The Deals Unravel
The News Gets Worse and Shares Plummet
By late September, Enron was essentially doomed, although it would be weeks
before that reality sank in.
As most of the nation focused on the initial horror and the anguished aftermath of
the September terrorist attacks, Mr. Lay was trying to reassure his own shaken
work force, already stunned by Mr. Skilling's abrupt departure and their stock's
continuing decline. In e-mail messages and conversations, he assured employees
that Enron was strong and that its stock - for many, the bedrock of their retirement
plans - would rebound.
But that optimistic prospect had actually evaporated, sometime during those
weeks, when auditors from Andersen discovered a mistake they had made, more
than a year earlier, in Enron's books. The way they accounted for the Enron shares
that had been used to finance the Raptor partnerships had incorrectly added $1
billion to the assets on Enron's balance sheet. Correcting the mistake would
reduce those assets by $1 billion.
By this point, Mr. Lay and his advisers had also decided to dismantle the Raptor
arrangements. That meant that the investment losses kept at bay for so long would
have to be reported to shareholders. It also meant that an additional $200 million
would have to be trimmed from Enron's assets.
On Oct. 15, Vinson & Elkins delivered its report saying that no further
investigation into the partnerships was necessary. The next day, Enron announced
it was deducting
$1 billion from its third-quarter earnings, producing its its first quarterly loss in
more than four years.
The next morning, the news for investors got even worse. The Wall Street Journal
had reported that $35 million of Enron's losses were related to its dealings with two
limited partnerships run by Mr. Fastow.
As one thread pulled away, the whole garment unraveled. The stock price, which
had been in the low $30's, dropped to just above $20 a share on Monday, Oct. 22.
During part of the price collapse, Enron employees with huge percentages of their
retirement funds in Enron stock could not sell their shares because the company,
coincidentally, was shifting the administration of its retirement plan. Employees'
accounts were temporarily frozen.
With the market clamoring for action, on Oct. 24, Enron placed Mr. Fastow on
leave. He would never return to the company.
The next day, Enron began casting about for a lifeline. Stanley Horton, the head of
Enron's pipeline group, had lunch with Stephen W. Bergstrom, the president of a
Houston rival, Dynegy Inc. Mr. Horton opened up, telling his competitor about the
troubles unfolding at Enron. While he had not cleared the idea with Enron's
chairman, Mr. Horton suggested that a merger of the two companies was the
answer.
Intrigued, Mr. Bergstrom called Dynegy's chief executive, Chuck Watson, who was
out of town attending his ailing mother in the hospital. The deal struck Mr. Watson
as interesting - Dynegy had long resented the shadow of its crosstown competitor -
but he insisted on hearing from Mr. Lay. The call came that afternoon, and the two
men agreed they would meet the next morning.
Enron, concerned that it needed advice before proceeding further, reached out to
the law firm of Weil, Gotshal & Manges in New York. Thomas Roberts, a Weil,
Gotshal partner, was already planning to fly to Dallas the next day for a college
scouting trip with his daughter. He agreed to hop a quick flight down to Houston
from there.
Meanwhile, on the 20th floor in the Enron building, things were getting worse.
Officials from Enron called Mr. Bauer at Andersen, asking some technical
accounting questions. As they chatted, one of the Enron officials dropped a bomb:
it appeared that Chewco, which had been counted as an independent entity, did
not meet the accounting requirements for such a designation.
Over the coming days, according to a memo he wrote for the file, Mr. Bauer learned
that papers for a secret side deal had been drawn up involving Mr. Fastow and Mr.
Kopper when Chewco was formed. That side deal had shifted the ownership of
Chewco away from independent investors, a fact that meant Chewco - and even
JEDI - had never been independent entities. Instead, all of Enron's transactions
with them had simply been transactions with itself. The accountants at Andersen
informed Enron that the hiding of the side deal may have been a criminal act.
Even with talks under way with Dynegy, the chances that Enron would survive
must have seemed slim. The stock price had fallen to just above $15 a share, and
was still sinking. Credit rating agencies were considering a reduction in Enron's
rating, which would only increase the financial pressure. On Oct. 26, with options
running out, Mr. Lay reached out to his friends in Washington.
He telephoned Donald L. Evans, the commerce secretary and one of President
Bush's closest friends, with whom he frequently spoke. But Mr. Evans was in St.
Louis for the day.
On Saturday, Dynegy's Mr. Watson arrived at Mr. Lay's home, and the two men
hammered out a deal in the kitchen. Mr. Lay agreed that he would step down from
the merged company. At the same time, Mr. Roberts and a colleague from Weil,
Gotshal
headed to Enron to explore other options for the company. The lawyers thought
they would be there for a couple of hours; they did not leave that day.
By Sunday, Mr. Lay was back on the phone to Washington, this time calling Paul
H. O'Neill, the Treasury secretary, at his apartment in the Watergate. Mr. Lay
described Enron's problems, suggesting that the company's collapse could put the
entire financial system at risk. Mr. O'Neill then asked Peter R. Fisher, the under
secretary for domestic finance, to examine that thesis. Mr. Fisher ultimately
advised Mr. O'Neill that such aftershocks were unlikely.
On Monday, Oct. 29, Mr. Evans returned to his office and telephoned Houston. Mr.
Lay ``indicated that he would welcome any support the secretary thought
appropriate'' in dealing with the credit rating agencies, said James Dyke, Mr.
Evans's spokesman.
Later that morning, Mr. Evans went to the weekly meeting of the administration's
economic team at the Treasury Department. Before going into lunch in a small
conference room off the Treasury secretary's office, he pulled Mr. O'Neill aside and
mentioned the call from Mr. Lay. Mr. O'Neill responded that he had also received a
call, and that he, too, had decided against intervening.
gfchapterTime Runs OutLurching TowardBankruptcy Court
On the surface, the Dynegy deal seemed to be Enron's salvation. The two boards
tentatively agreed to the merger on Nov. 7. But by then, Enron had announced
that its storied financial performance since 1997 had been an illusion, one created
in large part by Mr. Fastow's partnerships.
The news jolted an already disbelieving marketplace: Correcting the improper
accounting for its dealings with Fastow partnerships since 1997, Enron reported,
meant $600 million in previously reported profits were wiped out.
Enron assured the Dynegy officials that its businesses were sound, and its only
problems stemmed from a temporary panic in the market, triggered by the news of
the $1.2 billion equity reduction.
Mr. Lay worked hard to reassure investors that the surprises were over.
``Everything we know, you know,'' he said in a conference call with analysts.
But again, the truth of Enron was far different than its projection of strength. The
company was hemorrhaging cash; it burned through $2 billion in just the week
after it signed the merger agreement. Worse, it could not account for where a large
portion of that money had gone. And it told Dynegy nothing about it.
On Nov. 19, the bottom dropped out. Enron filed its quarterly report, known as a
10-Q,
revealing the drain of cash and the fact that payment on a note had been
accelerated because of the troubles; Enron owed $690 million, payable within days.
At Dynegy, executives were outraged. They had received little advance warning that
the revelations in the filing were coming. And now, with the market in a full-blown
panic, Enron shares dropped from $9.06 a share to $6.99 a share on Nov. 20.
Mr. Watson of Dynegy was soon on the phone with Mr. Lay, and sent a follow-up
letter documenting their discussion. ``We have not been consulted in a timely
manner regarding developments since November 9,'' the letter said. ``We were not
briefed in advance on the issues in your 10-Q. Our team had to make repeated
phone calls to your finance and accounting officials in an attempt to obtain
information. Some of the most significant information in the Q was never shown to
us at all.''
Calls went out the night before Thanksgiving to lawyers, bankers and advisers. The
day after the holiday, Enron sent a corporate plane to New York to bring everyone
to Houston. In Houston, a series of proposals were floated that weekend for a debt
``holiday'' for Enron until the merger was completed. But, trying to wriggle its way
out of the $690 million debt payment that was due, Enron had made commitments
that prevented any deal from going forward.
The negotiations now moved to the Doral Arrowwood Resort and Conference Center
in Rye Brook, N.Y. The advisers took up several conference rooms; only once were
they disturbed, when a wedding reception was held outside where they were
working.
On Monday, Nov. 26, it seemed that an agreement had been reached for a deal at a
reduced price. Mr. Lay and the contingent from Enron headed to the airport at
Teterboro, N.J., where the corporate plane awaited them. But just as they were
taxiing on the runway, a call came through on one executive's cellphone with news
that Mr. Watson was saying he could not sign off on a deal without his board's
approval. The airplane headed back to the hangar, where Mr. Lay took part in a
conference call with advisers and Dynegy officials.
On Wednesday morning, Nov. 28, some of Enron's directors gathered in the
company's board room; others phoned in. They were prepared to discuss possible
changes in the merger agreement. But before that started, Mr. Lay was notified
that he had a call waiting outside.
Mr. Lay left the room for a few minutes, then returned looking downhearted. ``I
just talked to Chuck Watson,'' he said, according to a person who was there. ``He
said he's terminating the merger.''
Time was up. Enron had no options left. Beginning at noon on Monday, lawyers
descended on Enron again, struggling to assemble a list of creditors and other
information they needed to finally seek bankruptcy protection. At 7 p.m. Saturday,
Dec. 1, the board of Enron met for a several-hour meeting. Finally, the motion to
declare bankruptcy was put before the directors. They unanimously supported it.
The lawyers worked through the night, putting the finishing touches on the filing.
Then, early in the morning of Dec. 2, Steven Vacek, a paralegal in Weil, Gotshal's
Houston office, sat down in front of a computer and signed onto the Internet site
for the Federal Bankruptcy Court in New York. The necessary information was
filled in, and the attachments made.
At 4:28 a.m., Mr. Vacek clicked the ``submit'' button. The bankruptcy petition was
filed.
Enron, which was supposed to have found its future in cyberspace, instead had
turned to the Internet to declare its demise.
Jeff Gerth, Richard A. Oppel Jr., Richard W. Stevenson, and Don Van Natta Jr. also contributed
to this article.
nytimes.com |
