Fastow: The Financial Wizard Tied to Enron's Fall
By DAVID BARBOZA and JOHN SCHWARTZ
The New York Times
February 6, 2002
HOUSTON — Before the financial shell games; before Chewco, Raptor and LJM; before the partnerships that earned him $30 million, Andrew S. Fastow had his first setback at the Enron Corporation (news/quote).
The setback came in 1996, when Mr. Fastow, a rising young star in corporate finance, was nearly fired for the poor job he did running a retail unit that aimed to put Enron into competition with local utilities around the country.
Mr. Fastow, whose surname rhymes with how, was simply out of his element among the intricacies of the retail market, colleagues said and his spokesman, Gordon Andrew, acknowledged. Yet while Enron was notorious for its cutthroat corporate culture, its succeed-or-leave ethic, Mr. Fastow had enough influence to return to his old department, finance.
"What the guy knew was numbers and finance," a longtime colleague said. "He knew how to close a deal. No one did that better than Andy."
Today, investigators think that Mr. Fastow's financial wizardry, his ability to wrap the company's assets and debts into complicated off-balance-sheet deals, was a central cause of Enron's undoing. What Mr. Fastow presented as an arrangement intended to benefit Enron, according to a report released on Saturday by a special committee of the board, "became, over time, a means of enriching himself personally, and facilitating manipulation of Enron's financial statements."
No one yet knows how much of the blame for Enron's collapse should fall upon Mr. Fastow. On Thursday, Mr. Fastow, 40, a father of two who was Enron's chief financial officer until he was forced to resign in October, is expected to invoke his Fifth Amendment right rather than give potentially self- incriminating answers to questions from members of Congress.
The crucial question is whether Mr. Fastow was the mastermind behind Enron's most suspect financing deals. Or was he, as Mr. Fastow has maintained through a spokesman, merely doing, with the board's knowledge, the bidding of his superiors at Enron, the former chief executives, Kenneth L. Lay and Jeffrey K. Skilling?
Even before Mr. Fastow's appearance on Capitol Hill, Representative James C. Greenwood, Republican of Pennsylvania, called him the "Betty Crocker of cooked books." And today, in one Congressional hearing, William C. Powers Jr., an Enron director who led the committee that wrote the internal report, said Mr. Fastow had been plagued by dual loyalties. "Fastow couldn't mind the store," Mr. Powers said, "because he was involved in the transactions."
For now, Mr. Fastow is not telling his story. He declined to be interviewed for this article, and he refused to cooperate with a special investigative committee for Enron's board. He also invoked his right against self-incrimination at a meeting a few weeks ago with the Securities and Exchange Commission.
But the portrait that is emerging of Mr. Fastow, from interviews with former colleagues and details from the Enron special report, is that of a brilliant, ambitious and hard-charging executive who, it appears, grew obsessed with using complex financing techniques to supercharge Enron's earnings while inflating his own paycheck.
Besides the $30 million he made in the LJM partnerships, Mr. Fastow earned a hefty salary and stock options at Enron. In 1999 and 2000, he sold about $23 million in Enron stock.
It was not as if he needed the money, his friends say; his wife, the former Lea Weingarten, is the heiress to a Houston real estate fortune. But Mr. Fastow was adamant, friends say, in his belief that the amount of money a person made was the only meaningful measure of success in business.
Even after Mr. Fastow retreated into seclusion last fall, he continued building an 11,500-square-foot house in Houston's wealthy River Oaks neighborhood. The Fastows also maintain an art collection, some of which has been displayed at the Contemporary Arts Museum and at the Menil Collection, both in Houston.
He also had a prominent role in Houston's Jewish community, taking charge of fund-raising for the city's new Holocaust museum.
"The work was significantly greater than the reward," said Bobby Lapin, a lawyer who has known Mr. Fastow for years. "The person I know bears absolutely no relation to the person who has been characterized, in some reports, within the walls of Enron."
But the focus on Capitol Hill is not on good deeds.
According to the internal report, Mr. Fastow and a group of other top executives secretly invested in a series of partnerships that benefited from swapping assets with Enron. Mr. Fastow used some of those partnerships to conceal losses at Enron. He used others to inflate profits, by about $1 billion in a 12-month period in 2000 and 2001. And in one instance, he invested $25,000 in Southampton Place, a partnership that in a matter of two months made $4.5 million from a deal with Enron, the special report said.
That transaction, and many others, were never disclosed to Enron's directors, the report said. The $4.5 million would eventually reach Mr. Fastow through a family foundation he had set up as a charity.
The collapse of Enron is a dramatic reversal of fortune for Mr. Fastow. Until last August, when Mr. Skilling resigned as chief executive, Mr. Fastow was at his side constantly, a crucial player in winning Enron acclaim as one of the world's most innovative companies.
He arrived at the company in 1990, at age 29, a handsome, talented and ambitious man who would eventually assume the job of chief financial officer in 1998 at the age of 36.
A graduate of Tufts University and the Kellogg School of Management at Northwestern, Mr. Fastow was helping to refashion a gas pipeline company into something more akin to a Wall Street trading house.
Those who knew Mr. Fastow at Enron described a man with twin personalities. They say he could be charming yet aggressive, quiet yet mercurial, and philanthropic yet bent on accumulating the trappings of wealth.
"He was very smart and very good at what he did," one former executive said. "He could be nice, but he could also be quite volatile and short- tempered. He didn't have a lot of patience with people who weren't as smart as him."
Andrew Stuart Fastow was born in Washington but grew up in New Providence, N.J., the son of a buyer for supermarkets and department stores. His career started in Chicago in the 1980's, at Continental Bank (news/quote), where he worked on "troubled loans," and more complicated deals, like leveraged buyouts.
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At Enron, he started by trying to arrange financing for Mr. Skilling's innovative plan, the creation of a "gas bank" that would help struggling energy companies by providing them with loans in exchange for their oil and gas reserves, which Enron could hedge and trade against in its growing derivatives unit.
Enron later began supporting energy producers by creating partnerships that allowed the company to keep the debt off the balance sheet. The first of those partnerships was named Cactus.
By 1993, the partnerships Mr. Fastow helped set up were so successful that Calpers, the California Public Employees' Retirement System, approached Enron about a joint venture. The partnership was called JEDI, or the Joint Energy Development Investments.
Later, there were hundreds of other partnerships, with names like Obi 1, Chewco and Raptor.
In recent years, as Enron pushed to build power plants and to develop new markets, the company needed huge amounts of capital, and partnerships were one way to pay for the projects without having the debt accumulate on Enron's balance sheet.
In 1999, CFO magazine honored Mr. Fastow for creating an innovative financing structure. In a rare interview, he told CFO that he would use off-balance-sheet transactions to avoid weakening Enron's credit rating. And he would do this while operating in the shadows.
"This guy was never anything but low profile," said John E. Olson, an energy analyst at Sanders Morris Harris. "He rarely, if ever, showed up at analyst meetings. He was a loan consolidator."
By 1999, there were small fissures in Mr. Fastow's labyrinthine financing empire. As early as 1997, Enron had difficulty finding a partner to buy out Calpers's interest. So, apparently to skirt disclosure rules, Mr. Fastow proposed listing his wife's family as outside investors. When he was rebuffed, Michael Kopper, who worked under Mr. Fastow at Enron, was selected. Because he was a lower-level employee, Enron would not have to disclose his interest in S.E.C. filings. Mr. Kopper would eventually make at least $10 million in profit from the venture.
Later, Mr. Fastow dealt with partnerships that involved at least four other Enron employees.
Mr. Fastow, the board report said, often played dual roles as an Enron executive and a partner of LJM. Once, he found himself at odds with Enron Broadband Services. "Fastow's involvement caused great distress for the E.B.S. team," the special report said. "They understood that their job was to get the best deal possible for Enron but driving a hard bargain for Enron drew the ire of Enron's C.F.O.'
Others, who worked closely with Mr. Fastow, say he was not a rogue operator. "I think there's too much focus on Andy," one longtime colleague said. Mr. Fastow, the colleague said, did not do anything on his own.
Other colleagues say it is quite possible Mr. Fastow took charge himself, that he got wrapped up in a series of complex transactions that ultimately doomed him. And even when it was all falling apart, Mr. Fastow was reluctant to acknowledge what was happening.
In October, after the company was forced to restate its earnings but before he left, Mr. Fastow appeared at an employee meeting at the Hyatt Regency hotel here. His remarks were brief and mysterious. "The Enron Corporation's balance sheet," one employee recalls him saying, "has never been in better health." |
