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 is 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.
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 an 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 DC.
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 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.
It's hot, Bill.
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?
Twenty thousand employees had lost their jobs.
Two billion dollars 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 he was ordained a Baptist minister...
...while I was very young.
Probably 2, 3 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, at 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 1987...
...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 10 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 to find out...
...what kind of guerrilla 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 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 to 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...
...in 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 10 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 at 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 HFV.
Hypothetical Future Value accounting.
If we do that, we can add a kazillion dollars to the bottom line.
Jeff, alright.
That sounds fantastic.
Oh, Jeff, thank you.
That's just superb 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 Performance Review Committee.
It required that people be graded from a one to a five.
And roughly 10 percent of people had to be a five.
And those people were supposed to be fired.
Hence, this came to be known 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'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 Online 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 LASIKs on his eyes, everybody at Enron got LASIKs,
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...
...1200 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.
He 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 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 a while, he was located on the seventh 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 strippers didn't even believe he was the CEO.
So he took them up to his office.
And I guess 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."
"So 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 one 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 18 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 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 online, 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.
Power business continue to grow at 25 percent.
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 them 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 them.
I looked around me, and all the guys that were buying all this Enron,
they were doubling 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 had always been.
And 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 100 to 115 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..."
"...and has 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.
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 20 years.
Enron has found a way to stay ahead of the curve.
From 7 PM to 7 AM,
we're paying for bandwidth that we are not using.
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-dollar 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 this 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 31 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.
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 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 fantasy land.
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 30 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.
He still had 450 million dollars back when he...
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 to a group of Merrill Lynch bankers.
He pitches them on the benefits of investing in a fund...
...that only buys assets from Enron.
Fastow knew what kind of deal he was offering as Enron's CFO.
He could guarantee profits for LJM.
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.
He was general partner of LJM, while at the same time,
being CFO of Enron.
You know, that's a whole another 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.
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 2000 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, Deutsche Bank...
These are some of the premier investment banks in the world.
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 US 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,
exhibit 333I.
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 participants...
...in this wrong-doing.
Merrill Lynch assisted Enron in cooking its 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'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 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?"
"Publicly calling 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 lieutenant, 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 28,000 to 30,000 megawatts in December.
We have an installed capacity in California at the time...
...of 45,000 megawatts.
Plenty of 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.
The tapes revealed Enron's contempt...
...for any values except one, making money.
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."
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.
Traders would stay after a 12-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.
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,"
"'If 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...
...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.
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 400 percent,
and then a week later,
someone else does it up in Northern California,
you begin to believe something's not smelling right here.
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 "free market..."
...because a free market is goddamn expensive to the customers.
It wasn't just Enron. Every company traded according to the rules...
...that California put up there.
We're talking about a commodity...
...that normally trades in the 35 to 45-dollar range.
High prices are when it gets into the 50s.
Or a thousand dollars?
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.
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 to confirm 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 gonna 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 in there.
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...
...that it was okay to up the power.
Go on in 20 volts.
California's Electric Utilities may have to pull the plug on millions of customers.
Four hundred and thirty five volts.
During the height of Wednesday's blackout,
fire crews had to free people trapped in elevators.
Four hundred and fifty volts.
You must continue. Go on, please.
You're gonna keep giving him at, what, 450 volts every shot now?
That's correct. Continue.
Right.
Four hundred and fifty volts.
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 online.
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 the 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 50 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 of here.
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 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 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 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 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...
...blame the energy crisis on Gray Davis?
Hello?
It's one of those "Only in California" stories.
The state's unpopular Governor, Gray Davis,
beset by an ailing economy and a 38 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 Schwarzenegger...
...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 "California."
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...
"If 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 14, 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...
...that 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 14th, 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 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 14, 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 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 in this."
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 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 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 11th.
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."
Now 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 up 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 30,000 employees,
and clearly, in a company with that size,
you have a lot of senior officers...
...that have a lot of authority in which you place enormous trust.
Clearly, 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,
that 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 20 million dollars...
...on a net worth basis.
And of course, 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 a surreal day.
We learned around 9:30 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 30 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 20 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.
And then all of a sudden, it was like a ghost town.
I can remember going into the old building,
on certain floors, 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.
Well, 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 348,000.
I sold it all for 1200 dollars.
It 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 32 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 moving 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 30 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 10 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 will 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 of 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 29,000 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.