CARL BASS SHIFTED HIS feet nervously as he waited for an elevator on the ground floor of a Houston office building. It was March 2, a Friday, just weeks after he had been offered a new job to manage Andersen’s relationship with the SEC, a post that would have meant relocating to Chicago. Days before, he had finally declined, saying that he wanted to stay in Houston, handling accounting issues.
Then yesterday, another call. Gary Goolsby, a top partner in Houston, asked him to drop by. As Bass rode up, he couldn’t shake the feeling he was about to be ordered to Chicago. He stepped off on the thirteenth floor. Goolsby welcomed him warmly and whisked him to his office. There, his demeanor hardened, like a doctor about to deliver bad news.
“Carl, I’m going to tell you something, and I’m going to tell you straight up,” he said. “Enron has a big problem with you consulting on their engagement.”
Bass’s mouth fell. He wasn’t on the Enron engagement. He was with the Professional Standards Group, work that in theory made him anonymous to the outside world. How did Enron even know what he was doing?
“Who has a problem?” he asked.
“Causey in particular thinks you’re caustic and cynical toward their transactions. It’s a big client-relationship issue, and, long story short, we’re not going to let you consult on Enron transactions anymore.”
The demands to sideline Bass had been swirling for weeks, and Andersen had tried, timidly, to fight them. But even the appeal to Causey from Joseph Berardino, Andersen’s new chief executive, had been to no avail. So Andersen caved. Standing up to Enron wasn’t considered a plausible option; the deep-pocketed client could shift its consulting business at the drop of a hat, leaving Andersen only the low-paying audit work. That was a risk that the Andersen partners were simply unwilling to take.
Bass, however, was flabbergasted. To his way of thinking, clients couldn’t boss accountants around like this. Accounting judgments were based on the rules, not the person. Bending to Enron’s demands was sure to have a chilling effect, maybe nudge Andersen partners to loosen up their interpretations. Then again, Bass figured that was what Enron wanted to achieve.
“Gary, I’m stunned,” Bass said. “If they don’t want me involved, that’s their call, I guess. But I can’t believe the firm is going along with this.”
“We’ve attempted to talk to them—”
“Gary, it shouldn’t be their call!” Bass retorted. “Them, of all clients. A high-risk, maximum-exposure client! And we’re letting them dictate to us what our quality-control procedures should be!” Goolsby held up a hand. “Carl, I’m not telling you to quit. Maybe consider that SEC opportunity in Chicago.” Bass said he would think about it. Then he left.
The next morning in Galveston, music filled the Moody Gardens coliseum as a group of young girls broke into a competitive dance routine. Two of Bass’s daughters were performing that day, and he had driven the family down the previous afternoon for what was supposed to be a time of fun.
But as he sat in the auditorium, Bass could only stew. Something had shattered for him. Andersen had a storied history, a tradition, and central to that was its unwavering integrity. That Andersen would never have allowed Enron to have its way like this. That Andersen was gone. The tradition was dead. It tore at Bass.
So be it. He would not be party to the collapse of values. He would not let a client decide his fate. I’m just going to leave the group, he thought. Maybe leave the firm.
One way or another, he had to do something.
In his home office the next afternoon, a Sunday, Bass switched on his laptop and connected to the Andersen network. He was scheduled to speak the next day with John Stewart, a top partner in the OSG, about Enron’s demand. But first Bass wanted to tell his side of the story.
He opened an e-mail, addressing it to Stewart. “I know you did not ask me for this,” he typed. “But I believe you should at least have a version of what I know about this Enron ‘thing’ with me.”
He recounted all of Enron’s questionable deals in December—Braveheart, Fishtail, and of course the absurd forty-five-day Raptor guarantees. His involvement in these had been limited to communications with the Andersen partners, who were obviously blaming the accounting judgments on him rather than presenting the decisions as the firm’s opinion.
“Once we conclude something, or render some advice, the engagement team should deliver that advice or conclusion as if it were their own,” Bass wrote. “It is after all the engagement team’s responsibility to sign the opinion—not ours.”
He typed for almost an hour. He hit the “send” button shortly before seven that evening.
John Stewart was a gentle man, not easily prone to anger. But the Bass affair had thrown him into a fury—at Enron, to be sure, but also at Andersen. He arranged a meeting with a number of senior partners in Chicago.
“The behavior of the client in this instance has been unprofessional,” Stewart declared. “This should not have been allowed to happen.”
One senior partner, Larry Rieger, agreed to speak with David Duncan, but that went nowhere. Soon Stewart reached a new resolve. If Enron didn’t like what Carl Bass had to say, too bad. His was too fine a mind to ignore; Stewart was still going to consult him. But he’d do so on the sly, so that nobody at the company would know.
After months of work, Jordan Mintz had almost completed the memo summarizing his concerns about LJM. With a little more work, it would be ready for Causey and Buy.
First, he wanted to be sure his bosses knew what he was up to, so he forwarded a draft copy to Fastow. Then he briefed Derrick, the general counsel, as well as other Enron lawyers, telling them about his findings and promising to send them a copy of the final memo.
The writing was a measured, almost dry account of the LJM funds and the shortcomings Mintz had detected. Some dated back to problems McMahon had protested years before, like the fact that Enron allowed LJM staffers to work alongside the company’s own finance employees.
To fix the system, Mintz proposed an array of actions. More requirements that analysts explain why a deal was in the company’s interest. Better involvement by Skilling in reviewing transactions. And coordinated approval of deals by an in-house legal, accounting, and commercial staff.
On March 7, the day before Mintz planned to send out the final memo, he was working at his desk, trying to get out early for his son’s seventh birthday. Kopper appeared in his doorway. Before Mintz could say a word, Kopper stepped in, throwing Fastow’s copy of the memo at his desk.
“What are you trying to do?” Kopper snarled. “Shut us down?”
Kopper stormed away, leaving Mintz behind, feeling a shiver of self-satisfaction. His little missive had apparently drawn some blood.
That same day, Vince Kaminski sat in his office, reviewing a stunning document. It left no doubt that Enron’s finance division could well be spinning out of control.
The decision the previous year to have a team analyze Enron’s company-wide risk was paying off. This document—written by the team leaders, Kevin Kindall and Li Sun—established a strong case that Fastow’s off-books partnerships had created an uncontrolled, unseen threat to Enron’s survival.The work was based on limited information, and more research was needed. But this effort had been undertaken without any real budget. Pushing it to the next level required money—and cooperation from the finance group.
Kaminski needed to get this in front of the right people and win their support so Kindall could finish the job. He had little concern about whether his team would get what it needed. Anyone could see that their findings so far were just a preliminary sign of a very large, very ugly problem.
On March 9, Kaminski and his analytic team dropped by Ben Glisan’s office for their scheduled presentation. Glisan led the group down the hall, where everyone took a seat at a conference table. Kaminski launched the discussion with the history of the analytic team and the rationale behind conducting a company-wide risk analysis. Then he turned the floor over to Kevin Kindall.
Glancing down at his report, Kindall went through his analysis. It was calm and reasoned, but painted a graphic picture of a finance division out of its depth, taking risks it did not fully comprehend.
Global Finance—through its structured deals—had entered into repeated arrangements where purchasers of assets could force Enron to take them back through what were known as total-return swaps. But nobody had any idea what potential damage these arrangements might cause in the future. No one kept a book on the swaps; basically, Fastow and his crew had no clear idea of how many there were or of the terms that had been created for them.
Then there were guarantees to purchasers that were issued by the finance division; again, no one kept track of them. The best estimate was that the finance group had put out some twenty-seven hundred corporate guarantees, without assessing the associated risks. It was like a bad housekeeper sweeping dust under the rug and forgetting about it.
There was another problem spelled out by Kindall, one Kaminski considered an emergency issue: Enron, a Fortune 50 corporation, had no idea of its cash position on any given day. No system was in place to track daily inflows and outflows for the whole company. What did exist, Kindall said, resulted in untimely reports from divisions, forcing Enron to borrow money unnecessarily, simply because no one knew if the cash was available. Disorganization was needlessly increasing Enron’s debt levels.
Still, the biggest risks were in the special-purpose vehicles, Kindall said, the off-books partnerships that had been the key to Fastow’s work.
“We weren’t able to gain access to a lot of information,” Kindall said. “But what we could review pointed to the existence of huge risk exposures that Enron simply hasn’t fully analyzed and does not understand.”
Just two off-books entities, Whitewing and Marlin, created enormous hazards. Because of their structure, underperforming assets that the entities had purchased could lead to future liabilities for Enron, Kindall said.
Plus, the deals had been structured with “trigger events” involving Enron’s share price and credit rating. Basically, to make the entities more attractive to outside investors, Fastow and his team had made commitments on behalf of the company—to issue stock, assume debt, or otherwise take on new obligations—if Enron’s stock price or credit rating sank.
Of course, that was exactly the time that Enron shouldn’t be taking on such commitments. Issuing more stock when the stock price was falling meant that the price could fall even faster. It was like striking an agreement to hose down a house with gasoline if a fire started. To make the original deal sweeter for outside investors, Fastow had created a structure that could push the company toward collapse as soon as trouble started.
Glisan listened silently. He wasn’t all that concerned about the triggers in Whitewing and Marlin. Finance used them all the time; even the Raptors had stock-price triggers. He knew all about them.
Kindall flipped the page of his presentation. “We’ve assessed the likelihood of hitting one of those triggers. For example, we have a five percent chance of a credit downgrade in the next twelve months.”
Five percent. That struck Glisan as high.
“But you have to understand, these are just the triggers we have located,” Kindall said. “There appear to be other triggers embedded in other vehicles as well.”
Those were hidden in documents that Kindall’s team hadn’t been allowed to review. The triggers appeared to have been assembled without regard to each other. Ultimately, they could all be activated in tandem, since they were all based on the same two factors.
“It’s likely the occurrence of one trigger will push down the share price so far that we hit another one embedded in some other vehicle,” Kindall said.
He cleared his throat. Presenting doomsday scenarios was never easy. “In truth, it’s conceivable we could hit a cascading series of triggers, setting off a domino effect, where each trigger pushes down our stock price even more,” he said. “That would result in a massive decrease in the share price and lower our bonds to a junk rating.”
Everyone knew what that meant. Enron, as a massive trader, could not survive if its credit rating fell below investment grade to junk status. Other traders would shut the company out of the market, fearing it lacked the financial wherewithal to stand behind its commitments.
The Raptors only increased the danger level, Kindall said. He focused on Raptor I. “Already there are unrealized losses totaling hundreds of millions of dollars in Raptor. It’s conceivable that just the disclosure of those kinds of unrealized losses may force our stock price and credit rating down to an extent that we hit one of the trigger events and set off the domino effect.”
Kaminski spoke up. His group needed a budget to finish its project, to identify the full scale of the threat. Much work remained to be done: assembling a complete list of all the off-books entities, calculating the risks they contained, and creating a forecast of expected liabilities.
Kindall agreed. “We need to take each off-book vehicle and closely examine all of the assets in them.”
He paused. “Once we have that information, we would then be able to estimate the probability of ruin.”
It was all there.
In a single stroke, Kevin Kindall—an inconspicuous mid-level analyst relying on scraps of data—had exposed the financial rot eating away at Enron.
It had come to this: Enron, the supposed corporate success story of the last decade, had ignored—no, disdained—the basics of business, allowing them to slip away in its single-minded pursuit of profit. To executives richly rewarded for each newfangled deal, cash management was boring, not the cutting-edge stuff that let Enron be Enron. Closely tracking exposures was seen as an expense, not a moneymaker. The workaday business of business just didn’t have the kind of sizzle that won plaudits and praise. Buying insurance? A monkey could do that.
That was the culture that had flared in the high-money days of the 1990s and had since spread through Enron like wildfire. Now, with eerie precision, Kindall had predicted the scenario that would ravage the company in just seven short months. The disclosure of the Raptor losses. A market shock. A cascading collapse as Enron’s stock price blew through one trigger after another, pushing the company toward its ultimate demise.
It was as if an unknown engineer at the White Star Line had laid out the dangers of icebergs to the Titanic months before the great ship’s ill-fated voyage. There was still time. Changes could be made, disaster averted. The survival of Enron depended on the response of Ben Glisan, a man whose secret million-dollar profit from a partnership gave him plenty of reason to oppose letting anyone look too closely at Fastow’s dealings.
As Kindall wrapped up his presentation, Glisan skimmed the last two pages of the written report. The analyst was explaining how the recent Fortune magazine article had spelled out a series of dismal statistics for the company, which would be even worse if the “hidden Enron” in all of the off-books partnerships were included.
Glisan flipped the pages closed. “Well, I appreciate all the work that went into this,” he said. “But there really isn’t anything to worry about.”
Nothing to worry about? Kaminski bridled at the brush-off. Kindall’s analysis portrayed a company that could be on the precipice, and simply not have the data to be aware of it. This might be a matter of life and death.
“Ben,” Kaminski said, “we can’t know that without conducting a full analysis.”
Glisan smiled. “Vince, I was involved in designing almost all of these vehicles,” he said. “We know what the risks are. It’s not an issue.”
Kaminski pressed his point; more study was needed, he insisted. Glisan raised his hands, relenting a bit.
“All right, Vince, I hear you,” he said. “I’ll go through this again and get back to you.”
The next morning at eleven, Glisan—now Enron’s only senior executive with the knowledge of the potential debacle the company faced—boarded a Continental Airlines flight with his family for a weeklong ski trip to Beaver Creek, Colorado, where they would be staying at the luxurious Villa Montane Townhomes. There he could relax, hit the slopes, maybe forget about work for a while.
Glisan never bothered to get back to Kaminski and Kindall about their analysis. And he also neglected to tell Lay, Skilling, or any of Enron’s directors about the terrifying warning he had just received.
Enron’s deal with Blockbuster was dead.
The skirmishes of the last few months had escalated into all-out warfare. Blockbuster complained that Enron had failed to provide the technology and access to customers that it had promised; Enron countered that Blockbuster wasn’t delivering quality content. By March, the recent contractual agreement forbidding either side from walking away had expired, and both were ready to call it quits.
In the days before the deal was called off, Lay was briefed on the troubled arrangement by David Cox, the primary negotiator. The movies secured by Blockbuster had been terrible, he said—lowbrow teen sex romps like Porky’s 3 and a bunch of how-to videos. As Cox described it, the celebrated Blockbuster relationship with movie studios was a bust. As the biggest player in video rentals, it had used its leverage to extract big studio concessions for its retail stores. The studios weren’t about to help Blockbuster build another business using their content, and several studio executives had quietly let Enron know that.
Lay listened with dismay. After all, the entire basis of the agreement with Blockbuster had been its supposed Hollywood contacts. But apparently no one from Enron had bothered to check by calling the studios. It was as if this twenty-year contract had been entered into on the fly.
Still, Cox was quick to assure Lay that all was not lost. Enron, he said, was developing its own Hollywood contacts. It would all work out in the end.
Perhaps. But that prospect didn’t change the fact that Enron’s twenty-year contract with Blockbuster would soon be terminated, just eight months after it was signed. Now its video-on-demand business would have no business partner, little content, and few customers. Yet, because of Project Braveheart, Enron would still have what really mattered to its executives: more than $111 million in reported revenues, enough for the broadband division to reach its financial targets.
The morning after the Blockbuster deal was canceled, Carl Bass was at his home office, surfing the Internet. He noticed a Reuters report on a news Web page.
“Blockbuster, Enron Broadband End Video-on-Demand Deal,” it read. He clicked on the story.
This could be bad. Bass knew that Enron had reported huge revenues from Braveheart, already a shaky deal. Not even Enron could argue a business with a name-brand partner was worth the same once the joint venture ended. Bass opened an e-mail and addressed it to John Stewart. He pasted a copy of the Reuters article in it, then typed a message: “I do not know if you knew of this yet.”
Stewart was on his computer at that moment and opened Bass’s e-mail. The Reuters report was disturbing, given the revenues Enron reported from Braveheart. In his reply, he typed that this was news to him.
“So what happens to the joint venture and the part that was securitized through an SPE to produce a material gain?” he typed.
That’s the sixty-four-dollar question, Bass thought.
He hit the “reply” button. “One would think (no direct knowledge since my phone no longer takes their calls) that there should be a loss reported,” he typed. “The ‘venture’ has now lost its value.”
A loss would never be taken. The collapse of the Blockbuster relationship, Enron executives argued, was a good thing. Its partner’s dicey relationship with movie studios had impeded the joint venture’s success. With Blockbuster out of the way, Enron was sure to sign the studios up even faster. Why, executives enthused, with Enron now fully in charge, Braveheart might even be worth more, not less, than was originally projected.
A week had passed, and Mintz still hadn’t heard back about his LJM memo. He asked his secretary to set up a meeting with Causey and Buy, and they agreed to get together a few days later. At the appointed time, Mintz arrived at Causey’s office. Buy showed up soon after, and the three took seats at the circular conference table. Mintz placed a copy of his memo on the table in front of him.
“Okay, Jordan,” Causey said, “it’s your meeting. What’s up?”
“Well, I wanted to find out what you guys are thinking about the memo,” Mintz said.
Blank stares. “What memo?” Causey asked.
Mintz felt himself deflating. They never read it.
“I wrote a memo about the policies and procedures on LJM and how they weren’t being followed,” Mintz said. “I included recommendations on how to fix the problems.”
Causey closed his eyes and nodded. “Oh, yeah.”
He stood and walked over to his desk, riffling through piles of papers. Buy looked evenly at Mintz.
“I didn’t bring my copy with me,” he said.
Causey started walking back to the table. “I can’t lay my hands on it right now,” he said.
Keeping up a tough front, Mintz suggested that he have Causey’s secretary run the copy he had brought through the Xerox machine. A fine idea, Causey and Buy agreed. Minutes later, everyone had a copy of the memo. Causey and Buy leafed through it. Their faces gave no sign of recognition.
“How do you want me to proceed?” Mintz asked, trying to end the awkwardness of the moment. “Should I just go through it page by page?”
Absolutely, they replied. Slowly, Mintz reviewed his concerns and recommendations. Causey and Buy repeatedly muttered words of approval, then encouraged Mintz to move on to the next topic. Mintz reached the last page.
“Now we have this screwed-up situation where these LJM people are on the twentieth floor,” he said. “And I want to be sure I have your support in getting them moved out.”
No question, they said. Mintz should get it started. They were behind him all the way.
Mintz was back in his office about ten minutes later. He slowly closed the door and walked to his credenza. He placed his copy of the memo there and just stared at it.
They hadn’t read the memo. Even when they heard about it, they could barely disguise their indifference. He had hoped they would be so outraged that they would set things straight. Instead, they had just patted him on the back, wishing him good luck in taking on his boss.
What a bunch of pussies, Mintz thought. I can’t believe these guys are senior executives with this company.