Kenneth Lay was the king of Houston. Then his much-hyped empire began to unravel, launching a scandal that threatens to engulf the White House, Wall Street and even Westminster. James Meek on how Enron fooled the world
Angelina Lario lives in Katy, an amorphous suburb about 48km west of downtown Houston. The house is vaguely English in style, a big, two-storey detached affair with a garden and two enormous cars parked at the front. It speaks of solidity, comfort and the aspirations of the American middle class. Lario and her husband are divorced, though still living in the same house with their 15-year-old daughter. Otherwise, until last year, life seemed to have justified Lario’s decision back in 1974 to quit her native New Orleans and head for Texas, land of opportunity.
For 26 years, she’d worked for one of the United States’s most powerful corporations and its predecessor firms. She’d amassed more than $500000 worth of shares in the corporation, to see her into a comfortable retirement. Unfortunately, that corporation was Enron.
Lario was talking on the phone when I turned up. She hung up and told me the news. Cliff Baxter, the former vice-president of Enron, had been found in the early hours of the morning, slumped over the wheel of his Mercedes near his home in the smart Houston suburb of Sugar Land, killed by a .38 calibre revolver bullet in the head. Later, after examining the suicide note and the corpse, the coroner would rule out foul play, but Lario’s first thought was that Baxter a man she used to talk to on smoke breaks had been murdered.
“He was such a nice person,” she said. “I’m just wondering whether someone killed him. I don’t know. Because he knew too much? This is just the beginning. This thing is getting messier and messier. I am just so shocked. He did know a lot. He did know too much.”
Baxter knew enough to get out of Enron last May, before the company’s spectacular collapse. He had warned his colleagues that they were heading for trouble. But he could not escape the rolling wave of scandal, the stench of sleaze and betrayal, still spreading outwards from the December 2 bankruptcy to Congress, the White House, Wall Street, and now Westminster and Downing Street. It promises not only to destroy reputations and expose back-room deals but to bring to the fore the most uncomfortable question for global capitalism: how can there be democracy in the world when so much power has leaked from, or been sold by, accountable governments to unaccountable corporations?
Lario wasn’t high up in Enron, but she was an eyewitness to its rise and fall, loyal almost to the end, and a victim when it crashed. Even now, she has difficulty believing that Enron’s guiding genius, Ken Lay, its chairperson and CEO for all but a few months, could have done anything wrong. “They lied to us, they deceived us into thinking that this was the greatest company. When we had our employee meetings it was, ‘The company’s doing great … we’re going to get that stock back up, don’t worry.’ Now I can understand why, at the last employee meeting with Lay, someone asked him if he was on crack. At the time I thought, God, how can anyone say something like that?”
Lario’s retirement plans were made up of three parts plain Enron shares, options to buy Enron shares at an old, hopefully lower price, and a pension invested in Enron shares. At the beginning of last year, when the shares were riding high at about $84 each, the whole package was worth more than $500000. Her broker suggested she sell up but instead she bought more shares, believing the boasts of Lay and other top executives that the price would rise to $125. Lay, meanwhile, was already sitting pretty: since 1988 he had made a staggering $145-million in profits from selling Enron shares, on top of his salary and bonuses, which in 2000 alone amounted to $12-million.
Despite the pep talks and her own confidence, as last year wore on, Lario watched her future trickling away. “To appease us, like throwing a dog a bone, they gave everyone options at $36 a share. Everybody thought, ‘Gee, what a nice guy.’ We had so much faith in him,” she said. “In October, when the stock was down in the 20s, everybody said I needed to get out. But I still had hopes, maybe it will come back up. I just decided no, I’m going to ride it to the end. What I did was, on the morning before the bankruptcy, I sold my shares for $3,90 each.” The day after bankruptcy was announced, Lario was fired.
With no job and no savings, at 56, Lario’s future is bleak. She gets $1200 a month unemployment benefit. The mortgage is just more than $500 a month; health insurance for her and her daughter another $500 a month. Even without the Enron collapse, unemployment in Texas is rising.
“I thought I was going to have a comfortable retirement,” she said. “Now I stand to lose my home and my credit.
“We were the icon of America. The seventh-largest company in the world, and Ken Lay brought it to that. It was because of him. Greed took over. These guys were rich and they just wanted to get richer and richer.”
That is not all Lay wanted. It would be easy to portray Enron as nothing more than a ravenous rogue corporation that rampaged briefly around the world and across the US, ruthlessly buying influence and exploiting regulatory loopholes in a self-perpetuating quest for size, power and money. The truth is more slippery. Lay wanted to be admired as a good man, a moral man, but the admiration he sought was in Houston, not the wider world. When a man is hailed as a great philanthropist at home it is, perhaps, easier for him to become complacent over what the source of his philanthropy is up to elsewhere.
A few hours before Baxter’s death, a function suite in the Westin Galleria Hotel in Houston began to fill with the stars of the Texas accounting profession, dolled up for their annual charity auction and banquet. In Houston men and women can barely gather together without raising money for a cause. This $150-a-head dinner with the Texas Society of Certified Public Accountants was in aid of the local Ronald McDonald House, which provides lodgings near children’s hospitals for the families of patients.
The jollity was strained. Here was the elite of Texan accountancy, doing the books of some of the world’s best-known Houston-based companies Compaq or Conoco and nobody wanted to talk about the Houston accountant who was, that day, the most famous Houston accountant of them all: David Duncan.
Duncan’s firm, Arthur Andersen, had a table at the banquet, but Duncan couldn’t have been there even if he’d wanted to be. He was in Washington, where he’d been interrogated, in front of a fascinated nation, by congressmen trying to find out why Andersen had not given advance warning of the true state of affairs inside Enron. Duncan was lead partner in the Andersen team that was supposed to be checking Enron’s vital signs; somehow, the accountants had failed to notice, or failed to report, that Enron was on the verge of collapse, and had tried to cover up what they had done by destroying documents. Duncan’s bosses had subsequently fired him, saying the shredding was all his fault, and they’d known nothing about it.
“Mr Duncan, Enron robbed the bank, Arthur Andersen provided the getaway car, and they say you were at the wheel,” sallied Republican representative Jim Greenwood to Duncan, at the congressional witness table. Duncan, to nobody’s surprise, invoked his constitutional right not to answer questions. Everyone understood that this was just the beginning of a slow unpeeling of the bandages wrapped around the Enron affair and there was no telling how deep this wound to the US was going to be.
In the Westin Galleria the accountants were carrying on as if nothing had happened. The bash was a glimpse of the nature of the Houston elite the culture that bred Enron and in which Lay flourished. It is a social scene that revolves around fundraisers for charities, churches, museums and theatres, as well as for politicians. Success and status is measured in the intensely competitive business of giving, as well as getting. It’s the paradox of Houston: these are powerful, wealthy individuals in a state with ugly extremes of poverty. These are people who gladly take local boy George Bush Jnr’s latest tax cuts. One Houstonian summed up the attitude as: “Welfare is for low-class chisellers and cheats who simply won’t work hard enough to get rich. At the upper level you have tax incentives basically, rewards for already being rich.” These are people running companies that sprawl across the globe. Yet it is from their local Houston peers that they seek approval. And Lay and his second wife Linda were the king and queen of this Houston world.
“The social fabric of this city revolves around charity benefits, where they raise on any given night between half a million and a million dollars,” said Shelby Hodge, society columnist for the Houston Chronicle. “Ken and Linda Lay have been an integral part of that over the years, as has Enron. Their demise is leaving a gap in the city socially, and in the non-profit community.”
No benefit is complete without an honouree, often a local magnate who will be lauded for their good works. At the Westin it was the head of one of the big Houston energy companies, Reliant. The highlight of the banquet was a tribute to Reliant boss Steve Ledbetter and his wife Paula. “When I think about Paula and Steve, I think about a couple truly committed to making Houston a better place,” said Carin Barth, the president of the local Ronald McDonald House fundraisers.
That’s what they used to say about Ken and Linda. They don’t say that now, except in the past tense. Recently a $15000 cheque from Enron to the Houston Ballet bounced and a tearful Linda Lay appeared on national television to declare, implausibly, that the couple were close to bankruptcy.
The truth is that Enron never was the US’s seventh-largest company. Like much written and said about it before hindsight set in last year, this was a fiction that the best brains in financial analysis and business journalism chose to run with because everybody else was running with it. Instead of its soaring share price being based on solid success, its success was a mysterious quality based on its soaring share price.
Enron called itself the US’s seventh-largest company thanks to an accounting loophole that let it put the full value of energy trades down on its accounts as if they were sales, even though it was simply acting as middleman. This is like the driver of a security van saying he’s a millionaire because he drives a million pounds in banknotes from one vault to another.
Journalists who wrote about Enron’s apparent success often characterised the two pipeline companies that Lay was responsible for merging and turning into Enron as “staid” or “stodgy”. In fact, they were large, successful businesses, but the merger lumbered Enron with a debt it never managed to shake off. The same journalists pointed out that these old companies had been replaced by one that worked out of “gleaming headquarters”. It is true that the Enron skyscraper gleams. It throws back crooked reflections, like totem poles, of the other towers of Houston’s mini-Manhattan. But a shine, we now know, is a poor indicator of financial probity.
As more details emerge of Enron’s short history, it seems that with the exception of persuading people to buy its shares, the firm failed in most things it did. In the early 1990s Lay and his team announced that they were going to be providers of energy to the world. Yet the company’s international projects did not go well. Enron built a power station in India, against expert advice warning that the electricity would be too expensive. Sure enough, it was. The acquisition of Britain’s Wessex Water for $2,8-billion failed to generate the cash-flow Enron expected. The construction of a network for the high-speed transmission of information didn’t make money.
As the decade wore on, the company switched its strategy. Instead of owning and operating real things such as power stations and pipelines, it would sell them off and make money by trading in energy and more intangible, conceptual things such as risk and even weather.
The company’s march to disaster took place against a background of brutal corporate culture that considered it routine to fire and replace one fifth of the workforce each year, based on assessments by colleagues that encouraged employees to plot, denounce each other and dissemble rather than cooperate. Bonuses were paid according to deals signed, rather than whether the deals made money. Feats of accounting acrobatics were carried out to conceal Enron’s losses; not just the thousands of dodgy “partnerships” set up to hide the company’s liabilities, but the stretching of a system called mark to market, where firms can claim years of future revenue in a long-term contract as if they had received the full amount up front.
Enron spent millions backing politicians and millions more on lobbyists to push its case for deregulation of energy markets. Recently, as a result of the Enron debacle, Max Yzaguirre was forced to resign from his job as head of Texas’s programme to deregulate the electricity market. He was an interesting choice for the job: he was the former president of Enron in Mexico. The day after Yzaguirre was appointed by Rick Perry, the Republican who became governor of Texas after George Bush, Lay gave Perry a $25000 campaign contribution. Perry said the timing was “totally coincidental”. Asked why he wasn’t handing back the $220000 he’d received from Enron over the years, Perry said: “That would send the message that money impacted my thought processes. It never has, and never will.”
More than 250 members of Congress from both parties including 71 out of 100 senators have dipped their hands into the $5,9-million in campaign contributions Enron or its managers have handed out since 1990. It is well known that the $623000 Bush received from Enron is more than from any other single source, but other illustrations of the Enron way are less widely told. The New York Times uncovered an important exemption from US law won by Enron in 1997, which enabled the firm to spread its web of partnerships overseas. The exemption was won directly from the US Securities & Exchange Commission (SEC) with the help of a hired former SEC employee Joel Goldberg. He had been the boss of the SEC official who signed the exemption, Barry Barbash. Both men, the Times reports, are now partners at the same law firm.
Back in Houston some claim that the Lays have become social pariahs. Others still speak warmly of them. Enron and the Lays were patrons of Houston’s opera and ballet whose charity balls are the highlight of the social season the city’s Holocaust Museum and the University of Texas MD Anderson cancer centre. They supported scores of charities and causes, including a successful campaign to keep affirmative action policies legal in Texas. The Lays helped raise millions of dollars for the University of Houston. Lay was a fervent activist in support of Houston, abandoning its usual free enterprise stance to put public money into sports stadiums.
Even Barbara Shook, Houston bureau chief of the Energy Intelligence Group, who voiced doubts about Lay’s business practices as far back as 1986, had to admit Lay put himself out for Houston’s civic pride. “Lay did a lot of good. I can’t deny that … He was a generous contributor to charity, both personally and through Enron. Enron’s corporate practice was to donate 1% of its earnings to charitable organisations.
“Ken Lay was going to be the master of the universe. And he was, for a little while. I can’t psychoanalyse him … I do know he started off a very poor boy in rural Mississippi. I do know that he’s extremely intelligent. But it was as if he was continuing to have to prove himself.”
He did, indeed, come from a poor Missouri family, his father dividing his time between Baptist preaching and selling animal feed. But there were limits to how humble his style really was in Houston. The Lays lived on the 33rd floor of the Huntingdon building, a lone luxury apartment block in the elite neighbourhood of River Oaks. There were four flats on each floor; the Lays had an entire floor and a house nearby for the servants. Lay was a regular at the River Oaks Country Club and the Houston Polo Club.
And there was another side to Lay’s fundraising: the political side. Often politics and charity merged together as comfortably as business and politics. The Lays underwrote the annual literacy event, a Celebration of Reading, whose patrons were the elder Bushes. “It all blends together very easily. It’s a very fine line. It’s not a line at all. As a politician, you’re always happy to see the guy with the money,” said Hodge.
These political-charitable events merged into Lay’s other persona, the businessman who built Enron. When the firm collapsed, astonishment was followed by anger, and not just from employees. At the country club and among his neighbours, Lay encountered rich Houstonians who had bet on Enron shares and lost.
In an e-mail to the Chronicle after the mass redundancies, but before Lay’s resignation, an anonymous Enron employee tried to convey the weird atmosphere in the almost empty company skyscraper: “I overheard several employees talking about their encounter with Ken Lay in an elevator. He stepped in and pressed the button for floor 50; a floor that once inspired awe and now provokes disgust and anger. They talked about how tense it was and about how they didn’t know whether to hate or admire him. I’m told he looked around, apparently reading their minds, and said, ‘Things just aren’t the same’.”
Big companies regularly go under. Mass lay-offs are common. Pension disasters are rarer, but they happen. Cash for access and influence-peddling are hardly new features on the political scene. Why is Enron special? Partly because all these characteristics of a big corporation gone wrong are combined. But also because the gap in the perception of the nature of Enron by the experts, and the reality, is so extreme that it is forcing some unlikely voices to ask questions about the way US big business is run. And because of the nature of the world, that means the way the world is run.
The most passionate advocates of present-day capitalism argue that the big global corporations are accountable to their shareholders. It might not be democracy or transparency as most people would understand it, but, argue the globalists, if companies answer to their investors, and healthy competition prevails, the market will see us all right. The Enron affair has horrified the advocates of the status quo because here was a darling of the stock market which was lying to its shareholders, with the possible connivance of its auditors, and, by its web of political connections in markets where there is often only one supplier, discrediting the idea of competition.
In a front-page article, the Wall Street Journal, a stalwart defender of capitalism, said: “The Enron scandal threatens to erode the country’s fondness for deregulated, unfettered markets, which grew steadily stronger through the 10-year economic boom that now has drawn to a close.”
For those already sceptical of unfettered markets, the Enron affair is an all too limited glimpse into the guts of a global corporation. It is confirmation that private bureaucracies can be as hopeless as public ones, and that auditors and shareholders are insufficient to bring big companies up to the level of transparency that true democracy demands. Who can say with certainty now where that $2,8-billion came from with which Enron bought Essex Water in 1998? Yet one morning more than a million people in Britain woke up to find that without their getting a vote on the matter, control of their water supply had passed to the other side of the Atlantic.
Shook claims that the days of deregulation and swaggering globalism are ending. “Part of the ‘me’ philosophy, the big self-interest kind of operating philosophy that became so common in the 1980s and 1990s, was that companies existed solely for their shareholders, and that they had no other stakeholders,” she said.
“The communities, the employees, they really had no say, because the company was not in business to provide a public service but to make money and to make money for shareholders. That was the [Ronald] Reagan era. And it carried over into [Bill] Clinton. But then companies like BP and Shell, even Exxon, they realised they had multiple stakeholders.
“If individual freedom and unbridled competition are such wonderful concepts, why did God feel obligated to give us 10 rules?” And what commandment would apply in Enron’s case? “You could start with the first one: Thou shalt have no other God before me,” said Shook. “They worshipped themselves.”