Enron: The Smartest Guys in the Room Page #2

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,

in 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 1997

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...

ten 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 and find out

what kind of guerilla

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 that

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,

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