Transcript for:
Enron's Fall: Lessons on Corporate Greed

It had taken Enron 16 years to go from about 10 billion of assets to 65 billion of assets and it took them 24 days to go bankrupt. What the hell is he building in there? This company collapsed.

so quickly and so entirely. I mean, it was into bankruptcy within a matter of weeks. It just immediately had all the makings of a gigantic scandal.

He's hiding something from the rest of us. The fatal flaw at end. Enron, if there is one you say, it was pride. But then it was arrogance, intolerance, greed. So many of them were blinded by the money that they didn't see that they were sinking their own lifeboat.

We have a right to know. It just got hungrier and hungrier. Sooner or later, they were doomed to go off that cliff at 90 miles an hour.

It's astounding that they got away with it for so long. In reality, Enron was a... House of Cards.

What we didn't know is that the House of Cards had been built over a pool of gasoline. It all sort of became smoke and mirrors. The committee will come to order. This is a case of America's largest corporate bankruptcy.

The question here is what happened, who was responsible for it happening, and what can we do to prevent this sort of thing from happening again? I think the Enron story is so fascinating because people perceive it as a story that's about numbers, that it's somehow about all these complicated transactions. But in reality, it's a story about people, and it's really a human tragedy. Thank you. Mama may have, Papa may have, but God bless the child that's got his own, that's got his own.

The strong gets more while the weak ones fade. Empty pockets don't ever make the grave. Mama may have, Papa may have, but God's the child.

Got his own Money Lots of friends Crowd of those When you're gone and Spend On this date at 2.23 a.m., Sugar Land Police discovered John C. Baxter located inside his vehicle with an apparent gunshot wound to the head. At this time, it has been a suicide note located. Sir, do you have any indication whether this was related to Enron's bankruptcy?

We do know that he was an Enron employee, but as far as any other indications of why he committed suicide, no, we do not. Mr. Skilling, let me touch on something that's sort of sad, and that's, of course, the suicide of Cliff Baxter. And you mentioned he was your best friend in your opening statement.

Before he died, did you have many conversations with him? Yes. And were any of them relative to Enron?

Yes. There's no one that knew Cliff toward the end that didn't realize that he was heartbroken by what had happened. And Cliff came over to my house and he said, they're calling us child molesters. He says that will never wash off.

But Mr. Scanlon, you don't believe that. I don't believe what? You don't believe that the press and everybody called.

Cliff Baxter or yourself or anybody on the board of directors denigrating or tainting you, you don't think it's accurate. It's what you're saying to us here today. I do not believe, I did not do anything wrong that was not in the interest, all the time that I worked for Enron Corporation, that was in the interest of the shareholders of the company. Ultimately, who was responsible for the downfall of Enron?

Only a few years ago, Enron was the nation's seventh largest corporation, valued at almost $70 billion. Pundits praised the company as a new business model. This trading floor was manned by America's best and brightest, charting the futures of energy and power. And high above, each with a private staircase, Ken Lay and Jeff Skilling had built their own plush staterooms. They were known as the smartest guys in the room, captains of a ship too powerful to ever go down.

In the Titanic, the captain went down with the ship. In Enron, it looks to me like the captain first gave himself and some friends a bonus, then lowered himself and the top folks down in the lifeboat, and then hollered up and said, by the way, everything's going to be just fine. Like...

Skilling, Ken Lay said he hadn't done anything wrong. We have a word with you real quick. We're seeing it. Really not this morning. Beyond the financial issues, some suspected a political conspiracy.

Enron had been the largest corporate contributor to the first presidential campaign of George W. Bush. This is not a political issue. It is a business issue. You know, Enron had made contributions to a lot of people around Washington, D.C. And if they came to this administration looking for help, they didn't find any.

To say no help here is like I did not have political relations with that man, Mr. Lee. What about the fact that George W. Bush calls Ken Lay... Kenny boy.

That's my nickname for my husband, which he overheard. So it wasn't original with the president. Certainly wasn't it? According to published reports, your husband earned about 300 million dollars in compensation and stocks.

from Enron over the last four years. What happened to all that money? It's gone. It's gone.

There's nothing left. This is the shredded evidence that we got that came out of Enron. We very quickly determined that the insiders had sold off a billion dollars of their stock in the preceding several months. Did you convert stock worth $66 million?

I don't know, but I... Would that be surprising to you to learn that you did that? No, that would not be surprising.

Mr. Fastow got only $30 million in stock proceeds from Enron, but he took another $30 million out with his side deals. I think there was just an immediate sense of outrage at Lay and Skilling and Fastow when people realized how much they had profited and how completely artificial the appearance of this company was. company had been. News of shredding at Enron raised more questions.

What answers were lost in the torn documents? 20,000 employees had lost their jobs. Two billion dollars in pensions and retirement funds had disappeared. Was Enron the work of a few bad men or the dark shadow of the American dream? Lay comes to the story of Enron from very humble roots.

My father was a Baptist minister and he was ordained a Baptist minister. I was very young, probably two, three years old. Ken Lay was a Baptist preacher's son in a family that had been poor all its life.

And he, throughout his life, worked several jobs as a kid and clearly had in mind that things could be better and wanted things to be better and had a huge ambition to make wealth for himself. He told a story later about sitting on a tractor, dreaming about the world of business and how different it could be from the way things were for him and his family. Lay was a PhD in economics and he became very early on a real apostle for deregulation. He was way ahead of the curve on this.

He was thinking about energy markets that would be deregulated. And in particular, a natural gas industry that was shackled by deregulation. And he pushed aggressively in Washington to change all of that.

Who could ever reach me was the son of a preacher man. In Washington, Lay became part of a new crusade to liberate businessmen from the rule of law. 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 under...

understand each other. It was 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, and 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 at this stage in 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 a transaction with Enron. 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 known 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. Do you? The issue with the company in 1987 involved the misappropriation of monies 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 McElroy, 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 Kenley'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 Bourget. Bourget 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.

speculator no one could find, M. Yass. What name did you suspect that was?

My ass, you know, and M. Smart. I said, 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 is 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 bourget 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, I got this panic call that they had drawn down $90 million in the previous five days. What we could do is just try to find out what kind of gorilla 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 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, McElroy 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 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 traitors 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. Bourget was convicted of fraud and spent one year in jail. With his biggest moneymaker now behind bars, Ken Lay had a problem. Who could he find to make money for Enron?

Every year, every day, every week, you have to come up with new ideas. I'm going straight to the top. Ken Lay saw in Jeff Skilling the guy who had the answer to what the future of the natural gas business was supposed to be.

Ken Lay is also a guy who considers himself a visionary, and he liked other people he thought of as visionaries. He liked people with big ideas, and Jeff Skilling was a person. with the biggest ideas of all.

Jeff Skilling's biggest single idea was to find a new way to deliver energy. Rather than be bound by the physical flow of the pipeline, Enron would become a kind of stock market for natural gas. It was a magical new idea, transform energy into financial instruments that could be traded like stocks and bonds. So that was the one good idea. In 1992, using that good idea, we became the largest buyer and seller of natural gas in North America.

Jeff was like the prophet. He came in and said, there's a whole new world out there. Forget about this pipeline stuff, you know, the state pipeline in the ground and gas in and gas out.

We can recreate this entire industry. An attorney from Vinson and Elkins, Amanda Martin was one of the first executives hired by Jeff Skilling and became part of his inner circle. The excitement was palpable.

You cannot imagine how proud we all were to be there. And then of course we had a leader who imbued us with a sense of confidence that if we were smart anything could be accomplished. And then the bottom line, we began to make money.

And that in and of itself was the reason why we were so successful. was a reaffirmation that this could be big. Skilling saw the opportunity to build an industry new and to start a business from scratch, but he had one specific condition that had to be met before he joined Enron, and it was that he'd be allowed to use a certain kind of accounting known as mark-to-market. Arthur Anderson said, signed off, and the SEC approved it. I remember walking in and going, what's going on, and Corsi and everybody, I mean, everyone was so excited, and in came the champagne, and we'd got mark-to-market accounting treatment.

And I often think about how clear my memory was about that event, and that was the beginning of a major cog in the downfall, ultimately, of Enron. Mark-to-market accounting allowed Enron to book potential future profits on the very day a deal was signed. No matter how little cash actually came in the door, to the outside world, Enron's profits could be whatever Enron said they were. Very subjective.

And very... It left it open to manipulation. And they were saying that we're going to sell power out of this power plant in 10 years for X dollars per kilowatt. And there was no way anybody could prove that they could do it. Well, good morning.

Hey, Reg, how are you? Finally, Greg. Good to see you.

Just sit, Todd. Sit down. We've been working hard on this and we've really pulled out all the stops. Look what we got. Origination.

We did $20 million last year. I think we can do $120 million this year. Trading.

We did $10 million last year. We think we can do $64 million this year. this is the key.

We're going to move from mark-to-market accounting to something I call HFV, hypothetical future value accounting. If we do that, we can add a kazillion dollars to the bottom line. Jeff! All right, that sounds fantastic! Oh, Jeff, thank you.

That's just superb performance. And you're gonna go far, my boy. Probably president of the company one day. You think so?

I think! He really believed that the idea was everything, and that when you came up with an idea, you should be able to book the profits from that idea right away. Because otherwise, some lesser man was taking the profits from the idea that some greater man had come up with in the past.

When Jeff Skilling applied to Harvard Business School, the professor asked him if he was smart. He replied, I'm fucking smart. One of his favorite books was The Selfish Gene, about the ways human nature is steered by greed and competition in the service of passing on our genes. At Enron, Skilling wanted to set free the basic instincts of survival of the fittest. Jeff had a very Darwinian view of how the world worked.

He was famous for saying once in Enron's early years that money was the only thing that motivated people. Skilling's notion of how the world should work really trickled down and affected everything about how Enron did business. He instituted a system known as the PRC or Performance Review Committee.

It required that people be graded from a 1 to a 5 and roughly 10% of people had to be a 5. And those people were supposed to be fired, hence this came to be known as Rank and Yank. I personally am convinced that the PRC process is the most important process that we conduct as a company. I've never heard of a company that's as good as Enron.

yet that would be successful terminating 15% of their people every year just to satisfy the fact that the other employees had to vote on and so when you're being evaluated by that group you are getting direct communication from Ken and me about what the objectives of the company are and how you fit with those objectives it was a brutal process the ability for a 25 year old to go in and to be reviewed and to be superior and as a consequence get a five million dollar bonus. I don't think that's repeated in many places in corporate America. Our culture is a tough culture. It is a very, very aggressive culture. At Enron, no one was more aggressive than the traders.

If I'm on the way to my boss's office to argue about my compensation, and if I step on somebody's throat on the way, that doubles it? Well, I'll stomp on the guy's throat. You know, that's how people work. On the trading side...

We got to be the biggest, baddest house in town. And by necessity, if you wanted to be in the market, you had to deal with Enron. Try to reconcile your big numbers here. Enron's traders were like the superpower.

powerful high school clique that even the principal doesn't dare to rein in. They had become the major engine of at least reported profits at the company. They took Jeff Skilling and Ken Lay's belief in free markets and turned it into an ideology. But they pitch it almost as a new economic religion. The force is with us.

I know the real world. I know the real world. Enron Online.

It will change the markets for many, many commodities. It is creating an open, transparent marketplace that replaces the dark, blind system that existed. It is real simple.

You turn on your computer, and it's right there. That's our vision. We're trying to change the world.

I think Jeff Skilling had a desperate need to believe that Enron was a success. I think he identified with... Enron, he proclaimed at one point, I am Enron.

The other thing about people at Enron is a lot of them were former nerds, including Jeff Skilling. He had been paunchy, he had big glasses, he was losing his hair. And Jeff Skilling one day kind of woke up and decided to change himself.

And he started working out, lost a lot of weight. But he really did remake himself through sheer will and force of personality. When Jeff got Lasix on his eyes, everybody at Enron got Lasix, so nobody was wearing glasses. I think Jeff Skilling is really a tragic figure in a classic sense of the word. He's a guy that people describe as incandescently brilliant, but he's also a guy who is radically different than he at times portrays himself.

He's portrayed himself as somebody who is very tightly monitored. risk. In reality, he's a gambler.

He gambled away huge sums of money before he was 20 years old by making wild bets on the market. So Jeff's skill in risk was glamorous. He was a huge risk taker.

He actually talked about... wanting to go on trips that were so perilous that someone could actually die. This manifests itself in trips that Jeff Skilling led for a small group of friends and customers.

A core cadre of Enron guys used to go on these wild adventures. Andy Fasta would go, Ken Rice would go. The trips were legend.

You know, we can sit and think about. what strange insecurities they were trying to overcome, but it made them feel good as men. They took a particularly memorable trip to the Baja, 1,200 miles on very rugged terrain in Mexico. This is a trip where people crashed bikes.

Ken Rice was on the trip, and he busted a lamp and acquired a bunch of stitches. People broke bones. One guy flipped a Jeep and almost got killed.

Those sorts of stories at NYU. became legend and it fed the whole macho culture of the place. Jeff Skilling had a way of describing people that he liked. He said, I like guys with spikes. He liked somebody with something extreme about them.

Ken Rice was one of the men with spikes, was a salesman of the group, very amiable, fun, man's man, and was the guy out selling deals to energy companies. In the case of Cliff Baxter, the company's chief dealmaker, he was extraordinarily talented. at just doing a deal, but he was a manic-depressive. Baxter was a very bright guy, very blunt, would tell Skilling whatever he thought, was closest to Skilling personally than anyone else in the company. There was a guy named Lou...

LuPi, who was a key Skilling lieutenant, helped build the trading business in the early years, went on to run Enron's doomed effort called Enron Energy Services. What was the job of EES as you ran it? It was to sell energy services to end users, industrial end users.

LuPi is the guy that Skilling tapped to run the EES business because this was so important to the company and to Skilling's future. He called LuPi my ICBM. And LuPi dispatched his enemies with... with incredible skill. And if that meant leaving bodies behind him, skilling was certainly fine about that.

Not feeling any. Blue Pie was kind of a mysterious figure. He's kind of like the invisible CEO. For a while, he was located on the seventh floor and there was this long office and it was all glass enclosed. And you would walk by there and it was just almost all the time it was empty.

Details didn't interest Lou Pye. Only two things seemed to motivate Pye, money and the peculiar fascination with strippers. For Pye, it was all about the numbers.

One, two, three, four. One, two, three, four, five, six, seven, eight. He was there every night after work, and he usually brought some of the traders along with him.

He spent quite a lot of money there as well, much of it charged to the Enron expense accounts. There were rumors that he brought strippers up to the trading floor. Almost everyone knew this story. The story is that because he's kind of a mild, soft-spoken, almost meek individual, that maybe the the strippers didn't even believe he was the CEO so he took him up to his office and I guess they they put on a little show for him there one night he was at a club and one of the guys said Lou all the rest of us are single you know we don't any problem but how do you keep your wife from smelling the strippers Perfume on you.

And Lou said, oh, I've got a secret. So I stop in at a gas station on the way home, and I spill a little gasoline on myself, and it kills the scent. So the other guy shot back and said, but Lou, doesn't your wife then think you're fucking the gas station attendant?

In the context of Lou Pye, everyone was horrified that Paul fell over the table, because Lou Pye was not a man to trifle with. Two days later, the guy who told the joke, as Enron legend has it, was dispatched to Calgary, Canada. Lu Pai lost all interest in running EES as soon as the numbers got high enough. I netted approximately $100 million. I don't know if that number's accurate, plus or minus $20 million.

And he actually left Enron with more money than anybody, $250 million, because he sold all his stock in Enron. after he got a divorce from his wife in order to marry his stripper girlfriend who had had his child. His exit from Enron was as mysterious as his presence there. Just sort of one day, we all learned that Liu Pai was no longer the CEO of EES.

Though Liu Pai flew away from Enron with $250 million, he was still a successful businessman. The divisions he left behind lost a total of nearly one billion. But Enron managed to disguise that fact. Lu Pai became the second largest landowner in Colorado. It was the number.

It was always making those numbers and looking. To me, the real mythology is high school mythology. That you wanted to be the most popular guy on Wall Street and you were going to do whatever you had to do to stay there.

And Jeff understood those rules better than I think anyone else. Americans are making a lot of money in stocks. The stock market soared to near record highs yesterday.

The stock market continued its bull run Thursday. The Dow rose at nearly 61 points. Even the person with very little disposable income all of a sudden began to play in the stock market because nobody could fail.

because stock prices were just going up and up and up. Another day, another record. And the internet and technology stocks just going wild. Gained more than 100 points to close at 7,895.81, the highest finish ever. It was a time where we had to...

biggest bull market in the history of the world. Ken Lay was right there acting as a cheerleader. Obviously, our stock has been doing very well. I think there's a fairly good chance we could see this stock price double again over the next year to 18 months. Say that you love me.

Go on and call me. Enron mounted a campaign to capture the hearts and minds of stock analysts. The natural gas stocks include Enron.

We're never satisfied, and I don't want us to ever be satisfied with the stock price. It should always be higher. Enron posted a 30% jump in second quarter profits as web-based trading boosted its wholesale energy business.

The game was played on Wall Street in such... an established way throughout the 1990s. As long as a company met or exceeded the analyst projections for quarterly earnings per share, the stock went higher.

The game was called pump and dump. Top execs would push the stock price up and then cash in their multimillion-dollar options. People at Enron got paid in large part through stock.

Everyone had a huge stake in seeing the stock price go up. And it was driven very clearly by the profits every single quarter. They were exceedingly conscious of that.

Gillian was and everyone else in the company was. They posted the stock price on the elevator. You were surrounded by the health of the company.

What's the stock price doing? We were consumed by it. This company was fixated on its stock price and fixated on a massive public relations campaign to convince the investment community that they were new, different, innovative, almost heralding a new era of...

corporate enterprise. Come work for us! We encourage our people to do new things, try new things, experiment, step out.

We begin by attracting the kind of people that are more comfortable in an environment of change. You know when you work for Enron, you're going to see the newest thinking. You're going to see the newest markets opening up. Enron Online, a fabulous, fabulous story. They were so good at their acting that they convinced corporate America that that they were smarter than anyone else.

Allen, with our sincere thanks and admiration, we are pleased and indeed honored to award you the Enron Prize for Distinguished Public Service. Power business continues to grow up 25%. They continue to sell the company as being a very stable place where it can predictably increase profits 10 to 15% a year. In fact, In fact, to get to those numbers, Enron was doing all sorts of questionable things, taking enormous risks. We like risk because you make money by taking risk.

By all accounts, Enron was soaring. But in reality, profits weren't going up. They were headed in the opposite direction.

Enron had vast natural gas operations all over the world. They had cost billions to build, and most were performing terribly. But in other places in the world, in India, great quarter and great year in India, phase one of the bull is in operation.

generating power, phase two is financed and is under construction. My experience indicated there were certain places that you assiduously stayed away from, and one of them, as an example, was India. They built this power plant in India. Nobody else would do that at the time. They were terrified of investing in India.

Enron did it, and did it in a big way. But Enron had failed to see something basic. India couldn't afford to pay for the power Enron's plant produced. Now, Dob Hall is a ruin.

Though it lost a billion dollars on the project, Enron paid out multi-million dollar bonuses to executives based on imaginary profits that never arrived. Where was the real money going to come from? Of course the pressure was enormous.

You had to come up with the next idea that would break through. Failure was not an option. A flurry of buyouts in the corporate world.

The biggest, Enron, announcing a buyout of Portland General. The merger. Merger with PGE put Enron in the electricity business, and Portland General's position on the West Coast gave Enron access to the newly deregulated market of California. The merger, we think, uniquely positions us...

to ultimately become the largest marketer of electricity and natural gas at both the wholesale and retail level nationwide. What brought all this on was with deregulation. They said that we would not survive unless we joined forces.

Enron, I'd never heard of them until they were going to buy us. They slid in here, and when they purchased PGE, all the PGE stock became Enron. Just went through, stamped every one of them. I looked around me, and all the guys that were buying all this Enron, they were doubling their money. And that whole time since then, I put...

the maximum I could into my 401 and savings. Portland General, again, good earnings and cash flow. It's what they call on Wall Street a trust-me story.

People that had been gas pipeline workers for decades kept all their money in the company because they thought it was as traditional and safe an investment as it had always been, and it wasn't anything close to that. Should we invest all of our 401K in Enron stock? Absolutely.

Don't you guys agree? No. No. love for sale Enron is a big winner today one of the things that fascinated me was that almost all of the Wall Street analysts who covered Enron had buy ratings or strong buy ratings on the company's stock why were the analysts blinded to the company's deceit?

we relied on the information that was available at the time which was trusted the integrity of the company's certified financial statements and the representations of the company's management. And we've been absolutely upfront with the analysts. Jeff Skilling was the critical component in creating the Enron illusion.

Time and time again, when we had a question to the sell-side analysts that they couldn't answer, the response was, I'll give Jeff a call. I'll run this by Jeff. By giving Jeff a call, the analysts weren't analyzing at all.

They were willing to believe. virtually anything Enron told them. Most of the analysts right now have a target price on us from $100 to $115 a share. Any analyst who didn't buy the company line became an enemy of Enron. Enron CFO Andy Fastow had his eye on John Olson, one of the only analysts skeptical of the Enron story.

Enron loved analysts'strong buy recommendations. Merrill was informed by Fastow, either you get somebody who is on board with us and has a strong buy recommendation and loves us at the same time, or we don't do any business with you. I knew that my days were numbered. This is an abuse.

Merrill Lynch fired John Olson. Soon after, Fastow rewarded the bank with two investment banking jobs worth $50 million. Analysts were routinely getting large bonuses from the investment banking departments to bring in investment banking deals.

Once that happens, you know, never was heard a discouraging word. While Enron's stock kept rising, its businesses kept losing money. Looking at the soaring stocks of the dot-coms, Skilling decided to take Enron into cyberspace. We're now in the process of seeing if we can create a bandwidth trading market. Enron is using its knowledge of trading gas to barter other forms of energy, even space on the information superhighway called bandwidth.

Ken Rice has worked at Enron for 20 years. Enron has found a way to stay ahead of the curve. PM, 7 AM.

Our themes around here is to always be asking why. Why something's done a certain way or why it's not done a different way. Just last week, Enron captivated Wall Street with its bold move into broadband.

teaming up with Blockbuster to deliver movies on demand. It was like being at a religious cult meeting. People started jumping up from their seats with their cell phones and their BlackBerrys, running out to the halls to call their bosses.

One analyst summed up his recommendation to investors in one word, wow, Enron stock soared 34% in two days. You can tell from the response in the stock market that they like the strategy. It makes sense.

They announced that they had developed the technology. It would be in test markets by the end of the year. And the technology works. The quality is great, and the customers like it, so we've made a lot of progress. The truth was that Enron was just struggling with the technology for video on demand.

The technology didn't work, and the deal with Blockbuster soon collapsed. But with the magic of mark-to-market, Enron used future projections to make the best of the technology. to book $53 million in earnings on a deal that didn't make a penny.

By the end of the year 2000, Enron was running out of ways to make the broadband business look successful. They tried every trick in the bag to try to create the illusion of a business where there was none, and the people who were working there were getting increasingly desperate. The executives started selling their stock. By Enron's collapse, Ken Rice had sold $53 million.

Ken Lay had sold $300 million. Cliff Baxter, 35 million. Jeff Skilling, 200 million. As the fraud is perpetuated, all the various lies and artifices begin to convince the ringmaster, if you will, himself, that it's this own bizarre reality. In fact, the fraud is the reality.

The perception is the reality. As long as you can keep the perception going on, it really isn't a fraud. You spoke about bandwidth trading. What about weather options or futures? How is that?

market developing. Yeah, we have a market in weather. When Enron announced its latest plan to trade weather, people wondered whether it was good science or science fiction. Did the weather guys get punished here if the weather is wrong? I don't know.

If you have any whip marks on your back, never mind. Well, unfortunately, that's a good call. Jeff, as time went on, had a harder time admitting things were wrong. And I have to believe that, you know, when the lights went out at night, he knew what was coming. I would liken it to the Titanic when you've got a captain who's saying maintain full speed and they bump into a couple of icebergs and then they still keep full speed going.

The captain of this ship, Enron, he ignored all the warning signs, and there were plenty of them. And the captain of the ship was? Kenneth Lay. It was one of the bloodiest days in Wall Street history.

Shares plummeted 31%. My tech stocks led Friday's fierce sell-off. This is really a great wake-up call.

Millions of nervous investors following the huge drop on Friday. The Dow Jones... Enron was especially a big deal by the end of the year 2000 because by then most internet companies had already begun to fall. Everybody on Wall Street was looking for the next big thing.

And here you had Enron, which appeared to be this shining star of a new economy company. Its stock price went up 90% in the year 2000 and had gone up over 50% the year before that. It was an it stock on Wall Street, one of those companies that can seemingly do no wrong. We were the poster child for the new economy.

We had this culture that had a lot of focus on reminding us how good we were. And as that culture emerged, then we get to Fortune magazine telling us we were the most innovative corporation in America. Then we really began to see the world as a whole.

to feel good about ourselves. Well, you all did it again. Enron was just recently chosen again for the sixth year in a row in the most admired company survey by Fortune magazine as the most innovative...

innovative company in America. Well deserved. Well deserved.

The sales pitch still sounded good, but one investor saw something in Enron's numbers that the stock analysts had missed. By and large, the analysts admitted to us in person, it's a black box. You have to take it on faith.

Who knows where the earnings come from? They just pop out, and all we know is they're always good. And I kept pointing out, well, yeah, isn't that the whole point of if it's a black box is there to fool you?

numbers are always going to be good until they're not. I'm not a beat reporter, so I would have had no reason to look at Enron. But Jim Chanos mentioned to me that I should take a closer look at Enron's financial statements. And it wasn't clear from Enron's financial statements that there was fraud here.

But what was clear is that something didn't didn't add up. In March 2001, Bethany McLean, a reporter with Fortune magazine, first raised questions about Enron's financial condition. She asked a simple question in the article that no one could seem to to answer, how exactly does Enron make its money? You got very upset with her, didn't you?

I very specifically remember the telephone conversation that I had with the Fortune reporter. She called up and started asking some very, very specific questions about accounting treatment on things. I am not an accountant, and I could not answer them. He became really, really agitated.

He said that people who raise questions like this were just trying to throw rocks at the company. and that I was not ethical because I hadn't done enough homework. And if I had done enough homework, I would understand how off-base my questions were.

Mr. Skilling, it appears as if you were trying to bully someone who was asking very basic questions about Enron. I said to her, I have got six minutes left before I have to be in a meeting, and I can't get into the details, and I'm not an accountant. And she said, well, that's fine, we're going to do the article anyway. And I said, if you do that, I'm going to be in a meeting.

that, I personally think that's unethical. And the next day, 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... 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 more than that. And was her article critical?

Yes, it was. The Fortune magazine article that's out, the headline is, Is Enron Stock Overvalued? The gist of the article is, 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 Businessweek had a favorable article about Enron the week before. And there's this competition that the news magazines have where if 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. 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. Because 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 fantasy land. Enron is a great place to be. essentially was losing money on a cash basis year after year and yet it was reporting profits so it was defying the laws of financial gravity and the way it 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 $30 billion 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 stock by making its debt disappear. To outside 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. Something to make us all happy. They could bury debt, they could bury losses. Many of the companies had exotic names, Jedi, Chuco, Raptors.

LJM was Fastow's most ambitious creation. It would work magic for Enron, and it would allow Fastow to conjure $45 million 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. you know, in retrospect, I would have never heard of LJM.

Is it your contention that you knew of it and it was appropriate? Arthur Anderson 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 videotape 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. I'm not selling the assets to myself. They own the assets.

They're selling them to LJM, too. Fastow knew what kind of deal he was offering his Enron CFO. He could guarantee profits for LJM.

Yeah, I think this is... He has a sort of Cheshire cat grin on his face as he talks about all the ways that the fund is going to profit. And he talks about the informational advantages that he's going to have in his dual role as Enron's CFO and as the head of these funds. He was general partner of LJM.

While at the same time being CFO of Enron. Now that's a whole other ball of wax when you want to talk about that conflict of interest because... No human being should be put in a situation where every single transaction they decide whether they're looking after Enron's best interests or their limited partners because this LJM partnership existed solely to do business with Enron.

As a result, there are five or six of the name-brand banks who have stepped up and said they'll commit to this. Commit they did, and why not? Fastow was letting them gamble with Enron's chips.

Fastow. was using Enron stock as collateral for a lot of these things. They were betting their own company on the transactions.

With a prospect of returns that would exceed 2,000%, 96 individual bankers invested in LJM. and America's major banks put up as much as $25 million each. It's sort of a who's who of Wall Street.

JPMorgan Chase, CS First Boston, Citibank, Merrill Lynch, Deutsche Bank. These are some of the premier investment banks in the world. It's just amazing how skilled Enron and Andy Fastow were at working Wall Street, playing on Wall Street's greed in order to get money out of them.

To quote Lennon, they were the investment bankers'useful idiots. As disturbing as Enron's own misconduct is the growing evidence that leading U.S. financial institutions not only took part in Enron's deceptive practices, but at times designed, advanced, and profited from it. them.

The Enron fraud is the story of synergistic corruption. There are supposed to be checks and balances in the system. The lawyers are supposed to say no. The accountants are supposed to say no. The bankers are supposed to say no, but no.

No one who was supposed to say no said no. They all took their share of the money from the fraud and put it in their pockets. Enron paid its advisors well. In 2001, the accounting firm Arthur Anderson received $1 million a week. Enron's law firm, Vinson & Elkins, did nearly as well.

Everyone had their hand out at the table. They were all being paid. And as long as Enron continued, they received their fees.

They were a part of the process. So it's hard now to say, oh, we didn't know anything. Had we known then what we know now about Enron's practices, we would not have engaged in these transactions with Enron.

The facts that we now have come to light about Enron, however, were not known at the time. I believe that the Citigroup professionals involved with these transactions acted in good faith. I'd like you here to look at one Citi email, exhibit 333i. The email trail here is...

all too lurid. Oh, for instance, one email I remember where the banker writes, Enron loves these deals. They produce cash, but they don't have to show the debt on the balance sheet. Now, a high school student can figure out that the banks were all knowing participants in this wrongdoing. Merrill Lynch assisted Enron in cooking its books by pretending to purchase an existing Enron asset when it was really engaged in a loan.

The accounting sham involved the sale of an interest in three Nigerian... barges. Nigeria is a long way from Manhattan, yet for some reason toward the end of the fourth quarter in 1999, Merrill Lynch suddenly decided to buy three Nigerian power barges from Enron. and power barges have nothing to do with Merrill Lynch's business.

It was a blatantly illegal transaction. It was just taking the barges, getting them off Enron's books, having Merrill Lynch, if you will, warehouse them for five months, and then buying them back. Mr. Martin, you've testified here today that there was no guarantee, and you've said that under oath.

Here's a document saying that the head of your whole division here was going to confirm. that understanding. Over the year 2001, Skilling became increasingly despondent.

He'd always been a moody guy, but people who knew him said he became just increasingly volatile, show up for work unshaven, looking blurry-eyed. And I think it was the battle of holding these two totally disjointed thoughts in his mind at the same time. One is Enron is superstar company, and the other of feeling like it was all crumbling away. The first cracks in Skilling's public image appeared in a conference call with analysts in April 2001. And then Jeff Skilling took questions. And about midway through the session, there was a questioner who was sort of aggressively wondering out loud why it was that Enron, as a financial services company in effect, could not release a balance sheet with its earnings statement like most.

financial institutions do. You're the only financial institution that can't produce a balance sheet or a cash flow statement with their earnings. Well, thank you very much. We appreciate it. And then quite audibly, you could hear Skilling say asshole.

And then he said, asshole. As I understand, you call him an asshole. And this just caused unbelievable amounts of consternation all across Wall Street because people thought, a Fortune 500 CEO losing it like this, publicly calling an investor an asshole?

If I could go back and redo things, I would not now have used the term that I used. Mark Palmer, Enron's chief PR guy, even ran a note up to Skilling telling him to apologize, and he just took the piece of paper and tucked it under the pile of papers on his desk, and afterwards... Enron's traders who had erupted in cheers when Skilling called this guy an asshole made him a sign.

There was a play off Enron's motto, ask why, and the sign said, ask why, asshole. My personal feeling was that Jeff looked at the numbers and he knew that we were in a massive hole. It was the only time, but I saw him truly, truly worried about keeping the stock price up. And he just kept saying to me, I don't know what.

Hell, I'm going to do. The broadband business was in complete meltdown, and there were all sorts of other problems that Jeff Skilling, as the company's chief operating officer, was wrestling with. In the middle of all of this, Ken Lay walks into Jeff Skilling's office holding up fabric swatches for the new G5 $45 million corporate jet he wanted to buy.

And he said to Jeff, asked a very important question, which of these cabin configurations do you like best, Jeff? While Ken Lay was stressing over the corporate jet, EES was headed for a crash landing. Facing $500 million in losses, Lu Pai's top lieutenant, Tom White, wondered how EES could show a profit by the end of the quarter.

One of the things that was always a strange occurrence at Enron was for weeks before a quarterly report, we would... be under the impression that we weren't going to make our numbers. But then somehow, miraculously, we always made the numbers and then some.

But then a question was asked to Tom White, how is it that we made the numbers? And his answer was one word, California. California, here we come.

The first clues to Enron's new strategy hit California with a jolt. It started at noon, rolling across the state. Sacramento, San Francisco, Beverly Hills, Long Beach, San Francisco. San Diego.

26,000 miles of California power lines, enough to circle the earth. But for the second day in a row, not enough electricity for America's largest state and the world's sixth largest economy. The first thing we heard about this energy crisis...

This is where our lights are going to go off in the middle of winter when we're using half the electricity We normally use during the summer the Bay Area got hit by not one but two rolling blackouts We only need twenty eight thousand to thirty thousand megawatts in December We have an installed capacity in California at the time of forty five thousand megawatts Plenty of power to meet our electric demand of course we have blackouts in December the people who control California's power grids say once again, they're worried about having to black out the northern half of the state When the rolling blackouts started in California, there was definitely a lot of excitement in the air. It was something new. It was something that hadn't been encountered before.

It was, how is this event going to affect the price of power? Controlled rotating outages are being implemented. I knew. I knew that there was illegality going on. I could feel it.

I could smell it. I could sense it. And there was no other explanation. Because the numbers just didn't add up. We had enough power in California.

It was never about lack of supply. When I ran for governor in 1998, not... One human being asked me about electricity.

This thing kind of came out of the woods as far as I was concerned, and I was trying in the early days to learn what was happening, how we could fix the problem. California was selected by Enron as the prime place to experiment with this new concept. concept of deregulated electricity. Reducing electricity cost is only one benefit from choice and competition.

In 1996 under pressure from energy companies, Governor Pete Wilson and the California legislature passed a bill allowing for the deregulation of electricity. I wasn't in the legislature in 1996 but I can tell you that there isn't a legislator alive that can tell you with any sophistication how a deregulated electricity market ought to work, not a one. California's deregulated system was a bizarre compromise between legislators and free market advocates.

The rules were complicated and hard to follow. Inside Enron, California's system was little more than a joke. And once in place, Enron made sure that the joke would be on California.

I remember the conversation I had with Ken. At the end of it, he says, well, there you go, buddy, let me just tell you. It doesn't matter, really does. What kooky rules you Californians put in place. I got a bunch of really smart people down there who figure out how to make money anyhow.

One of the smartest guys at Enron was Tim Belden, who ran the West Coast trading desk. Tim Belden was a fervent believer in the idea of free markets, and as such he spent hours poring over the new rules for the deregulation of California's energy industry, looking for loopholes that Enron could exploit to make money. He found plenty.

After the bankruptcy, a confidential memo surfaced revealing the names of Belden's strategies to game the California market. Wheel out. Get shorty. Fat boy. Recently, audio tapes of the Enron traders were discovered.

What do you want to call this project? I have a catchy name for that. How about something friendly like Death Star?

The tapes revealed Enron's contempt for any values except one, making money. Hey John, it's Tim. The regulatory is all in a big concern about is we're wheeling power out of California. He just steals money from California to the tune of... A million.

Okay, he arbitrages the California market to the tune of a million bucks or two a day. An arbitrage opportunity has been defined to me as any opportunity to make abnormal profit. So an abnormal profit would be returns above and beyond the norm.

I was told that a good trader is a creative trader, and a creative trader is a trader that can find arbitrage opportunities. One of those opportunities was called Ricochet. I'll see you guys.

I'm taking mine to the desert. In the midst of the energy shortages... Enron traders started to export power out of the state.

When prices soared, they brought it back in. So we fucking export like a motherfucker. We get rich trying to... Traders would stay after a 12-hour shift and pour over maps of the Western energy grid. What are the permutations and combinations of ways to move power around the West?

And I think that's something that Enron knew better than any other energy marketer in the country, period. We know all of the California imports. We know all of the California load. We're getting pretty spoiled on this money. You said you were getting a little scared we're making a little too much, and I tend to agree with you.

These are two traders, T-R-A-D-E-R-S. This is what they say. What we did was overbook the transmission line we had the rights on and said to California utilities, if you want to use the line, pay us.

By the time they agreed to meet our price, rolling blackouts had already hit California, and the price for electricity went through the roof. Did you have any knowledge that this was happening? The only thing that I'm aware of, Senator, is there was a difference of opinion on the rules of the independent system operator.

It was just set up. The rules weren't quite clear. We have traitors here from Enron who are saying they did something wrong, but you don't see anything wrong.

I have one last question and then I am done. Traders soon discovered that by shutting down power plants, they could create artificial shortages that would push prices even higher. Hey, this is David up in Enron. Uh-huh. There's not much demand for power at all.

If we shut it down, could you bring it back up in three or four hours? Oh, yeah. Why don't you just go ahead and shut her down then, if that's okay?

Okay. When you see two or three energy companies with 30, 35% of their entire capacity down for maintenance on a single day, and as a result, the price of electricity skyrocketing 300 or 400%, and then a week later, someone else does it. It's up in Northern California. You begin to believe something's not smelling right here.

I want you guys to get a little creative. Okay. And come up with a reason to go down. Like a forced outage type thing?

Right. Those guys, at the flip of a switch, could just yank the California economy. on its leash whenever they wanted to, and they did it, and they did it, and they did it, and they made so much money.

The heart of it is that an industry that went for a hundred years, from the days of Edison, built the best electrical system in the world, sold the power at reasonable prices to consumers, and was very reliable, was all of a sudden turned into a casino. These strategies made some money for Enron, but the real money was made by betting that the price of energy would go up. It did, and the West Coast traders made nearly $2 billion for Enron.

Can't treat electricity like you treat oranges. It's the lifeblood of society. It can't be stored.

You can't turn these people loose and let them just have a, quote, free market. because a free market is goddamn expensive to the customers. There would be ample supply available at the right fucking price.

Oh, sure there would. It wasn't just Enron. Every company traded according to the rules that California put up there. And we're the future of Enron.

And we're fucking making half a billion dollars for Enron. Can you believe that? Yeah.

We'll definitely retire by we're 30. We're talking about a commodity that normally trades in the 30. $35 to $45 range, high prices are when it gets in the 50s, or $1,000. Prices aren't going to stay at $1,000 forever. It weeds out the weak people in the market.

Get rid of them, and you know what? The people who are strong stick around it. The Enron traders never seem to step back and say, wait, is what we're doing ethical?

Is it in our best long-term interests? Does it help us if we totally rape California? Does that advance our goals of nationwide deregulation?

Instead, they sought out every loophole they could in order to profit from California's misery. Temperatures in California are hitting higher than 100 degrees, fueling wildfires and fears that California's strained power grid could once again near collapse. What's happening?

There's a fire under the core line. It's a DA-45-2100. Burn, baby, burn.

That's a beautiful thing. I was never comfortable on the trading floor at Enron. And if I had questions, I didn't ask them because I didn't want to know the answer. You know, I didn't want confirmed what I suspected might be true. That what I was doing was in fact unseemly or was at least unethical, if not worse.

Why did the traitors do what they did? Was it their multi-million dollar bonuses? Or had Enron found a way to exploit the darker side of human behavior? In the early 60s, Stanley Milgram tried to figure out what characteristics there were of evil people. Was there an evil strain, or could normal people do really bad things?

And so he set up this experiment. In the experiment, he had an actor playing an experimental subject, and a really good example of that was this. real experimental subject.

You want to step right in here, Lerner, and have a seat there. They went into this room, and he had an experimenter say, we're going to see if mild electric shocks will help people memorize lists. Incorrect. You'll now get a shock of 75 volts.

Oh! Soft hair. He kind of did some yelling in there.

The Milgram experiment has a lot to say about Enron, because I think people lost their sense of morality. Like Milgram, once you accepted the idea that behaving inhumanely was okay, you could do anything, and the shocks increased with the number of mistakes that they made. I can't stand the pain! Let me out of here! You can't stand it?

I'm not gonna kill that man, eh? You can't stand it? The subject, the real subject, is begging the scientist-looking person to stop, too.

And the scientist only says, the experiment requires that you continue. Please continue. Go on, please.

You accept all responsibility? The responsibility is mine. Correct. Please go on.

In a way, Skilling was almost like the guy telling those people below him that it was okay to up the power. Go on in 20 volts. California's electric utilities may have to pull the plug on millions of customers.

It's the fucking coolest thing I've done in a long time. Yeah, holy fuck yeah. You gotta love the West. Oh. 435 volts.

During the height of Wednesday's Blackout, fire crews had to free people trapped in elevators. All the money you guys stole from those poor grandmothers of California? Yeah, Grandma Millie, man.

She's the one who couldn't figure out how to fucking vote on the butterfly ballot. Now she wants her fucking money back for the- How are you charged right up to the ground? 450 volts.

Yeah, they're out there having fun in the warm California sun. We must continue. Go on, please.

You're going to keep giving them what? 450 volts? have you got now that's correct continue it's kind of hard to say well we should be you know we shouldn't do this even though it's allowed because you know i mean that's what we do right nothing could happen it's an earthquake let that thing float out to the pacific and put them candles 450 volts milgram's discovery was disturbing 50 of the subjects were willing to shock to the death so long as the commands came from a seemingly legitimate source source.

Tonight I'm declaring a state of emergency in California. To give the state the authority and the resources to keep the lights on in California. The governor who's been basically capitulating to the demands of the energy companies and the utility companies needs to put his foot down. We wanted the governor to send in the state police or the National Guard to seize control of the power plants. and put them back online.

And I thought we didn't have to take over every planet. We really only had to take over one, because then they would know he meant it. I'm going to get the $9 billion back that Enron, Dynergy, and Reliant stole from us and get it back to you. Despite what the people in California think, Enron's making money despite California, not because of California.

The year-long energy crisis would cost the state of California $30 billion. The markets in California are leading. most regulated markets in North America today.

And that's what's causing the problem. California is never deregulated. And I'm by stock today. We are doing the right thing.

You're the good guys. We are the good guys. We are on the side of angels. Oh, I can't help myself.

You know what the difference is between the state of California and the Titanic? This is being webcast, I know I'm going to regret this, but at least when the Titanic went down, the lights were on. A top executive at one of America's biggest power companies received a raucous welcome in San Francisco tonight. Protesters heckled Enron CEO Jeffrey Skilling outside and inside during his appearance at the Commonwealth Club.

One of the protesters even brought a blueberry pie and delivered it herself. 50% hike in utility rates. Consumers in California are angry, and they should be. And if we had anything to do with this, then we are the stupidest people in the world. I work for an organization.

Every day people call saying they can't pay their electricity bills. Bill for the dollar box. The tidal wave of public anger started to grow. Ken Lay flew out here and convened a meeting of friends and I guess he had a little more foresight than we did. He invited Arnold Schwarzenegger, brought him together at the Peninsula Hotel and had a lunch meeting.

The notes... from that meeting really still have never surfaced. But we know that Ken Lay's pitch was, we've got to stay the course with deregulation and the market will correct itself and everything will turn out fine. Now, at the time, we didn't understand really why he was...

so concerned, but now we do. The fact is that Ken Lay was out here because he understood that Enron itself was a house of cards. And if deregulation were to collapse, that Enron itself would collapse. But Ken Lay had a trump card. In the midst of the energy crisis, his friend George W. Bush became president.

I, George Walker Bush, do solemnly swear. I, George Walker Bush, do solemnly swear. Ken Lay is going to be Secretary of Energy.

Get out of here. How great would that be for all the players in the market? It'd be great.

I'd love to see Ken Lay be Secretary of Energy. Ken Lay did have easy access to the Bush administration. On April 17th, he met with Vice President Dick Cheney and strongly argued against the imposition of a new president. of federal price caps in California.

We're doing everything we can to help in California on a short-term basis. There's not a lot you can do. You can't manufacture kilowatts in the West Wing and the White House.

We're fighting with both hands tied behind our back. We no longer have the power to stop this. If the federal government doesn't help us, we're a dead duck.

At the time... Gray Davis was a likely candidate to run for president. Ken Lay knew that might give his friend George Bush a political reason to oppose California's appeals for federal price controls. They know full well my administration's belief that price controls will not solve the problem. His view was that the federal government really shouldn't get involved.

This is California's problem. And I'm saying with all due respect, Mr. President, our law... Said the federal government regulates this, so it is your problem. And you make appointments to the Federal Energy Regulatory Commission. So we had a polite but spirited discussion on that, and he says, I just can't be of help to you on that.

As I said from the very beginning of my administration, we'll work to help California in any way we can. And the best way we can is to be good citizens. FERC, the federal agency which regulates energy in America, refused to intervene. What was FERC doing and why was it not taking action? The chairman of FERC was Pat Wood, the man Ken Lay had personally recommended for the job.

It was easy for FERC to do Enron's bidding because all they had to do was do nothing, which they did very well. Federal regulators are being pressured to act by the now Democratic-controlled Senate, where here... A Democratic Senate forced FERC to impose regional price caps.

That ended the energy crisis, but not the political one. Did Ken Lay and George Bush have a political agenda to blame the energy crisis on Gray Davis? Oh, hello.

It's one of those only in California stories. The state's unpopular governor, Gray Davis, beset by an ailing economy and a $38 billion budget deficit, faces possible recall. And rumored as a possible replacement for Davis, movie star Arnold Schwarzenegger. The Terminator?

We'll see whether he's back or not. Gray Davis has terminated opportunities, and now it's time we terminate Gray Davis. Could I predict a phony energy crisis as a result of deregulation? Yes. Could I predict that Arnold Schwarzenegger would be our governor as a result of deregulation?

Never would have come up with that. That's like a bad science fiction movie. Apparently we have all been wrong. It is pronounced California. Ladies and gentlemen, the governor of the great state of California, Arnold Schwarzenegger!

We could just hear rumbles all the way up and down Main Street here and all throughout the city that things were... We're very difficult at Enron. One guy who, a year before, had come to me and said, I'm working for Enron, I was very excited.

But within a year, was waking up every night with nightmares. I've got no life left. And I feel like I'm being consumed by this company. As doubts began to surface about the company and the erratic behavior of its CEO, Enron's stock began to fall. I remember one of the most poignant meetings I'd ever had with Jeff.

I had left Enron. And I had come over to talk about whether or not I would return to Enron. I said, Jeff, you've got a real problem.

The traders, they will cut your throat if they think it will get them to the trough sooner. Jeff was silent, and he looked out the window, and he looked back at me and he said, yeah, Amanda, you're most likely right. By the end, the traders ran Enron. You know, the inmates had taken over the asylum. All through the summer, the stock continued to decline.

There was a buzz that a major announcement was going to take place, but we all thought that Ken Lay was leaving Enron and that he had been asked by the Bush administration to join his administration. But that wasn't the case at all. It was Jeff Skilling announcing that he was stepping down as a CEO, and that took everyone by surprise.

No one could believe. CEOs generally don't just resign out of the blue without a well-orchestrated PR campaign beforehand to pave the way so there's no disruption, there's no questions, there's no front page stories, which of course is exactly what happened. It was at that point that I knew the architect of the disaster knows that it's crumbling and the rat is leaving the sinking ship.

Two days later, I met with him and Ken Lay. I had informed the company that I was going to downgrade the stock on Skilling's resignation. I asked Jeff Skilling, are there any more shoes to drop? Have we seen the... ...the worst of it, and I was concerned about the energy crisis that was occurring in California.

Well, Skilling convinced me that it was for personal reasons. I left his meeting feeling sort of emotional because of the concern that he seemed to be showing about the relationship he had with his family. He appeared to be distraught. And I remember saying to an investor, if he's not telling the truth, then it's a good thing he quit his day job because he needs to go to Hollywood. I left Enron on August 14th, 2001 for personal reasons.

Mr. Skilling, a massive earthquake struck Enron right after your departure. And people in far inferior positions to you could see cracks in the walls, feel the tremors, feel the windows rattling. And you want us to believe that you sat there in your office and didn't, and had no clue that this place was about to collapse. On the day I left, on August 14th, 2001, I believe the company was in strong financial condition. I think he was smart enough, and he didn't even have to be that smart.

He had seen documents that I think predicted the future. I think he was smart enough to think, I can get out now and this company isn't going to collapse for a year, maybe a year and a half, so I won't get the blame. It was working fine when I left, guys.

After Skilling resigned, Enron's chairman, Ken Lay, took over as CEO. Boy, I didn't expect that. But thank you.

Thank you very much. Well, I'm delighted to be back. I'm sorry Jeff did resign. It was a stunning announcement that he was stepping down as a CEO. And I think...

The flags started going up at that point for everybody. We are facing a number of challenges, but we're managing them. Indeed, I think the worst of that's behind us, and the business is doing great.

We're not the only stock that's decreased in value this year. It's just that we've been hit a little harder than many others. If a few of these other problems disappear, like California, like India, I think the worst is over.

And I'm excited. August 14th, 2001, Jeff Skilling abruptly resigns. And that made me angry, it made loads of employees angry.

I mean, there was a real sense of betrayal by the employees. I mean, this was, you know, Jim Jones feeding us the Kool-Aid and then deciding not to drink it himself. The day after Skilling resigned, Sharon Watkins sent a letter to Ken Lowe.

We will begin with Ms. Watkins. I am Sharon Watkins. Would you identify your counsel for the committee?

Yes, my counsel is Mr. Philip Hilder. When you hear the story for the first time, it's unbelievable. What Sharon was telling me was more than accounting irregularities as such.

I mean, it was a massive fraud of enormous proportions. In mid to late June of 2001, upon the resignation of Cliff Baxter, I went to work directly for Mr. Fastow. It has evolved to the corporate crime of the century. I was highly alarmed by the information I was receiving. What Sharon Watkins discovered began the unraveling of Fastow's complex partnerships.

Andy put me in charge of this asset listing, and there were about a dozen assets that had been hedged with one of Andy's entities, the Raptors. And so I was working with his spreadsheet, and... You know, the math just didn't add up.

It didn't make sense to me. I mean, accounting doesn't get that creative. You know, I couldn't believe that Arthur Anderson had signed off on it. I couldn't believe that so many people were going along.

Behind Fastow's partnerships were enormous guarantees of Enron's stock. Fastow had gambled Enron's future on the hope that its stock would never fall. My first reaction was that I should warn Ken Lay.

The day after Skilling left, I sent this one-page anonymous letter. But within a week, I was meeting with Ken Lay. I had identified myself in the hopes of really making my point that Enron needed to address this situation. I mean, companies rarely get away with cooking the books. But when they do survive, it's when they come clean, not when they're exposed from the outside.

Ms. Watkins, I went to... Ms. Watkins did not talk to me, Senator. Well, Ms. Watkins said Clifford Baxter told her... That he met with you repeatedly to express his concern. Cliff and Andy had a, they didn't like each other.

They had a very strained personal relationship. relationship and Cliff's issue had nothing to do with the appropriateness or inappropriateness of the transaction. I'd mentioned Cliff Baxter in these memos and I remember I made the comment to him well you're one of the good guys you know you were one of the people fighting against this and it'd be all right and he said oh I don't think it's gonna be all right for any of us involved in this.

When I started working on the book with Sharon, I was interested in writing about a whistleblower. People don't really appreciate what she did and the bravery that it took in that company. Andy Fastow would not have put his hands in the Enron candy jar. without an explicit or implicit approval to do so by Mr. Skilling. I can't for the life of me see what basis she would have for suggesting that I would know something.

I mean, how would she know that? And I don't see that it's at all inconsistent that there would be some things. I don't know if some people purposely kept me from knowing some things.

I felt like I was one lone voice within Enron saying, look, we've committed horrible fraud. And of course, all hell broke loose. Within six short weeks, Enron was spinning out of control.

Probably in more normal circumstances, I would add a few more words to say about September the 11th. Just like America's under attack by terrorism, I think we're under attack. And of course, now we've got the SEC inquiry, informal inquiry. The SEC launched an investigation when the Wall Street Journal published articles revealing Fastow's murky deals.

Enron announced massive financial restatements. Investors began to worry that billions in mark-to-market profits were really losses. As you can, of course, see, the underlying fundamentals of our businesses are very strong. Indeed, the strongest they've ever been. But regrettably, that's not what Wall Street is focusing on.

And I doubt that's what you're focusing on. This inquiry will take a lot of time on the part of our accountants and lawyers and others. But it will finally put these issues to rest. At the very moment Ken Lay was talking to employees, only a few blocks away, Enron's accounting firm, Arthur Anderson, had begun destroying its Enron files.

On October 23rd, Anderson shredded more than one ton of paper. Despite the rumors, despite the speculation, the company is doing well, both financially and operationally. He was making all kinds of statements, reassuring employees, and not just employees, reassuring investors.

We have no accounting irregularities. the company's in the best shape it's ever been in. Now from the standpoint of Enron stock, we're going to bring it back. We're going to bring it back. Alright, we're down to questions.

And I've got a few up here. I would like to know if you are on crack. If so, that would explain a lot. If not, you may want to start because it's going to be a long time before we trust you again.

It certainly wasn't clear to anyone at Enron, much less anyone outside of Enron, it wasn't really clear what was going on or what... was going to happen. I know this is a lot of, there's a lot of speculation about Andy's involvement.

I and the board are also sure that Andy has operated in the most ethical and appropriate manner possible. The next day, Andy Fastow was fired when the Enron board discovered that he had made more than 45 million dollars from his LJN partnerships. The question, Mr. Fastow, is how could you believe that your actions were in any way Consistent with your fiduciary duties to Enron and its shareholders, or with common sense notions of corporate ethics and propriety?

How do you answer, sir? Mr. Chairman, on the advice of my counsel, I respectfully decline to answer the questions based on the protection afforded me under the United States Constitution. Andy, in many ways, I think he was set up as the fall guy.

All of the Enron executives were saying, there's your man, Andy Fastow, he's the crook. You know, he's the one that stole from Enron, stole from LJM. He's the one that cooked the books.

Go after him. I've thought about this and thought about this, and it couldn't have just been a few executives at Enron that made this happen. If you think of the banks involved, Chase, Morgan.

Citibank. Um... The billions in loans. Arthur Anderson. What about Vincent and Elkins?

The lawyers that represented us. There had to have been complicity across the board. Because it was all too easy.

All too easy. The Enron collapse was an enormous tragedy. This is a company that had over 30,000 employees and clearly in a company that size you have a lot of senior officers that have a lot of authority in which you place enormous trust. Clearly in this case, case there was at least one, Andy Fastow, that betrayed that trust. To the extent that I did not know what he was doing, that he obviously didn't share with me what he was doing, then indeed I cannot take responsibility for what he did.

I never heard him say, I take responsibility for a thing. It sounded to me like the wonderful movie Chicago. I was reminded of the puppet strings and the dancers and the tap dancing and pointing at the gun, the gun, the gun. I mean, everybody's in step but Johnny.

I continue to grieve, as does my family, over the loss of the company. Linda and I saw our net worth reduced from several hundred million dollars down to some something less than $20 million on a net worth basis, and of course, as you said, about a million dollars or less in liquidity. I don't know whether I'd rather be shot as a crook or as an idiot.

I believe the only venue for me is the ride of broken dreams. Oh, you mean the Enron ride. Let's go.

Enron hit the national psyche. It hit it as sort of the time-tested lesson, and that is if it looks too good to be true, sometimes it is. it is my belief that enron's failure was due to a classic run on the bank I've seen one, but that's got all the air marks of being a run. On December 2, 2001, less than four months after Skilling's resignation, Enron declared bankruptcy. I remember.

It was just a strange kind of a surreal day. We learned around 9.30 about the bankruptcy and that we were all being let go. We all felt like we were on the Titanic and the last lifeboats had long gone and we were just now on the sinking ship. We had 30 minutes to leave the building, and at that point, it was no longer like being on the Titanic.

It was kind of like being on Lusitania. The torpedo had hit, and there's 20 minutes to get out. There was a lot of disbelief.

Very few of the rank-and-file people ever dreamed that Enron would actually go bankrupt. Then all of a sudden it was like a ghost town. I can remember going into the old building on certain floors late in the afternoon or evening, and it was scary.

There'd be like papers blowing around and nobody there, and it was just very eerie. Mr. Skilling, your opening statement was extremely compassionate to the employees. And I want to show you a tape, and I believe we have it ready to go.

Listen to this. Should we invest all of our 401k in... stock absolutely.

Don't you guys agree? Why is it that you had begun unloading your stock pretty heavily before that date and yet led the employee to think they should keep buying stock. Ms. Senator, I have been a major shareholder in Enron Corporation. You can take the videotape to mean what you want it to mean. I was a supporter of Enron Corporation.

You know what happened to those people. They lost everything. I feel terrible about what happened to the employees.

Well, at one time, things were really rosy for us, and we all had some really nice-looking 401ks. Cays and pensions, and it peaked, and then it just started going down and went lower and lower and lower. At the peak, I had about $348,000, and I sold it all for $1,200. That was what I got for it when it was done. While Enron's stock was plummeting, the retirement accounts of Enron's rank-and-file workers were frozen.

We were frozen out of our accounts. It was right about $32, I believe. And over that time, from when it was frozen to when it opened up, I think it went down to nine.

And we could not access it. And what came out later that was so bad was the fact that Ken Lay and Skilling and all the top people were moving their money then. But we couldn't. The insiders had sold off a billion dollars of their stock.

Compare that to the lineman who worked for a state-owned utility company for most of his life. Put away money each month and what's he have to show at the end of the day for his years of hard and decent labor? He gets a big goose egg and pie is out in Hawaii somewhere with $350 million in the bank.

That's wrong. There's still to this city a layer of anger and upset. I am still doing counseling three years later with some families.

With some of those who are most reflective, it's gone to a deeper layer. And they are looking at the corporate culture itself in this country. You know, you can gain the whole world, and all the trinkets, and all the trophies of the world, the corner office, and all the perks, and you really can lose your soul in the midst of this.

On January 25th, 2002, seven weeks after the Enron bankruptcy, Cliff Baxter committed suicide. With the media hounding him because he was mentioned in my memos, and the fact that he had been sued civilly because he'd cashed in for about $30 million worth of stock, I guess it all came crashing down on him. I think Cliff's suicide note tells it all. You know, where there was once great pride, now there is none.

It's very hard for me to talk about Cliff. We were very close for many years, and he was a wonderful, wonderful man. But a lot of who Cliff was was tied up in how he had succeeded at Enron. It is hard to look at your life's work and say, it's failed.

But you have to take a long, cold look at yourself and say, who was I? Who did I become? And realize that you may have seen your shadow. Andy Fastow pled guilty to conspiracy to commit wire fraud.

He agreed to forfeit $23 million in assets. His sentence was reduced to 10 years in exchange for testifying against other Enron executives. Why Enron?

Why not WorldCom or Tyco or Global Crossings? Ultimately... In Enron, the fatal flaw was a sense that brains and wiliness could outthink the way that the system eventually will work.

In 2004, Jeff Skilling was indicted for insider trading and conspiracy to defraud investors. Pleading innocent, he paid his attorneys a retainer of $23 million to defend him. Enron should not be viewed as an aberration, something that can't happen anywhere else.

because it's all about the rationalization that you're not doing anything wrong. We've involved Arthur Anderson, we've involved the lawyers, the bankers know what we're doing. There's a sense, the diffusion of responsibility. Everyone was on the bandwagon, and it can happen again.

Enron's accounting firm, Arthur Anderson, was convicted of obstructing justice. With its reputation for honesty destroyed. America's oldest accounting firm fell along with Enron and 29,000 people lost their jobs.

Enron shareholders are suing Enron and its banks for $20 billion. Ken Lay was also indicted for conspiracy to commit fraud. His attorney maintains that no one has been hurt more by the Enron bankruptcy than Ken Lay.

All they can show up is art. With today's arrest of Ken Lay, the top echelon at Enron. Has now been called to account for their crimes.

Mr. Mayor, do you have anything to say, sir? A little later, Dale. Looking at Enron is like looking at the flip side of so much possibility.

Because like most things that end terribly, it didn't start out that way. It started with a lot of people who thought they were changing the world. And over time, they became victims of their own hubris, victims of their own greed.

And so it's like taking so much promise and possibility and looking at it in a mirror and seeing the flip side reflected back at you. I think the larger lesson was what Enron asked of its employees, which was ask why. And, you know, I didn't ask myself why enough.

I didn't ask managers why enough. I didn't ask my colleagues why enough. SELF-DEMON Sing me.

There's a leak, there's a leak in the boyaroo. The poor, the lame, the blind. Who are the ones that we can't discharge? Killers, thieves, and warriors. God, jump.

We got some free, got some free, got some free business, business. Taking up the tank with the shovel and the pick. It's a job, it's a job. Money move rising with the plague and the firm.

To the mob, to the mob. It's all over. The weak, the salient, the poor, the lame, the blind Who wants to be kept in charge? Killers, thieves, lawyers Concentrate, concentrate To be good, God.