there was illegality going on.
I could feel it. I could smell it.
I could sense it.
And there was no other explanation.
Because the numbers just didn't add up.
We had enough power in California.
It was never about lack of supply.
When I ran for Governor in 1998,
not one human being asked me about electricity.
This thing kind of came out of the woods,
as far as I was concerned.
And I was trying in the early days
to learn what was happening; how we could fix the problem.
California was selected by Enron
as the prime place to experiment
with this new concept of deregulated electricity.
Reducing electricity cost is only one benefit
from choice and competition.
In 1996, under pressure from energy companies,
Governor Pete Wilson and the California legislature
passed a bill allowing for the deregulation of electricity.
I wasn't in the Legislature in 1996,
but I can tell you that there isn't a legislator alive
that can tell you with any sophistication
how a deregulated electricity market ought to work.
Not a one.
California's deregulated system was a bizarre compromise
between legislators and free-market advocates.
The rules were complicated and hard to follow.
Inside Enron,
California's system was little more than a joke.
And once in place,
Enron made sure that the joke would be on California.
I remember the conversation I had with Ken.
At the end of it he says 'Well,
Dave, old buddy, let me just tell you.
It doesn't matter really to us
what kooky rules you Californians put in place.
I got a bunch of really smart people down here
who will figure out how to make money anyhow.'
One of the smartest guys at Enron was Tim Belden,
who ran the west coast trading desk.
Tim Belden was a fervent believer
in the idea of free markets
and as such he spent hours poring over the new rules
for the deregulation of California's energy industry,
looking for loopholes that Enron could exploit to make money.
He found plenty. After the bankruptcy,
a confidential memo surfaced revealing the names of
Belden's strategies to game the California market
Wheel Out, Get Shorty, Fat Boy
Recently, audio tapes of the Enron traders were discovered.
What do you want to call this project?
Probably have a catchy name for that.
How about, you know,
something friendly like 'Death Star'?
The tapes revealed Enron's contempt
for any values except one, making money.
Hey John, it's Tim.
Regulatory's all in a big concern
about is we're wheeling power out of California.
He just steals money from California
to the tune of a million Can you rephrase that?
Okay, he arbitrages the California market
to the tune of a million bucks or two a day.
An arbitrage opportunity has been defined to me
as any opportunity to make abnormal profits.
So an abnormal profit would be
returns above and beyond the norm.
I was told that a good trader is a creative trader.
And a creative trader is a trader
that can find arbitrage opportunities.
One of those opportunities was called Ricochet.
I'll see you guys. I'm takin' mine to the desert.
In the midst of energy shortages Enron's traders
started to export power out of the state.
When prices soared, they brought it back in.
So we fuckin' export like a motherfucker.
Getting rich? Trying to.
Traders would stay after a twelve hour shift
and pour over maps of the western energy grid.
What are the permutations and combinations of ways to
move power around the west.
And I think that's something that Enron knew better
than any other Energy marketer in the country, period.
We know all of the California imports.
We know all of the California load.
We're getting' pretty spoiled with all this money.
You said you were getting a little scared
we're making a little too much. And I tend to agree with you.
These are two traders, t-r-a-d-e-r-s.
This is what they say.
'What we did was overbook the transmission line
we had the rights on and said to California Utilities,
'lf you want to use the line, pay us.'
By the time they agreed to meet our price,
rolling blackouts had already hit California
and the price for electricity went through the roof.'
Did you have any knowledge that this was happening?
The only thing that I'm aware of Senator,
is there was a,
there was a difference of opinion
on the rules of the independent system operator.
It was just set up, the rules weren't quite clear.
We have traders here from Enron
who were saying they did something wrong.
But you don't see anything wrong.
I have one last question and then I am done.
Traders soon discovered that by shutting down power plants,
they could create artificial shortages
that would push prices even higher.
Hey, this is David up at Enron.
There's not much demand for power at all here.
If we shut it down,
can you bring it back up in 3 or 4 hours?
Oh, yeah.
Why don't you just go ahead and shut her down then,
if that's ok? Okay.
When you see two or three energy companies
with 30, 35 percent of their entire capacity down
for maintenance on a single day
and as a result the price of electricity is
skyrocketing three or four hundred percent
and then a week later someone else does it up
in Northern California
you begin to believe something's not smelling right here.
We want you guys to get a little creative.
Okay.
And come up with a reason to go down.
Like a forced outage type thing?
Right.
Those guys at the flip of a switch
could just yank the California economy
on it's leash whenever they wanted to.
And they did it, and they did it,
and they did it. And they made so much money.
The heart of it is that an industry
that went for a hundred years from the days of Edison built
the best electrical system in the world,
sold the power at reasonable prices to consumers
and was very reliable was all of a sudden
turned into a casino.
These strategies made some money for Enron.
But the real money was made by betting
that the price of energy would go up
It did.
And the West Coast traders made
nearly two billion dollars for Enron.
You can't treat electricity like you treat oranges.
It's the lifeblood of the society.
It can't be stored.
You can't turn these people loose
and let them just have a quote free market
because a free market is God
Damn expensive to the customers.
There would be ample supply available
at the right fuckin' price.
Oh, sure there would.
It wasn't just Enron
"Every company traded according to the rules
that California put up there.
We're the future of Enron.
And we're fucking making half a billion dollars for Enron.
Can you believe that?
We'll definitely retire by the time we're 30.
We're talking about a commodity that
normally trades in the thirty-five,
forty-five dollar range.
High prices are when it gets into the fifties.
A thousand dollars?
Prices aren't going to stay at 1,000 bucks forever.
It weeds out the weak people in the market.
Get rid of them and you know what,
the people who are strong will stick around.
And the Enron traders never seemed to step back and say,
'Wait. Is what we're doing ethical?
Is it in our best long term interests? '
'Does it help us if we totally rape California? '
'Does that advance our goals of nation-wide deregulation? '
Instead they sought out every loophole
they could in order to profit from California's misery.
Temperatures in California are hitting higher than 100 degrees
fueling wildfires and fears that California's strained power grid
could once again near collapse.
What's happening?
There's a fire under the core line.
It's been de-rated from 45 to 2100.
Burn, baby, burn.
That's a beautiful thing.
I was never comfortable on the trading floor at Enron.
And if I had questions, I didn't ask them,
because I didn't want to know the answer.
You know, I didn't want confirmed
what I suspected might be true.
That what I was doing was, in fact,
unseemly or was, at least, unethical,
if not worse.
Why did the traders do what they did?
Was it their multi-million dollar bonuses
or had Enron found a way to exploit
the darker side of human behavior?
In the early 60's Stanley Milgram
tried to figure out what characteristics
there were of evil people.
Was there an evil strain or could normal people
do really bad things?
And so he set up this experiment.
In the experiment he had an actor playing
an experimental subject and a real experimental subject.
Want to step right in here and have a seat?
They went into this room and he had an experimenter say,
'we're going to see if mild electric shocks
will help people memorize lists.
Incorrect... You'll now get a shock of 75 volts.
Soft air.
He kind of did some yelling in there.
The Milgram Experiment has a lot to say about Enron
because I think people lost their sense of morality.
Like Milgram, once you accepted the idea
that behaving inhumanly was okay,
you could do anything.
And the shocks increased with the number
of mistakes that they made.
I can't stand the pain! Let me out of here!
He can't stand it. I'm not going to kill that man.
The subject, the real subject is begging
the scientist-looking person to stop too.
And the scientist only says
'the experiment requires that you continue.
Please continue. Go on, please.
You accept all responsibility?
The responsibility is mine, correct.
Please go on.
In a way, Skilling was almost like the guy
telling those people below him
it was okay to up the power.
California's Electric Utilities
may have to pull the plug on millions of customers.
It's the fucking coolest thing I've done in a long time.
Holy fuck, yes. You gotta love the west.
Oh.
During the height of Wednesday's blackout,
fire crews had to free people trapped in elevators.
All that money you guys stole from those
poor grandmothers in California.
Yeah, Grandma Millie, man.
She's the one who couldn't figure out how to fucking vote
on the butterfly ballot.
Now she wants her fucking money back for all the power
you've charged right up her ass.
You must continue. Go on, please.
You're gonna keep giving him what... 450 volts every shot now?
That's correct. Continue.
It's kinda hard to say well we should be,
you know we shouldn't do this even though it's allowed
because you know. I mean, that's what we do.
Right.
Best thing that could happen is fucking an earthquake.
Let that thing float out to the Pacific.
Put up fucking candles.
Milgram's discovery was disturbing.
Fifty percent of the subjects were
willing to shock to the death,
so long as the commands came
from a seemingly legitimate source.
Tonight I'm declaring a state of emergency
in California to give the state
the authority and the resources to
keep the lights on in California.
The Governor, who's been basically
capitulating to the demands of the energy
companies and utility companies, needs to put his foot down.
We wanted the Governor to send in the state police
or the National Guard to seize control of the power plants
and put it back on-line.
And I thought we didn't have to take over every plant,
we really only had to take over one.
'Cause then they would know he meant it.
I'm going to get the nine billion dollars
back that Enron,
Dynergy and Reliant stole from us and get it back to you.
Despite what the people of California
think Enron's making money despite California,
not because of California.
The year-long energy crisis would cost
the state of California $30 billion dollars.
The markets in California are the most regulated market
in North America today.
And that's what's causing the problem.
California, it never deregulated.
Enron, buy stock today.
Thank you very much.
We are doing the right thing.
You're the good guys.
We are the good guys. We are on the side of angels.
Oh, I can't help myself.
You know what the difference is between
the state of California and the Titanic?
This being a web cast, I know I'm going to regret this.
At least when the Titanic went down,
the lights were on.
Jeffery Skilling, how's it feel to make a killing?
A top executive at one of America's biggest power
companies received a raucous welcome in San Francisco tonight.
Protestors heckled Enron's CEO,
Jeffery Skilling outside and inside
during his appearance at Commonwealth Club.
One of the protestors even brought a blueberry pie
and delivered it herself.
Police!
A hundred and thirty two million dollars is what he made.
We had a fifty percent hike in utility rates.
Consumers in California are angry.
And they should be.
And if we had anything to do with this,
then we are the stupidest people in the world.
I work for an organization.
Every day people call saying
they can't pay their electricity bills!
You made millions of dollars off of California...
Get out! Go to jail.
When the tidal wave of public anger
started to grow Ken Lay flew out here
and convened a meeting of friends
and I guess he had a little more foresight than we did.
He, he invited Arnold Schwarzenegger.
Brought them together at the Peninsula Hotel
and had a lunch meeting.
The notes from that meeting really still have never surfaced,
but we know that Ken Lay's pitch was
we've got to stay the course
with deregulation and the market will correct itself
and everything will turn out fine.
Now at... at the time we didn't understand
really why he was so concerned.
But now we do.
The fact is that Ken Lay was out here
because he understood that
Enron itself was a house of cards
And if deregulation were to collapse,
then Enron itself would collapse.
But Ken Lay had a trump card.
In the midst of the energy crisis his friend,
George W. Bush, became president
I, George Walker Bush, do solemnly swear.
Ken Lay's going to be Secretary of Energy.
Get out of here.
How great would that be for all the players in the market?
Lt'd be great.
I'd love to see Ken Lay be Secretary of Energy.
Ken Lay did have easy access to the Bush administration.
On April 17th,
he met with Vice President Dick Cheney,
and strongly argued against the imposition of
Federal price caps in California.
We're doing everything we can to help in California
on the short term basis. There's not a lot you can do.
You can't manufacture kilowatts
in the West wing of the White House.
We're fighting with both hands tied behind our back.
We no longer have the power to stop this.
If the federal government doesn't help us,
we're a dead duck.
At the time, Gray Davis was a likely candidate
to run for president.
Ken Lay knew that might give his friend George Bush
a political reason to oppose California's
appeals for federal price controls.
They know full well my administration's belief
that price controls will not solve the problem.
His view was that the Federal government
really shouldn't get involved. This is California's problem.
And I'm saying, 'with all due... due respect,
Mr. President, our law said
the Federal government regulates this,
so it is your problem.
And you make appointments to the Federal Deregulatory Commission.
So, we had a polite, but spirited discussion on that.
And he says,
'I just can't be of help to you on that.'
As I said from the very beginning of my administration,
we'll work to help California,
in any way we can.
And the best way we can is to be good citizens.
FERC, the federal agency which regulates energy in America,
refused to intervene.
What was FERC doing and why was it not taking action?
The chairman of FERC was Pat Wood,
the man Ken Lay had personally recommended for the job.
It was easy for FERC to do Enron's bidding
because all it had to do was do nothing
which they did very well.
Federal Regulators are being pressured to act
by the now Democratic controlled Senate where here...
A Democratic Senate forced FERC to impose regional price caps.
That ended the energy crisis, but not the political one.
Did Ken Lay and George Bush have a political agenda to
blame the energy crisis on Gray Davis?
Oh hello.
It's one of those 'only in California' stories.
The state's unpopular Governor,
Gray Davis, beset by an ailing economy
and thirty eight billion dollar budget deficit,
faces possible recall.
And rumored as a possible replacement for Davis,
movie star Arnold Schwarzenegger.
The Terminator?
We'll see whether he's back or not.
Gray Davis has terminated opportunities
and now it's time we terminate Gray Davis!
No Recall! No Recall!
Could I predict a phony energy crisis
as a result of deregulation?
Yes. Could I predict that Arnold Schwartzerneger
would be our Governor as a result of deregulation?
Never would have come up with that.
That's like a bad science fiction movie.
Apparently we have all been wrong,
it is pronounced Caly-forn-ya.
Ladies and gentlemen,
the Governor of the great state of California,
Arnold Schwarzenegger!
We could just hear rumbles all the way up and down
Main Street here and all throughout the city
that things were very difficult at Enron.
One guy who a year before had come to me and said,
I'm working for Enron,
and was very excited but within a year
was waking up every night with nightmares.
'I've got no life left
and I feel like I'm being consumed by this company.'
As doubts began to surface about the company
and the erratic behavior of its CEO
Enron's stock began to fall.
I remember one of the most poignant meetings
I'd ever had with Jeff.
I had left Enron
and I had come over to talk about whether or not
I would return to Enron.
And I said, 'Jeff, you've got a real problem.
The traders, they will cut your throat,
if they think it will get them to the trough sooner.'
Jeff was silent.
And he looked out the window
and he looked back at me and he said,
'Yeah Amanda, you're most likely right.'
By the end, the traders ran Enron.
You know, the inmates had taken over the asylum.
All through the summer, the stock continued to decline.
There was a buzz that a major
announcement was going to take place.
But we all thought that Ken Lay was leaving
Enron and that he had been
asked by the Bush administration to join his administration.
But that wasn't the case at all.
It was Jeff Skilling announcing that
he was stepping down as the CEO.
And that took everyone by surprise.
No one could believe that.
CEO's generally,
don't just resign out of the blue
without a well orchestrated PR campaign beforehand
to pave the way so there's no disruptions,
there's no questions, there's no front page stories,
which is, of course, exactly what happened.
It was at that point that I knew,
the architect of the disaster knows that
it's crumbling and the rat is leaving the sinking ship.
Two days later I met with him and Ken Lay
because I had informed the company
that I was going to downgrade the stock
on Skilling's resignation.
I asked Jeff Skilling,
'are there any more shoes to drop.
Have we seen the worst of it.'
And I was concerned about the energy crisis
that was occurring in California.
Well, Skilling convinced me that it was for personal reasons.
I left his meeting feeling sort of emotional
because of the concern that he seemed to be
showing about the relationship he had with his family.
He appeared to be distraught.
And I remember saying to an investor
'lf he's not telling the truth,
then it's a good thing he quit his day job
because he needs to go to Hollywood.
I left Enron on August fourteenth,
2001 for personal reasons.
Mr. Skilling a massive earthquake
struck Enron right after your departure.
And people in far inferior positions to you
could see cracks in the walls,
feel the tremors, feel the windows rattling,
and you want us to believe
you sat there in your office and didn't...
and had no clue
that this place was about to collapse?
On the day I left, on August fourteenth,
2001, I believed the company was in strong,
financial condition.
I think he was smart enough
and he didn't even have to be that smart,
he had seen documents that I think predicted the future.
I think he was smart enough to think
I can get out now and this company
isn't going to collapse for a year,
maybe a year and a half, so I won't get the blame.
It was working fine when I left, guys.
After Skilling resigned, Enron's chairman,
Ken Lay took over as CEO.
Boy, I didn't expect that.
But thank you.
Thank you very much.
Well, I'm delighted to be back.
I'm sorry Jeff did resign.
It was a stunning announcement,
that he was stepping down as CEO.
And I think the flags
started going up at that point for everybody.
We are facing a number of challenges,
but we're managing them.
Indeed I think the worst of that's behind us.
And the business is doing great.
We're not the only stock
that's decreased in value this year.
It's just that we've been hit a little harder than...
than many others.
If a few of these other problems disappear,
like California, like India.
I think the worst is over.
And I'm excited.
August fourteenth 2001,
Jeff Skilling abruptly resigns.
And that made me angry.
It made loads of employees angry.
I mean, there was a real sense of betrayal
by the employees. I mean, this was, you know,
Jim Jones feeding us the Kool-Aid
and then deciding not to drink it himself.
The day after Skilling resigned,
Sherron Watkins sent a letter to Ken Lay.
We will begin with Ms. Watkins.
I am Sherron Watkins.
Would you identify your counsel for the committee.
Yes. My counsel is Mr. Philip Hilder.
When you hear the story for the first time,
it's unbelievable.
What Sherron was telling me it was more than accounting
irregularities, as such.
I mean, it was a massive fraud of enormous proportions.
In mid to late June of 2001,
upon the resignation of Cliff Baxter,
I went to work directly for Mr. Fastow.
It has evolved to the corporate crime of the century.
I was highly alarmed by the information I was receiving.
What Sherron Watkins discovered
began the unraveling of Fastow's complex partnerships.
Andy put me in charge of this asset listing.
And there were about a dozen assets that had been hedged
with one of Andy's entities, the Raptors.
So I was working with this spreadsheet and,
you know, the math just didn't add up.
It didn't make sense to me.
I mean, accounting doesn't get that creative.
You know, I couldn't believe that
Arthur Andersen had signed off on it.
I couldn't believe that so many people were going along.
Behind Fastow's partnerships
were enormous guarantees of Enron's stock.
Fastow had gambled Enron's future
on the hope that its stock would never fall.
My first reaction was that I should warn Ken Lay.
The day after Skilling left,
I sent this one page anonymous letter.
But within a week I was meeting with Ken Lay.
I identified myself
in the hopes of really making my point
that Enron really needed to address this situation.
Companies rarely get away with cooking the books.
But when they do survive, it's when they come clean.
Not when they're exposed from the outside.
Ms. Watkins, I went through...
Ms. Watkins did not talk to me, Senator.
Well, Ms. Watkins said Clifford Baxter told her
that he met with you repeatedly to express his concern.
Cliff and Andy have had a... they didn't like each other.
They had a very strained personal relationship
and Cliff's issue had nothing to do
with the appropriateness
or inappropriateness of the transactions
I mentioned Cliff Baxter in these memos.
And I remember I made the comment to him,
'you're one of the good guys,
you know, you're one of the people
fighting against this. And it'd be alright.'
And he said,
'oh I don't think it's going to be alright
for any of us involved.'
When I started working on the book with Sherron,
I was interested in writing about a whistleblower.
People don't really appreciate
what she did and the bravery that it took in that company.
Andy Fastow would not have put his hands
in the Enron candy jar without an explicit
or implicit approval to do so by Mr. Skilling.
I can't for the life of me see what basis she
would have for suggesting that I would know some...
I mean, how would she know that?
And I don't see that it's at all inconsistent that
there would be some things that I don't know
if some people purposely kept me from knowing some things
I felt like I was one lone voice within Enron saying,
'look, we've... we've committed horrible fraud.'
And of course all hell broke loose.
Within six short weeks Enron was spinning out of control.
Probably in more normal circumstances
I would have a few more words to say
about September the eleventh.
Just like America is under attack by terrorism,
I think we're under attack. And of course.
Now we've got the SEC inquiry, informal inquiry...
The SEC launched an investigation
When the Wall Street Journal published
articles revealing Fastow's murky deals.
Enron announced massive financial restatements.
Investors began to worry that billions
in mark-to-market profits were really losses.
As you can see foresee,
the underlying fundamentals of our businesses are very strong.
Indeed the strongest they've ever been.
But regrettably,
that's not what Wall Street is focusing on.
And I doubt that's what you're focusing on.
This inquiry will take a lot of time
on the part of our accountants and lawyers and others.
But it will finally put these issues to rest.
At the very moment Ken Lay was talking to employees,
only a few blocks away, Enron's accounting firm,
Arthur Andersen,
had begun destroying its Enron files.
On October 23rd,
Andersen shredded more than one ton of paper.
Despite the rumors, despite the speculation,
the company is doing well both financially and operationally.
He was making all kinds of statements.
Reassuring employees and not just employees,
reassuring investors,
'we have no accounting irregularities,
the company's in the best shape it's ever been in'
From the standpoint of Enron stock,
we're going to bring it back...
we're going to bring it back.
Alright, we're down to questions.
I've got a few of them here.
'I would like to know if you are on crack?
If so, that would explain a lot.
If not. You may want to start
because it's going to be a long time
before we trust you again.'
It certainly wasn't clear to anyone at Enron,
much less anyone outside of Enron
it wasn't really clear what was going on or...
what was going to happen.
I know this is a lot...
There is a lot of speculation about Andy's involvement
I and the board are also sure that
Andy has operated in the most ethical
and appropriate manner possible.
The next day, Andy Fastow was fired
when the Enron board discovered that
he had made more than $45 million dollars
from his LJM partnerships.
The question, Mr. Fastow, is how could you believe
that your actions were in any way consistent
with your fiduciary duties to Enron
and its shareholders or with common sense
notions of corporate ethics and propriety?
How do you answer, sir?
Mr. Chairman on the advice of my counsel,
I respectfully decline to answer the questions
based on the protection afforded me
under the United States Constitution.
Andy, in many ways,
I think he was set up as the fall guy.
All of the Enron executives were saying,
'there's your man, Andy Fastow. He's the crook.
You know, he's the one that stole from Enron,
stole from LJM.
He's the one that cooked the books.
Go after him.'
How will you plead, Mr. Fastow?
I've thought about this and thought about this.
And it couldn't have just been a few executives
at Enron that made this happen.
If you think of the banks involved Chase,
Morgan, Citibank
the billions in loans Arthur Andersen...
What about Vincent and Elkins,
the lawyers that represented us?
There had to have been complicity across the board.
Because it was all too easy;
all too easy.
The Enron collapse was an enormous tragedy.
This is a company that had over thirty thousand employees,
and clearly with a company that size
you have a lot of senior officers
that have a lot of authority in which you place enormous trust.
But in the case there was at least one,
Andy Fastow, that betrayed that trust
to the extent that
I did not know what he was doing,
he obviously didn't share with me what he was doing,
then indeed I cannot take responsibility for what he did
I never heard him say,
'I take responsibility' for a thing.
It sounded to me like the wonderful movie, 'Chicago'.
I was reminded of the puppet strings
and the dancers and the tap dancing
and pointing at the gun, the gun, the gun.
I mean. Everybody's in step with Johnny.
I continue to grieve, as does my family,
over the loss of the company.
Linda and I saw our net worth reduced
from several hundred million dollars down to
something less than twenty million dollars
on a net worth basis.
And of course, as... as you said,
about a million dollars or less in liquidity.
I don't know whether I'd rather be shot as a crook
or as an idiot.
I believe the only venue for me is the 'Ride of Broken Dreams.'
Oh, you mean the Enron ride!
Let's go!
Enron hit the National psyche.
It hit it as sort of, the time-tested lesson.
And that is, if it looks too good to be true,
sometimes it is.
We're all going to be rich!
We broke even.
It is my belief that Enron's failure was
due to a classic run on the bank.
Don't look now but there's something funny going on
over there at the bank, George.
I've never really seen one,
but that's got all the earmarks of being a run.
On December 2nd 2001,
less than four months after Skilling's resignation
Enron declared bankruptcy.
I remember it was just a strange,
kind of surreal day.
We learned around nine thirty about the bankruptcy
and that we were all being let go.
We all felt like we were on the Titanic
and the last lifeboats had long gone
and we were just now on the sinking ship.
We had thirty minutes to leave the building
and at that point it was no longer
like being on the Titanic.
It was kind of like being on the Lusitania.
The torpedo had hit
and there's twenty minutes to get out.
There's a lot of disbelief.
Very few of the rank and file people ever dreamed that
Enron would actually go bankrupt.
Then all of a sudden, it was like a ghost town.
I can remember going into the old building,
on certain floors, ah, late in the,
afternoon or evening. And it was scary.
There'd be like paper blowing around,
and nobody there,
and it was just... it was very eerie.
Mr. Skilling, your opening statement was
extremely compassionate to the employees.
And I want to show you a tape.
And I believe we have it ready to go.
Listen to this.
Should we invest all of our 401k in Enron Stock?
Absolutely. Don't you guys agree?
Why is it that you had begun unloading your stock?
Pretty heavily before that date
and yet led the employees to think that
they should keep buying stock?
Ms. Senator,
I have been a major shareholder in Enron Corporation
and you can take the videotape to mean
what you want it to mean.
I was a supporter of Enron Corporation.
You know what happened to those people.
They lost everything.
I feel terrible about what happened to the employees.
Oh at one time, things were really rosy for us.
And we all had some really nice-looking 401ks
and pensions and then it peaked.
And then it just started going down,
and it went lower and lower and lower.
At the peak I had about 348 thousand.
I sold it all for 1200 dollars;
was what I got for it, when it was done.
While Enron's stock was plummeting,
the retirement accounts of Enron's rank
and file workers were frozen.
We were frozen out of our accounts.
It was right about thirty two dollars, I believe.
And over that time,
from when it was frozen to when it opened up,
I think it went down to nine.
And we could not access it.
And what came out later that was so bad,
was the fact that Ken Lay and Skilling
and all the top people were movin' their money then.
But we couldn't.
The insiders had sold off a billion dollars of their stock.
Compare that to the lineman who worked for a staid,
old utility company for most of his life;
put away money each month.
And what's he have to show, at the end day,
for his years of hard and decent labor?
He gets a big goose egg.
And Pai is out in Hawaii somewhere,
with 350 million dollars in the bank.
That's wrong.
There is still to this city a layer of anger and upset.
I am still doing counseling,
three years later, with some families.
Where some of those who are most reflective,
it's gone to a deeper layer.
And they are looking at the corporate culture itself
in this country.
You know, you can gain the whole world
and all the trinkets
and all the trophies of the world,
the corner office, and all the perks
and you really can lose your soul in the midst of this.
On January 25th, 2002,
seven weeks after the Enron bankruptcy,
Cliff Baxter committed suicide.
With the media hounding him
because he was mentioned in my memos
and the fact that he'd been sued civilly
because he'd cashed in for about
thirty million dollars worth of stock
I guess it all came crashing down on him.
I think Cliff's suicide note tells it all.
You know, Where there was once great pride,
now there is none.
It's very hard for me to talk about Cliff.
We were very close for many years.
And he was a wonderful, wonderful man.
But a lot of who Cliff was tied up in how
he had succeeded at Enron.
It is hard to look at your life's work and say
it's failed.
But you have to take a long, cold look at yourself and say,
'who was I? Who did I become? '
And realize that you may have seen your shadow.
Andy Fastow pled guilty to conspiracy to commit wire fraud.
He agreed to forfeit 23 million dollars in assets.
His sentence was reduced to ten years
in exchange for testifying against other Enron executives.
Why Enron?
Why not Worldcom or Tyco or Global Crossings?
Ultimately in Enron the fatal flaw was a sense that brains
and wiliness could out-think the way
that the system will eventually work.
In 2004, Jeff Skilling was indicted for insider trading
and conspiracy to defraud investors.
Pleading innocent,
he paid his attorneys a retainer of
23 million dollars to defend him.
Enron should not be viewed as an aberration,
something that can't happen anywhere else.
Because it's all about the rationalization
that you're not doing anything wrong.
We've involved Arthur Andersen, we've involved the lawyers.
The bankers know what we're doing.
There's a sense the diffusion of responsibility.
Everyone was on the bandwagon.
And it can happen again.
Enron's accounting firm.
Arthur Andersen,
was convicted of obstructing justice.
With its reputation for honesty destroyed,
America's oldest accounting firm fell along with Enron
and twenty nine thousand people lost their jobs.
Enron's shareholders are suing Enron
and its banks for 20 billion dollars.
Ken Lay was also indicted for conspiracy to commit fraud.
His attorney maintains that no one has been hurt more
by the Enron bankruptcy than Ken Lay.
Nice of all of you to show up this morning.
With today's arrest of Ken Lay,
the top echelon at Enron
has now been called to account for their crimes.
Mr. Lay, do you have anything to say, sir?
A little later today I will.
Looking at Enron is like
looking at the flip side of so much possibility
because like most things that end terribly,
it didn't start out that way.
It started with a lot of people who thought
they were changing the world.
And over time they became victims of their own hubris,
victims of their own greed
and so it's like taking so much promise and possibility
and looking at it in a mirror and seeing
the flip side reflected back at you.
I think the larger lesson was
what Enron asked of its employees which was ask why.
And you know I didn't ask myself why enough;
I didn't ask managers why enough,
I didn't ask my colleagues why enough.