The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (26 page)

Meanwhile, over at Enron, Jeff Skilling, newly hired to get the Gas Bank up and running, decided he needed a finance executive who knew something about securitization. Skilling, after all, wanted to free up capital so he could do more natural-gas deals, and he thought that securitization was one way to do that. An executive search firm found Fastow, who was more than ready to leave the bank for Enron. At Continental, promotions and pay raises were slow in coming, bonuses were small, and a young executive on the make had to be willing to spend long years in the trenches. Not yet 30 years old, Fastow was already getting impatient. Besides, Houston was his wife’s hometown.

Skilling was dazzled by Fastow’s résumé, never for a moment questioning whether any of it was exaggerated. Fastow’s experience “launching and managing” a business at CCC meant that the young finance whiz had an “entrepreneurial bent,” Skilling concluded. His work “creating and selling” FRENDS meant that he could come up with new ideas to free up capital. And he had other attributes, too. For instance, Fastow claimed on his résumé that at Continental he was responsible for “continuing education of commercial bank lending and portfolio officers regarding accounting and risk adjustment implication of asset securitization.” “I just went agog,” Skilling later said. “He was perfect. Absolutely perfect.”

Gene Humphrey, who was then Skilling’s finance head, was less certain. He was actually more impressed with Lea Fastow, whom Enron brought into the company’s treasury department. (Indeed, many people at Enron thought she was the smarter of the two.) Still, this was 1990 and Enron was still a pipeline company; star corporate finance prospects weren’t exactly rushing to apply for the position. In November, Skilling offered Fastow the job, and he took it. His title was manager, his starting salary was $75,000, up from the $68,000 he’d made at Continental, and his signing bonus was $20,000. He was also guaranteed a bonus of at least $25,000 in the following year. He began work on December 3, 1990.

Early on, one of the gas-bank executives took Fastow to meet a crusty Oklahoma oil producer. It was instantly clear that Enron’s new finance guy was out of his element. The oilman had a wad of chewing tobacco the size of a baseball in his cheek and periodically interrupted the conversation to spit a stream of brown juice into a tin can, leaving Fastow in a state of shock.

For the most part Fastow didn’t stand out in his first few years at Enron—certainly, not many people would have guessed that he would one day ascend to become the CFO of a Fortune 500 company. “I thought he was a strange little guy . . . he didn’t talk much, but he came up with creative structures,” says one executive. “He might not have been the brightest guy in the world, but he was very, very hardworking,” says another. Not long after he arrived, one executive assistant says, he skipped a vacation cruise the Weingarten family had planned to the Galápagos Islands because he was too busy with work. Fastow was also a big practical joker who would throw slimeball goo against glass walls as a joke and kept Frisbees and other toys all over his office.

ECT was small in those days, and Fastow rose rapidly. He worked on the first Cactus deal, was the leader in developing the JEDI partnership, and helped devise the EPP strategy. In 1992, Gene Humphrey wrote in a performance review that “Andy is and is continuing to develop into one of the strongest financial innovators that I have worked with. He has a strong and solid future at Enron.” (Humphrey noted, however, that Fastow needed improvement in the “personal relationship skills useful in the heat of negotiation. Sometimes a kind word is more useful than a blunt assertion.”) By mid-1993, Fastow was a vice president, and his performance reviews were increasingly positive. In 1994, Fastow received raves for his “creativity, vision, persistence, initiative, presentation skills” and his “innovative thinking on new deal structures.” He was told, though, that he needed to develop “strong lasting relationships” with capital providers such as banks and insurance companies and to “negotiate with a win/win attitude.” By late 1995, Fastow had become a managing director, with a salary that topped $225,000.

And yet he was unhappy. Why? Because even though he was making more money than he’d ever made in his life (and was married to an heiress), he could see plainly that his pay wasn’t even close to what the big earners at Enron were raking in. Even worse, it probably never would be. The people who made the big money at Enron were the executives who either ran divisions or landed big deals. John Wing, Lou Pai, Ken Rice, Rebecca Mark, and others were already millionaires, thanks to their Enron compensation deals. They got huge bonuses, tons of stock options, pieces of their deals or businesses—you name it. But executives like Fastow, in finance, were never going to make that kind of money. And that’s because the finance department, important though it was to ECT’s success, wasn’t a profit center in its own right. It didn’t contribute directly to Enron’s earnings; as they say in business, it didn’t have its own P&L. (The letters P&L stand for profit and loss. The phrase means that a division isn’t just a cost center; it makes money for the company.) “The whole story about Andy is that if you didn’t have a P&L at Enron and you didn’t add a lot of money to the P&L, you weren’t a man,” says a former colleague.

Desperate to prove that he belonged among Enron’s heavy hitters, Fastow began lobbying Skilling to give him a division to run. And because he had become one of Skilling’s favorites, Fastow got his wish. By 1996, Skilling had put Fastow in charge of a new division he’d recently set up. It was supposed to be Enron’s first foray into the retail-energy business, an effort to sell electricity and gas directly to the consumer. But nobody had figured out how, precisely, Enron was going to do that; Fastow was told to come up with the business plan for the new unit.

Try as he might, he simply couldn’t do it. Fastow’s business plans were so poor that Skilling kept sending him back to the drawing board. “He had lots of big ideas and went in lots of different directions,” recalls a former colleague. “He would talk a big game.” But he never came up with anything that had a real shot at being a business. Within nine months, after many shouting matches with Skilling, Fastow was back in finance. Fastow saw his failure as a major humiliation, potentially fatal for his career at Enron. There was no glossing over the fact that he failed miserably. Some of the traders started calling him Andy Fast-Out.

But within a matter of months, Skilling sent a clear signal to the rest of the organization that Fastow was not going to be punished for his failure. On January 13, 1997, just weeks after replacing Kinder as Enron’s president, Skilling named Fastow a senior vice president, in charge of treasury, risk management, pricing capital, and funding for all of Enron’s business. Fastow was also named to Enron’s management committee. He was now part of the inner circle. (Shortly after Fastow was promoted, his wife Lea, who had risen to assistant treasurer, left Enron after giving birth to their first son.)

 • • • 

To many who knew him well, Fastow seemed an incredibly insecure man. There were many people at Enron who kissed up to Skilling, but few did it as overtly as Fastow. “Gratuitous annual self promotion” reads an entry on Skilling’s calendar next to a meeting with Fastow. Fastow named his first son Jeffrey; after the birth, as Fastow was passing out cigars in the office, he had to fend off jibes accusing him of being a “suck-ass” for naming his son after his boss. According to one former managing director, Fastow replied, “Hey, who’s done more for me other than my mom and dad?”

Fastow frequently complained about money: how he wasn’t making as much as he should. After getting his promotion to senior vice president, Fastow hired a personal image consultant to help him dress like a corporate executive; later, he
started wearing double-breasted designer suits, buttoned up, making him a dandyish figure in the halls of Enron, where people tended toward 1990s-style casual cool (khakis and open-collar shirts). Before he bought a new Porsche, he polled women in the office to see whether he should buy a blue car or a black one.

Fastow also seemed to have a split personality; he was Enron’s version of Dr. Jekyll and Mr. Hyde. “He was so mean in business but so personally delightful,” says one banker who knew him well. In a company full of strident Republicans, he was not. Years before it became a public issue, Fastow turned down a coveted invitation to attend the Masters golf tournament because women weren’t allowed in the club. He was a devoted and doting father. He was also a health nut who was known for taking long runs. And he took care of employees—certain employees, that is—whom he needed on his side. “You always knew Andy was out for himself, but as long as you made him look good, he always looked after you,” says a former colleague.

But Fastow was also greedy and out for himself—a “take-no-prisoners political animal,” according to a former colleague—who had no qualms about taking credit for things others had done. And he had a vicious temper. “You could tell when he was about to twist off,” says one banker. “That mouth would go in a certain way, and then he’d stretch his neck. You knew he was going to explode, and it would be terrifying.” To the bankers and Wall Streeters he dealt with regularly, Fastow’s volatile fist-pounding manner came to exemplify Enron’s culture. And over the years, it only got worse. “As time went on, Andy changed,” says an early senior executive. “People started to become afraid of him and afraid to speak out. It almost created a fear factor between Andy and people who did not agree with him.”

In late 1997, Skilling decided to search outside the company for a CFO. He met with a handful of candidates and took a particular shine to Denise McGlone, the former CFO of Sallie Mae, who in 1997 was named one of
Euromoney
’s top 50 women in finance for her work in risk management and derivatives. He went to New York to talk to McGlone and was impressed enough that he had her fly to Houston to make the rounds at Enron. Fastow, recalls a former colleague, “freaked out.” She continues: “I was sitting in my office. He’d been acting really weird. Skilling walked by with this woman, introducing all of us. Andy really almost had a meltdown over it. He was in his office, staring at his desk, not reading anything, not doing anything.”

Rick Causey, Enron’s chief accounting officer, was almost as upset as Fastow. For both men, their worry was the same: a new CFO would inevitably get between them and Skilling. They each went to Skilling and told him that either one of them would work for the other but neither would work for McGlone. They got their way. Lay told Enron’s board that he felt the best candidate was an internal one: rising star Andy Fastow. In March 1998, Fastow, just 36 years old, was named CFO of Enron. Once again, Enron had installed the wrong man in the wrong job for the wrong reason.

“Andy didn’t have the knowledge base required to be the CFO of a major company,” says one of his former bosses at Continental. He had a narrow set of skills—creating financial structures—and lacked the experience and judicious temperament the job required, the willingness to say no to deals and the attention to basics necessary to insure that the company’s balance sheet remained strong. “Andy didn’t have a risk-control bone in his body,” says Sherron Watkins.

He lacked something else: the knowledge that being a CFO demanded. Fastow knew so little about accounting that one person who knows him wasn’t even sure he could dissect a balance sheet. “It amazes me that you’d take a corporate finance asset-backed guy and make him CFO,” says his former boss. “That’s not what a CFO’s job really is.” Of course, the man had never worked at Enron.

 • • • 

Though he now held the exalted title of chief financial officer, Andy Fastow’s job didn’t really change at all. He still saw his primary role as creating the financial structures that would allow Enron to hit its profit targets. And even though he was now CFO, Fastow was never supposed to be able to do whatever he wanted without any oversight. There were others, both in and outside the company, whose job was to act as a check on Fastow, to perform the same kind of role as his old bosses at Continental. To put it another way, there were people whose job it was to say no to Andy Fastow when he wanted to cross the line.

Ostensibly, the person inside Enron who was supposed to help keep Fastow in check was Rick Causey, the company’s chief accounting officer. At most companies, the chief accounting officer reports to the CFO. But that wasn’t true at Enron. Aware of Fastow’s shortcomings, Skilling made Causey his equal and gave him many of the day-to-day responsibilities that a CFO normally handles. Causey reported directly to Skilling.

One of Causey’s responsibilities was to determine how Fastow’s transactions were reported on Enron’s financial statement. He was also the go-between between Enron and its outside accountants at Arthur Andersen. Had he been willing to declare that Fastow’s transactions didn’t pass the smell test, it would have been impossible for Fastow to do what he did. On paper, at least, he had the authority to stop Fastow from going too far. But Rick Causey didn’t see his job in those terms. Instead, he saw his role as
facilitating
Fastow’s transactions. Ultimately, he was every bit as weak in his role as Rick Buy was as chief risk officer.

A University of Texas graduate, Causey joined Arthur Andersen straight out of school and spent almost nine years there, the last half of which he worked primarily on the Enron account. In 1991, Causey joined Enron as assistant controller at a salary of $100,000 and helped do the accounting work for JEDI and Cactus. Though he never made partner at Arthur Andersen, he was promoted to chief accounting and information officer at Enron at the age of 37. To a large extent, Enron was all he knew.

Within the company, people used to call the roly-poly Causey “the Pillsbury doughboy.” Soft-spoken, considerate, salt of the earth, he loved playing golf and attending University of Texas football games. He wasn’t a bully, either—not the way Fastow was—but he knew what he had to do, and he did it willingly. Not that he had much choice. “If he didn’t figure out a way to make things happen, he’d be fired,” says a former finance person.