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two former Enron chief executives, Jeffrey Skilling and

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Kenneth Lay.

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He's written a book on the case called "Conspiracy of Fools,"

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and writes on the subject for "The New York Times." I'm

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pleased to welcome him back to this table.

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Kurt, it's good to see you.

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Thanks for being with us.

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Thank you, Ron.

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You know, we're coming to the end of the trial

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phase of what is maybe the greatest corporate scandal in

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American history, and yet we are so far away from the day on

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which this all broke loose, that maybe it

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would serve the viewers

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well to remind them of exactly how this all started and --

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Someone needs to remind me.

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-- in 2001.

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People may have forgotten that this was in fact a scandal that

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had many, many moving parts.

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Well, this was, to me, the scandal of

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scandals, because it had so many elements to it.

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But basically what happened, it started very quietly.

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You had in august of 2001, Jeffrey Skilling, who was -- had

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then been the chief executive of the Enron

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Corporation, which was

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a big gas company and gas trading company down in Houston.

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In August, he announced, after about six months on the job,

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that he was going to leave, and people started wondering why

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would this man leave so soon after becoming chief executive?

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The "Wall Street Journal" started writing articles about

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some off-book partnerships that Enron had.

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Traders started getting very nervous, and Enron announced

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that they were going -- you know, when the chief executives

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leave, they sometimes -- they come in --

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For personal reasons or

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whatever the excuse is.

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They'll say, we have to take a write-down of

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this, that and the other.

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And Enron took some very large write-downs.

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And the problems just kept snowballing, with questions

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about the partnerships, which were being run by their chief

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financial officer, with questions about Enron's health.

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And the markets -- the energy markets shut Enron out.

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It tried to make a merger, and at the end of the day, on

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December 2nd of 2001, the company went bankrupt about 12

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weeks after the whole thing started.

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But this was a juggernaut prior to this.

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I mean, Ken Lay founded Enron back in the

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late 1980s, mid-1980s.

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He was consolidating a variety of different energy companies,

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natural gas companies and the like, and he was building what

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was at the time believed to be a very modern energy company,

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which by the late 1990s was a true darling of Wall Street.

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Why did it get so much attention, and

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why was it so hot?

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Why was it so valuable at one point during the bull market of

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the 90s?

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This will sound perhaps overly simplistic.

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It was so hot because everyone thought it should be.

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One of the things that happened in the 90s was that so many of

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us stopped paying attention to boring things

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like business models.

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The Enron business model is one of the most irrational things

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I've ever seen.

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Explain what you mean by that.

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Because, you know, people understood it at one point as an

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energy company that was selling natural gas, transmitting it

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through pipelines, doing various, you know, deals in the

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energy business.

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And yet, at a certain point, it turned into an entirely

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different type of organization.

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It basically turned into a monstrosity, and

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that was the problem.

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You had two or three completely different companies being run,

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and they were at complete odds with each other.

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You take them one segment at a time, you had

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the pipeline business.

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Fine business, you move gas through the pipelines, you get

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paid for it.

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Ken Lay understood that business.

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He was good at that business.

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Then you had their wholesale trading business.

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And this was a way that Enron had of creating fixed-price gas

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contracts, so that customers like factory owners, utilities

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and the rest, could know what the cost of their energy would

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be years -- going years out.

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And this is a long-standing

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practice in that business.

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Right.

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They did it a different way that would take, like,

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10 minutes to explain.

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But they did come up with a very smart idea there.

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And they also started their own trading market for

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those energy contracts.

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Now, this is actually where the heart of the problem is, because

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that's where their success is.

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I think the number that came up at the trail is that the trading

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-- the wholesale trading business made up 94 percent of

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their earnings.

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The problem is, it's a trading business.

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Trading business lives off of credit rating.

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It lives off of, you know, the other traders saying, I think

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you'll about around in a few days when you have to bring me

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the cash.

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And Enron had, you know, while most trading businesses have

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ratings of A,

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It was a risky credit, in other words. It was risky to do

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business with Enron, to trade with Enron all

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the way through that period.

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And the only thing that kept people coming

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back was faith.

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Now, meanwhile, once they have this business going, they

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believe they're so smart, Enron goes off into a series of crazy

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businesses -- international power plants where the business

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model -- where the projects they put together

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don't make any sense.

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The water business, something they don't know about.

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The broadband business, something they don't know about.

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Which they were going to trade, right?

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These were all trading vehicles

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of some sort. Right?

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All -- I always loved the water business.

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They were going to trade water like gas, and I'm thinking I

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don't think anybody would care if your gas came from Mexico,

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but your water --

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There's a revenge issue there that

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we all know about.

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And so each one of these businesses -- they

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went into power distribution in Brazil, they went -- each one of

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these businesses was billions and billions and billions of

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dollars of capital investment, all of them putting the credit

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rating under greater stress.

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Meanwhile, here is the only business that's actually making

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a lot of money, is completely dependent on credit rating.

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You had -- if you had a bump in this company -- and all

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companies have bumps -- the whole thing would fall apart,

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and that is what happened.

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But then again, infinitely more

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complex over time. Right?

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You had those three businesses, but then it was Jeff Skilling,

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the former CEO, it was Ken Lay, and it was Andy Fastow, who was

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a high-ranking executive there, who got into a variety of

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different vehicles, offshore vehicle as they like to call

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them in the business, through which they were able to transfer

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profits and losses.

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How did they get so involved in this kind of accounting -- these

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accounting irregularities that ultimately really played into

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their demise by the time they collapsed in December of 2001?

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Well, what's interesting is Fastow's whole

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approach was to utilize these vehicles, these partnerships, to

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obtain financing to go through -- to go into

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these other businesses.

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That's how it all started.

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So they were financing vehicles to fund all

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the new businesses that Enron -- whether it

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was trading broadband

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capacity, whether it was in fact trading advertising capacity --

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they event went so far as to do that.

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And the water business, all of these things.

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They had partnerships for all of these.

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And that is a very reasonable way to do business if the

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underlying business works.

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They kept going down the path of -- it was

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like giving a teenager

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a credit card.

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We can buy this and we can buy this and we can buy this.

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The partnership financing allowed them to access a ton of

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capital without really showing a hit in their stock price,

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without showing a hit on their books.

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And so they just ran off and did all these businesses that they

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didn't know anything about.

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And that didn't really produce the type of

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revenue or profit that was expected, or that they told

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investors they were going to produce.

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They were not.

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And that was the problem, is when you get right down to it,

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the real dirty secret of Enron is these people were terrible

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businessmen, businesspeople.

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Were they frauds?

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I mean, because that's what this trial is all about.

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Well, there was definitely fraud at Enron.

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There was a lot of fraud at Enron.

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And that does come -- you know, when you're in a culture that

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believes you're smarter than everybody, you're better than

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everybody, and aren't we just being clever, it's a very short

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distance from there to fraud.

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What came up in this criminal trial, what was so interesting

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was that the two main defendants, Jeffrey Skilling and

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Ken Lay, for the last few years, what

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everybody has been hearing,

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they would imagine it would be this overarching conspiracy, and

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in fact the charges were really very subtle.

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That doesn't mean they weren't important.

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Let me ask you about that.

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Because the government's approach to this, the

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prosecutorial approach to this was to keep this trial

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relatively simple, because the business was so complex that if

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you put it in front of a jury of 12 people who may not have

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familiarity with accounting irregularities, with offshore

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shell corporations, with insider trading, that

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they were going to

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run into something that was so complex you couldn't convict

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these guys, right?

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I actually don't think that was the issue.

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Because one of the problems you had -- for example, if you took

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on the accounting.

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A lot of the accounting is obscene, but when you follow it

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through on precisely what the rules say, it's -- it's --

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Legal?

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It follows the rules.

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Then there's the next issue, for those that don't follow the

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rules, well, did these two defendants know about the

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element within it that didn't follow the rules?

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And so what the prosecution did, which I think was brilliant and

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really was this case, is they stood back and said, forget the

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accounting, forget finance, forget all -- what this is about

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is truth and falsity.

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This is about telling lies to the market.

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And I've always looked on Enron as that.

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It's not did it violate the accounting rules?

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It's did they use the accounting rules, rightfully or wrongfully

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-- let's not worry about whether they violated the rules -- to

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lie to the marketplace, and I think that that is undeniable.

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Now, whether or not these two people are going to be convicted

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of that, that's still up to the jury.

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I'm going to get to that in a second.

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Let's talk a little bit more about that, because it's

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critical, the question of whether or not they lied, not

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only in their accounting practices, but there are

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videotapes of Ken Lay talking to employees telling them to buy

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the stock, even as Enron was beginning down that slippery

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slope towards bankruptcy.

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He and other executives sold a billion dollars worth of stock

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in Enron's final year, even as they were telling their

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employees to buy more of it for their 401(k) plans.

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They were telling Wall Street investors to do the same thing.

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Their market value was very, very high at the time that this

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was going on, only to plunge later.

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Are they going to be convicted for that type of lie, which in

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itself is kind of a bold-face act of insider trading and

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deception, if true?

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I can flat out say Ken Lay will not be

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convicted of that, because he hasn't been charged with that.

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They have made that a huge issue in the trial, because the issue

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is one of, is it this a truthful man?

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Once he got on the stand, he opened that up for examination.

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The reason they haven't charged him -- and I know everyone wants

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it to be that it's just pure insider trading -- the man never

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sold a share that wasn't on a margin call other than --

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Explain what that means, though.

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He borrowed -- there were many things he did

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that really made it look like he believed in the company.

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He borrowed $100 million, securing that with Enron shares.

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So the value of the Enron shares has to hold at a certain level.

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If the price drops, then the bank says you need to give us

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00:11:11.300 --> 00:11:14.701
more money.

256
00:11:14.701 --> 00:11:17.801
Well, Lay basically had 90 percent of his

257
00:11:17.801 --> 00:11:20.801
assets in Enron shares.

258
00:11:20.801 --> 00:11:23.567
And so he -- if he didn't believe in the company, the

259
00:11:23.567 --> 00:11:26.234
easiest thing he could have done is tell the bank I can't make

260
00:11:26.234 --> 00:11:29.100
the margin call, and the bank then would have sold the shares.

261
00:11:29.100 --> 00:11:31.734
Right.

262
00:11:31.734 --> 00:11:34.367
So he sold the shares to make the margin call.

263
00:11:34.367 --> 00:11:37.067
And he was doing it at a bit at a time,

264
00:11:37.067 --> 00:11:39.701
which was the prescription for disaster.

265
00:11:39.701 --> 00:11:42.167
That way, he met the margin calls all the way down rather

266
00:11:42.167 --> 00:11:44.501
than just having his position liquidated when he got hit by

267
00:11:44.501 --> 00:11:46.968
the first margin call, which would have preserved him a lot

268
00:11:46.968 --> 00:11:49.434
of money.

269
00:11:49.434 --> 00:11:51.801
Now, that's all very complicated.

270
00:11:51.801 --> 00:11:54.501
It's all very -- you know, you have to actually look at the

271
00:11:54.501 --> 00:11:57.033
details of the transactions.

272
00:11:57.033 --> 00:11:59.734
And people will go, well, he could have done it another way.

273
00:11:59.734 --> 00:12:02.501
I'm not saying what he did was honest, but there's a reason he

274
00:12:02.501 --> 00:12:05.100
wasn't charged with it.

275
00:12:05.100 --> 00:12:07.767
And the reason is, it's really hard to say that somebody who

276
00:12:07.767 --> 00:12:10.267
had 90 percent of his assets in one stock didn't

277
00:12:10.267 --> 00:12:12.701
believe in the stock.

278
00:12:12.701 --> 00:12:15.467
What about the other executives who sold shares

279
00:12:15.467 --> 00:12:18.167
all the way through that final year, same story?

280
00:12:18.167 --> 00:12:21.000
No, they're all very different, and I think

281
00:12:21.000 --> 00:12:23.767
there was -- there were a lot of people -- Enron had hit the end

282
00:12:23.767 --> 00:12:26.667
of the line in many ways.

283
00:12:26.667 --> 00:12:29.467
It had thrown a lot of oranges in the air, and they were all

284
00:12:29.467 --> 00:12:32.334
going to come back down.

285
00:12:32.334 --> 00:12:35.167
But there was also -- you had a point of transition.

286
00:12:35.167 --> 00:12:38.000
You know, it wasn't just Skilling who left.

287
00:12:38.000 --> 00:12:40.701
You had Ken Rice leaving, you had Lou Pai leaving.

288
00:12:40.701 --> 00:12:43.601
These were all sort of the second in command.

289
00:12:43.601 --> 00:12:46.234
There was a new wave of executives coming in.

290
00:12:46.234 --> 00:12:48.901
And all of these guys had gotten rich.

291
00:12:48.901 --> 00:12:51.567
And, you know, it was -- this company was

292
00:12:51.567 --> 00:12:54.367
undergoing a transformation.

293
00:12:54.367 --> 00:12:57.200
One of the transformations it underwent

294
00:12:57.200 --> 00:13:00.200
was, at least according to some newspaper reports, I believe in

295
00:13:00.200 --> 00:13:02.901
your own paper, that at one point Enron, in order to make

296
00:13:02.901 --> 00:13:05.467
the company look better to Wall Street analysts, marched a group

297
00:13:05.467 --> 00:13:07.968
of secretaries and other non-traders down to their

298
00:13:07.968 --> 00:13:10.567
trading floor, sat them at computers, had them working the

299
00:13:10.567 --> 00:13:13.234
phones, and made it look like one of their trading floors was

300
00:13:13.234 --> 00:13:16.000
a very active place in the business, where they were

301
00:13:16.000 --> 00:13:18.601
generating revenues and profits, when in fact, according to the

302
00:13:18.601 --> 00:13:21.334
published reports, these were people who weren't trading; they

303
00:13:21.334 --> 00:13:24.033
were just pretending to trade as analysts walked

304
00:13:24.033 --> 00:13:26.567
through this (inaudible).

305
00:13:26.567 --> 00:13:28.968
Let's give credit where credit is due, that

306
00:13:28.968 --> 00:13:31.234
was the "Wall Street Journal".

307
00:13:31.234 --> 00:13:33.667
OK.

308
00:13:33.667 --> 00:13:36.234
Fair enough.

309
00:13:36.234 --> 00:13:38.667
But that in and of itself wasn't a crime.

310
00:13:38.667 --> 00:13:41.367
That was an example of just the immaturity and foolishness of

311
00:13:41.367 --> 00:13:44.167
the management of the Enron Corporation, that they bring

312
00:13:44.167 --> 00:13:47.067
these people in, and it's all for show.

313
00:13:47.067 --> 00:13:50.100
And you know, when you look at what Enron was, and you look at

314
00:13:50.100 --> 00:13:53.200
-- it is the ultimate emperor has no clothes story.

315
00:13:53.200 --> 00:13:56.067
What you needed was for someone to say, there's a problem here.

316
00:13:56.067 --> 00:13:58.801
And so much of what went on was about appearance.

317
00:13:58.801 --> 00:14:01.801
So much of what happened was about ginning up faith.

318
00:14:01.801 --> 00:14:04.834
And so --

319
00:14:04.834 --> 00:14:07.067
Was it about faking the numbers?

320
00:14:07.067 --> 00:14:09.300
Was it about complicity on the part of Arthur Andersen, which

321
00:14:09.300 --> 00:14:11.534
was put out of business by the government as an accounting firm

322
00:14:11.534 --> 00:14:13.767
for being Enron's accountant and signing off

323
00:14:13.767 --> 00:14:16.000
on all these numbers

324
00:14:16.000 --> 00:14:18.434
in which people had faith?

325
00:14:18.434 --> 00:14:21.234
I would say that anybody who doesn't think

326
00:14:21.234 --> 00:14:23.934
Arthur Andersen should have received the corporate death

327
00:14:23.934 --> 00:14:26.701
penalty needs to read "Conspiracy of Fools."

328
00:14:26.701 --> 00:14:29.367
Which is a very good book, we should point out.

329
00:14:29.367 --> 00:14:32.067
Thank you!

330
00:14:32.067 --> 00:14:34.701
They -- the Andersen accountants bear a very significant

331
00:14:34.701 --> 00:14:37.334
responsibility for what happened.

332
00:14:37.334 --> 00:14:40.033
The mind-set there was one of -- the reality of the accounting

333
00:14:40.033 --> 00:14:42.667
rules is the rules are the rules, and when you get the

334
00:14:42.667 --> 00:14:45.234
interpretation from the good people who know the accounting,

335
00:14:45.234 --> 00:14:47.901
you say, this is where we can go.

336
00:14:47.901 --> 00:14:50.534
The people who were running the Enron engagement team were more

337
00:14:50.534 --> 00:14:53.100
on the mind-set of let's compromise between what Enron

338
00:14:53.100 --> 00:14:55.567
wants and what the rules guys are saying, which is sort of

339
00:14:55.567 --> 00:14:58.234
like if you had a driving instructor who -- I want to go

340
00:14:58.234 --> 00:15:00.767
through the red light, well, pull halfway across.

341
00:15:00.767 --> 00:15:03.133
It doesn't accomplish anything.

342
00:15:03.133 --> 00:15:05.567
Just drive down the middle of the road (inaudible)

343
00:15:05.567 --> 00:15:08.267
double yellow lines.

344
00:15:08.267 --> 00:15:11.234
Right.

345
00:15:11.234 --> 00:15:14.133
And the end result of that was that Enron was being allowed to

346
00:15:14.133 --> 00:15:17.167
do things that -- that removed from the company's plate the

347
00:15:17.167 --> 00:15:19.934
requirement to make tough choices, the requirement to make

348
00:15:19.934 --> 00:15:22.901
decisions, the requirement to recognize that they didn't have

349
00:15:22.901 --> 00:15:25.634
an endless supply of capital, to recognize that maybe they

350
00:15:25.634 --> 00:15:28.667
weren't so good at everything they did.

351
00:15:28.667 --> 00:15:31.601
And, you know, when you have a company -- I mean, I -- I've

352
00:15:31.601 --> 00:15:34.467
written about fraud for 20 years.

353
00:15:34.467 --> 00:15:37.100
I didn't know that it was possible to fake cash flow.

354
00:15:37.100 --> 00:15:39.601
Cash flow was something that I always thought was, well --

355
00:15:39.601 --> 00:15:42.300
Well, WorldCom and Bernie Ebbers

356
00:15:42.300 --> 00:15:44.834
actually faked revenue.

357
00:15:44.834 --> 00:15:47.234
That's not easy to do.

358
00:15:47.234 --> 00:15:49.567
Yeah, but revenue --

359
00:15:49.567 --> 00:15:52.000
revenue -- cash is cash.

360
00:15:52.000 --> 00:15:54.667
Ultimately, you've got to have it there.

361
00:15:54.667 --> 00:15:57.167
And they figured out a way to legally -- no one ever said it

362
00:15:57.167 --> 00:15:59.567
was illegal -- and in fact, a court ruled that it was legal --

363
00:15:59.567 --> 00:16:01.968
to legally transform borrowed money into cash flow, which made

364
00:16:01.968 --> 00:16:04.300
the company look better.

365
00:16:04.300 --> 00:16:06.634
But --

366
00:16:06.634 --> 00:16:08.934
In the old days, they used to call that a loan.

367
00:16:08.934 --> 00:16:11.234
Yeah, exactly.

368
00:16:11.234 --> 00:16:13.534
I mean, some of the aspects of

369
00:16:13.534 --> 00:16:15.834
this are so fantastic

370
00:16:15.834 --> 00:16:18.567
in a certain respect, is that they were able to transform a

371
00:16:18.567 --> 00:16:21.267
variety of business transactions that were in one way classified

372
00:16:21.267 --> 00:16:23.901
differently under normal business practices, and then

373
00:16:23.901 --> 00:16:26.601
turn them to their advantage repeatedly.

374
00:16:26.601 --> 00:16:29.501
And what to me it comes down to is one of the

375
00:16:29.501 --> 00:16:32.501
more fascinating things I found.

376
00:16:32.501 --> 00:16:35.501
Any time there's a business where the -- and I don't want to

377
00:16:35.501 --> 00:16:38.501
say any time -- many of the times I've seen business where

378
00:16:38.501 --> 00:16:41.400
the executives are trumpeting the market and the value of the

379
00:16:41.400 --> 00:16:44.100
market and the importance of the market -- I agree.

380
00:16:44.100 --> 00:16:46.901
The market's very, very important, and it's -- it is a

381
00:16:46.901 --> 00:16:49.634
very good task master.

382
00:16:49.634 --> 00:16:52.334
But many times, those are the companies that are running to

383
00:16:52.334 --> 00:16:54.901
Washington to get tariffs.

384
00:16:54.901 --> 00:16:57.334
And here, if you think about it, Enron was a believer in the

385
00:16:57.334 --> 00:16:59.634
market, so long as the market was going its way.

386
00:16:59.634 --> 00:17:01.901
They would lie to the market.

387
00:17:01.901 --> 00:17:04.067
They would misrepresent to the market.

388
00:17:04.067 --> 00:17:06.200
They wouldn't say, "here's our performance.

389
00:17:06.200 --> 00:17:08.300
Here's what's happening.

390
00:17:08.300 --> 00:17:10.400
Tell us what the market thinks."

391
00:17:10.400 --> 00:17:12.434
They also -- they got some help from

392
00:17:12.434 --> 00:17:14.701
Washington, too.

393
00:17:14.701 --> 00:17:17.100
I mean, I think part of the story that's forgotten is some

394
00:17:17.100 --> 00:17:19.434
of the exemptions that they received with respect to

395
00:17:19.434 --> 00:17:21.667
regulatory approvals for certain businesses that they were

396
00:17:21.667 --> 00:17:24.000
involved with came because Wendy Gramm, the former head of the

397
00:17:24.000 --> 00:17:26.367
Commodities Futures Trading Commission, ended up on the

398
00:17:26.367 --> 00:17:28.667
Enron's board.

399
00:17:28.667 --> 00:17:31.000
Her husband was a senator, changed a vote in order to, as I

400
00:17:31.000 --> 00:17:33.467
recall -- if I may be -- I may be correct?

401
00:17:33.467 --> 00:17:35.801
I'm not sure about that.

402
00:17:35.801 --> 00:17:38.167
But they did get pre-Bush years some special

403
00:17:38.167 --> 00:17:40.467
treatment when it came to regulatory exemptions, right?

404
00:17:40.467 --> 00:17:42.767
The thing that was the most interesting that

405
00:17:42.767 --> 00:17:45.033
they got was in the early 90s, the SEC gave them the authority

406
00:17:45.033 --> 00:17:48.000
to use something called mark-to-market accounting.

407
00:17:48.000 --> 00:17:50.734
There's nothing wrong with mark-to-market accounting.

408
00:17:50.734 --> 00:17:53.567
What Enron ended up doing was ludicrous.

409
00:17:53.567 --> 00:17:56.234
And they would enter into a contract saying you owe me $1

410
00:17:56.234 --> 00:17:58.834
every year for 20 years.

411
00:17:58.834 --> 00:18:01.501
And so this year we're going to recognize the present value --

412
00:18:01.501 --> 00:18:04.367
All $20.

413
00:18:04.367 --> 00:18:07.501
-- of $20.

414
00:18:07.501 --> 00:18:10.467
And they would, you know, when you start that with one

415
00:18:10.467 --> 00:18:13.400
contract, well, you know, it's not great, but it's arguable.

416
00:18:13.400 --> 00:18:16.534
They began to apply that to thousands of different things

417
00:18:16.534 --> 00:18:19.367
that never were intended to use it.

418
00:18:19.367 --> 00:18:22.000
So simply put, what they were doing was

419
00:18:22.000 --> 00:18:24.467
front-loading all their future revenues and profits so that

420
00:18:24.467 --> 00:18:26.801
business looked better than it really was.

421
00:18:26.801 --> 00:18:29.434
Which is why the cash flow issue was there.

422
00:18:29.434 --> 00:18:31.901
Because you had 20 years of revenue right today, but the

423
00:18:31.901 --> 00:18:34.234
cash is coming out -- is still going to come over 20 years.

424
00:18:34.234 --> 00:18:36.501
So they needed some other way to show that they

425
00:18:36.501 --> 00:18:38.701
were producing cash.

426
00:18:38.701 --> 00:18:40.834
So they borrowed it.

427
00:18:40.834 --> 00:18:43.000
This was huge scandal.

428
00:18:43.000 --> 00:18:45.434
The company's market value went to zero

429
00:18:45.434 --> 00:18:48.000
because it went bankrupt.

430
00:18:48.000 --> 00:18:50.400
Thousands of people lost jobs.

431
00:18:50.400 --> 00:18:53.000
Assets from Enron were sold off at bargain-basement prices to

432
00:18:53.000 --> 00:18:55.801
willing buyers, pension funds were affected,

433
00:18:55.801 --> 00:18:58.667
mutual funds were affected.

434
00:18:58.667 --> 00:19:01.567
And yet Enron, in the defense that they presented for Jeff

435
00:19:01.567 --> 00:19:04.367
Skilling and Ken Lay, blamed a lot of their problems on the

436
00:19:04.367 --> 00:19:07.100
marketplace, those bad guys out there, those hedge fund

437
00:19:07.100 --> 00:19:09.767
investors who were selling the stock short, betting it would go

438
00:19:09.767 --> 00:19:12.467
down, and trying to drive them out of business.

439
00:19:12.467 --> 00:19:15.000
And that, to me, was a demonstration -- it

440
00:19:15.000 --> 00:19:17.634
was -- only Ken Lay made that argument, and that to me was a

441
00:19:17.634 --> 00:19:20.601
demonstration that he was not fit to be the chief executive of

442
00:19:20.601 --> 00:19:23.601
this company.

443
00:19:23.601 --> 00:19:26.767
The idea that he would get on the stand at this late date and

444
00:19:26.767 --> 00:19:29.901
still start -- basically trying to save his reputation.

445
00:19:29.901 --> 00:19:32.901
I find it fascinating that he's at a criminal trial, and rather

446
00:19:32.901 --> 00:19:35.801
than trying to persuade people that he's not a criminal, he

447
00:19:35.801 --> 00:19:38.467
spends some of his -- much of his valuable time trying to

448
00:19:38.467 --> 00:19:41.234
convince them that he's a good chief executive.

449
00:19:41.234 --> 00:19:43.801
And that's off the table.

450
00:19:43.801 --> 00:19:46.234
His reputation is not an issue anymore.

451
00:19:46.234 --> 00:19:48.567
His company went bankrupt in the midst of massive

452
00:19:48.567 --> 00:19:50.434
scandal and mismanagement.

453
00:19:50.434 --> 00:19:52.300
There's no way around that.

454
00:19:52.300 --> 00:19:54.200
And so --

455
00:19:54.200 --> 00:19:56.067
Can he claim, as he did, that he

456
00:19:56.067 --> 00:19:57.934
did not know a lot

457
00:19:57.934 --> 00:20:00.501
of what was going on?

458
00:20:00.501 --> 00:20:03.234
Can he legitimately claim that Jeff Skilling and Andy Fastow

459
00:20:03.234 --> 00:20:05.801
and others did all of this behind his back, and that he

460
00:20:05.801 --> 00:20:08.200
simply didn't understand or didn't know what was going on?

461
00:20:08.200 --> 00:20:13.367
It comes down to what you mean as "this."

462
00:20:13.367 --> 00:20:16.000
That sounded very late 90s, didn't it?

463
00:20:16.000 --> 00:20:18.801
Because for instance, did Ken Lay know

464
00:20:18.801 --> 00:20:23.934
about the use of partnerships? Yes.

465
00:20:23.934 --> 00:20:26.033
Did Ken Lay know that the chief financial officer was running a

466
00:20:26.033 --> 00:20:27.868
partnership that was doing deals

467
00:20:27.868 --> 00:20:29.501
with Enron? Yes.

468
00:20:29.501 --> 00:20:32.567
Did the board know? Yes.

469
00:20:32.567 --> 00:20:34.501
Did the investors know?

470
00:20:34.501 --> 00:20:36.234
They should have.

471
00:20:36.234 --> 00:20:38.067
It was in the company's financial filings.

472
00:20:38.067 --> 00:20:39.767
And so there's a large amount of what people say,

473
00:20:39.767 --> 00:20:41.701
oh, they hid this.

474
00:20:41.701 --> 00:20:43.634
Most of the people who say what they had actually haven't read

475
00:20:43.634 --> 00:20:45.601
their financial filings.

476
00:20:45.601 --> 00:20:47.334
There is a lot of what was claimed to have been hidden that

477
00:20:47.334 --> 00:20:49.200
in fact was just lying there in plain sight.

478
00:20:49.200 --> 00:20:51.334
Although there were very small footnotes in many

479
00:20:51.334 --> 00:20:54.267
cases to the actual --

480
00:20:54.267 --> 00:20:56.267
Some of it -- but the stuff about -- for

481
00:20:56.267 --> 00:20:58.267
example, the stuff about Fastow's

482
00:20:58.267 --> 00:21:00.234
partnership, which were called

483
00:21:00.234 --> 00:21:02.234
>>LJM-2 and LJM-1: And he was making unusual amounts of money

484
00:21:02.234 --> 00:21:04.234
from these transactions.

485
00:21:04.234 --> 00:21:06.467
Well, he is now, by the way, serving a 10-year prison

486
00:21:06.467 --> 00:21:11.501
sentence and cooperating in this trial. Correct?

487
00:21:11.501 --> 00:21:14.467
Yes.

488
00:21:14.467 --> 00:21:17.400
And he was -- he was an interesting fellow, because in

489
00:21:17.400 --> 00:21:20.234
1999, the board approved allowing him to have this

490
00:21:20.234 --> 00:21:23.534
partnership that would do deals with Enron, creating this

491
00:21:23.534 --> 00:21:26.667
horrific conflict of interest, and they did it on the idea,

492
00:21:26.667 --> 00:21:29.767
well, Andy is a really honest guy and we really trust him.

493
00:21:29.767 --> 00:21:32.567
And what they didn't know was that in the two or three years

494
00:21:32.567 --> 00:21:35.200
-- I'm sorry, the three years prior to that decision -- he'd

495
00:21:35.200 --> 00:21:37.901
stolen something like $12 to $13 million from the company.

496
00:21:37.901 --> 00:21:41.100
And, you know, it's one of the things that's most interesting

497
00:21:41.100 --> 00:21:44.634
about the trial.

498
00:21:44.634 --> 00:21:47.834
One of the things in "Conspiracy of Fools" that was most

499
00:21:47.834 --> 00:21:50.767
controversial is that people -- I made it very clear that

500
00:21:50.767 --> 00:21:53.467
Skilling and Lay did not know about Fastow's crimes from 1996

501
00:21:53.467 --> 00:21:56.000
to 1999.

502
00:21:56.000 --> 00:21:58.667
Does that let them off the hook in this trial?

503
00:21:58.667 --> 00:22:01.501
No, because Fastow got up on the stand in

504
00:22:01.501 --> 00:22:04.534
this trial and said, oh, they didn't know about that, but they

505
00:22:04.534 --> 00:22:07.300
did know about 1999 forward.

506
00:22:07.300 --> 00:22:10.033
What's interesting, given all we've heard about partnerships

507
00:22:10.033 --> 00:22:12.934
and the rest, is how little a role those actually

508
00:22:12.934 --> 00:22:15.601
play in this case.

509
00:22:15.601 --> 00:22:18.501
The jury can walk away and say Andy Fastow lied about

510
00:22:18.501 --> 00:22:21.167
everything, and convict both of these guys on

511
00:22:21.167 --> 00:22:23.834
a number of charges.

512
00:22:23.834 --> 00:22:26.734
Do you think the jury will?

513
00:22:26.734 --> 00:22:29.701
I mean, this is one of those things where -- look, Richard

514
00:22:29.701 --> 00:22:32.501
Scrushy at HealthSouth, which was a huge scandal -- five chief

515
00:22:32.501 --> 00:22:35.133
financial officers who worked for him said that he was, at the

516
00:22:35.133 --> 00:22:37.601
very least, in part responsible for that company's great

517
00:22:37.601 --> 00:22:40.234
difficulties, and he was acquitted.

518
00:22:40.234 --> 00:22:43.000
Can the same thing happen here?

519
00:22:43.000 --> 00:22:45.968
It's always possible.

520
00:22:45.968 --> 00:22:49.000
The -- the thing in this trial that was interesting, going in

521
00:22:49.000 --> 00:22:52.200
to the defense, as you talk to the people who were -- who were

522
00:22:52.200 --> 00:22:55.367
there every day and getting sort of the run of the -- what the

523
00:22:55.367 --> 00:22:58.634
mind-set is, the general mind-set was that Skilling was

524
00:22:58.634 --> 00:23:01.567
-- really had a hill to climb, but that Lay pretty much had to

525
00:23:01.567 --> 00:23:04.400
just not blow himself up, and he could win this.

526
00:23:04.400 --> 00:23:07.033
Although he was said to be quite testy during

527
00:23:07.033 --> 00:23:09.000
his --

528
00:23:09.000 --> 00:23:11.000
No, this is before he testified.

529
00:23:11.000 --> 00:23:12.968
That's right, yes.

530
00:23:12.968 --> 00:23:14.934
This is before -- when the

531
00:23:14.934 --> 00:23:16.901
prosecution rested,

532
00:23:16.901 --> 00:23:19.567
that was -- the mind-set was Skilling, you know, has a real

533
00:23:19.567 --> 00:23:22.100
row to hoe here, but Lay really just has to hit a softball.

534
00:23:22.100 --> 00:23:24.767
Well, they get on the stand.

535
00:23:24.767 --> 00:23:27.634
Everybody is anticipating Skilling being, you know, a

536
00:23:27.634 --> 00:23:30.067
grumpy, difficult witness.

537
00:23:30.067 --> 00:23:32.334
He actually was pretty good.

538
00:23:32.334 --> 00:23:34.234
And he -- I don't know if he pulled it out, but he certainly

539
00:23:34.234 --> 00:23:36.634
didn't hurt himself.

540
00:23:36.634 --> 00:23:38.934
Lay got on the stand and put a gun to his head.

541
00:23:38.934 --> 00:23:41.167
He argued with his own lawyer.

542
00:23:41.167 --> 00:23:43.334
He argued with his own lawyer.

543
00:23:43.334 --> 00:23:45.467
He was difficult.

544
00:23:45.467 --> 00:23:48.100
He was snippy.

545
00:23:48.100 --> 00:23:50.567
He argued things that nobody -- I don't think anybody is going

546
00:23:50.567 --> 00:23:53.100
to buy.

547
00:23:53.100 --> 00:23:55.734
For example -- I mean, what I loved was when he was talking

548
00:23:55.734 --> 00:23:58.200
about who is at fault, and he started blaming the "Wall Street

549
00:23:58.200 --> 00:24:00.868
Journal" and saying they were on a witch-hunt.

550
00:24:00.868 --> 00:24:03.334
And then a few minutes later, he starts blaming everything on

551
00:24:03.334 --> 00:24:05.934
Andy Fastow.

552
00:24:05.934 --> 00:24:08.734
And I thought, well, wasn't that the witch that the "Wall Street

553
00:24:08.734 --> 00:24:11.601
Journal" was writing about?

554
00:24:11.601 --> 00:24:14.467
Weren't they writing about Andy Fastow?

555
00:24:14.467 --> 00:24:17.434
And so it's sort of -- he both reinforces what the reporters

556
00:24:17.434 --> 00:24:20.167
were doing and then says that they were on a witch-hunt.

557
00:24:20.167 --> 00:24:22.734
And ultimately, I think the biggest problem for Lay is that

558
00:24:22.734 --> 00:24:25.234
he has not been able to sit back and say, here is

559
00:24:25.234 --> 00:24:27.667
what really happened.

560
00:24:27.667 --> 00:24:30.133
He hasn't been able to get his head around it.

561
00:24:30.133 --> 00:24:32.667
And this idea of blaming it on reporters and short-sellers and

562
00:24:32.667 --> 00:24:35.300
the sun is just crazy.

563
00:24:35.300 --> 00:24:38.133
You said you've been covering scandals for 20

564
00:24:38.133 --> 00:24:40.968
years, and we've both been doing a lot of research on these

565
00:24:40.968 --> 00:24:43.801
things since the beginning of the stock market history in the

566
00:24:43.801 --> 00:24:46.434
United States, and it's littered with examples of fraud.

567
00:24:46.434 --> 00:24:48.901
I mean, the 1920s, the 1960Ss, there was the great Salad Oil

568
00:24:48.901 --> 00:24:51.267
swindle, which is not much talked about, but was a very

569
00:24:51.267 --> 00:24:53.667
interesting scandal.

570
00:24:53.667 --> 00:24:56.100
I love that one.

571
00:24:56.100 --> 00:24:59.100
And in the 1970s, there was a host of different

572
00:24:59.100 --> 00:25:01.834
financial scandals on Wall Street, then again in the '80s

573
00:25:01.834 --> 00:25:04.467
and then again in the '90s.

574
00:25:04.467 --> 00:25:07.567
As they go, how will Enron rank among, not just the ones we've

575
00:25:07.567 --> 00:25:10.400
seen in the past but the ones we've seen in the present,

576
00:25:10.400 --> 00:25:13.534
including WorldCom, Tyco and the like?

577
00:25:13.534 --> 00:25:16.400
I think Enron not only is the biggest scandal

578
00:25:16.400 --> 00:25:19.067
of all time, I think it's the most important.

579
00:25:19.067 --> 00:25:22.000
Because if you look at WorldCom, WorldCom was an old-line

580
00:25:22.000 --> 00:25:24.801
accounting fraud.

581
00:25:24.801 --> 00:25:27.868
You have a number that's in this column, you put it over here.

582
00:25:27.868 --> 00:25:30.901
And that's been done a thousand times before; it will be done a

583
00:25:30.901 --> 00:25:33.667
thousand times from now.

584
00:25:33.667 --> 00:25:36.868
Tyco, you look at it, and it's a guy basically sees cash on the

585
00:25:36.868 --> 00:25:40.434
table and puts it in his pockets.

586
00:25:40.434 --> 00:25:43.367
OK, that happens all the time.

587
00:25:43.367 --> 00:25:46.067
You have circumstances where there are people who are working

588
00:25:46.067 --> 00:25:48.667
in the crevices of the law and finding ways to lie and cheat.

589
00:25:48.667 --> 00:25:51.601
You had, you know, Ponzi.

590
00:25:51.601 --> 00:25:54.033
There was a great book that came out recently called "Ponzi

591
00:25:54.033 --> 00:25:56.367
Scheme," which, you know, when you read it, you really have the

592
00:25:56.367 --> 00:25:58.367
feel of the 1990s, and it is about that fraud from back in

593
00:25:58.367 --> 00:25:59.901
the 1920s.

594
00:25:59.901 --> 00:26:01.467
First in, first out.

595
00:26:01.467 --> 00:26:03.000
Yeah.

596
00:26:03.000 --> 00:26:04.534
And even Drexel in the 1980s was a fraud

597
00:26:04.534 --> 00:26:06.067
basically about an abuse

598
00:26:06.067 --> 00:26:08.200
of power, with people who had control of

599
00:26:08.200 --> 00:26:10.367
the junk bond markets.

600
00:26:10.367 --> 00:26:12.501
Here, Enron is something completely different, because

601
00:26:12.501 --> 00:26:14.667
what Enron is about is an abject failure of every

602
00:26:14.667 --> 00:26:16.834
single level of

603
00:26:16.834 --> 00:26:19.901
protection that was put in place in the aftermath

604
00:26:19.901 --> 00:26:22.467
of the Great Depression.

605
00:26:22.467 --> 00:26:24.901
And there have been many times in the course of covering this

606
00:26:24.901 --> 00:26:26.968
that I have just sort of stood back in awe looking

607
00:26:26.968 --> 00:26:28.767
at what was done.

608
00:26:28.767 --> 00:26:31.067
And the things that bother me the most are not the things that

609
00:26:31.067 --> 00:26:33.868
are illegal.

610
00:26:33.868 --> 00:26:36.767
People will break the law.

611
00:26:36.767 --> 00:26:39.334
It's the things they did that are outrageous and wrong and

612
00:26:39.334 --> 00:26:41.567
result in -- in -- in -- cause results that you never would

613
00:26:41.567 --> 00:26:43.734
want to tolerate, but that are in fact legal.

614
00:26:43.734 --> 00:26:45.868
And in fact, it was, as you say, it was a

615
00:26:45.868 --> 00:26:47.734
failure of management.

616
00:26:47.734 --> 00:26:49.901
It was a failure of market oversight.

617
00:26:49.901 --> 00:26:52.133
It was a failure of the regulatory institutions that

618
00:26:52.133 --> 00:26:54.267
kept an eye on these places.

619
00:26:54.267 --> 00:26:56.767
But it was also a failure of investors, and

620
00:26:56.767 --> 00:26:58.934
that's something that, you know, we like to point the finger at

621
00:26:58.934 --> 00:27:01.033
everyone other than ourselves.

622
00:27:01.033 --> 00:27:03.100
You know, the late 1990s was a period of

623
00:27:03.100 --> 00:27:05.167
insanity in this country.

624
00:27:05.167 --> 00:27:07.534
A willful suspension of disbelief.

625
00:27:07.534 --> 00:27:09.767
And if -- I mean, "Fortune" magazine, you

626
00:27:09.767 --> 00:27:11.968
had a very smart person at "Fortune" magazine, Bethany

627
00:27:11.968 --> 00:27:14.133
McLean, who sat down and asked a very simple question in 2001,

628
00:27:14.133 --> 00:27:16.234
How does Enron make its money?

629
00:27:16.234 --> 00:27:18.434
And she couldn't answer the question.

630
00:27:18.434 --> 00:27:20.634
And that to me was the most important article that was done.

631
00:27:20.634 --> 00:27:22.634
And there were a couple of hedge fund investors

632
00:27:22.634 --> 00:27:24.801
who recognized that same fact about that same time and started

633
00:27:24.801 --> 00:27:27.234
selling the stock short, because they couldn't figure out how

634
00:27:27.234 --> 00:27:30.000
Enron made its money.

635
00:27:30.000 --> 00:27:32.868
It didn't make any logical sense.

636
00:27:32.868 --> 00:27:35.534
And Bethany's article was really like the seminal event in this

637
00:27:35.534 --> 00:27:38.100
whole thing, because it laid out -- you know, here is a smart

638
00:27:38.100 --> 00:27:40.868
person looking, actually looking at the filing, saying -- having

639
00:27:40.868 --> 00:27:43.667
the courage to say, "I don't get it.

640
00:27:43.667 --> 00:27:46.033
And the fact that I don't get it means something."

641
00:27:46.033 --> 00:27:48.067
Now, you know, I guess I've gotten past the point of

642
00:27:48.067 --> 00:27:50.100
thinking that investors are going to sit down and read

643
00:27:50.100 --> 00:27:52.267
financial filings.

644
00:27:52.267 --> 00:27:54.367
But they really  --

645
00:27:54.367 --> 00:27:56.234
That was something of the past.

646
00:27:56.234 --> 00:27:58.100
They really shouldn't be putting their money

647
00:27:58.100 --> 00:27:59.767
in things they don't understand.

648
00:27:59.767 --> 00:28:01.501
And nobody --

649
00:28:01.501 --> 00:28:03.400
Simple Peter Lynch principle,

650
00:28:03.400 --> 00:28:05.634
old investing principle.

651
00:28:05.634 --> 00:28:08.067
And nobody could have understood Enron,

652
00:28:08.067 --> 00:28:10.100
because to understand it means to short -- to sell it short,

653
00:28:10.100 --> 00:28:12.167
and if you own the stock, I guarantee you you don't

654
00:28:12.167 --> 00:28:14.200
understand the company, because it just did not

655
00:28:14.200 --> 00:28:16.234
make rational sense.

656
00:28:16.234 --> 00:28:18.100
What do you think the legacy of this trial, now

657
00:28:18.100 --> 00:28:20.234
that it's coming to a conclusion, will ultimately be?

658
00:28:20.234 --> 00:28:22.067
I think actually we have to wait for the

659
00:28:22.067 --> 00:28:23.968
appeals court.

660
00:28:23.968 --> 00:28:26.067
If Skilling is convicted, his charges are

661
00:28:26.067 --> 00:28:27.968
pretty standard fraud.

662
00:28:27.968 --> 00:28:29.601
Lay has some very aggressive charges that were brought

663
00:28:29.601 --> 00:28:31.267
against him, and I'd be very interested to see what an

664
00:28:31.267 --> 00:28:32.934
appeals court says.

665
00:28:32.934 --> 00:28:34.567
If they stand up, we're going to -- if

666
00:28:34.567 --> 00:28:36.234
they're held up on appeal,

667
00:28:36.234 --> 00:28:38.067
we're going to have some new laws that -- new interpretations

668
00:28:38.067 --> 00:28:40.000
of law that CEOs will have to deal with.

669
00:28:40.000 --> 00:28:42.067
All right.

670
00:28:42.067 --> 00:28:44.567
Kurt, thanks very much, good to see you.

671
00:28:44.567 --> 00:28:49.601
It's good to see you.

672
00:28:49.601 --> 00:28:51.033
Kurt Eichenwald is author of "Conspiracy of