The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (15 page)

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Of all the guys with spikes that Skilling gathered around him in those early days of ECT, none was as close to him as Cliff Baxter. Baxter’s particular talent was in the arena of mergers and acquisitions; he was Skilling’s in-house M&A specialist. Over time, Baxter’s deals helped get Enron into the retail-energy-services business, electricity trading, and broadband. The two men lunched together several times a week. They regularly sneaked away from the company’s smoke-free offices for a furtive cigarette in a parking garage across the street. And Baxter was one of the few who could barge into Skilling’s office unannounced and say whatever was on his mind. After Baxter died, Skilling told friends: “I probably spent five times as much time with Cliff as anybody else.”

A police sergeant’s son from a Catholic family in Amityville, Long Island, Baxter had put himself through New York University then joined the air force, rising to captain. After leaving the military, he earned his MBA at Columbia University in 1987. He worked as an investment banker before joining Enron’s Washington office in 1991. Not long after that, Baxter approached Skilling to advise him that Enron was “wasting my talents.” Skilling hired him.

Like Pai, whom he despised, Baxter was someone who could have thrived only at Enron. Blunt, blustery, and bombastic, Baxter had a towering ego and a volatile personality. He was a devoted friend and a generous mentor—he once loaned a new Enron arrival $40,000 to buy a luxury car—but he was also exceedingly sensitive to perceived slights involving his own status and compensation. He could be giddily happy when he was in the middle of a deal and go into a deep, unshakable funk when he wasn’t. “He was,” says one former executive, “a bundle of contradictions. He was very aggressive, but at the same time he was the most insecure man I’ve ever seen in my life. He’d present something in such a strident way, and then afterwards, he’d come up to you privately and say, ‘Was that right?’ ”

He was also brutally honest. Almost alone among those close to Skilling, Baxter was quick to voice moral indignation, something he did frequently over the years. He didn’t hesitate to tell others when they’d done something wrong. He clashed bitterly with other ECT executives, especially Pai.

Though he eventually made millions at Enron, he also complained frequently that he was underpaid and underappreciated. While Baxter had many fans, he was, in many ways, not an easy man to like.

But Skilling didn’t care. Baxter, he later told people, “was the best deal guy I ever saw,” and that’s all that mattered. And Baxter
was
good. Meticulously organized, he planned out his deal strategies in tiny, neat handwriting and had a keen sense of how events might unfold. When he was in the middle of a transaction, he’d be transformed, as if the intensity of the deal was an intoxicant he couldn’t resist. “Cliff Baxter is like an Indy race car,” Ken Rice used to say about him. “If you wanna play, Cliff Baxter is the one you want. But you don’t want to take him out of the garage to go to the 7-Eleven.”

In 1995, in a dark mood after wrapping up a deal, he spent an entire lunch berating Skilling, telling him how he’d made a mess of his life. When Baxter finally stopped ranting, Skilling advised him to see a doctor. “Are you saying I’m
crazy
?” Baxter demanded. He was incensed that Skilling could suggest such a thing. “That’s it—I quit!”

That summer, he took a job at Koch Industries, a big, privately owned commodities conglomerate in Wichita, Kansas. It was “a bungee trip,” in the words of a former Enron executive. Koch Industries was a conservative midwestern company, and there was no way it could absorb Baxter’s outsized ego. Shortly after arriving at Koch, he insisted that he could travel only on the corporate jet. “He just couldn’t survive in a normal atmosphere,” says a former colleague. Baxter had already bought a house and moved his wife and two children up to Wichita. But just weeks after he’d left for Koch, he was already putting out feelers about returning. He finally called Skilling himself. “What would you think about my coming back?” he asked. “A lot of people up here are real jerks.”

Skilling wanted Cliff back; before Baxter left, he had given him an open offer to return. There was one hitch. Though Skilling was firmly in charge, he had been promoting the notion that ECT operated like a professional firm, where top executives acted almost as partners. So he submitted the issue to a monthly meeting of ECT’s 13 managing directors and sought the group’s blessing. But Skilling, who knew there was sentiment within the group that Baxter was more trouble than he was worth, wasn’t going to take a chance that the answer would be no. He made a point of greasing the deal with a rare personal appeal to Pai. “I know you’re going to raise a stink about this—
don’t,
” Skilling pleaded.

When Baxter got the official word, it was early evening. The next morning he jumped in his car and started off on the 600-mile trip back to Houston, leaving his family photos, Rolodex, and deal toys behind in his office. Koch executives arrived the next morning to discover that Baxter, after just two months on the job, had disappeared without a word.

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There was one final piece of the puzzle. If ECT was going to grow as rapidly as Skilling wanted, he needed more than long-term gas contracts and more than a trading operation. He also needed a way to finance it all. Financing was his most serious constraint, the one thing that could hold him back. Enron was reluctant to pour money into ECT. Kinder had told Skilling that he wanted ECT to be able to fund itself and that any capital Enron put into ECT would count against the phantom equity the top executives held in the division.

The cash flow from the hard assets Skilling controlled didn’t come close to meeting his needs, given how many people he was hiring and how much he was spending to make the new business grow. And he could hardly plow the profits back into the operation: because of mark-to-market accounting, most of those earnings were only paper profits. The actual cash wouldn’t be seen for years.

That left the banks. But Skilling didn’t want to depend heavily on bank loans either. Part of the reason was that he couldn’t: Enron already had lots of debt, which put serious limits on how much any division could borrow. Besides, borrowing itself was a constraint. Loans required collateral and had to be repaid; loans had a way of tying your hands, not freeing them.

But there were other, newer techniques for raising capital, one in particular that Skilling found especially compelling. Back when he was a consultant, Skilling had been deeply influenced by a well-known McKinsey partner named Lowell Bryan. Bryan was one of the pioneers of securitization: the practice of pooling loans together and selling them to outside investors in the form of a security. For instance, a credit card company, instead of tying up its own capital by keeping credit card loans on its balance sheet, could bundle them together and sell them into the marketplace. Then it could use the capital it reaped from the securitization sale to make more loans. In 1987, Bryan wrote that “securitization’s potential . . . is great because it removes capital and balance sheets as constraints on growth.” He believed that most financial-services companies would be greatly aided by securitizing their loan portfolios.

And that’s exactly what Skilling was seeking to do:
remove capital and balance sheets as constraints on growth.
And since so much else about ECT was modeled on the financial-services industry, why not securitization as well? Why couldn’t ECT bundle, say, the loans it was making to struggling gas producers? Why couldn’t it use securitization techniques to generate capital that would allow it to grow faster than would otherwise be possible? Why couldn’t Skilling transform this aspect of the national gas business as well? So that’s what he did. Which is to say, that’s how Enron first got into the business of setting up special-purpose entities.

Unlike some of the later special-purpose entities Enron created, these early deals were entirely aboveboard; the company even publicized them. The first such deal, completed in 1991, was called Cactus. Despite its many complex wrinkles, it was, at its core, a securitization deal. Enron bundled some $900 million of the money it had promised to front for gas producers and sold shares on those deals, as a package, to a group of high-powered investors, including General Electric. Under the terms of the deal, the group would then sell the gas back to Enron, which would resell it to wholesale customers like Sithe Energies. As a result of Cactus, the debt was eliminated from Enron’s balance sheet and ECT was handed cash to accelerate its growth.

The next big deal was a landmark event for Enron. In 1993, the California Public Employees Retirement System (known as CalPERS) agreed to put $250 million in cash into a new off-balance-sheet investment partnership that Enron would run. For its 50 percent stake, Enron would contribute $250 million of its own stock. The money would be used to make energy-related investments (which is indeed what it did over the course of the next four years). With an investment portfolio of $130 billion, CalPERS is the largest public pension fund in the country and it is also among the most respected institutional investors in the world. A CalPERS imprimatur isn’t quite on a par with Warren Buffett’s deciding to put money into a company, but it’s pretty close. Enron touted the partnership in press releases, and internally there was enormous pride in what the deal represented. It meant that Enron was finally joining the big leagues.

The partnership was called JEDI. Officially, the acronym stood for Joint Energy Development Investments. But it was also a sly nod to the
Star Wars
films; the man who devised the partnership was a
Star Wars
devotee, a finance executive named Andrew Fastow, whom Skilling had hired three years earlier. Though Skilling was enamored of him, Fastow hadn’t yet made much of an impression on the rest of Enron.

With the financial piece in place, nothing could stop ECT, and nothing did. By 1996, in its sixth full year of existence, Skilling’s division made $280 million before interest and taxes, more than 20 percent of Enron’s earnings. Trading was rapidly becoming the company’s biggest profit center. At the same time, Skilling was firmly established as the company’s resident genius.

“Everyone believed what he said because he hadn’t been wrong,” recalls one ECT executive. “It was death if he raised his voice. He was brilliant at asking questions. He made people feel inadequate. People spent days getting ready for a meeting with him.” When Skilling stepped out for a stroll in the trading room, the word went out as though Elvis were in the building:
“Jeff’s on the floor!”

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Skilling himself later spoke of his days building ECT as his favorite time at Enron, the time when he had the most fun. But among those who worked for Skilling, fun was one of the last words they would associate with him.

Everyone in those years worked brutal hours, which took an inevitable toll, and no one worked harder than Skilling himself. Ever since he was a teenager, Skilling had been a workaholic, with little time for idle chitchat or variation in his routine. In his years at McKinsey, he arrived every day at 7
A
.
M
.
and ate breakfast—Twinkies and a Diet Coke—at his desk. Lunch was always the same: ham and cheese on white bread with mayo and a bag of Cheetos. He worked until about 8
P
.
M
.
on weekdays and came into the office every Sunday afternoon.

In 1990, Skilling had negotiated his move to Enron while his wife was in labor with their third child, reviewing drafts of his employment contract in the hospital labor-and-delivery room between Sue’s contractions. After he arrived at Enron, he worked even harder. “I’d wake up at three o’clock in the morning in a cold sweat and say, ‘What have I
done
?’ I was working like a fool, an absolute fool,” he later told friends. “It was fun, but it wasn’t good for you.” One Friday afternoon, Skilling bumped into gas-marketing executive Dan Ryser, who explained that he was hustling out to coach his kids’ soccer team and get his mind off business. “What do you do to get your mind off the business?” the executive asked. “Nothing,” Skilling responded.

Skilling built a vacation home in Utopia, in the Texas Hill Country. He relished his visits there partly because the four-hour drive from Houston gave him time to think about work. One weekend in 1995, while rock climbing there Skilling fell 20 feet and seriously hurt his ankle. A local doctor told him that he could do nothing: the ankle was so badly mangled that Skilling needed to go to a big-city hospital for surgery. Scheduled to leave the next day on a four-day trip to Germany, Skilling bought a set of crutches and hobbled onto the plane. The surgery took place a month later; reassembling his ankle required a bone graft, two pins, and three screws. Skilling later looked on his decision as “setting an example for the organization: things need to get done.”

Inevitably, Skilling’s family bore the brunt of his work habits. In the mid-1990s, with his marriage on the rocks, Skilling approached Lay and the Enron board for their approval of a last-ditch attempt to patch things up with his wife Sue. He would work half time, two weeks on the job, two weeks off, and spend the rest of his time trying to work things out at home. Ron Burns, an Enron pipeline executive, would serve as co-CEO to help run ECT. Skilling changed his title to managing director and accepted the 50 percent pay cut demanded by Kinder; he envisioned acting much like a management consultant, letting Burns handle the day-to-day operations. The Enron board thought the arrangement odd but approved it.

As a manager, Burns was everything Skilling wasn’t. He motivated people not by throwing money at them but by taking an interest in their lives and making them feel appreciated. He had exquisite people skills. As one ECT employee put it, “He could fire you and you’d feel good about it.” Though Burns lacked Skilling’s crackling intelligence, he had the kind of practical management skills that most companies treasure—and that Skilling never had. He also had little tolerance for the kind of outrageous behavior and free spending that Skilling routinely indulged, or for guys with spikes. “He was the human part of the team,” says an old ECT hand.