Enron's Fall

Abstract:

Ray Bowen, a Citigroup banker at the time and now Enron's chief financial officer, once asked Mr. [Andrew Fastow] about a batch of complex equations that filled a whiteboard in the conference room next to the Mr. Fastow's office. "You can't tell me you understand those equations," Mr. Bowen commented to Mr. Fastow. Mr. Fastow replied: "I pulled them out of a book to intimidate people."

The Fastows headed to Mrs. Fastow's native Houston in 1990, both taking jobs at a young company called Enron. Just five years old, Enron was starting to evolve from a natural-gas and pipeline company into a trading firm. Mr. Fastow was one of the first managers hired by Mr. [Jeffrey Skilling], who himself had only recently arrived, from management consultants McKinsey & Co. Brought into Mr. Skilling's inner circle, Mr. Fastow returned the loyalty, telling colleagues he had named a child after his mentor. When Mr. Skilling became Enron's president and chief operating officer in early 1997, he and Mr. [Kenneth Lay] promoted Mr. Fastow to lead a new finance department. A year later, Mr. Fastow became chief financial officer.

LJM employees used Enron office space and were on its phone system. When a call came from LJM, Enron employees would have no reason to know the person on the line was representing LJM unless he or she said so. In mid-2000, as Enron Broadband Services was negotiating to sell some fiber-optic cable to LJM2, an LJM2 employee named Anne C. Yaeger called the Enron unit and grilled it about Enron's valuation of the cable, without identifying herself as an LJM staffer, according to a former employee familiar with the matter.

Full Text:

Copyright Dow Jones & Company Inc Aug 26, 2002

When Enron Corp. was riding high, Chief Financial Officer Andrew Fastow had a Lucite cube on his desk supposedly laying out the company's values. One of these was communication, and the cube's inscription explained what that meant: When Enron says it's going to "rip your face off," it said, it will "rip your face off."

It was a characteristic gesture inside Enron, where the prevailing corporate culture was to push everything to the limits: business practices, laws and personal behavior. At Enron's London office, lavishly paid executives submitted blind e-mail bids for the 18 parking places. One of them paid $6,250 to use a well-placed spot for a single year.

This culture drove Enron to dizzying growth, as the company remade itself from a stodgy energy business to a futuristic trader and financier. Eventually it led Enron to collapse under the weight of mindbogglingly complex financial dodges.

Last week brought the first criminal consequences, as former financial executive Michael Kopper pleaded guilty to charges that he helped build a web of partnerships that disguised Enron's waning fortunes and funneled millions to himself, Mr. Fastow and others. The plea made it clear the federal government is now preparing a case against Mr. Fastow.

Finance and accounting remain the core of the Enron story, but the company's cowboy culture -- and the way top bosses such as Mr. Fastow and former Chief Executive Jeffrey Skilling inspired it -- are also key to understanding what happened in this historic business debacle. Only now is the full scope becoming apparent, amid government probes and a growing willingness by some former and current employees to speak about it.

Enron executives lived large, beginning with fast cars. Porsches were one favorite. Former Enron Broadband Services Chief Kenneth Rice drove in Ferrari Challenge races, an exclusive series for the rich. "They were guys who could afford not only to buy Ferraris, but to wreck them," says Todd Renaud, a former information technology director at the company.

Sometimes, employees celebrated their deals or trading wins by heading off to a local strip club. Brittany L. Lucas, a dancer at a club called Treasures, recalls a group of about eight Enron men striding in last summer and announcing they had $10,000 to celebrate with. "Enron guys were known for spending big money and letting you know they worked there," says Ms. Lucas, who says she made $1,200 for herself that weekday afternoon, her best day ever. In late 1999, Enron advised employees they shouldn't use their company cards at the clubs, citing the clubs in a memo under their discreet billing names.

Despite its growing size, Enron operated a little like a family business at times. In 1997, it acquired a company co-owned by a son of Chairman Kenneth Lay, which planned to go into the business of trading pulp and paper. Employees say they were urged to use a travel agency operated by a sister of the chairman. "It was beyond encouraged," says James Alexander, financial chief of Enron Global Power & Pipelines in 1994 and 1995. The sister of Mr. Lay said last year the Enron business was won through competitive bidding.

Mr. Alexander, speaking generally of the company, says, "Enron was always playing it close to the edge."

A spokesman for the company, Mark Palmer, says that's not the culture today. "The 12,000 remaining employees at Enron and former colleagues that were laid off feel like they are being unjustly painted by a brush that appears to be deserved for only a few," he says.

Indeed, most at Enron never had a chance to cash in like top managers, whose perks were being protected to the end. Worried last fall that bankruptcy lawyers might try to seize a final $100 million-plus in bonuses for executives and top traders, then-President Greg Whalley told managers to make sure they could defend the checks as retention payments, says one manager involved in the process.

Enron executives would challenge employees, and not just in the office. During a company picnic at Houston's AstroWorld in the late 1990s, Mr. Skilling dared Lou Pai, head of Enron Energy Services, to join him in "barnstorming," a blend of hang gliding and sky diving. Mr. Pai refused, but others felt compelled to take up the challenge.

In this environment, Mr. Fastow managed to stand out. Often telling investment bankers that Enron had "the biggest wallet on Wall Street," he would describe to each one where his firm stood in the pecking order, based on the roughly $100 million in fees Enron paid out yearly. He told a Goldman, Sachs & Co. team he wasn't going to do anything with a presentation they had prepared until they agreed to lend Enron some money, adding that lots of other banks were waiting in line, say people familiar with the incident.