Enron: The Smartest Guys in the Room Page #7

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

'Is 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,

'Is 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 fantasyland.

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

thirty 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.

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.

Remember, I'm not sellling

the assets to myself.

They own the assets.

They're selling them to LJM2.

Fastow knew what kind of deal

he was offering as Enron's CFO.

He could guarantee

profits for LJM.

I think this is an

extraordinary opportunity.

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.

Isn't there a question of

conflict of interest?

There is never

any question that

I will be on both sides

of the transaction.

I will always be on the LJM

side of the transaction.

He was general partner of LJM,

while at the same time,

being CFO of Enron.

You know, that's a whole

'nother 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,

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