Former Enron CFO Andy Fastow raised hundreds of millions of dollars to bolster the company’s finances. But some employees saw problems with how he did it—problems too big to ignore. Listen to Episode 3 of our Bad Bets podcast 🎧
Enron's stock price rose astronomically in the late '90s, buoyed by investor confidence in former CEO Jeffrey Skilling-and by earnings reports that seemed to show Enron's profits growing by leaps and bounds. But as we now know, those numbers were engineered by a man named Andy Fastow, Enron's chief financial officer at the time. In this episode, we take a look at Mr. Fastow and hear from the whistleblowers who exposed him and Enron's financial engineering.
Andy Fastow: And in so doing, I caused a great deal of harm, not just financial harm, but a lot of personal harm to people as well. Sharon Watkins: The math on the spreadsheet didn't add up. Someone is going to be out 700 million. Who is it? Jim Timmons: He said, "I need a pool of capital to make investments with. Come up with some structure, and then let's talk about it."Jim Timmons: I thought I had a great idea, but it had to be structured the right way to be a success.
Jim Timmons: I said, how can you be the general partner when you're CFO of Enron? That's when he said I got a code of ethics waiver from the Board. So I didn't say anything more that day, but I went back to my office and could hardly believe what I'd heard. Jim Timmons: I don't know if that would've done any good. I think Andy had enough power at the time where if somebody double crossed him like that or tried to second guess him, I think they would've been a real short timer at the company. That's just my opinion.
John Emshwiller: But he was also effective. He brought in cash from investors, hundreds of millions of dollars, which helps explain how he became CFO of one of America's largest companies in his thirties. Fastow reportedly made millions as CFO, but according to Timmons, it still wasn't enough. John Emshwiller: Timmons decided it was time to warn them, but he had to be discreet. When it's your job to recruit investors, the idea that you're nudging them away is not something you want getting back to your boss, especially when your boss is Andy Fastow. So Timmons hatched your plan. He called up someone he knew at CalPERS.
John Emshwiller: In short, Timmons told him about the conflict of interest. The CalPERS official took notes on that yellow pad. Timmons was pretty clear.John Emshwiller: The CalPERS official ultimately agree with Timmons. It was too risky to invest. John Emshwiller: We tried getting in touch with a pension fund official who at that meeting, but he didn't return phone calls. Timmons was stunned. Fastow was telling the investors they came first, not Enron. I can understand Timmons reaction, but when I think about it, Fastow probably couldn't have said anything else. And Enron likely wouldn't have wanted him to. First, who would invest money in a partnership where the top guy says his loyalty isn't to the partners.
John Emshwiller: Enron's Board was top notch, people from business, academia, and government. Some had a good deal of expertise in finance and accounting, and they were well compensated, earning twice the average paid to public company directors according to a later Senate report. Yet during those last years, the Board didn't stop Fastow, even when they could have.
John Emshwiller: Some Board members did raise concerns. For instance, Rebecca Mark-Jusbasche, who is the CEO of Enron International told us that she voted against Fastow's conflict waiver. She described Fastow's statements about the meeting as finger pointing and self-serving. She says the conflict of interest issue was discussed a lot, and she doesn't recall Skilling making remarks anything like those described by Fastow. But in the end, the Board approved it.
John Emshwiller: I still shake my head when I think about the decision to approve LJM, so many smart people, expert opinions, so many comforting assurances, yet none of that could change the fact they were green lighting a giant conflict of interest, involving top financial officer. They put Enron on a road that a little over two years later took the company over a cliff.
John Emshwiller: Watkins joined Enron in the early 1990s. She had a reputation for having a short fuse, especially when she thought someone was being incompetent. By 2001, she was a Vice President in the Global Finance unit, working for Andy Fastow. Shortly after she joined Fastow's operation in June, a spreadsheet landed on her desk. It listed about 200 Enron assets worth around $.
John Emshwiller: Alarmed and with big losses on her mind, Watkins took her concerns straight to the top, Enron's CEO Ken Lay. First, she wrote a memo and sent it to Lay. Here she is reading from it. John Emshwiller: A week later, Watkins met with Lay, Enron's captain. Face to face, she was fired up and ready. She only had 30 minutes. She quickly took her seat in Lay's conference room.
John Emshwiller: Watkins hid her shock, worried Lay wasn't taking her seriously. She said Lay assure her they would look into it and fix any problems. So how did you feel when the meeting ended, and you walked out? John Emshwiller: They gave Watkins a new computer. Much later in court, Fastow would acknowledge he wanted Watkin's computer seized. Soon after Watkin's August meeting with Lay, the company transferred her to a new job in human resources. She had put in a request to get out of Fastow's department. Watkins had been hopeful when she walked out of Lay's office in August, but as the weeks went by, she became wary.
John Emshwiller: Watkins, however, didn't take her concerns with the press, nor did she immediately leave the company. In fact, she wrote another memo for Lay in late October 2001 as Enron's death spiral had begun, suggesting how he might save the company and himself. But Enron's former Director of Private Equity, Jim Timmons, did go to the press. He faxed us documents about LJM that broke the story open.
Rebecca Smith: And then he went on to say that he thought that the way Andy's character had been disparaged was unfair. He said that his character had been "loosely thrown about." So he appeared to be standing behind his CFO, but of course, we saw very soon that he really wasn't.
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