In the spring of 1998, shortly after Andy Fastow became Enron’s chief financial officer, he approached Jeff Skilling about using the equity markets to raise money. Selling new shares of stock is one of the most common ways a corporation can raise capital, and in the middle of a roaring bull market, it’s one of the easiest ways as well. Unlike debt, the money never has to be paid back; investors are betting that the company will use the capital wisely and that the stock will go up as a result. If it doesn’t, the investors, not the company, take the hit.
Although Enron clearly needed capital—it had by then billions in debt and was preparing to spend billions on new business ventures—Skilling and Lay were cool to the idea. Skilling, in particular, was opposed to anything that might hurt the stock price, even temporarily. That’s always the danger when new shares flood the market: the new supply can outstrip the demand for the stock and push the price down. Additional shares also make it harder to hit an earnings-per-share number because there are more shares outstanding. As they say on Wall Street, existing shareholders are diluted.
But Fastow countered that the stock market would easily absorb the shares; Enron hadn’t sold a significant amount of stock in five years, and its executives could surely tell a compelling story. Eventually, Skilling and Lay relented, and Enron raised some $800 million in the offering. Less than a year later, Enron sold more stock. But after that, although Andy Fastow and his group at Global Finance generated billions of dollars of new capital for Enron, never again did they do a financing as simple and straightforward as an equity offering. By then, the era of Enron’s financial subterfuge had begun in earnest.
In Finance 101, there are only three ways for companies to fund their growth. They can take on debt, issue stock, or draw from their existing cash flow. Enron had committed to Wall Street that it was going to grow rapidly; that was an essential element of the Enron “story.” But all three of these tactics were ruled out at Enron. The company couldn’t put too much debt on its balance sheet because that would hurt its credit rating (and banks would stop lending if Enron’s debt ratios got out of whack). Nor could it use existing cash flow, since Enron didn’t have much real cash flow. And although the equity market was, indeed, available, Skilling had made it clear that he didn’t want to tap it often.
Yet Enron continued to fund its growth—to the tune of billions of dollars each year—through the miracle of structured finance. Structured finance enabled Enron to raise capital off its balance sheet to an extent no one imagined possible. According to an Enron board presentation, Fastow’s Global Finance group was raising around $20 billion worth of capital a year, mostly through structured finance deals. As Fastow himself once told the board, his job was to “feed the beast.”
In business terms, it was as if the company had discovered a way to defy the laws of gravity. Using off-balance-sheet vehicles and other complex transactions, Enron seemed to be able to make money magically appear without either adding debt or issuing stock. And that’s precisely how many Enron executives felt, especially those who worked directly for Fastow: they thought they were magicians, reinventing corporate finance, rewriting the rules of the game, thumbing their nose at the way business had always been done.
One wonders now whether Fastow recognized that he was creating an illusion, especially as the pressure increased, and the sums became larger, and the chicanery required to pull it all off grew more brazen. For the most part, Fastow seemed to exhibit great pride in the work he was doing—he even bragged about some of Enron’s more clever structures. But every once in a while, he would show that he could glimpse a more terrifying reality. Once, a banker asked him what would happen to Enron if the deal flow ever stopped.
“It implodes,” Fastow responded.
• • •
Fastow’s role made him the kind of figure he’d always wanted to be at Enron: truly indispensable. He had never stopped seething over the fact that people in finance weren’t considered as important at Enron as the deal makers or the traders, and part of his motivation was to change that perception. Thus, within months of taking on the CFO role, he tripled the finance staff to over 100 and, as he later boasted, “transformed finance” into an internal capital-raising machine. He set up the group to resemble nothing so much as an investment bank, up to and including selling its services to other parts of the company. (In fact, Enron even set up a small group that tried to capture underwriting fees on the company’s own deals.) One in-house presentation laid out all the things that Global Finance could do for Enron’s divisions. The aim, the presentation declared, was “to craft solutions to help business units achieve their goals. . . . Common business unit goals include earnings, fund flows . . . balance sheet management, return on invested capital.” Later, after explaining the various vehicles Global Finance had at its disposal to “craft solutions,” the presentation added, “There is no obligation to use these vehicles. They are one option for achieving business unit goals.” But of course almost every part of Enron used them, even the divisions run by executives who detested Fastow.
Like its leader, the top executives in Global Finance all had chips on their shoulders. Their attitude, says a former finance executive, was that “we’re working really hard to fix the mistakes the rest of the company is making.” They worked terrible hours. To anyone who crossed them, they could be verbally abusive: one person described theirs as a “bully culture.” The finance executives resented having to clean up behind the deal makers who dug the holes and resented even more, as one employee put it, “that the people who dug the holes walked off with the loot.” Because they were the ones who saved the company every quarter, they saw themselves as heroes. As an in-house lawyer named Kristina Mordaunt, who worked for a period in Global Finance, later told investigators: “Everyone was applauding the finance team for its efforts. Enron was hiring smart investment bankers, creating new structures, and getting the market used to them. . . .”
One of the few high-ranking Enron executives who ever expressed concern about Fastow was Cliff Baxter, though he, too, found times when he had to rely on Global Finance. He’d often complained to Skilling that Fastow was a little too clever. Baxter used to say that it was always worth paying a little more to ensure that a deal was clean. With Fastow, he’d add, you could never tell whether deals were clean because they were so complicated.
Even with his new higher profile, Fastow remained a shadowy figure to the rank and file. He didn’t seem to care whether people outside his own small circle liked him. He spent most of his time with members of his own group and with the bankers and investment bankers who aided and abetted the Global Finance team. Under his leadership, Global Finance was tight-knit, secretive, and seemingly untouchable. Soon after taking over corporate finance, Fastow began freezing out Bill Gathmann, the corporate treasurer, by holding meetings without him. (Gathmann was soon replaced by an executive named Jeff McMahon.) And while the Global Finance staff could sit in on meetings taking place in other parts of Enron, outsiders were not allowed to attend Global Finance meetings. Just as Skilling had gathered loyalists around him, so did Fastow.
The most important Fastow disciples were a pair of executives named Michael Kopper and Ben Glisan. Kopper, who was three years younger than Fastow, arrived at Enron in 1994. A Long Island native, he went to Duke and the London School of Economics and was working in structured finance for Toronto Dominion bank when Enron came calling. He was 29 when he joined the company.
Kopper wasn’t the person from Toronto Dominion whom Enron wanted to hire. Enron had been recruiting Kopper’s boss, a more senior banker named Kathy Lynn; she brought him with her into the company. (Although Kopper joined at a fairly junior level, he still got a signing bonus of $20,000 and a salary of about $85,000 a year.) But Kopper quickly leapfrogged Lynn, becoming fast friends with both Fastow and his wife, Lea. In an early performance review, Rick Causey noted that Kopper was a “valuable asset to Enron” and good at “keeping the banks focused on Enron’s goals”; he ranked him in the top 10 percent. Later reviews add that Kopper “conveys a win-win attitude.” (Perhaps as testimony to how worthless the reviews could be, Kopper’s reviews also claim that his “deals are structured so that they are always clear . . . no unnecessary complexity,” that “risks are clearly identified,” and that Kopper “sacrifices personal good for others and the team.”) The only critical comment: “customers sometimes think you negotiate too hard.” Of course at Enron, that wasn’t necessarily a bad thing. In 1996, Kopper signed a new employment agreement, giving him a salary of $135,000, a signing bonus of $100,000, and guaranteed bonuses of $100,000 for each of the next two years. By 1997, Kopper headed Fastow’s special projects group.
Kopper was gay, and over the years, he became more open within the company about his sexuality. Fastow could not have cared less; his reaction upon learning that Kopper was gay was “So what?” Kopper and his partner Bill Dodson, who worked in finance at Continental Airlines, lived in a starkly contemporary house that featured a glass staircase. The two traveled widely, and within Enron, Kopper was known as a jet-setter and a fashion hound who favored Prada suits. Although Kopper made over $1 million in cash salary and bonus in 2000—and had millions in Enron stock—those who know him could see how it wouldn’t be enough. “Given the opportunity to make money, he wouldn’t spend much time thinking about it,” says a former executive.
Within Enron, Kopper was even less well known than Fastow. After Enron’s bankruptcy, Ken Lay said he didn’t even know who Kopper was. Some of those who did know him, though, disliked him intensely. He was temperamental and difficult to work with—and in doing his boss’s bidding, he amplified Fastow’s flaws. “He would wind Andy up, tell tales, and make it worse,” says one former executive. “People wouldn’t cross him because they knew there would be an explosion from Andy.” People who knew them both also considered Kopper smarter than Fastow; some view Kopper, not Fastow, as the brains behind the most complicated of Enron’s off-balance-sheet vehicles. Says one former executive: “Kopper would make the bullets, and Fastow would fire them.”
The other Fastow disciple, Glisan, joined Enron as a 30-year-old accountant in late 1996. Like Kopper, Glisan also shot through the ranks. But to insiders, Glisan didn’t seem anything like Kopper or Fastow—at least at first. When he joined Enron, he wasn’t arrogant or hot-tempered, and he got along with just about everybody. A native Texan who grew up in a blue-collar neighborhood outside of Houston, Glisan seemed thrilled to have made it as far as he had—at one point, Kopper described him as a “workhorse carrying one of the heaviest loads in the group.” He struck many people as a Boy Scout who wasn’t capable of imagining a dishonest deed, much less carrying one out.
Glisan came to Enron the same way so many others did, through Arthur Andersen’s Houston office. He attended the University of Texas, where he majored in finance, graduating in 1988. After working as a lending officer at Bank One in Austin, he went back to UT for his MBA, where he earned a 4.0 grade point average. He then joined Coopers & Lybrand in Dallas as one of two MBAs hired into a pilot management development program to provide “audit and consulting services on high-risk engagements” (a small irony). In January 1995, Glisan accepted a position in Arthur Andersen’s Houston office, where he worked mainly on ECT. He stayed for only a year and half, at a salary of $66,000, before being recruited to Enron, where his salary increased to just over $100,000. (He also got a signing bonus of $15,000 and, of course, the promise of lots of options.)
Glisan was a highly skilled accountant who understood all of the nuances of his craft. “He was very clued up about accounting,” says another Enron accountant. “He knew exactly what to say to bankers and accountants to appease any concerns they might have.” In a 1999 review, Kopper wrote that Glisan knew “exactly when and how to make trades and negotiate a deal.” (He also wrote that Glisan was “always working to create solutions with Enron’s best interests in mind.”) One person who worked closely with Glisan saw something else. If he saw something unethical, says this executive, “Ben was not mature enough to make a noise and stop it.” Another former executive puts it this way: “He wasn’t willing to be his own guy.” Over time, Glisan’s affability slowly morphed into the swaggering arrogance that characterized so many Enron executives. “It was painful when he didn’t get his way,” says an ex-colleague. “He would browbeat people.”
Like many Enron executives, Fastow used the semiannual Performance Review Committee to push his people ahead and buy their loyalty. Though the original purpose of the PRC had become largely perverted, most executives at least went through the motions. Fastow didn’t bother. “People were expected to cite anecdotal evidence and provide rational backup,” says one former senior executive. “Andy didn’t do that. He just dug his heels in.” Skilling was the only one who could get Fastow to back off, but if he didn’t rein Fastow in, the group would often just cave and give Fastow’s people the top ranking so they could move on and go home.
The public high point for Fastow came in 1999, when CFO Magazine gave him a CFO Excellence Award, an honor he’d actively campaigned for. “Our story is one of a kind,” Fastow told the magazine. He explained that Enron couldn’t dilute its shareholders by issuing equity, and couldn’t jeopardize its credit rating by issuing debt. He went on to describe how Enron issued off-
balance-sheet debt, backing it up with Enron stock. This was the tactic that later triggered Enron’s final crisis. But in 1999, with Enron’s stock on the rise, its credit-rating intact, and its earnings headed ever upward, there wasn’t so much as a whisper of doubt or complaint. On the contrary. “He has invented a groundbreaking strategy,” said a Lehman Brothers banker quoted approvingly in the story. An analyst at one of the credit-rating agencies touted Fastow’s ability to “think outside the box.” And Skilling took the opportunity to publicly celebrate his protégé. “We needed someone to rethink the entire financing structure at Enron. . . . [Fastow] deserves every accolade tossed his way.”
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There are several different ways to think about Andy Fastow’s deals. One is in terms of what was disclosed. Contrary to popular belief, many of the entities Enron created to play its financial games were not only revealed in the company’s publicly filed financial documents but were things Fastow was only too happy to boast about. Wall Street analysts often mentioned the company’s “innovative” financing tools in their reports. Credit-rating agencies knew about much of Enron’s off-balance-sheet debt. But there were other deals in which the circle of outsiders in the know was small—and the disclosure in Enron’s financial documents was purposely vague—because Enron knew that real disclosure would raise too many questions. And finally, there were deep, dark secrets that no one knew about except Fastow and his closest associates, including Kopper and Glisan.
A second way to think about the deals is in terms of their purpose. All the structured-finance deals Fastow and his team cooked up were meant to accomplish a fairly simple set of goals: keep fresh debt off the books, camouflage existing debt, book earnings, or create operating cash flow. At their absolute essence, the deals were intended to allow Enron to borrow money—billions upon billions of dollars that it needed to keep itself going—while disguising the true extent of its indebtedness. What made Enron’s transactions so bewildering was not their purpose so much as their sheer multiplicity. Enron would mutate every vehicle it created to strip more and more accounting benefits from it and would often use one vehicle as a building block for another, so that unraveling one transaction would mean unraveling a half-dozen others. “It looks like some deranged artist went to work one night,” is how Enron’s postbankruptcy CEO, Steven Cooper, summed up the resulting tangle.
To see how Enron used these building blocks—and how they mutated in complexity—consider a structure called Whitewing. Whitewing began life in December 1997 as something called a minority-interest transaction, which took advantage of various accounting rules governing the way business ventures with third parties are reported in a company’s financial statements. Enron borrowed $579 million from Citigroup and then raised another $500 million, mostly debt from an entity affiliated with Citi, plus a sliver of equity from other investors. Whitewing, in turn, used this money to buy $1 billion in Enron preferred stock. (The remaining $79 million was used to help pay the investors their return.)
The Whitewing structure was not a secret—it was disclosed in Enron’s financial statements—but the $500 million showed up on the financial statements not as debt but as a minority interest in a joint venture. “The primary purpose of the transaction had been to convert debt to equity” is how corporate treasurer Jeff McMahon later described the transaction to Enron’s board. That was true only in a technical sense. The $500 million hadn’t been converted; it had only been disguised. Enron was still responsible for paying the money back. This was one of the first times that Enron used its stock—the value of the preferred shares in Whitewing—to support an off-balance-sheet financing. It was not the last.
This time, the bet on Enron stock was highly successful. Within a few years, the value of the preferred stock Whitewing owned had risen substantially. So Fastow’s team decided to pay back Citigroup, issue yet more debt, and remove Whitewing from Enron’s balance sheet altogether. It did so in a fall 1999 deal that Ben Glisan put high on his list of accomplishments for that year. In order to move Whitewing off its balance sheet, Enron needed more independent equity. So it created an entity called Osprey, which, through yet another entity, raised $100 million in “equity” (actually, certificates that paid a fixed return) from various banks and insurance companies. At least $1 million of that supposedly independent money came from a handful of investment bankers at Donaldson, Lufkin & Jenrette, the firm that was paid to sell the deal. Then, Osprey sold another $1.4 billion in debt to institutional investors. That $1.5 billion was used to buy a “limited partnership interest” in Whitewing. Under accounting rules, Whitewing now qualified for off-balance-sheet treatment: it was partly owned by that ostensible third party, Osprey. About one-third of the new money went to pay back Citigroup’s original Whitewing loan. The remainder was set aside to purchase assets from Enron. Whitewing was precisely the kind of vehicle that Fastow’s Global Finance team marketed internally to help business units meet their financial goals.
And what was supporting that $1.4 billion in debt? (Which was also not a secret: in fact, the credit rating agencies rated that debt.) Mainly, it was the value and dividends from the Enron preferred stock plus the value of the assets Whitewing bought. But that wasn’t all. Enron also promised that if the assets in Whitewing weren’t sufficient to pay back the money—which would come due in early 2003—it would make up the difference by issuing stock. And if it couldn’t issue enough stock, it would pay cash. There were also triggers built in to reassure investors: If Enron’s credit rating fell below investment grade and, in addition, its stock fell below $28, the investors could demand to be paid back immediately. In other words, although the Osprey debt was technically off-balance-sheet, investors and rating agencies knew that the obligation ultimately belonged to Enron. As if there was any doubt about whose debt it really was, all they had to do was flip open the Osprey offering document, which is all about . . . Enron. Later, in 2000, Osprey sold approximately $1 billion in additional debt. As part of the inducement to new investors, Enron raised the trigger price on its stock to $59.78.
Thus was Enron stock supporting a pool of debt that was being used to buy Enron’s assets and create cash flow. If that sounds like impossibly circular logic, in commonsense terms it was. According to the court-appointed examiner in the Enron bankruptcy case, the company used the Whitewing structure to buy at least $1.6 billion in assets from various divisions in the company. The examiner also says that Whitewing was, in effect, used to refinance hundreds of millions in Enron debt.
Another kind of minority-interest transaction took place toward the end of 1999, when Enron was desperate to show cash flow. In a deal called Project Nahanni, Enron, in essence, borrowed $485 million from Citigroup and raised a sliver of equity ($15 million) through a minority-interest financing, used that money to buy Treasury bonds, sold the Treasury bonds, and booked the proceeds as cash flow from operations under the pretext that buying and selling bonds was part of Enron’s day-to-day business. That $500 million represented a staggering 41 percent of the total $1.2 billion in operating cash flow that Enron reported that year. Then, right after the first of the year, when the camouflage was no longer necessary, Enron repaid Citi. Over the years, there were many more minority-
interest financings, with names like Rawhide, Choctaw, and Zephyrus, all done with Wall Street’s help, that allowed Enron to pretty up its financial statements.
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A second tool Enron relied on was Skilling’s old friend, securitization (which is also known by the accounting statute, FAS 140, that governs it). By the late 1990s, securitization was no longer considered an exotic form of financing. All kinds of companies were using securitizations for all kinds of purposes. Banks, of course, securitized credit card loans, and retail companies securitized receivables. Composers were also securitizing song royalties; states were securitizing the proceeds from tobacco litigation. Anything, it sometimes seemed, could be securitized. The point of the exercise had not changed: instead of waiting for money to trickle in over time, the owner of the asset estimated the value of the future cash flow, sold it off to investors at a discount, and pocketed the money it took in from the sale. To use a word Skilling loved—and that became a term of the art at Enron—it was a way to “monetize” assets.
As securitizations gained popularity, new wrinkles developed. One of the most important ones was the use of so-called special purpose entities, which were set up by companies specifically to purchase the assets being securitized. The original idea behind SPEs was to isolate risk by setting up an independent legal entity that owned just one asset—say, credit card receivables. The investors who controlled the independent entity would reap the gain, but they would also have to accept the risk of something going wrong. In any event, the asset was isolated from the rest of the company’s business risks.
But if the companies themselves set up the SPEs, what exactly constituted independence? Amazingly, the rules developed by the accounting gurus stated that as long as 3 percent of the capital in the SPE came from an independent source and was truly at risk—meaning that it could all be lost if the deal went awry—the SPE qualified as independent. In other words, even if 97 percent of the capital consisted of debt raised by the company selling the assets, the company didn’t have to include that debt on its balance sheet. (Don’t search for the logic behind the 3 percent threshold. There isn’t any. For years, there were some, including a few high-ranking accountants at Arthur Andersen, who argued that 3 percent was absurdly low.) Ken Lay later told investigators that while he could read a balance sheet, he did not understand the accounting requirements for SPEs until October 2001.
But though most of Enron’s SPEs technically included the 3 percent of independent money, in fact, its entities were rarely truly independent. Enron gave implicit—sometimes explicit—guarantees that it would take care of the lenders. In addition, Enron often tossed a derivative called a total return swap into the mix. This security, in essence, meant that Enron guaranteed the investor a debtlike return; in exchange, Enron kept almost all of the real return. (Adding a classic Enron twist, the company would then mark-to-market the estimated value that it expected to receive from the asset.) To put it another way, Enron had “sold” something and booked earnings and cash flow from the “sale.” But the asset wasn’t truly gone; now there was a big slug of additional debt that had to be paid back within a few years. The court-appointed bankruptcy examiner later concluded that much of Enron’s liquidity was the “result, in effect, of loans to Enron for which Enron retained the ultimate liability.” He also contends that Enron did not properly disclose that liability to investors. People in RAC called these deals “boomerangs.”
Over time, Enron securitized just about everything that wasn’t nailed down—fuel-supply contracts, shares of common stock, partnership interests—and even some things that were nailed down. For instance, Enron securitized the profits it expected to generate from many of Rebecca Mark’s international assets, including plants in Puerto Rico, Turkey, and Italy. In total, from 1997 to 2000, according to one analysis, Enron booked $366 million in net income from such power-plant securitizations.
Securitization, at least the way Enron did it, provided a great short-term boost. But as with so many other Enron deals, it created ticking time bombs of debt, debt that was rarely supported by the true value of the asset, because it was often based on unreasonably optimistic assumptions about what would happen over a period of years. “It was a purported sale, but it looked and smelled like a financing,” as a former Enron International executive puts it. It also created holes for the future. After all, if you’ve generated earnings and cash from selling something, you can’t claim those earnings or cash flow the next year or any year afterward. “Enron borrowed from the future until there was nothing left to borrow,” says one Enron executive. “If shareholders understood the extent to which the future was being mortgaged . . .” ponders another. At the time of its bankruptcy, Enron had over $2 billion in off-balance-sheet debt related solely to securitizations.
While securitizations generated both cash and earnings, cash was too critical to the company to be a mere by-product. So Global Finance had a separate area that specialized in creating cash flow. As early as 1997, for instance, Enron came up with a convoluted way to raise cash by “selling” some of the gas stored in its huge Bammel facility to an SPE backed by Enron guarantees. The result: $152 million in cash, 72 percent of the total cash that Enron’s operations generated in 1997.
The most important of Enron’s cash-generating devices, though, was something called a prepay. The Enron bankruptcy examiner later called prepays the company’s “quarter to quarter cash flow lifeblood.” While there were many variations on the theme, here’s how a typical one worked: Enron would agree to deliver natural gas or oil over a period of time to an ostensibly independent offshore entity that was, in fact, set up by one of its lenders. The offshore entity would pay Enron up front for these future deliveries with money it had obtained from the lender. The lender, in turn, agreed to deliver the same commodity to Enron; Enron would pay a fixed price for those deliveries over a period of time.
On the surface, these looked like separate transactions. But in reality, the commodity part of the deal canceled out, leaving Enron with a promise to pay a lender a fixed return on money it had received. In other words, it looked suspiciously like a loan with interest. Nevertheless, Enron listed prepays not as debt but as trading liabilities that were supposedly offset by trading assets. And although there are Enron finance executives who to this day claim that prepays were trading liabilities, one would be hard pressed to find an independent observer who would agree that they shouldn’t have been classified as debt on Enron’s books. The Enron bankruptcy examiner certainly didn’t view them as legitimate. “These delivery requirements went from party to party around a circle with the result that the apparent assumption of price risk was illusory,” he wrote in a report released in March 2003. “Thus, the transactions were in substance debt, funded by either large financial institutions or institutional investors.”
Enron, which began using a version of prepays as early as 1992, quickly got hooked. According to an analysis done by the Senate Permanent Subcommittee on Investigations, Enron engaged in $8.6 billion (and possibly much more) of these transactions, mainly with a Chase Manhattan–sponsored entity located in the Channel Islands known as Mahonia and a Citigroup-backed entity called Delta. Not incidentally, these were lucrative deals for the banks: the Wall Street Journal estimated that Chase earned as much as $100 million in fees and interest from these deals.
In congressional hearings, both J. P. Morgan Chase and Citigroup denied that prepays were, technically speaking, loans, adding that Arthur Andersen had signed off on Enron’s accounting—and that in any case they weren’t responsible for Enron’s accounting. (Chase Manhattan merged with J. P. Morgan on December 31, 2000. J. P. Morgan’s dealings with Enron over the years were dwarfed by Chase’s relationship with the company.) Another institution that transacted prepays with Enron, Credit Suisse First Boston (which acquired Donaldson, Lufkin & Jenrette in 2000), was concerned at one point about what its bankers called the “reputational risk” of one deal. Enron promised that its treasurer or CFO would sign off on it. So CSFB went ahead. Later, one banker described the prepay in an e-mail as “Ben’s pet project.”
But their internal e-mails and discussions leave no doubt that the banks understood what Enron was doing with prepays—and why:
“Enron loves these deals,” wrote a Chase banker in a 1998 e-mail, “as they are able to hide funded debt from their equity analysts. . . .” And a Chase banker in a 1999 e-mail: “They are understood to be disguised loans and approved as such. . . .” In a deposition taken in a lawsuit that resulted from these transactions, a J. P. Morgan Chase employee recalls a senior Chase executive named Bob Mertensotto referring to the prepays as “smoke and mirrors.” Citigroup understood the deals the same way Chase did. “E gets money that gives them c flow but does not show up on the books as big D Debt,” a Citigroup banker wrote in a 2000 e-mail.
And both banks worked to reduce their own risk to Enron. Chase entered into some $1 billion worth of insurance contracts that were supposed to pay in the event Enron didn’t. (After Enron’s bankruptcy, J. P. Morgan Chase sued the insurance companies when they refused to pay. The insurers said that they hadn’t known that the transactions were really loans.) For its part, Citigroup sold its risk to public investors through a series of notes. In its internal calculations of Enron’s total debt, Citigroup included the prepays. But when it came to selling the risk to investors, it used Enron’s financial statements—which were supposed to comply with GAAP accounting—and lumped prepays in with trading liabilities. Thus, while Citigroup didn’t want to assess its own risk without seeing the full picture, it was perfectly willing to sell investors a more pleasing image. GAAP accounting, noted Citigroup internally, was the “least conservative analysis.” (“Legal but sleazy” is what one senior Wall Streeter says.) Citigroup ultimately issued over $2 billion worth of such securities. From Enron’s perspective, this was highly desirable, because now Citigroup could lend it even more money.
In contrast to structures like Whitewing, the prepays were very hush-hush, and Enron went to great lengths to keep it that way. An internal Enron presentation of one of the Citigroup deals touts its “unique ‘black box’ feature” and talks about “limiting disclosure.” At one point, an institutional investor who bought the Citi securities learned something about the offshore entity Delta and began to make phone calls posing troublesome questions. An Enron e-mail to Citi read: “We need to shut this down.”
How was Enron, which was perennially short of cash, going to pay off these loans, which had to be repaid on an ongoing basis? In theory, the company would use future cash flows from outstanding trades to pay them back. But that does not appear to have happened. Instead, Enron used fresh prepays to replace earlier ones. One executive says that before Kinder’s departure in 1996, prepays never got above $200 million. After he left, they exploded. At the end of 1998, Enron had $1.3 billion in outstanding prepays; at the time of Enron’s bankruptcy, it had almost $5 billion in outstanding prepays. In 1999, Enron’s cash flow from operations would have been negative without prepays and Project Nahanni. “The banks liked it because Enron got addicted,” says one former risk executive. “Enron had to repay the loan, but the cash flow didn’t materialize. So it snowballed.” Another Global Finance executive argues that as discrete transactions, the prepays make sense: “The problem is, Enron did them on steroids.”
Actually, the problem was that nobody inside Global Finance thought any of this was a problem. Though the company was piling up truly astounding levels of debt—by the end, Enron owed some $38 billion, of which only $13 billion was on its balance sheet—the executives who made up Fastow’s team seem to have barely thought about it. They certainly never added it all up, though that’s precisely what responsible finance executives are supposed to do. Instead, the Enron finance executives thought about how much smarter they were than everybody else in American business. They also convinced themselves and their accountants that they were complying with GAAP accounting, though the mental gymnastics required to get there were often tortured, to say the least.
Indeed, they thought their work was giving the company a competitive advantage. In an in-house memo written toward the end of 1999, Kopper listed Glisan’s goals for the year 2000. The only thing he mentioned was the need “to continue to provide innovative mechanisms for raising capital for Enron.”
In another telling in-house memo, an executive named Joe Deffner, who was in charge of the prepays and became known as Enron’s cash czar, wrote a self-evaluation in 2000 to his boss. Cash flow, he noted, “is probably the single most critical and difficult metric for Enron to achieve to maintain its BBB+ rating.” (BBB+ is several notches higher than the minimum for a company to be considered investment grade.) He then noted that of the aggregate $9.7 billion of operating cash flow reported by Enron for 1995 to 2000, the SPE transactions he had worked on had accounted for 56 percent.
“To maintain our credit rating, if Enron were to finance itself primarily or solely through simpler on-balance-sheet reported structures, 40 percent of each transaction would be funded by the issuance of new debt and 60 percent through retained earnings or new equity,” Deffner wrote; “. . . for 2000 I was responsible for the Global Finance team that generated approximately $5.5 billion of overall off-balance-sheet financing, which at a 60 percent equity allocation would have required $3.3 billion of new equity capital in 2000 to support a BBB+ rating. The value of avoiding . . . equity dilution is difficult for me to quantify although, as a shareholder, I know it’s reflected in the valuation. . . .”
Far from worrying that he was helping Enron misrepresent the business, Deffner clearly believed that he deserved a big bonus.
• • •
Is it clear by now that Fastow and his Global Finance group could not have done what they did without plenty of help? They needed accountants to agree that prepays were a trading liability. (“Enron is continuing to pursue various structures to get cash in the door without accounting for it as debt,” an Arthur Andersen employee wrote in 1998.) They needed lawyers to sign off on deal structures. They needed the credit-rating agencies to remain sanguine in the face of frightening levels of off-balance-sheet debt. Most of all, though, they needed the banks and the investment banks to help them carry out their machinations. Every bit as much as the accountants at Arthur Andersen, the banks and investment banks were Enron’s enablers.
At the top of the list were two of the biggest banks in the country, Chase Manhattan and Citigroup. Enron’s relationships with the two giant banking institutions went back practically to the company’s beginnings. Chase had helped finance the merger between HNG and InterNorth that created Enron. Marc Shapiro, Chase’s vice chairman in charge of finance and risk management, was well acquainted with Ken Lay; in the 1980s, he headed Houston-based Texas Commerce Bank, which Chase acquired in 1987. (Lay sat on the board of Texas Commerce for a period.) For its part, Citi helped Ken Lay fend off the corporate raider Irwin Jacobs back in 1987 by loaning Enron part of the $350 million it needed to buy out Jacobs’s stake in the company.
It wasn’t just Enron that had changed dramatically since those days; so had the two banks. They were both eager participants in the ongoing process of bank consolidation that swept the country throughout the 1990s, a process that created a small handful of giant national financial institutions. Chase, for instance, had been formed through a series of acquisitions that included three of the largest banks in New York: Chase Manhattan, Chemical Bank, and Manufacturer’s Hanover. Citigroup, the parent company of Citibank, had transformed itself into the largest financial institution in the world; it included Travelers Insurance Group and the Salomon Smith Barney brokerage house.
More to the point, perhaps, both banks could offer their corporate clients not only loans but a full range of investment banking services, including stock underwriting and research. For decades, the Glass-Steagall Act had prevented banks and investment banks from encroaching on each other’s turf, but during the 1980s and 1990s, Glass-Steagall had gradually been chipped away until Congress, in the face of furious lobbying, finally repealed it in 1999. Once that happened, the nation’s big banks began using their lending prowess to land investment banking deals.
Few banks were as aggressive as Chase and Citigroup. From the banks’ point of view, this made perfect sense: lending, though the most fundamental of banking activities, had devolved into a low-profit, low-margin enterprise, while investment banking, with its outsized fees, was one of the most profitable endeavors known to man. And few clients were as profitable as Enron. Fastow and his team were always in a hurry to complete a deal, and their deals were always far more complicated than a plain-vanilla underwriting. And there were so many of them. “There was something to play in, if you wanted, every month,” says one banker who did business with Enron. “Behind every closed door, there was a deal going on at Enron,” says another. The result was that Enron was willing to pay fees that few other companies would contemplate. By the late 1990s, Enron had become one of the largest payers of investment banking fees in the world. According to the company’s own calculations, it paid out $237.7 million in fees in 1999 alone. By the end, Citi was reaping some $50 million a year from Enron.
This increased competition for investment banking fees made the banks not just eager to land business but practically desperate. Objectively, the party that should have felt desperate was Enron; it simply had to have a steady infusion of capital just to keep operating. But there were so many banks clamoring for those Enron fees that Fastow could keep them on a string just by playing them off against each other. This he did brilliantly. He tapped into their own greed, pitting banks against one another, forcing them to curry favor with him, and in so doing, he crafted one more Enron illusion. He made it appear that he was the one who held all the cards.
Part of the banks’ desperation stemmed from Enron’s place in the Wall Street nexus. Investment bankers, as a rule, tend to think they’re a lot smarter than the company executives they’re advising, but they didn’t feel that way about those they were dealing with at Enron. Global Finance executives acted just like investment bankers. They spoke the same language. And the Enron people were just as smart as the bankers, or so the bankers believed. Since on Wall Street you are known by the people who choose you to do their business, it thus became a badge of honor to have a piece of the Enron account. “You weren’t an energy banker if you weren’t banking Enron,” says one.
It was also true that the ethos of many investment banks was not all that different from the essential Enron mind-set. The ethics of their deals with Enron were never much of a concern among the bankers. “In investment banking, the ethic is, ‘Can this deal get done?’ ” says a banker. “If it can and you’re not likely to get sued, then it’s a good deal.” In their internal correspondence, it’s almost impossible to find an instance of investment bankers’ worrying about the propriety of what they were doing. When they worried at all, they were concerned about the perception. An e-mail from the head of risk management for Citigroup’s investment banking division warned about one deal: “The GAAP accounting is aggressive and a franchise risk to us if there is publicity.” The deal was done anyway.
Fastow worked exhaustively to squeeze everything possible from Enron’s—and his own—relationship with the banks. This prerogative he guarded jealously, screaming at any Enron executive outside his fiefdom who dared to initiate contact with a bank without his permission. Baxter, in particular, chafed at this restriction; it was one of the key reasons for his animosity toward Fastow. Eventually both he and Dave Maxey, the hunter of lucrative tax deals, were allowed to call bankers without clearing it with Fastow.
In managing the banks, Fastow never missed an angle. He and his group knew how to hint that another had already agreed to do a deal, which of course made the bankers even more eager to land the business. He sometimes cast deal proposals as a “favor” that would be rewarded with more lucrative business later. He did not take no graciously. As CSFB banker Osmar Abib wrote after turning down an Enron deal: “I am about to . . . get my head taken off by Michael Kopper and Kathy Lynn at the charitable dinner tonight sponsored by Enron . . . we should all expect a blistering call from Fastow once he gets the feedback. . . .” And there was no mistaking that Fastow was the man they had to please. Skilling would sometimes drop in on meetings Fastow was holding with bankers, but he was mostly window dressing. His appearances, says one banker, were mainly meant to convey “I know the answer, and I’m right. I’m Jeff Skilling. And I’m Enron—are we all clear here?” (Skilling later told people, “I’m not particularly interested in the balance sheet. It seemed to be doing well. We always had money.”)
Fastow’s most aggressive tactic was his internal ranking of the 70 or so banks that did business with Enron. Fastow had his minions keep meticulous track of the number of deals each had done with Enron and how much they’d received in fees. The Global Finance team would look at the capital the banks had extended versus the investment-banking fees that they had earned. Enron saw the investment-banking fees not as the price for advice—Enron, after all, didn’t need advice—but as a return on the capital. Then he divided all the banks into three categories—Tier 1, Tier 2, and Tier 3—based on their willingness to do his bidding.
As a 58-page document prepared for a January 2000 internal “relationship review” meeting of Enron’s top finance executives describes it, the Tier 1 banks had to be willing to lend large sums to Enron “when needed,” be willing to “underwrite $1 billion in short period of time,” give Fastow ready access to their top executives, and have a relationship officer “capable of delivering institution”—in other words, someone who could make sure the bank didn’t say no to an Enron request. In return, says the document, “Enron will manage to a minimum 20% ROE.” Though Enron did not hold many people accountable internally, Fastow was like Rich Kinder when it came to the banks. At that same relationship review—which was an annual event—members of the Global Finance team discussed each bank’s performance, and whether the bankers had gotten the “previous message” about what they needed to do to enhance their relationship with the company. The session ended with cocktails.
Tier 1 status didn’t necessarily go to the biggest or most prestigious banks. The issue was explicitly how much you did for Enron—and how often you came through in the clutch. One banker recalls Fastow’s explaining just what it meant to come through for him: “Giving us credit when we need it, typically at quarter-end or year-end, when we need to sell assets. We’ll buy them back and give you a return on your capital.” So Morgan Stanley and Goldman Sachs—two of the most prestigious names on Wall Street, investment banks with conservative lending rules—sometimes found themselves consigned to Tier 3, with the likes of the State Bank of India. Meanwhile, little-known firms like West LB and ABN Amro were among the nine firms in Tier 1, right up there with Credit Suisse First Boston, Citigroup, and Chase Manhattan. Fastow conferred Tier 1 status as though it were something to be coveted, and he wasn’t shy about telling banks that weren’t in the top bracket what they needed to do to get there. “You guys have got to put up a little more capital if you want to make it to the big leagues,” a Tier 2 banker recalls Fastow telling him.
Every year, Tier 1 bankers (no spouses, thank you) got invited to join Fastow and his top lieutenants on an expensive jaunt to some fancy locale. This was their reward. On one outing to Miami Beach, a Brazilian-themed dinner for 60 featured performances by a quartet of Capoeira acrobats, a pair of carnival dancers, and hand-rolled cigars. The entertainment alone cost $13,000. At another Tier 1 outing, this one to Las Vegas, Enron rented a fleet of 15 helicopters to fly the bankers over a mountain for dinner at a Nevada vineyard, to see the casino strip lit up at night, and to the Grand Canyon for a picnic. The total tab for one of these annual outings ran as high as $130,000.
Fastow even expected the banks that got Enron’s business to contribute to his pet charities. A February 1998 Chase memo from Rick Walker, who was the relationship manager for Enron, reads: “In addition to our business relationships, Chase has endeavored to be supportive of the charitable causes sponsored by Enron and its executives. . . .”
Some bankers resented Fastow’s manipulations—and his constant browbeating—even as they scrapped for the company’s business. “Every once in a while, we had to step back and count to ten and say the client is the client, but . . .”
remembers one banker. “They’d beat the crap out of the lawyers, they’d beat the crap out of the investment bankers, they’d beat the shit out of the accountants. There’s zero loyalty to anything but that trade. It was hell doing business with them, but you had to because they were so big.”
There were also lots of whispers in the banking world that Enron consumed incredible amounts of capital, that the company was way overleveraged, that, as one internal Citigroup e-mail explicitly put it, “Enron significantly dresses up its balance sheet for year-end.” But despite the whispers—indeed, despite knowing far more than most people about what was really going on inside Enron—few bankers were willing to stop doing business with the company. They were hooked, too.
• • •
One of the things investment bankers get to do is invest their own money in deals they’re working on; it’s one of the sweeter perks of the job. That’s one reason the investment bankers from Donaldson, Lufkin & Jenrette were able to put up some of the equity when Enron was putting together the Osprey deal. And it’s why, over the years, investment bankers from Merrill Lynch and other Wall Street firms sometimes invested in Enron’s deals. Since Andy Fastow saw himself as running his investment bank within Enron, he wanted to be able to invest in Enron’s deals, too. Even though he was making, by the late 1990s, upward of $1 million in salary and bonus annually and had millions more in stock options, he wanted more. More than that, he felt that he deserved more.
This was not some belated itch Fastow suddenly needed to scratch. As early as 1995 he had approached investment bankers about setting up a partnership, with himself as its head, to buy Enron assets. The idea went nowhere. A few years later, Enron’s law firm of Vinson & Elkins called a meeting to discuss the possibility of allowing Enron employees to make investments in company deals after Fastow brought it up again. A lawyer named Ron Astin said that he didn’t think it was a good idea at all: such a partnership could appear to be a vehicle for favored employees and was likely to exacerbate rivalries between business units.
Fastow pressed the issue. After all, he said, investment bankers did it. Astin countered that Enron wasn’t an investment bank; it was an energy company. He also told Fastow that if he insisted on pursuing the idea, he needed to get the explicit approval of both senior management and the board. Even so, he didn’t think such a partnership was appropriate given Fastow’s position as Enron’s top finance executive.
What Astin didn’t know—indeed, what almost no one outside a tiny circle of Global Finance executives knew—was that Fastow and several others were already investing in deals. One of the difficulties in setting up the off-balance-sheet vehicles Enron had come to rely on was finding that independent investor who would put up the 3 percent equity slice. And the more vehicles Enron set up, the harder it became. “Think about trying to raise equity and explain these deals on a true third-party basis,” says one former Global Finance executive. “There’s no way you could have done it.”
So starting in the early 1990s, the Global Finance team pulled together a small group of investors known internally as the Friends of Enron. When Enron needed to find that 3 percent equity investor, it turned to the friends. One friend was a real-estate broker named Kathy Wetmore, who had helped many Enron executives find their homes, including Fastow and Kopper. Another was a woman named Patty Melcher, who was a friend of Fastow’s wife, Lea. Fastow approached Melcher about investing in eight deals; she told the New York Times that she made investments ranging from $100,000 to $2 million in five deals. Of course, given the nature of their relationships with Enron executives, the “friends” were independent only in a technical sense. Though they made money on their investment, they hardly controlled the entities or the assets within them. Which, of course, was precisely the point.
In 1997, Fastow decided to take it one step further. That January, Enron bought a company called Zond, which owned some wind farms. Because wind farms provide alternative energy, they enjoy a legal status as qualifying facilities (QFs). QFs get certain government-mandated benefits, such as higher rates from electric utilities, which are required to buy power from them. However, those benefits disappear if the QF is more than 50 percent owned by a utility. In early 1997, Enron wasn’t a utility, but it was about to become one, because of its pending acquisition of Portland General.
From Enron’s point of view, the solution was simple: set up a special-purpose entity that would purchase Zond. That way, Enron would retain full control of the asset while the wind farms would be able to keep their government-granted benefits. (So much for the free market.) In May, Fastow and Kopper created two special-purpose entities known as the RADRs. The RADRs bought 50 percent of Enron’s wind farms for approximately $17 million, 97 percent of it a loan from Enron. This time, instead of turning to the friends, Fastow and his wife, Lea, supplied most of the required $510,000 in independent equity themselves—but they hid that fact. In May 1997, according to the government, Lea Fastow wired $419,000 to Kopper, who then funneled the money to two other investors, one of them also an Enron employee.
No one probed deeply enough to uncover this deception. In fact, no one probed at all. Fastow told Enron’s board that most of the money was a loan from Enron and that the transaction was “not a sale for book purposes”: Enron retained all the risks and rewards associated with the projects and retained an option to repurchase the shares. In other words, the board was informed that Enron was using the RADRs as a place to park the wind-farm assets in order to retain government benefits to which it wasn’t entitled. But according to the minutes of that meeting, not a single board member asked where the equity was coming from or challenged the transaction. The Federal Energy Regulatory Commission was given much of the same information but still approved the continuing QF status for Zond. (Later, Southern California Edison, which had to buy power from the Enron wind farms, complained that it was overcharged by as much as $176 million from July 1997 to April 2002.)
When investment bankers invest in a deal they’re working on, the cards may be stacked in their favor, but the deal isn’t rigged. The RADRs, though, were rigged; Fastow had seen to it that Enron guaranteed the RADRs a minimum return. In July 1997, the RADRs began to make distributions. According to the government, the investors of record paid Kopper, who in turn secretly paid Fastow, transferring, in late August, $481,850 from his Bank One account to a bank account in the name of Lea and Andrew Fastow. That represented an effective annual return on the Fastows’ investment of over 50 percent. To the government, these payments were kickbacks, pure and simple. But to Fastow, who operated within the warped world of Enron, they were just commissions. After all, he’d given others the opportunity to invest, so they owed him.
Over the next three years, according to the government, the RADRs generated about $4.5 million in proceeds, from which Kopper and his lover Dodson paid more than $100,000 back to Fastow and his family in increments that were always no more than $10,000 so that they could be classified as gifts. Fastow told Kopper that if anyone ever asked about the $10,000 transfers, he could explain them by saying they were close friends. The government also alleges that the Fastows did not report any of this money on their income tax returns.
That same year, Fastow and Kopper did a second, bigger deal that was remarkably similar in character. You’ll recall that years before, Enron had convinced CalPERS to invest in one of its first off-balance-sheet joint ventures, JEDI. By 1997, all the money in JEDI had been invested, and Enron urgently wanted CalPERS to set up a second fund. CalPERS was willing to do so only if Enron could find a buyer for its stake in JEDI. The two parties agreed that $383 million, which represented a 22 percent annual return for CalPERS, was a fair price. (This return later helped Enron convince others to invest in its deals.) But although Fastow and his team did look, Enron wasn’t able to find an outside buyer.
Once again, Fastow’s Global Finance came to the rescue by setting up a special-purpose entity to buy out CalPERS. It was called Chewco, named after the Star Wars character Chewbacca. Fastow first tried to persuade Jeff Skilling that Lea’s family should be allowed to put up the necessary 3 percent equity and that Fastow should be allowed to manage the partnership. But Skilling said it was “too messy.” So Fastow again turned to Kopper, whose involvement did not have to be disclosed publicly because of his lower rank, to manage the partnership and invest in it. The Enron accountant who worked on Project Chewco was Ben Glisan.
Skilling, who signed off on Kopper’s involvement, later said that he thought he had discussed it with the board. Although that’s not reflected in any board minutes, there is one sentence about Chewco in Enron’s 1999 annual report that implies that it wasn’t a secret: “In addition, an officer of Enron has invested in the limited partner of JEDI and from time to time acts as agent on behalf of the limited partner’s management.” Another Enron employee sent diagrams of the deal showing Kopper’s stake to Vinson & Elkins. And while there were no official announcements about Kopper’s involvement, there were plenty of whispers within the company about Fastow’s favoritism toward his top deputy.
The closing of the Chewco deal was sheer panic. CalPERS insisted that the deal close quickly, or it would demand more money. Kopper was scrambling to come up with the $125,000 he was supposed to invest—people later surmised that he was waiting for a distribution from the RADRs. Barclays, the large British bank that was supposed to provide the outside equity, was proving to be a difficult partner. Barclays didn’t want to put real equity into this deal. So Enron proposed what looked like a loan, although it wasn’t called a loan, but rather equity certificates. This alone probably should have disqualified Chewco for off-balance-sheet treatment. But then Barclays insisted that the loan be collateralized, meaning that nobody could claim that the equity certificates constituted money that was truly at risk, as accounting rules require. “It is implausible,” an investigator later concluded “that he [Glisan] (or any other knowledgeable accountant) would have concluded that Chewco met the 3 percent rule.” Yet Glisan signed off on the deal, as did Arthur Andersen.
What’s amazing, given the problems Chewco later caused, is what small sums of money were involved. Chewco’s final structure consisted of a $240 million loan from Barclays—a loan that was guaranteed by Enron—and a $132 million advance from JEDI. All that Fastow’s team needed to do was find $11.49 million in independent “equity” to meet the 3 percent threshold. Instead, of the required $11.49 million, most of the money came from Barclays, and it was backed up by Enron collateral worth $6.6 million. Kopper supplied the remaining $125,000, $100,100 of which represented reinvested proceeds from the RADRs, according to the government. On December 18, 1997, Kopper transferred part of his interest to Dodson, presumably in order to avoid the appearance that he controlled Chewco. They must have believed no one would ever look more deeply.
Even today, it’s murky who knew what when. Glisan later insisted that he did not know about the collateral or that Kopper was the only other outside investor. Others, however, say he was present in meetings in which it was discussed, and handwritten notes that investigators say were his cite Chewco’s “unique characteristics” as “extreme leverage . . . minimization of third party capital.” The form transferring the collateral into the reserve accounts was signed by an Enron executive named Jeremy Blachman, who had helped Glisan land his job at Enron. Blachman later said that he didn’t know the details. The Arthur Andersen partner who worked on Chewco, Tom Bauer, had been Glisan’s boss before Glisan moved to Enron. Bauer later said that he didn’t know about the collateral or about Kopper’s involvement, either. Although Ken Lay and several other board members later said they didn’t remember Chewco, the executive committee of the board approved it on November 5, 1997.
It’s very clear who benefited. One executive says that it was the Chewco deal that helped secure Fastow the CFO job—who else could have pulled it off? And Enron did well, too. Keeping JEDI off its balance sheet boosted its earnings by hundreds of millions of dollars over the next few years. Enron used JEDI to book income from various derivatives trades related to the appreciation of the Enron stock that JEDI held—$126 million in the first quarter of 2000, for instance. Enron also found other ways to book earnings from Chewco: by charging it a $10 million structuring fee on the loan it extended and by marking-to-market the ongoing management fees it charged Chewco. (That alone added over $20 million to earnings in 1998.) Later, Enron used the increased value of its shares in JEDI to raise hundreds of millions more in off-balance-sheet debt. And Chewco also provided a chunk of the independent equity in Whitewing—meaning, of course, that Whitewing probably wasn’t really independent, either.
All those benefits help explain why everyone was willing to look the other way. And while they averted their eyes, Fastow and Kopper profited. On January 6, 1998, just seven days after the deal closed, Chewco borrowed more from JEDI and paid a management fee of $141,438 to Kopper and Dod-
son. In other words, they recovered their investment and then some in the space of a week. Kopper was paid $500,000 a year to manage Chewco, $1.5 million in total. In December 1998, Fastow had Enron pay Chewco a $400,000 nuisance fee to amend an agreement. According to the government, Kopper kicked $67,224 back to Fastow, his sons, and the Fastow Family Foundation, a purported charity he set up. They did not report this money to the IRS, either, the government claims. The government also says that some $54,000 was paid to Lea Fastow as “administrative fees.” Much later, at Fastow’s direction, Enron repurchased Chewco. Kopper got some $13 million, despite arguments from others at Enron that the Chewco stake was worth no more than $1 million. No one understood why Fastow was willing to push so hard on Kopper’s behalf.
This was the deep, dark secret buried within Global Finance.