CHAPTER 1

THE TWO MEN PUSHED through the glass-and-chrome doors of the Enron building and hurried down the polished granite steps outside. Across the street, a white fountain resembling a mammoth three-tiered wedding cake bubbled in the brilliant winter morning. The sounds of splashing receded as the men crossed Smith Street, a main artery for downtown Houston. Rounding a corner, the older man, David Woytek, glanced at his watch. Fifteen minutes to go . Fifteen minutes, he felt sure, till all hell broke loose.

Without a word, he picked up the pace, followed in step by John Beard, a colleague from Enron’s internal-audit department. On that morning, February 2, 1987, the two were eager to meet with Ken Lay, to finally prove that two of his underlings had cheated his company. Beard carried the damning evidence—bank records showing millions of dollars siphoned from Enron into personal accounts, transactions so suspicious that the bank itself raised a red flag to Woytek. But, most delicious of all, the executives under investigation—Louis Borget and Thomas Mastroeni, two top officers in Enron’s oil-trading unit in Valhalla, New York—would be at the meeting, defending themselves with what Woytek and Beard were certain would be a tangle of lies.

The proof was strong, but the auditors knew it would need to be. Borget was Enron’s earnings Svengali, a man whose business reliably brought in tens of millions of dollars in badly needed annual profits. He and Mastroeni, his top finance executive, were rumored to consort with the rulers of Saudi Arabia and Kuwait, contacts everyone believed gave them strong knowledge about the inner workings of OPEC, the Arab petroleum cartel. Taking them down would mean losing their connections and dismantling their profit machine at a time when Enron was struggling.

But Woytek and Beard believed Lay would have no choice; their case was ironclad. Mastroeni had opened an Enron corporate account at Eastern Savings Bank, listing himself and Borget as the signers. But neither had bothered to tell Enron about the account, and it was not recorded in the company’s books. Millions in corporate cash had been wired there, about half of which ended up in Mastroeni’s personal accounts. The dealings had all the earmarks of some multimillion-dollar scam, with Enron as the mark.

Woytek and Beard turned onto Dallas Street, two blocks from their destination, Enron’s other offices at the Houston Natural Gas building. The streets of downtown seemed almost abandoned that morning, with only a smattering of cars around, a reminder that the years-long oil bust was still wreaking its havoc on Houston.

The two auditors walked into the lobby, taking the elevator to the sixteenth floor. There, a receptionist directed them to the office of Mick Seidl, Enron’s president. Lay had borrowed the office for the morning meeting while Seidl was on the road.

They arrived in the doorway of the large, wood-paneled office. Borget and Mastroeni were already inside, deep in discussion with John Harding and Steve Sulentic, the home office’s nominal supervisors of the oil unit. When the auditors walked in, the conversation stopped.

“Hey,” Harding said. “Good to see you.”

There were handshakes all around. Borget picked up a thick stack of documents and slid them across the table.

“This is a memo with everything you need to know about these transactions,” he said. “All the relevant banking records and other material are attached.”

“Thanks,” Woytek replied. “We’ll look through it.”

Beard picked up the documents and left Seidl’s office, following Woytek to an unoccupied secretary’s desk. He set the documents down, leaning over as he read them. “CONFIDENTIAL,” the first page blared. “Memo for the File.”

Step by step, the memo described how the transactions came about. In one paragraph it mentioned some attached bank statements. Beard thumbed through the pages and found the records. He studied them for an instant.

Wait a minute .

He scanned the records again, fearful he had made some mistake. No, there was no doubt. He glanced over at Woytek.

“Dave, come here,” he said. “Take a look at these.”

Woytek strolled over and skimmed through the statements. They were from Eastern Savings Bank, in the name of the oil-trading division. Nothing seemed surprising; the discovery of that account had set off the investigation. With an almost imperceptible shrug, Woytek looked at Beard, waiting to hear what he was missing.

“These are the same statements we already have from the bank,” Beard said. “But this copy has been altered.”

“You’ve gotta be kidding me. Show me our copy.”

Beard fished through his briefcase, pulling out an almost-identical set of the statements. Woytek laid the pages side by side with the records from Borget.

Unbelievable. The statements were from the same account on the same date, but the numbers were different. The original records showed hundreds of thousands of dollars sloshing in and out. In this new copy, those transactions had simply disappeared. Woytek held Borget’s records up to the light. No lines. No shadows. No telltale signs anywhere of an alteration. Somebody had put a lot of effort into this.

Woytek chuckled. These traders were planning to defend themselves to Lay— using dummied-up records? This meeting was going to be even more interesting than he had thought.

“Well,” he said, looking up, “that settles it. Those two are gonna be fired today.”

As the two auditors spoke, they saw Lay and Rich Kinder, Enron’s general counsel, walking toward Seidl’s office. Woytek and Beard gathered up their papers and stood to greet them. Everyone immediately followed Lay into the office and took a seat around the conference table.

After some chitchat, Lay opened things up. “Well, we know why we’re here. So, Lou, why don’t you go ahead?”

Borget handed out copies of the memo with the attached bank records. “As everyone’s aware,” he began, “questions have been raised about some of the trading operation’s financial transactions. We want to go through them so that you know why these were done. I think everyone will be very satisfied with what they hear.”

Borget and Mastroeni took turns laying out the story. Because of their huge profits in 1986, they explained, company managers had asked them to find a way to shift income into 1987, the current year; that way, Enron would have a jump on hitting its profit projections.

“Now, we were told to get that done using whatever legitimate business practice we could,” Borget said, moving his hands as he spoke. “So we set up a system that’s used by lots of other trading companies.”

The idea was to conduct twinned trades that canceled each other out, known as a “book-out” or a “net-out.” So, Mastroeni explained, they tracked down three trading companies—Isla Petroleum, Southwest Oil & Commodities, and Petropol Energy—that wanted to boost their 1986 earnings. Then, that December, Mastroeni and Borget entered into trades that gave profits to the competitors and losses to Enron. The plan was to reverse the trades in 1987, with Enron gaining the profits and the three others getting the losses. All the parties would walk away even and with exactly the results they wanted. The Eastern Savings account had been opened as a precaution, Mastroeni explained, to hold the money until the trades were completed. But since it was in the company’s name, Mastroeni said, he had transferred the money to personal accounts, ready to be returned to Enron once the 1987 trades were conducted.

“How many other transactions have you guys done off the books?” Woytek asked.

“This is it,” Mastroeni replied.

As the traders’ words tumbled out, Woytek breathed deeply. This is the stupidest thing I’ve ever heard .

Sulentic broke in, looking Lay in the eye. “This was all just a misunderstanding, Ken. Lou and Tom really believed they were acting in Enron’s interest. I say we accept that mistakes were made, do what needs to be done to correct them, and move on to a profitable 1987.”

Lay nodded grimly, seeming lost in thought. “This is obviously not the type of thing we want to have happen,” he said finally. “I understand what you were trying to do, but this is not the way to accomplish that.”

Everything would be undone, Lay ordered. The transactions must be reversed and the off-books bank account shut down. And there would be other consequences. New controls, new oversight. This would not happen again.

Lay sat back. “Does anybody else have anything?”

“Well,” Woytek said, “I have a couple of problems”

There was a short discussion about taxes and when the income would be reported. Heads nodded all around; they agreed Enron would report all of its 1986 profits in that year and pay the taxes. Woytek glanced at the traders. By raising such a tangential issue first, he seemed to have lowered their guard. They looked relaxed, confident.

Time to move in for the kill.

He held up the banking records from the memo. “But the real problem I have is that these bank statements you guys brought here today have been altered.”

Woytek pulled out the second set of statements, describing the discrepancies. All the while, he stared at the traders, looking in their eyes for a flicker of shame or embarrassment. None . Just pure, controlled fury.

“Now, wait a minute!” Borget snapped.

“I can explain that,” Mastroeni interrupted.

There was this trader, Mastroeni said, who had been fired at the end of 1985. After Enron paid out its bonuses for the year, the trader had hired a lawyer, threatening to sue the company if he didn’t receive a bonus.

“There was so much going on at Enron at the time we didn’t want to start a new political problem internally,” Mastroeni said. “So we set up a closeout transaction for him and paid him a $250,000 bonus. But that was it.”

“So why alter the records?” Woytek asked.

Borget scowled. “We just didn’t want to cloud up this meeting with this stuff about bonuses. It has nothing to do with what we’re talking about. So we just took it out.”

The back-and-forth continued for several minutes. Lay just watched, expressionless as he listened. Woytek wrapped up his interrogation and sat back, ready for the hammer to drop.

Lay clasped his hands on the table. “Well,” he said finally. “Okay.”

Oh, shit , Woytek thought. These guys had just presented forged documents, and they’re going to get away with it?

“I just don’t want this to happen again,” Lay continued. “If something like this comes up again, call us. We can handle this bonus situation. But these profits have got to be reported properly.”

The meeting ended, and the traders, somehow, had survived. Everyone began filing out.

“Dave, John, stay behind a minute.”

The two auditors looked back at Lay, who was signaling for them to return to the conference table. They took their seats; Lay stayed silent until the office door closed.

“Okay,” Lay said. “Go to Valhalla and look through their records. If I find out Borget is trading on inside information, on tips he’s getting from somebody in OPEC, I’ll make sure he never works in the industry again.”

Woytek and Beard nodded, taking notes.

“So, John,” Lay continued, “you go ahead and get that going, and Dave and I will run through some details.”

Beard gathered his papers and strode out of the room. Lay leaned in, his eyes boring in on Woytek.

“I want you to go up there and take your top people,” Lay said. “Make sure every penny of this money is returned to the company, even this bonus Borget was talking about. I want all of it back. And I want you to go today, now.”

“All right,” Woytek replied. “We’re on it”

Both men stood, and Lay escorted Woytek to the door. He felt confident that his message had been heard. He wasn’t going to stand by and be played for a fool. Besides, the trading unit had always struck him as a little wild and woolly; maybe this was the chance to get the place under some more watchful eyes. Lay liked that idea; he liked to see the possibilities, the upside. As anyone who knew Enron would say, Lay and his company had long ago learned that every challenge could be transformed into opportunity.

———

The dilapidated black truck rumbled over the rural Missouri road, veering ever closer to the edge. In the flatbed, dozens of crated-up chickens squawked, scratched, and clucked as the truck headed out of a speck of a town called Raymondville. It was 1948, and Ken Lay’s father, Omer, was struggling for the second time to keep a general store afloat. Omer had taken to purchasing chickens from local farmers, selling them at a profit in nearby cities, and on this day he had gambled everything on a single shipment. But his driver had knocked back a few drinks and now was weaving all over the road. The weight of the truck shifted, until it flipped over in a terrible crunch of metal and wood. The driver survived, but most of the chickens were killed—right along with Omer’s business.

The accident was a turning point for the struggling, deeply religious Lay family. With two daughters and Kenny, their six-year-old middle child, Omer and his wife, Ruth, had hoped the store might allow them to settle down, maybe own their own place. Now those dreams were gone.

Omer took a job in Mississippi selling stoves door-to-door, bouncing his family around the state but never seeing enough success to make ends meet. The family hit bottom one Thanksgiving when Ruth—the spark plug of the household who delighted in nothing more than whipping up family feasts—could only afford to serve luncheon meat. Admitting defeat, the Lays moved to a Missouri farm with some of Ruth’s family until Omer could get back on his feet. Soon he found work in sales and a spot preaching at a church.

Around that time, young Kenny—he was usually “Kenny” as a child, never “Ken” and rarely “Kenneth”—scouted up some jobs for before and after school so that he could help the family. He delivered newspapers, mowed grass, baled hay, anything he could find. Between Omer and Kenny, money was coming in, and the Lays were able to settle in a home just off a dirt road cutting through Rush Hill.

Within a few years the financial troubles returned. Lay’s older sister, Bonnie, headed to college, and the cost was far more than the family had anticipated. The only way the family could scrape together the money for college, they decided, was for the kids to live at home. So the Lays moved again, this time some fifty miles southwest to Columbia, the college town for the University of Missouri.

Lay’s big moment in college came in his sophomore year, when he signed up for introductory economics, taught by a popular professor, Pinkney Walker. Lay found himself mesmerized by Walker’s lectures laying out free-market theories; this , he decided, was what he wanted to study. Walker was impressed with the smart young man and became a mentor for young Lay. With Walker’s encouragement, Lay stayed on at school after his senior year to obtain his master’s degree. But that was enough for Lay; he was eager to get out and start earning some money.

He took a job with Houston-based Humble Oil & Refining, later part of Exxon, helping set up the company’s corporate-development department for what seemed a princely salary of thirteen thousand dollars a year. With his career blooming, Lay felt ready to settle down, and in June 1966 he married his college sweetheart, Judith Ayers.

Lay took to the job, enthralled as he debated topics like the future growth rate of the American economy. But soon a new opportunity emerged. His company’s chief executive was looking for a speechwriter, and Lay got the assignment, winning the chance for a close-up view of life at the top of the corporate world. He liked what he saw.

For many young American men, the late 1960s were a time for putting plans on hold. The Vietnam War was escalating, deferments were running out, and the draft loomed. Lay did his best to avoid the military, keeping the job that gave him a deferment and studying nights for his doctorate. Still, he found the arrangement distasteful and wound up attending the Navy’s officer candidate school in Rhode Island starting in January 1968. From there, it was on to the Pentagon, where he was hired to apply his economics knowledge. Lay soon found himself assembling econometric models and later analyzed the economic effects of military spending for his doctoral thesis.

When his time in the military was up, Lay was eager to return to the corporate world. But then Pinkney Walker, his old economics professor, was named to the Federal Power Commission, and he persuaded his star student to join him as his technical assistant. After eighteen months, Lay was asked to serve as deputy undersecretary of energy for the Department of the Interior; he accepted and was named to the post in October 1972 at the age of thirty. In a little more than a year, he was ready to move on.

He latched on to a senior-level position at Florida Gas, a sleepy pipeline company in Winter Park, thanks to an old acquaintance, W.J. “Jack” Bowen, its chief executive. Lay found the smaller company suited him. But the following year his pal Bowen left for Transco Energy, a pipeline giant in Houston, turning the top job over to Selby Sullivan, his second in command. Over the next seven years, Lay moved up the corporate ladder until he was president.

Still, at times he chafed under Sullivan, whose management style he found unnervingly erratic. One night Lay received a phone call at home from Sullivan, asking him to handle an early-morning meeting in Orlando. Lay agreed, and the next morning attended the meeting. But when he called in to the office, a panicked assistant told him Sullivan was pacing the halls, screaming, “Where’s Lay?”

Sullivan’s frequent explosions were always followed by long apologies, a habit Lay began to exploit. When important decisions needed to be made, Lay would anger his boss on purpose, then wait for the inevitable mea culpa. Only then would he present the issue that needed a decision, making clear how he wanted things to go. More often than not, the contrite Sullivan agreed, not knowing he had been manipulated by his young president.

In Washington, D.C., the group of energy-industry executives milled about the hallway of the Capitol Hill office building, grabbing refreshments between meetings of the American Gas Association. Ken Lay scooped up a couple of hors d’oeuvres and noticed his old pal Jack Bowen. They chatted a few minutes, with Bowen asking about life in Florida. It was the spring of 1981, and Lay intimated he didn’t plan to hang around Winter Park much longer. While he didn’t mention it, Lay was tiring of Sullivan’s antics and was eager to run his own show. He also had personal issues; his marriage was troubled and was on the verge of falling apart. Bowen walked away convinced he might be able to steal his former colleague for Transco.

Two weeks later, Bowen called, asking Lay to join Transco as his number two and heir apparent. Lay agreed and, days before his departure, filed for divorce.

It seemed a glorious time to live in Houston. The oil shocks of the 1970s had pushed energy prices through the roof, levitating the town in a bubble of economic growth. Throughout the industry it became a matter of faith that oil prices, which had already tripled, would do it again, surpassing one hundred dollars a barrel. But just after the thirty-nine-year-old Lay arrived, the good times stopped rolling. Oil prices cracked, and soon crashed.

Pipeline companies like Transco suddenly found themselves in a bind. Under old regulations, they were required to have adequate supplies to fill their pipelines before expanding their markets or capacity. To accomplish that, they entered into “take or pay” contracts with producers, committing to buy a set percentage of a well’s production over years—whether customers needed it or not. And they agreed to pay ever increasing rates. After all, if energy companies could sell oil at a hundred a barrel, they sure wouldn’t spend time looking for gas selling at thirty.

Reality wasn’t quite that simple. When oil prices fell, the contracts kept gas at high prices, meaning that while producers might want to drill it, customers didn’t want to use the more expensive fuel. Pipeline companies were left with contracts worth billions for gas that nobody wanted.

The problem hit Transco hard. Shortly after Lay joined, he found that the company, which had assured him it had no take-or-pay exposure, had failed to properly account for its contracts. If oil prices kept falling, he figured, his new employer would go bust. So Lay corralled a group of Transco analysts and urged them to play around with a new idea: setting up a spot market for gas. That would jettison the old system in which producers sold gas to pipeline operators, who sold it to distributors, who sold it to the final customers. Instead, in a spot market, producers—or at least the ones who released Transco from its contracts—would sell directly to customers; Transco would then be paid to move the gas through its pipeline.

It seemed like a great idea. Lay worked for months obtaining the necessary regulatory approvals, and then sat back to watch it succeed. Problem was, no one was interested. On the first day of trading, Lay was on vacation in Florida with his new wife, the former Linda Phillips Herrold, his onetime secretary at Florida Gas. After some time puttering around the hotel, he called in to hear how things had gone. Not a single trade had taken place. Same on the second day. And the third. No one was willing to be the first producer to break ranks and utilize the new system.

By the fifth day of failure, Lay headed back to Houston. He and his team worked the phones, persuading a few independent producers to try the new market. From there, Lay reached out to other contacts; the breakthrough came when Shell Oil announced it would use the spot market. Within eighteen months, the spot market had pretty much taken over all new contracts, and Lay emerged as an industry legend, a man who had transformed certain disaster into a new business. Plenty of other companies took notice.

On a Thursday afternoon in May 1984, Lay was in the Woodlands, a part of suburban Houston, playing tennis with a Transco banker, when he heard he had a call. He ambled off the court and picked up the phone. On the line was John Duncan, chairman of the executive committee of Transco’s smaller rival Houston Natural Gas, or HNG. Duncan said that the HNG board was eager to meet with Lay for breakfast that Saturday; Lay thought the suggestion sounded suspiciously like the opening gambit in an effort to persuade Transco to purchase HNG.

That Saturday, Lay drove over to Duncan’s home near the Houston Country Club for breakfast. Over eggs and toast, Duncan lobbed in a surprise: the HNG board wasn’t interested in Transco; they were interested in Lay. They wanted to bring him in as chairman and chief executive. Lay was flattered but dubious. Over the weekend, though, Duncan and other HNG directors kept up the pressure, throwing all kinds of incentives into the mix. By Sunday, Lay agreed to come aboard, so long as Bowen, who was counting on him to take over Transco, gave his blessing.

The next morning, Monday, Lay arranged to have a private lunch with Bowen and spent the entire meal spelling out the details of the HNG approach. Bowen seemed a little disappointed HNG hadn’t asked him. On the other hand, he wasn’t about to block the move.

“I’m not going to stand in your way,” Bowen said. “So you go ahead, become a CEO right now.”

The decision was made. Ken Lay, the kid from rural Missouri, became chairman and chief executive of a major corporation in June 1984, at the age of forty-two.

It could be argued that the creation of Enron was set in motion on April 21, 1985, when a thirteen-year-old Texas boy decided to phone Zurich.

Earlier that day, the teenager, Beau Herrold, had taken a message for his stepfather from Sam Segnar, chief executive of InterNorth, an Omaha energy company. Beau told the caller that his stepfather, Ken Lay, was traveling with his mother, Linda. As instructed, he refused to say where Lay was or how to reach him. Still, Beau chewed over the call; it somehow seemed urgent enough that he decided to let his stepfather know about it right away. He checked his parents’ itinerary and saw that they would be arriving at the Dolder Grand Hotel in Zurich. Beau called and left a message for Lay with the front desk.

That evening at eleven, the Lays arrived at the hotel from the latest meeting with European investors. At the front desk, Lay picked up Beau’s message and, after checking in, called the boy. Lay knew Segnar’s name, and certainly knew his company, InterNorth, a rival, but he had no idea why the man was calling. Taking a seat at a small desk in the one-bedroom suite, he dialed Segnar at home. As the phone rang, Lay glanced out the window, admiring the lights of Zurich twinkling under a cloud-filled sky. Segnar answered, and the two men spent a moment exchanging pleasantries. Then Segnar sprang the question.

“Ken,” Segnar said, “would you have any interest in putting our two companies together?”

The idea struck Lay out of the blue. He barely knew what to say. “Well, Sam,” Lay finally replied, “truthfully, I’ve never really thought about it before.”

There were plenty of reasons to do it, Segnar said. Both companies were pursuing a strategy based on the idea that fully deregulated markets were coming in the gas industry. Both understood that the biggest pipeline systems would be the winners. Both had been snapping up smaller pipelines and were often competing bidders. Fighting over scraps made no sense when they both could achieve their shared goal through a single merger—with each other.

Segnar had plenty of other justifications for pushing the deal, but many of those went unmentioned. Irwin Jacobs, the feared corporate raider, was loading up on InterNorth stock. If Segnar didn’t take control of his own destiny, Jacobs might do it for him. A major acquisition, like HNG, would load the company up with debt and make it far less attractive as a candidate for a hostile takeover.

Intrigued, Lay asked some questions and said he would get his best people working on the idea. For the next few days, he traveled through Europe with almost no sleep. During the day he met investors; all night he held strategy sessions by phone with his team. HNG wanted seventy dollars a share, InterNorth haggled for sixty-five. Segnar caved on everything, including a commitment that Lay could take over in a matter of years. The seventy-dollars-a-share deal was announced on May 2, just eleven days after the phone call to Zurich.

There was little time for celebration. Lay had acquired new problems, as he discovered at a September reception in Houston. He hosted the get-together for the InterNorth crowd, giving them a chance to meet the city’s big oilmen. But instead, the directors trooped off to another room to verbally beat up Sam Segnar. They had grown angry about the HNG deal, which they thought had put the company too deeply in debt. Worse, they had heard rumors that Lay and Segnar had secretly agreed to move the headquarters from Omaha to Houston. Segnar denied there was any such deal, but the directors wanted to hear it from Lay—that night.

As the last of the guests filed out of the reception, Lay headed over to meet the angry directors. He was not in a mood to play nice; a lot of effort had gone into organizing the reception, and the directors had basically insulted everyone in Houston’s energy industry. But before he could speak, the directors started in, making it clear that there was more at stake than some bruised feelings; apparently, the directors distrusted Segnar, their own CEO.

Lay assured them that no secret deal existed, yet at the same time pushed the idea of moving the headquarters to Houston. The directors decided to hire a consultant to analyze the option. They turned to John Sawhill—a former Nixon Administration official now with McKinsey & Company, the management consulting firm—who had done work for InterNorth in the past.

It was a decision that would bring to the company the man who ultimately redefined its future.

———

“What, are you kidding me? No way.”

Jeff Skilling almost laughed. His boss, John Sawhill, had just phoned to tell him about the HNG/InterNorth headquarters study. Skilling, at thirty-one already a rising star in McKinsey’s Houston office, was incredulous.

“Jeff, it’s an important assignment,” Sawhill said. “It’s something the company really wants.”

Skilling could only shake his head. He knew about the battles at HNG/InterNorth in the Houston-versus-Omaha debate. Whatever the answer, somebody at the company would be furious—and almost certainly blame the consultants.

“How do you win this one, John? How do you decide this? I want nothing to do with it.”

Sawhill implored his underling to reconsider, but Skilling was adamant. Finally, the two agreed to turn the job over to McKinsey’s Washington office, effectively shielding Houston from the company’s inevitable wrath.

For most young businessmen, such a refusal of a client request might seem risky. But not for Skilling; he was already viewed as a McKinsey wunderkind—brash and arrogant, but with the intellectual firepower to justify his lofty self-image. Born in Pittsburgh in 1953, he was the second of four children, the son of a valve salesman. The family eventually settled in Aurora, Illinois, where Skilling’s father worked with a company called Henry Pratt.

Aurora was a typical Midwestern town, with wide-open plains and endless enthusiasm for the high-school sports teams. But Skilling, who arrived at the age of twelve, didn’t go in much for sports—or many other school activities. He was a shy, awkward kid, horribly intimidated by girls and largely bored by his teachers.

Home life wasn’t much better. His father, Thomas, was happy-go-lucky, but he wasn’t around much; his mother, Betty, was a chronic complainer who seemed to blame her husband for a life that didn’t work out the way she hoped. Even positive events in Jeff’s life—a stellar report card, an aced test—fueled her pessimism. “You think things are going well now,” she often said. “Just wait. Things’ll fall apart. Sooner or later, they’ll get you.”

Skilling ached for something to enthrall him and finally found his answer in the working world. His older brother Tom fancied himself an expert on weather patterns, and as a teenager found a spot doing the weather on WLXT-TV, a struggling local television station. The place was nothing much to look at; its crumbling offices had previously been a Moose Lodge. Tom persuaded the managers to hire his younger brother to fix it up. Jeff showed up every day—painting walls, scrubbing floors, doing odd jobs—but would often steal away during his break time, asking the technicians about the broadcast equipment.

His big chance came when he was about thirteen. The station was hosting an event to celebrate its early success, and a number of local politicians were on hand. When one part of the broadcast didn’t come off properly, the station’s anxious general manager screamed at the young man running the control booth, who quit on the spot.

The evening looked doomed. Then the chief electrician came up with a suggestion: since Jeff Skilling had learned to work the equipment, why not let him try his hand? Within minutes the teenager was running the broadcast, and he was so successful he kept the job. Skilling was thrilled; here he was, a kid dropped at the station in his mom’s car, bossing around grown-ups. He found that he loved being in charge, dictating how the work should be accomplished.

The television station went bankrupt just before Skilling left for Southern Methodist University in Dallas, where he had been granted a full scholarship. While there, Skilling had his first real exposure to the vagaries of the business world—and showed his own disposition toward gambling in the markets. He had invested his savings in the company that employed his dad, and watched with delight as the price climbed year after year. It seemed like a painless way to wealth; Skilling even borrowed against the stock to buy his first car. But the early 1970s ushered in a bear market, the price collapsed, and Skilling was broke. He was forced to get a bank loan just to purchase new tires for his car.

But his investment failure only spurred him to deepen his knowledge of business by studying esoteric investments, like options and warrants. Ultimately, he dreamed up a theory of how to turn commodities like gold into securities like stock and wrote a school paper about the idea. Exhilarated by the intellectual challenge, Skilling abandoned his plans to become an engineer and instead focused on preparing for a career in business.

Skilling skipped his college graduation, instead driving up to Chicago to marry his girlfriend, Susan Long, whom he met at SMU. From there, he found his first full-time job at First City National Bank in Houston, where he figured out a way to identify sophisticated crooks who were defrauding the bank with bad checks; he was bursting with pride when an equation he devised helped catch a couple of bad guys.

Despite his success, he decided that the place that could help him really shine was Harvard Business School. He applied and was notified that a dean from the school would be in Houston for another event and would interview him. Freshly scrubbed and in a suit, Skilling headed for the meeting at the downtown Hyatt Hotel, but things got awkward quickly. The dean drilled Skilling with questions for about forty-five minutes; Skilling gave prepared, formulaic answers and sensed things were going badly. “Skilling,” the dean finally said. “Are you smart?”

Skilling smiled. I’ve probably blown this anyway. What the hell? “I’m fucking smart,” he shot back.

“That’s what I would guess. So why are you giving me all these bullshit answers?”

“I thought that was what you were supposed to do.”

“Okay, so drop that. Tell me what you really think. Why do you want to go to Harvard?”

Skilling breathed in deeply. “I want to be a businessman,” he said. “I really want it bad.”

The conversation began anew, continuing for another hour, and this time Skilling sensed everything was clicking. And he was right; before the day was out, he learned that he had been admitted.

Harvard transformed him. At first intimidated by his classmates, he soon found he outscored most of them on classroom tests. His conceit began to show, alienating some potential friends. But his professors considered Skilling brilliant, and in 1979 he graduated as a Baker Scholar, a designation bestowed on the top five percent of the class.

He was offered a position at McKinsey & Company, the consulting firm with a reputation for arrogance that matched his own, and leaped at it. After wheedling his way back to Texas—first in McKinsey’s Dallas office, then in Houston—he focused on energy, an industry whose approach to business struck him as hopelessly outdated and, more important, just plain screwy. He attacked its problems with a vehemence that won him the reputation of a brilliant but self-important strategist.

By 1985, Skilling had been working with John Sawhill on InterNorth for more than three years, long enough to understand the company’s internal politics and steer clear of the headquarters debate. After fobbing the assignment off on Washington, Skilling thought little about it again until a draft copy landed on his desk. He picked it up and flipped through the pages.

What the hell?

He couldn’t believe what he was reading. The thing was junk —more like a travelogue than a real report. Which city had more professional sports teams? Which had more nonstop flights? What businessman would relocate his business solely on the basis of such trivia?

Skilling snapped up a pen and started writing. He wasn’t about to turn over such a shoddy piece of work to a client—suicide mission or not. If the Washington office couldn’t handle the assignment, then he’d do it himself.

Skilling and Sawhill walked past the front desk at the Omaha Marriott on their way to the first-floor meeting rooms. On this day, November 12, 1985, a film crew—in town to make a movie about Boys Town—had taken over, lending the usually businesslike place an air of frivolity. Still, Skilling and Sawhill barely noticed. Not this morning, on the day of their formal report to the HNG/InterNorth board.

The two men arrived at ten o’clock at the door of the Columbus Room, where the board was meeting. An aide told them to wait. They wandered over to chairs outside the door and sat. Minutes passed, followed by hours.

Then, fireworks. Directors started yelling at one another. Skilling and Sawhill glanced at each other. Neither could quite make out the words. Finally, sometime after one o’clock, the door opened. Sam Segnar emerged, his eyes red-rimmed. Sawhill and Skilling stood.

“Listen,” Segnar said, “I just want you to know I’ve been replaced as the chief executive of the company.”

Sawhill and Skilling were too stunned to speak.

“It’s been nice knowing you,” Segnar said. He headed down the hallway, tears in his eyes. The two consultants just stood there; all this over the headquarters? This assignment might be more lethal than even Skilling had thought.

The door opened again; the board was ready for them. Most of the directors were looking sheepish. On one side, Ken Lay, a man Skilling had met in passing only a few weeks before, was wide-eyed and a little pale.

Sawhill and Skilling found their seats, and the situation was laid out for them. Segnar was gone; Ken Lay was now president and chief executive. Bill Strauss, InterNorth’s sixty-three-year-old former chairman, had returned to his old job and would be running the meeting.

“All right,” Strauss said. “Now we want to hear your advice on the corporate headquarters location.”

Sawhill stood, straightening his coat. “Thank you,” he said. He spoke for a few minutes, then gestured toward his colleague. “Let me introduce Jeff Skilling, who’s handling this presentation.”

Oh, thanks, John . Skilling launched into the report. The conclusions were simple: HNG/InterNorth’s business was in Houston. Its key pipeline there had numerous problems, and its contracts required renegotiation; management needed to be there to oversee the work.

“Now,” Skilling said, “the worst possible outcome would be to maintain dual headquarters. So you need to decide, Houston or Omaha, and we would recommend Houston.”

A pause. Charles Harper, the chairman and chief executive of ConAgra, an Omaha-based food company, gestured that he wished to speak. Strauss recognized him.

“This,” Harper said, fury in his voice, “is the biggest pile of bullshit I have ever heard in my life!”

For several minutes Harper and other directors raged. The company was a major Omaha employer; it couldn’t just pick up and leave. Harper turned red as he stormed, and Skilling feared the man was building up to a heart attack.

“Okay,” Skilling said, holding up his hands. “Listen, I’m just a consultant. I’m just giving my advice.”

One director moved that the company maintain dual headquarters. Another seconded the motion.

“Fine,” said Strauss, the chairman. “All in favor?”

A chorus of ayes filled the room.

“Opposed?” Silence.

Jesus Christ , Skilling thought.

“The ayes have it,” Strauss said.

Defeated, Skilling and Sawhill made their way out of the room as the directors called a break. Lay hustled to the hallway to find the consultants. “Jeff! John!” he called.

The two consultants waited as Lay hurried up to them.

“I want to apologize for what happened here,” he said. “The work you did was very good, we appreciate the thought that went into it. I think you’re probably right, but we just can’t do it now.”

Skilling nodded, mumbling his thanks. For all the trouble the board had given him, he thought, at least this fellow Lay was a class act.

HNG/InterNorth descended into chaos. The ousting of Segnar was supposed to calm the waters at the company; instead, it set in motion an endless drama of backstabbing and one-upmanship as longtime InterNorth employees prepared for a final battle with the interlopers from HNG. Many viewed Lay as one misstep away from Segnar’s fate.

Topping it off, the newly merged company was still struggling through the basics, including the selection of its independent accounting firm. HNG had long relied on Deloitte Haskins & Sells; Lay and his top management were recommending that firm. But InterNorth had used the prestigious Arthur Andersen & Company, and the directors were frightened that changing firms would leave Andersen no choice but to shut down its Omaha office.

The issues came to a head in late January 1986 at a series of directors’ meetings in the sixteenth-floor boardroom of the Omaha headquarters. Lay easily won the battles with subordinates; the directors accepted his appeal to terminate two longtime InterNorth executives he believed were sowing discontent. But the selection of auditors proved to be far stickier. The audit committee—which would make the final recommendation of accountants to the full board—listened in silence as Keith Kern, the chief financial officer, presented management’s recommendation of Deloitte as auditors and Andersen as consultants.

When Kern was finished, Lay spoke up. “Now, the management committee is not unanimous here,” he said. “But I personally agree with the recommendation.”

The first shot from the directors was a surprise: it was aimed at Andersen. James Renier, who worked at Honeywell, said he was worried about that firm. He knew Andersen had been clobbered in recent years by malpractice lawsuits; it had paid about $140 million in such cases over five years, seven times more than any other firm.

That would not be an issue, Kern replied. “They’ve discussed those cases with us in detail. The amount of money is large, but, really, the number of cases is relatively small. We don’t think it’s a concern.”

The signal of support for Andersen was all the other directors needed. Of course the lawsuits weren’t a problem, several said. In fact, one suggested, why take the auditing away from Andersen? With all the difficulties that HNG/InterNorth was facing, why go to the trouble of a switch? Why not rely on Andersen for everything?

Georgiana Sheldon, formerly head of the Federal Energy Regulatory Commission, felt uncomfortable with the suggestion. “Wait,” she said. “I don’t like the idea of giving all the work to Arthur Andersen. I’d be concerned about a possible conflict of interest if the same firm performed both the consulting and the auditing.”

The directors understood. Auditors might need to examine the outcomes of consultants’ strategies. Who would want an adviser grading its own papers?

“I agree,” said Robert Jaedicke, the Stanford Business School dean who served as the committee chair. “I’d be concerned if Andersen was appointed auditor and a transition wasn’t made quickly to another consultant.”

The bantering left Lay uneasy. Once again the board members seemed to be undercutting their managers in favor of their own parochial interests. “I need to point something out,” he said. “Our CFO made this recommendation to me, and I agreed with it. So it’s the recommendation of the CFO and the CEO that this proposal, as outlined, be accepted.”

The room went silent. Finally, someone took the bait. “I’m concerned about the message we’d send if this committee doesn’t support management,” Renier said.

The dynamic of the discussion was shifting. But Jaedicke asked for a forty-eight-hour recess. Lay walked out frustrated. It was a stupid squabble, one that, if he lost, would once again undercut his authority.

Some battles are just not worth fighting .

The only way to win, Lay decided, was to adopt the board’s position as his own. He would be victorious in defeat. Two days later, Lay went back to the boardroom to speak with the directors by conference call.

“It is very important at this stage in the company’s history to have unanimity from this committee,” Lay said. “In view of the fact of the virtual equality of the two firms, management has revised its recommendation”

He paused for a moment. “We are now recommending that Arthur Andersen be retained as our independent auditor.”

The directors unanimously agreed. Arthur Andersen was retained as auditor and consultant; Deloitte was abandoned. No one raised the concerns again about the possible problems of Andersen serving in two conflicting roles.

Lay’s defeat on the accounting issue set Bill Strauss to thinking. His reappointment as chairman was supposed to help the company come together. Instead, it was pulling itself apart. Already he thought Lay was spending too much time on internal politics; the man had been given the CEO title but received little of the respect that the job deserved. Something needed to be done, Strauss decided. Everything was put in motion in early February 1986, when Strauss ambled down to Lay’s office.

“Look, Ken, I know these are tough times, and they’re probably not going to get any easier,” Strauss said.

“That’s probably an understatement,” Lay said, chuckling.

“Well, we need to resolve a few things. I need to know your hands are tied to the steering wheel, that you’re here for good.”

One problem, Strauss said, was that Lay’s contract from HNG allowed him to pull the rip cord on a golden parachute up to a year after the company merged. So there was still plenty of time left for Lay to walk away from his job with about three years’ worth of salary and bonus.

“If everybody is going to get behind you, Ken, we need to know there’s no escape hatch,” Strauss said. “I’d like you to give up your golden parachute, and I’d like to be able to tell the board at the next meeting that you did.”

Lay asked for the weekend to think about it, and talked it over with his wife, Linda. On Monday he returned with the verdict: Strauss could let the directors know he was giving up the pay package.

The board met on February 11, 1986, at an office building in Orlando, Florida. The directors gathered around the table, and Strauss started things off. Lay figured he would open with the announcement about the pay package.

“I have something to tell you,” Strauss began. “I’m going to tell you something that only my wife and I know.”

What? Strauss’s wife sure wasn’t the only one to know about Lay’s decision. What was going on?

“In the last few weeks I’ve met with each of you individually. I’ve talked to you about what ought to happen at this company. I’ve asked you about the management team, and the problems and all of that”

Strauss looked over at Lay. “I’ve reached the conclusion that I should step down as chairman and Ken should become chairman.”

No one spoke; no one moved.

“This company needs one leader and one leader only,” Strauss continued. “There has to be no doubt about that. So, effective right now, I resign as chairman, I resign from the board, and I am going back to Omaha.”

Strauss walked out—no good-byes, no handshakes. In that moment Lay understood Strauss’s request from the week before; he had tied Lay’s hands to the steering wheel before jumping out of the car. It was the ultimate rebuke to the board; the company had only one driver now, and the board could either support him or crash.

The directors sat in silence, until finally one of them spoke up. “I nominate Ken Lay as chairman.”

The vote was immediate and unanimous. Lay assumed total control. Before the year was out, his own supporters had a majority on the board—enough to succeed in moving the headquarters to Houston. But the tumult that surrounded the creation of his company was far from over.

“Enteron.” The decision seemed final. HNG/InterNorth would abandon its awkward name and be rechristened “Enteron.” It would be the strongest signal of the company’s emergence into the new Lay era. On February 19, 1986, eight days into Lay’s chairmanship, the company announced that the new name would be put to a shareholder vote in April.

The name had been proposed by Lippincott & Margulies, a pricey New York consulting firm that had spent three months and millions of dollars on the project. It derived from an analysis of the company’s business—“En” for “energy,” “ter” for “international” and “InterNorth,” and “on” because it sounded cool. After thinking it up, the consultants had checked around the world to be sure no other company was using the name and that it did not have some vulgar meaning in another language.

Problem was, no one bothered to check Webster’s . “Enteron” is also a word for the digestive tube running from the mouth to the anus—particularly unfortunate, given that Lay’s company produced natural gas. Within days of the announcement, the soon-to-be Enteron was a laughingstock.

It all came to a head one Saturday as Lay and his two top advisers—Mick Seidl, his president, and Rich Kinder, his general counsel—jogged three miles in Houston’s Memorial Park, debating what to do. Seidl and Kinder believed that the issue would blow over in little time; Lay was equally adamant that the new name had to go.

Two days later, Lay contacted the naming consultants, informing them that either they needed to figure out a new name quickly or it would stay HNG/InterNorth. Somehow, the work that took three months for the first name was repeated in little more than a week. Lay liked the new suggestion immediately; the shareholders overwhelmingly approved it.

HNG/InterNorth would from then on be known as Enron, a name that in its first days was already on its way to being bound up in scandal.

———

The limousine eased along the sidewalk outside the New York airport, stopping where David Woytek and two other auditors were waiting. It was days after the big showdown in Houston over the secret bank accounts, and Woytek and his colleagues—including John Beard and Carolyn Kee, an Arthur Andersen partner—had come to New York to conduct the inspection of the trading unit that Lay ordered. They loaded their luggage and climbed in the limo—provided by Borget, the unit’s head—which took them to the offices at the Mount Pleasant Corporate Center. But they were forbidden to enter without being announced, and once they were inside, Borget ordered them not to speak to his traders.

“I don’t want you stirring them up and making me lose people,” Borget told them.

For three days, the auditors played cat and mouse, with Borget and Mastroeni providing the bare minimum of the records they requested. Finally, on the third day, Woytek had had enough. He flagged down Borget.

“What’s the matter?” Borget asked.

“We want to see the backup for these trades,” Woytek replied, holding up some trading records.

“What do you mean?”

“The telexes, the wire transfers. All of these trades had to create a paper trail. We want to see it.”

Borget tightened. “Okay, we’ll get it for you.”

The records never arrived. Instead, Borget phoned Houston to complain about the auditors’ disruptions. A few hours later, Mick Seidl, Enron’s president, called Woytek.

“You guys need to pack up and come home,” Seidl said.

“What? Why?”

“Borget is getting upset, the traders are getting upset. You need to pull out. We’re going to turn this over to Arthur Andersen instead.”

Woytek couldn’t believe it. Borget’s got them hoodwinked again . But he knew there was no fighting a direct order. “Fine,” he said. “We’ll come back”

The investigation in Valhalla was turned over to Carolyn Kee, who summoned a number of young Andersen auditors to help her dig through the paperwork. Still, Woytek and his team had rifled through enough records to know things in oil trading were bad. For one thing, Borget had sold a company car for seventy-eight hundred dollars and stolen the proceeds, depositing them in the Eastern Savings account.

And then there was M. Yass, a broker from another firm identified as part of the profit shifting. About $106,000 from the bank account had been converted into cash and supposedly paid to Yass, a man described by Borget as a Lebanese national working with Southwest Oil & Commodities. But the auditors were convinced that Yass was a ghost, a creation of the traders’ imagination, invented for the purpose of shifting money around. Even his name—Woytek figured it stood for “My Ass”—suggested that the traders were thumbing their noses at Houston.

The team had tried to track down Yass and Southwest Oil. Beard hired a private investigations firm called Intertect to check the backgrounds of Borget and Mastroeni, and to locate Yass, Southwest Oil, and the other companies that supposedly helped in the profit-shifting scheme.

The report arrived at Enron in the second week of February. Southwest Oil, Isla Petroleum, and Petropol Energy did not exist. The telex numbers for them provided by Borget and Mastroeni were bogus. Worst of all, the report said, Mastroeni, the unit’s top finance executive, had been personally sued by banks for using fraudulent documents to obtain loans.

Woytek took the devastating report up the line, hurrying over to the office of Keith Kern, Enron’s chief financial officer. He gave Kern a copy, laying out everything the private investigators had uncovered.

“Why did we hire these people?” Kern asked, “We don’t need to be doing this. Arthur Andersen is up there; they’re looking into everything.”

Kern tossed the report on his desk.

“I want you guys to drop it.”

At four o’clock on the afternoon of April 29, Enron’s audit committee gathered in the boardroom of the new Houston headquarters. For an hour the directors heard about the company’s internal-audit work for 1986. They could not have been more pleased; after months of tumult, it sounded as if Enron’s controls were finally falling into place.

“I think you would agree that this is a remarkable turnaround in a very short period of time,” Robert Jaedicke, the committee chairman, said during a presentation from accountants with Arthur Andersen.

“Absolutely, yes,” replied Jack Tompkins, an Andersen partner. “I would agree with that.”

Once all the happy talk was out of the way, the directors turned to the matter of Enron Oil. Andersen had submitted its final report a week earlier, loading it with caveats about their inability to determine whether crimes had been committed. The report was breathtaking in what it failed to reveal—nothing about Mastroeni’s past problems with fraud, or the nonexistent trading partners, or the forged documents. It did caution that the potential losses in the oil-trading business seemed far larger than the directors believed, but that point went by with little comment.

Instead, Mick Seidl held up the report as evidence that the swirl of suspicions about the goings-on in oil trading could be dispelled. “While there appear to have been some errors in judgment, there are no indications that anything was done for personal gain,” he said.

The directors asked questions signaling deep discomfort with Mastroeni. Lay listened, disturbed by the direction of the discussion. Before the meeting, Borget had called him personally, pleading to save Mastroeni’s job. The unit wouldn’t work without him, Borget had said, and Lay took the warnings seriously. It was clear to him that he needed to make a decisive move to avert an action by the directors. He began to speak.

“I hear your concerns, and I understand them. But I’ve made the decision. I’ve got to put my CEO hat on and do what is in the best interest of Enron. We cannot afford to be disrupting our trading operations unnecessarily. It is too important to our financial performance.”

Lay’s tone was resolute. “I’ve decided we’re not firing anyone. But we will make changes. We will keep Tom Mastroeni on the payroll, but he will be relieved of his financial responsibilities. We’re going to name a new chief financial officer for the unit and move that person up there to take control. And all of the banking and financial activities will report through Houston from now on. That’s my decision.”

Ron Roskens, one of the directors, was the first to respond. “Well, I have to tell you, this bothers me.”

Other directors agreed, but Lay held firm. None of the directors seemed willing to start up the sort of battle that had infected Enron in the years before. So, with their reservations clear, the committee voted to back Lay.

After so many months of controversy, the oil-trading-unit scandal appeared all but over.

Lay stretched out his legs as he sat in a soft, upholstered seat on an Enron corporate jet. It was the afternoon of October 9, 1987. He and a few colleagues were somewhere over the Atlantic, flying back from meetings with European investors. Lay was feeling a little sleepy when he noticed one of the pilots coming his way.

“Mr. Lay?” the pilot said. “We just got a message from Mr. Seidl. He’s getting on a plane, and he’s going to meet you in Gander.” Lay nodded. “Okay, thanks.”

This wasn’t good. Lay and the others were already on their way to Houston. What could be so urgent that his president would fly to meet him at a refueling stop in Newfoundland?

More than an hour later, the plane landed at the Gander International Airport. Lay and the other executives traveling with him—Forrest Hoglund from the oil and gas group and Kern, who had recently been named chief financial officer of that division—huddled in a corner of the terminal, waiting for Seidl. His plane arrived in less than an hour, and Seidl hustled off, finding his colleagues at a small table. He grabbed a chair and sat down with them.

“I was just up in New York with Lou Borget,” Seidl said. He had gone there for a social lunch at the Pierre Hotel, hoping to repair the relations strained by the investigations months before. But over the meal Borget had dropped a bombshell. His group’s bets on the direction of oil prices had been going badly. The group had been trading on expectations that prices would fall, but then they rose. When Borget doubled his bet, hoping to make up the loss, they rose again. To hide the problem, Seidl said, Valhalla kept two sets of books, never revealing their position to Houston.

“Now the trading desk has got some very, very large exposed positions that we didn’t know about,” Seidl said.

“How much are we talking about?” Lay asked.

Seidl took a breath. “Hundreds of millions, maybe more than a billion if the market goes the wrong way.”

Lay was speechless. A billion dollars in potential trading losses? With Enron still struggling under all the debt it had assumed in the merger, this could bring the company down. Immediately, the pilots were told that Lay’s flight plans were changing; he was heading to Valhalla.

Before getting on the plane, he contacted Mike Muckleroy, an experienced Enron oil trader in Houston who for months had been warning—just as the Andersen report had cautioned might be the case—that Borget had to be busting through his trading limits. But Lay hadn’t listened, chalking Muckleroy’s complaints up to jealousy. Now he needed Muckleroy to help save the company by cleaning up Borget’s mess.

By Saturday morning, Lay had arrived in Valhalla and summoned Borget to a nearby hotel conference room. Borget sauntered in, all smooth and self-confident.

“Okay, Ken,” he said. “I know we’ve got a problem here, but it’s manageable, and we’re going to solve it.”

“How did the problem happen, Lou?”

“Ken, I just saw it as a great opportunity for the company, a real chance to hit a super home run. I figured everybody in Houston would be nervous about it, but I didn’t think we could afford to pass up the opportunity.”

Borget pressed his charm offensive, but this time Lay wasn’t buying. Instead, he pumped Borget for information to help Enron minimize the disaster. Finally, when he figured he had heard everything Borget had to offer, Lay lowered the boom.

“Lou, you know you violated a lot of company policies in all of this,” he said. “And you’ve really exposed us to possibly horrendous downsides here.”

“Well, again, Ken, I’m very confident we can work all of this out without any harm to the company.”

Lay ignored him. “Lou, I have no choice but to terminate you.”

Borget sat back, speechless. “What?” he sputtered. “You can’t work your way out of this problem without me!”

“Yeah, Lou, we can.”

Borget pushed him to change his mind, but Lay was unbending. Finally Lay’s message sank in. Borget stood and made his way to the door, then stopped and turned.

“Well, if you decide you need my help, I’ll be at home. You can call me.”

With that, Borget strode away, leaving Enron forever.

———

The second scandal in the oil-trading division transformed Enron, destroying old internal alliances and reshaping the corporate leadership structure.

For three weeks, Mike Muckleroy led a group of traders in gradually shrinking the size of Enron’s oil-market position. They were in constant fear that competitors would realize the gravity of Enron’s situation and bid up the price of oil; after all, the company had to pay pretty much any price to save itself. But they pulled it off. By late October, Enron’s after-tax losses had shrunk to a manageable eighty-five million dollars.

In the months that followed, the Valhalla unit was shut down. Within a few years, Borget and Mastroeni were charged with fraud and tax crimes; Borget was also charged with aiding Enron in filing false income-tax returns through the profit shifting. Both men pleaded guilty; Borget was sentenced to a year in prison, and Mastroeni received a suspended sentence and probation.

Lay and Seidl knew someone had to pay the price for the debacle, and it certainly was not going to be Lay. While Seidl continued at Enron for a couple of years, his responsibilities gravitated to Rich Kinder, now working as chief of staff, sort of a roving Mr. Fixit. While Seidl was viewed internally as indecisive, Kinder was a barn-burning man of action who inspired fear in Enron’s executive ranks—just the sort of manager the company needed.

Lay acknowledged soon after the announcement of the trading losses that Enron would have to change its ways. In late October 1987, he called an all-employee meeting in Houston. He held himself up as a victim of Borget and Mastroeni, as someone who had no reason to suspect the problems in Valhalla. But, he said, he walked away from the scandal having learned an important lesson.

“We became involved in a business with risks that we did not appreciate well enough,” Lay told the assembled crowd. “And I promise you, we will never again risk Enron’s credibility in business ventures without first making sure we thoroughly understand the risks.”

It was a commitment he would fail to keep. L+ly1ogV4We7GP2fZPGTbkxmp1TEWhErjuS1nt2UruDBX2Bq+Fcr7WmiRcQw3P0S