FW: Texas Monthly (November 2001): How Enron Blew It

FYI
-----Original Message-----
From: Lees, Lisa=20
Sent: Thursday, October 25, 2001 3:05 PM
To: Gray, Barbara N.
Subject: FW: Texas Monthly (November 2001): How Enron Blew It

=20
-----Original Message-----
From: Denny, Jennifer=20
Sent: Wednesday, October 24, 2001 1:43 PM
To: Lees, Lisa
Subject: FW: Texas Monthly (November 2001): How Enron Blew It

=20

-----Original Message-----=20
From: Puthigai, Savita=20
Sent: Wed 10/24/2001 11:11 AM=20
To: Engel, Thomas; Denny, Jennifer=20
Cc:=20
Subject: FW: Texas Monthly (November 2001): How Enron Blew It

-----Original Message-----=20
From: McKinney, Lara =20
Sent: Wednesday, October 24, 2001 8:43 AM=20
To: Enron London - EOL Product Control Group; Puthigai, Savita=20
Subject: FW: Texas Monthly (November 2001): How Enron Blew It=20

FYI - it is a good article=20

-----Original Message-----=20
From: Connelly, Angela =20
Sent: 24 October 2001 10:59=20
To: McKinney, Lara=20
Subject: FW: Texas Monthly (November 2001): How Enron Blew It=20

This is a long one - but definitely worth reading.=20

Cover title: Enron's Cutthroat Culture=20
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How Enron Blew It=20
Less than a year ago, the Houston-based energy behemoth had everything: mon=
ey, power, glitz, smarts, new ideas, and a CEO who wanted to make it the mo=
st important company in the world. Now its stock is down, wall street is be=
arish, and the CEO is gone. What went wrong?

by Mimi Swartz < <http://www.texasmonthly.com/mag/issues/authors/mimiswartz=
.php<<=20
THE ENRON SKYSCRAPER NEAR THE SOUTH END OF HOUSTON'S DOWNTOWN feels like th=
e international headquarters of the best and the brightest. The lobby in no=
way resembles the hushed, understated entryways of the old-fashioned oil c=
ompanies, like Shell and Texaco nearby. Enron, in contrast, throbs with mod=
ernity. The people hustling in and out of the elevators are black, white, b=
rown; Asian, Middle Eastern, European, African, as well as American-born. T=
hey are young, mostly under 35, and dressed in the aggressively casual unif=
orm of the tech industry-the guys wear khakis, polo shirts, and Banana Repu=
blic button-downs. Almost preposterously fit, they move through the buildin=
g intently, like winners. Enron is nothing if not energetic: A Big Brother-=
size TV screen frantically reports on the stock market near a bank of eleva=
tors, while another hefty black television relaying the same news greets pe=
ople entering from the garage. A sculpture of the corporate symbol, an E ti=
pped at a jaunty angle, radiates colors as it spins frenetically on its axi=
s; a Starbucks concession on the ground floor keeps everyone properly caffe=
inated. Multicolored, inspirational flags hang from the ceiling, congratula=
ting Enron on its diversity and its values; one more giant banner between e=
levator banks declares Enron's simple if grandiose goal: "From the World's =
Leading Energy Company to . . . The World's Leading Company!"

For a while, that future seemed guaranteed, as Enron transformed itself fro=
m a stodgy, troubled pipeline company in 1985 to a trading colossus in 2000=
. It was a Wall Street darling, with a stock price that increased 1,700 per=
cent in that sixteen-year period, with revenues that increased from $40 bil=
lion to $100 billion. "The very mention of the company in energy circles th=
roughout the world creates reactions ranging from paralyzing fear to envy,"=
notes a 2001 report from Global Change Associates, a firm that provides ma=
rket intelligence to the energy business.

This Enron was largely the creation of Jeff Skilling, a visionary determine=
d to transform American business. Hired sixteen years ago as a consultant b=
y then-CEO Ken Lay, Skilling helped build a company that disdained the old =
formula of finding energy in the ground, hauling it in pipelines, and then =
selling it to refineries and other customers. Instead, it evolved into a co=
mpany that could trade and market energy in all its forms, from natural gas=
to electricity, from wind to water. If you had a risky drilling venture, E=
nron would fund it for a piece of the action. If you wanted your megacorpor=
ation's energy needs analyzed and streamlined, Enron could do the job. If y=
ou were a Third World country with a pitiful infrastructure and burgeoning =
power needs, Enron was there to build and build. Basically, if an idea was =
new and potentially-and fantastically-lucrative, Enron wanted the first cra=
ck. And with each success, Enron became ever more certain of its destiny. T=
he company would be the bridge between the old economy and the high-tech wo=
rld, and in February of this year, Skilling reaped his reward when he succe=
eded Lay as chief executive officer. Enron, says Skilling, "was a great mar=
riage of the risk-taking mentality of the oil patch with the risk-taking me=
ntality of the financial markets."

The Enron story reflects the culture that drove American business at the en=
d of the twentieth century. Like the high-tech companies it emulated, Enron=
was going to reinvent the American business model and, in turn, the Americ=
an economy. Maybe it was natural that this Brave New World also produced a =
culture that was based on absolutes: not just the old versus the new, but t=
he best versus the mediocre, the risk takers versus the complacent-those wh=
o could see the future versus those who could not. The key was investing in=
the right kind of intellectual capital. With the best and the brightest, a=
company couldn't possibly go wrong.

Or could it? Today Enron's stock trades at around $35, down from a high of =
$80 in January. The press cast Enron as the archvillain of California's ene=
rgy crisis last spring, and Skilling caught a blueberry pie in the face for=
his relentless defense of the free market. A long-troubled power plant pro=
ject in India threatened the company's global ambitions. Telecommunications=
, in which Enron was heavily invested, imploded. Wall Street analysts who o=
nce touted the company questioned its accounting practices. Some of the cha=
nge in Enron's fortunes can be attributed to the economic downturn in uncer=
tain times that has afflicted all of American business. But the culture tha=
t the company created and lived by cannot escape blame.

ENRON, JEFF SKILLING SAYS, HAD "a totally different way of thinking about b=
usiness-we got it." At Enron, in fact, you either "got it" or you were gone=
-it was as simple as black and white. It is not coincidental, then, that th=
e color scheme of Skilling's River Oaks mansion mirrors the corporation he =
once headed. Here, the living room's white walls shimmer against the mahoga=
ny floors. Black leather trims the edge of snowy carpets. Billowy sofas set=
off the jet-black baby grand. In the entry, white orchids cascade from a b=
lack vase on a black pedestal table that in turn pools onto cold, white mar=
ble. There is only one off-color note: After almost twenty years, Jeff Skil=
ling is no longer associated with Enron, having resigned abruptly after jus=
t six months as CEO. Once, Skilling was hailed as the next Jack Welch (Gene=
ral Electric's masterful CEO), as one of Worth magazine's best CEO's in Ame=
rica (anointed in 2001), and even as a daredevil who hosted the kind of unc=
hained adventure junkets in which, a friend told BusinessWeek, "someone cou=
ld actually get killed." Today, he sounds more like Ebenezer Scrooge on Chr=
istmas morning. "I had no idea what I'd let go of," Skilling says of all th=
e personal sacrifices he made while retooling Enron.

From a black chair in the white library, across from a huge black and white=
photograph of his daughter and two sons, Skilling clarifies. The demands o=
f working 24-7 for Enron caused him to ignore his personal finances. Divorc=
ed, he lived in a 2,200-square-foot house without a microwave or a dishwash=
er. He almost missed his brother's wedding. "Learning a foreign language-I =
never learned a foreign language!" he exclaims. He never once took his youn=
gest son to school. "I'm interested in the kids. You don't do kids in fifte=
en-minute scheduling." Travel: "You can't go to Africa for a week and get a=
nything out of it!" Skilling includes the study of architecture and design =
on his list of missed opportunities, then he stops and sighs. "I'm not sure=
that fulfillment in life is compatible with a CEO's job," he says, finally=
. Then his eyes lock on mine, and his voice, which had softened, regains it=
s pragmatic edge. "It would have been easy to stay," he says. "But that wou=
ld not have been good for me."

He's a smallish, ruddy-faced man who keeps himself at fighting weight, hand=
some in the way of corporate titans, with piercing cheekbones and that assi=
duously stolid gaze. But the impatience Skilling once reserved for cautious=
underlings and dull-witted utility company executives is now targeted at r=
eporters who have labeled his resignation "bizarre" and associates who are =
bitterly skeptical of his need for family time. His shrug stretches the lim=
its of his shimmering blue button-down, and his matching blue eyes look put=
upon. "I'm surprised," he says, "that people have so much trouble understa=
nding this."

PEOPLE WHO PASSED THROUGH DOWNTOWN HOUSTON in the late eighties or early ni=
neties couldn't help but notice a funny and, for its time, novel scene unfo=
lding throughout the workday at the base of the Enron Building. From nine t=
o five and before and after, you could see people slipping out of the prist=
ine silver skyscraper to smoke. They perched on the chrome banisters or lur=
ked near the glass doors at the entry, puffing like mad. They always looked=
hurried and furtive, even ashamed. Whatever people knew about Enron in tho=
se days (and most people didn't know much), it was often associated with th=
at scene: Enron boasted one of the first nonsmoking corporate headquarters =
in Houston, and there couldn't have been clearer evidence of its break with=
the energy world of the past. What macho engineer would have put up with s=
uch humiliation?

But this company was a child of another time, that period in the mid-eighti=
es when chaos enveloped the gas business. Federal deregulation of natural g=
as turned a steady, secure industry, in which gas pipeline companies freque=
ntly enjoyed a monopoly in portions of the areas that they served, into a v=
olatile free-for-all. The situation was compounded five years later by fede=
ral deregulation of the pipeline business. So it happened that a gentlemanl=
y gas pipeline company, Houston Natural Gas (HNG) found itself under attack=
from Coastal Corporation, Oscar Wyatt's less than gentlemanly firm. HNG wa=
s then run by Lay, a sturdy, taciturn former economics professor and Transc=
o chief operating officer who had a passion for military strategy. (His doc=
toral thesis at the University of Houston was on supply and demand in the V=
ietnam War.) Lay, who was from Missouri and never succumbed-at least outwar=
dly-to Texas brashness, had done well enough: Thanks to canny expansions, H=
NG's pipelines stretched from Florida to California and throughout the stat=
e of Texas.

HNG fended off Coastal, but to protect the company from other takeover atte=
mpts, Lay nimbly engineered the sale of HNG in 1985 to a friendly Nebraska =
pipeline concern called InterNorth, one of the largest pipeline companies i=
n the country at the time. Then, a funny thing happened: HNG started acting=
in a way that would characterize the company for years to come-a lot like =
Coastal. What the Nebraskans blithely labeled "the purchase" was being call=
ed "the merger" back in Houston, and before long, following some particular=
ly brutal politicking between Omaha and Houston, the company's center of gr=
avity started shifting toward Texas, and shortly after that, Ken Lay was ru=
nning a new company called Enron. "Over time it became clear that Lay had a=
better vision of the future," says one person associated with Enron at tha=
t time. "He never fought change. He embraced change."

Lay had won, but what exactly did that mean? Enron was saddled with massive=
debt from the takeover attempt, and thanks to deregulation, no longer had =
exclusive use of its pipelines. Without new ideas-for that matter, a whole =
new business plan-the company could be finished before it really even got s=
tarted.

LIKE MANY PEOPLE WHO TEAMED UP WITH ENRON IN THE EIGHTIES, Jeff Skilling ha=
d spent a lot of time in the Midwest, and he was self-made-at fourteen he h=
ad been the chief production director at a start-up TV station in Aurora, I=
llinois. (His mother would drop him off there every day after school.) "I l=
iked being successful when I was working, and I was smart," he told Busines=
sWeek earlier this year. But unlike many of his Enron colleagues, Skilling =
wasn't deliberate and soft-spoken and happy to go home at five o'clock; he =
was anxious and excitable, and nothing, but nothing excited him more than w=
hat he would come to call "intellectual capital." He loved being smart, and=
he loved being surrounded by smart people. He graduated from Southern Meth=
odist University, went into banking-assets and liability management-and too=
k on Harvard Business School, where he graduated in the top 5 percent of hi=
s class. Then Skilling took the next step on what was then the new, souped-=
up path to American success: He joined Manhattan's McKinsey and Company as =
a business consultant, and that is where Ken Lay found him in 1985.

It is often said of Lay that his instincts for hiring the best are flawless=
, and his choice of Skilling probably saved the company. Skilling was above=
all an expert at markets and how they worked. While everyone else was worr=
ying about the gluts and the shortages that defined the gas industry, he al=
one saw the parallels between gas and other businesses. And so in a world w=
here credit was nearly impossible to come by, Skilling came up with what he=
called the Gas Bank, which contractually guaranteed both the supply and th=
e price of gas to a network of suppliers and consumers. Enron would not be =
a broker but a banker. It would buy and sell the gas itself and assume the =
risk involved. And Enron would make money on transactions, much like an inv=
estment bank would.

Skilling worked up some numbers and found them "absolutely compelling." The=
n the McKinsey consultant took the idea to a meeting of about 25 Enron exec=
utives. He had a one-page presentation. "Almost to a person," Skilling says=
, "they thought it was stupid." Almost. After Skilling left the meeting dej=
ected, he walked Ken Lay to an elevator and apologized. Lay listened and th=
en said, "Let's go."

The Gas Bank was not an overnight success. For months Skilling woke up in a=
cold sweat, sure he had ruined not only his career but the careers of doze=
ns of colleagues who had assisted him. In fact, he had come upon one of tho=
se divides that seem to define his life: "I believed this whole world would=
be different, a huge breakthrough" is the way Skilling puts it today, and =
even if he is typically immodest, he was right. Fairly soon after launching=
, the company sold $800 million worth of gas in a week. True to Skilling's =
character, success turned out to be a matter of old versus new: He says the=
joke around Enron was that if a company's CEO was under fifty, "We were in=
." And he was in too: In 1990 Skilling finally left McKinsey and joined Enr=
on as the head of Enron Finance Corporation, a new division created just fo=
r him. In 1991 that company closed a deal that earned $11 million in profit=
. After that, says Skilling, "we never looked back."

Skilling and Lay also realized that the Gas Bank couldn't work unless it ha=
d a trading component. Myriad trades were needed to build the market that w=
ould make the project go. But by buying and selling enormous quantities of =
gas, Enron not only constructed a market but almost instantly came to domin=
ate it. The company had the best contacts, the best intelligence, and the b=
est access to supplies. That, in turn, attracted more customers who wanted =
to be part of the play. With so many customers in its pocket, Enron could b=
etter predict the direction of the market and could use that knowledge to m=
ake trades for its own benefit-Enron could in effect bet on which way the p=
rice of gas would go, as one might do with pork bellies or soybeans, but wi=
th startling accuracy, thereby generating profits higher than anyone could =
have ever imagined.

THIS CHANGE COULD NEVER HAVE OCCURRED without another change Skilling had m=
ade: He created, within Enron, a new culture to match its new trading busin=
ess. The idea was to build a "knowledge-based business," which demanded a s=
kill set not exactly prized by Enron's employees from the old HNG days. Mos=
t were deliberate, cautious, responsible, somewhat defensive people, most o=
f them men, of course-the kind of people you'd expect to find working in an=
industry regulated by the federal government. But now the company needed b=
older people for its bold new era: that included anyone who wanted to make =
money-lots of money-for themselves and for the company. "Enron was going to=
create a niche for itself or die," one former executive explains. "The peo=
ple who had narrow views eventually were forced out, because if they had na=
rrow views about other things, they had narrow views about the market."

Skilling wanted smart people but not just any smart people. He wanted the s=
martest people from schools like Harvard, Stanford, and maybe, Rice. And be=
cause his firm was now acting more like a bank than a pipeline company, he =
wanted to draw from the pool of recruits that would be attracted to the big=
gest and best investment banks, like Merrill Lynch or Credit Suisse First B=
oston. In addition to being smart, Enron people were also supposed to be "a=
ggressive." You were right for Enron if you didn't want to wait until you w=
ere thirty to close your own deals or move up in an organization.=20

You could see what he was looking for on "Super Saturdays" at the Houston h=
eadquarters: eight fifty-minute interviews with ten minute breaks in betwee=
n-the company might herd as many as four hundred people through in just one=
day. They were scored from 1 to 5 on their smarts, their problem-solving a=
bility, their passion for hard work, and what at Enron was called "a sense =
of urgency." People who scored less than 2.5 were scratched. The shrewdest =
candidates knew how to work Enron before they were even hired: These were t=
he types that automatically turned down the company's first offer, knowing =
Enron would come back with more. The starting salary was around $80,000. Ma=
ybe it wasn't a fortune-yet-but the signing bonus, about $20,000, was more =
than enough for a lease on the obligatory Porsche Boxster or one of the lof=
ts being renovated close to downtown. (Enron people didn't live in far-flun=
g suburbs. Suburbs were uncool and too far from the office.)

For the lucky winners, Enron offered the corporate equivalent of a gifted-a=
nd-talented program. New associates learned the latest techniques for struc=
turing energy deals, and there were rotations at Enron offices around the g=
lobe. The hours were long, but every possible need was taken care of. A com=
pany concierge handled all the things important people couldn't be bothered=
with: picking up dry cleaning or prescriptions, shining shoes, cleaning th=
e house, planning a vacation. Of course, a lot of people who worked for Enr=
on never got to take vacations-they were too busy making money-but they cou=
ld use the company gym and the company's personal trainers. If they were ov=
erweight or wanted to quit smoking, they could join Enron's Wellness Progra=
m. Massages were offered six days a week, from seven in the morning until t=
en at night. "They were so cutting edge," rhapsodizes someone involved with=
the company health care program at the time. "They really thought about th=
e psychology and what it took to keep these people going."

Skilling handed out titles analogous to those at Wall Street firms-analysts=
, associates, directors, and managing directors-but everyone knew that thos=
e titles didn't really matter. Money did. Instead of competitive salaries a=
nd decent bonuses, Enron offered competitive salaries and merit-based bonus=
es-with no cap. "If you really worked hard and delivered results, you could=
make a lot of money," says Ken Rice, who stayed with Enron for 21 years un=
til resigning recently as the head of the company's faltering broadband div=
ision. Or, as the saying goes, you got to eat what you killed. Gas traders =
with two or three years of experience could wind up with a $1 million bonus=
. And the more you produced, the closer you got to Jeff: Real hot dogs join=
ed him glacier hiking in Patagonia, Land Cruiser racing in Australia, or of=
f-road motorcycling in a re-creation of the Baja 1,000 race, ending at a sp=
ectacular Mexican villa. "Every time he'd speak, I'd believe everything he'=
d say," one loyalist says.=20

And why not? By 1995 Enron had become North America's largest natural-gas m=
erchant, controlling 20 percent of the market. But at a company where the b=
uzzword was "aggressive," that was no place to stop: Skilling and Lay belie=
ved the Gas Bank model could easily be applied to the electricity business.=
Firmly committed to the notion that a deregulated market meant better serv=
ice at lower prices for consumers (and untold profits for Enron), they bega=
n barnstorming the country, pressing their case with entrenched power compa=
ny presidents (who, with their multimillion-dollar salaries and monopoly se=
rvice areas, had little incentive to change) and energy regulators (who wer=
e somewhat more receptive, thanks in part to Enron's generous lobbying effo=
rts).

But the biggest winner of all was probably Jeff Skilling. In 1997 Ken Lay m=
ade him the president and chief operating officer of the company. By then, =
the division known as Enron Capital and Trade Resources was the nations lar=
gest wholesale buyer and seller of natural gas and electricity. The divisio=
n had grown from two hundred to two thousand employees, and revenues from $=
2 billion to $7 billion. "Mr. Skilling's experience so far with the turmoil=
in the industry has convinced him that he is on the right track," the New =
York Times noted. Everyone would certainly have thought so: Enron and Skill=
ing had totally transformed one industry and were well on their way to tran=
sforming another.

"FIRING UP AN IDEA MACHINE; Enron Is Encouraging the Entrepreneurs Within,"=
sang the New York Times in 1999. "In the staid world of regulated utilitie=
s and energy companies, Enron Corp is that gate-crashing Elvis," crowed For=
tune in 2000. Wall Street was demanding tech-size growth on a tech timetabl=
e, and Enron, in 2000, obliged with second quarter earnings of $289 million=
, up 30 percent from the previous year. That year the company seemed to dis=
cover a market a minute: Under Skilling, Enron was trading coal, paper, ste=
el, and even weather. No one blinked when a London wine bar became an Enron=
client. People drank more in warm weather than cold, so why not buy a hedg=
e against the usual winter downturn?

But most exciting to the financial world was Enron's entry into high-tech c=
ommunications. Because of the company's marketing dominance, EnronOnline be=
came another overnight success, handling $335 billion in commodity trades o=
nline in 2000. Enron, as usual, made its money on the spread between the bi=
d price and the asking price. Then there was the broadband business: To Enr=
on, trading excess capacity in large, high-speed fiber-optic networks (empt=
y lanes on the fabled information highway) wasn't that different from tradi=
ng the capacity of natural gas pipelines. So Enron created a market for wha=
t the industry calls bandwidth. Soon after, it also announced a twenty-year=
deal with Blockbuster to deliver movies on demand electronically to people=
in their homes. Enron looked like a company that couldn't lose. "Its strat=
egy of building businesses, shedding hard assets, and trading various commo=
dities can help it do well even in an uncertain market," BusinessWeek insis=
ted.

There was, however, another reason Enron did so well in such a short time: =
the company's hard-nosed approach toward its customers. The old notion of c=
ustomer service was based on the long haul-you had to nurse and coddle cust=
omers to keep them. But Enron had new markets and new ideas-customers had t=
o come to it. Over time, the company stopping referring to its business cli=
ents as customers and began calling them "counterparties."

Skilling wanted the biggest profits on the shortest timetable: Gains were m=
aximized by creating, owning, and then abandoning a market before it became=
overtaxed and overregulated. So if you wanted to launch a high-risk ventur=
e quickly-such as Zilkha Energy's new high-tech approach to drilling for oi=
l-you got your financing from Enron because a bank would take forever to un=
derwrite the project, if it ever would. But because Enron invented its mark=
ets and subsequently dominated them, Enron could set the terms of its deals=
, from the timeline to the method of accounting to whether the deal happene=
d at all.=20

While many businesses used what was known in the industry as "mark-to-marke=
t accounting," for instance, Enron used it on an unprecedented scale. The c=
ompany priced their deals at current market value-but it was always Enron's=
idea of the market value; companies that balked at their pricing didn't ge=
t deals. And while old-fashioned companies spread their profits out like an=
nuities over a period of years, Enron took most of its profit up-front. How=
ever many millions would be made on a deal that covered several years, they=
went on the books in the current year. If a few analysts thought there mig=
ht be something fishy about what they called "subjective accounting," inves=
tors didn't particularly care as long as the profits rolled in. As the mark=
et fluctuated and the landscape changed, the company might abandon a projec=
t that had been in the works for months because its profit margins weren't =
going to be high enough. "Enron is known for leaving people at the altar," =
says one former employee. Winning the highest possible profits for the comp=
any could even extend to Enron's attitude toward charity. When a fundraiser=
for the Houston READ Commission, a literacy group, called on Enron for a c=
ontribution, it was suggested that he start raising money for Enron's compe=
ting literacy charity: "Even the person who was supposed to give money away=
for Enron was supposed to make money for Enron," he says.

As Enron became more and more successful, the culture Skilling had created =
took on a dark side: The competition turned inward. As one member of the En=
ron family put it, "It became a company full of mercenaries." The change st=
arted at the bottom. As Enron's domination of the energy market grew, most =
of the recruiting frills fell away. New associates were treated much like t=
he commodities the company traded. Global Change's Enron spies reported ove=
rhearing orders like "I need a smart person-go buy me one" or "Buy me an in=
telligent slave, quick." Enron had never been the kind of place where peopl=
e sang to you on your birthday, but now the workaholism bordered on self-pa=
rody: A Random Acts of Kindness program lasted only a few months. It was to=
o disruptive. People couldn't get their work done.

And, of course, Enron had a program for institutionalizing creative tension=
. The Performance Review Committee, which had initially been installed by S=
killing in the Capital group, became known as the harshest forced ranking s=
ystem in the country. Employees were rated on a scale of one to five, and t=
hose with fives were usually gone within six months. (The PRC's nickname qu=
ickly became "rank and yank.") It was a point of pride that Skilling's divi=
sion replaced 15 percent of its workforce every year. As one Skilling assoc=
iate put it, "Jeff viewed this like turning over the inventory in a grocery=
store." Skilling's approach to business-get in and get out-had become Enro=
n's attitude toward its workers. In time, it would become many workers' att=
itude toward the company. Teamwork, never that valuable in a trading cultur=
e, went the way of the eyeshade and the abacus. If protocol required an Enr=
on higher-up to come from Europe to help with a project in the Third World,=
he might help-or he might not, depending on whether another, potentially m=
ore lucrative project was pending elsewhere.

Everyone felt the pressure to perform on a massive scale at massive speed: =
"They were so goal oriented toward immediate gratification that they lost s=
ight of the future," says one former employee. Anyone who couldn't close de=
als within a quarter was punished with bad PRC scores, as were the higher-u=
ps who had backed them. Past errors and old grudges were dredged up so ofte=
n as new ammunition in PRC meetings that the phrase "No old tapes" became a=
n Enron clich?. "People went from being geniuses to idiots overnight," says=
one former Enron executive.

In such a hothouse, paranoia flowered. New contracts contained highly restr=
ictive confidentiality agreements about anything pertaining to the company.=
E-mail was monitored. A former executive routinely carried two laptops, on=
e for the company and one for himself. People may have been rich at Enron, =
but they weren't necessarily happy. One recruiter described the culture thi=
s way: "They roll you over and slit your throat and watch your eyes while y=
ou bleed to death."

BEFORE JEFF SKILLING COULD TRANSFORM ENRON from the world's leading energy =
company into the world's leading company, he had to make one more change: J=
ust as he had done ten years before, Skilling had to purge the company of i=
ts remaining old order. Where Enron once prized cautious executives who dea=
lt with tangible assets like pipelines, it now valued bold executives who d=
ealt with intangible assets. Pipelines, power plants-they may have been Enr=
on's pride, but Skilling wanted them gone. Expensive, long-term building pr=
ojects had no place when Wall Street was devoted to quick profits and enorm=
ous returns on investment capital, and Skilling knew it. "It wasn't the tim=
e for long-term approaches," an Enron executive says of Wall Street's mood.=
"It was the technology era."

To rid Enron of the last vestiges of its past, Skilling had to take on Rebe=
cca Mark, long considered his rival for the CEO's job. Mark was for many ye=
ars the poster child for the Enron way: Young, attractive, aggressive-her n=
ickname was Mark the Shark-she came from sturdy Midwestern stock but had th=
e requisite Harvard MBA. Mark was largely responsible for the success of En=
ron International, the asset-heavy side of the company where she developed =
$20 billion worth of gas and power plants, which accounted for 40 percent o=
f Enron's profits in 1998. For this she reaped breathtaking compensation-on=
e Enron executive estimated $10 million-and adoring press clips, including =
two appearances on Fortune's list of the fifty most powerful women in corpo=
rate America.

But then Mark ran into trouble with a gas-fired power plant in Dabhol, Indi=
a, one of the largest ever constructed. She had played the game the Enron w=
ay: Taking Enron into a new market, she had finagled low import taxes (20 p=
ercent instead of the usual 53) and hung in through 24 lawsuits and three c=
hanges in government. But the time and expense needed to make India and oth=
er Enron plants around the globe successful did not mesh with Enron's goals=
, and Skilling's impatience with Mark grew.

Forcing Mark out, however, was no easy matter. Key executives left, divisio=
ns were dismantled, but she remained. The truth was Enron didn't mind firin=
g lower-level employees, but it hated to fire the kind of aggressive, relen=
tless people it tended to promote. The company preferred humiliation-keepin=
g a director in his cubicle, say, but failing to include him in the glamour=
deals, or kicking someone upstairs with a fancy title. (One particularly d=
ifficult executive won a few years at graduate school, gratis.) A company a=
s smart as Enron could probably deduce too that dispatching one of the most=
visible businesswomen in the country would provoke a public-relations disa=
ster. So Lay and Skilling did something classically Enronian: They gave Mar=
k her own company. Despite Skilling's contempt for asset-heavy businesses, =
Enron spent more than $2 billion to buy a run-of-the-mill British water uti=
lity that could serve as Enron's entry into the emerging world of water pri=
vatization. Mark was put in charge of making Enron, yes, the world's greate=
st water company. Azurix, as the new business was called, looked like anoth=
er sure thing: Its IPO in 1999 raised $695 million.=20

But Mark had to succeed on Enron's increasingly abbreviated timetable in a =
business fraught with political and emotional complexities. Water is not li=
ke gas or electricity-owners and governments are a lot less willing to give=
it up, even for lots of money. The company stumbled, layoffs commenced, an=
d confidence evaporated. By August 2000 the stock price, which had started =
out at $19, had fallen to $5. Mark's resignation followed, and Azurix, much=
diminished, was folded into Enron. "I think it's best for Rebecca to start=
afresh," Lay, who had been a mentor to Mark, told the Wall Street Journal.=
Or as one critic put it, "They were more interested in destroying the old =
culture than running a business."=20

As 2000 drew to a close, Skilling was in total command. In December Ken Lay=
announced the inevitable: "The best time for the succession to occur is wh=
en the company is doing well," he told the press. "Enron is doing extremely=
well now." In February 2001 Jeff Skilling took over the CEO's job.

ALMOST IMMEDIATELY THE TROUBLE STARTED. Enron's domination of the electric-=
power market made it an instant target in the California deregulation debac=
le. Both PBS's Frontline and the New York Times took on Enron, portraying t=
he company as a heartless colossus that used its influence in Washington (L=
ay and Enron's political action committee are the top contributors to Georg=
e W. Bush) to force old people on fixed incomes to choose between buying fo=
od or electricity. Skilling and Lay appeared on camera singing belligerent =
anthems to the free market, while another memorable scene juxtaposed one of=
the company's jackallike traders against a hapless state employee in Calif=
ornia, as both tried to buy power online. The Times reported that Lay had t=
ried to persuade a new federal commissioner to change his views on energy d=
eregulation. The bad press was, to say the least, ironic: Just as the media=
was pounding Enron for its omnipotence, Wall Street was discovering its we=
aknesses. By late March the stock price had slid to $50 a share from $80 in=
January.

Within Enron, the asset-based divisions took the rap for the decline. (The =
India plant continued to be enormously costly, at least in part because of =
constant turnover within Enron's management team.) But the California situa=
tion was more visible and therefore more damaging, despite Enron's claim th=
at the state had never built enough power plants to service its population =
and never properly managed those it had. "For three months Gray Davis did a=
very good job of blaming us," says Mark Palmer, a vice president for corpo=
rate communications. "We were a Texas company. There was a Texan in the Whi=
te House. California was a state that didn't put him in office, and his big=
gest contributor was a Texas energy company. Performance is going to take c=
are of our stock price. The truth will take care of Gray Davis." (Californi=
a utilities still owe Enron $500 million, another reason stockholders might=
be panicky.) But more problematic than the crisis itself was Skilling's al=
l too apparent lack of contrition. Facing down his critics, he cracked a jo=
ke comparing California with the Titanic. ("At least the Titanic went down =
with its lights on.")

But the biggest problem was Enron's telecommunications division, which had =
been responsible for at least one third of its heady stock price. Investors=
believed that Enron could revolutionize high-speed communications, just as=
it had revolutionized gas and power. Enron estimated the global market for=
buying and selling space over fiber-optic cable would grow from $155 billi=
on in 2001 to $383 billion by 2004-but then the tech bubble burst. So too d=
id the much-hyped movies-on-demand deal with Blockbuster. For the first tim=
e in its confoundingly successful life, Enron had nothing new to take to ma=
rket. Like the popular high school girl who suddenly packs on a few pounds,=
Enron suddenly looked less alluring to Wall Street.

Skilling launched a campaign to keep Enron's most important cheerleaders, t=
he stock analysts, in the tent, but he wasn't cut out to be a supplicant. D=
uring the reporting of first quarter profits, he called an analyst who chal=
lenged Enron's financial reporting an "asshole." When the company reported =
hefty second quarter profits, many analysts questioned whether those profit=
s had come from the generation of new business or from the sale of old asse=
ts. Ignoring the growing chorus critical of Enron's accounting, Skilling pr=
omised, as he always had, that innovations were just around the corner. "Th=
ere wasn't any positive news," Carol Coale, of Prudential Financial, says n=
ow. "Basically, he talked me out of a downgrade."

The business press, so generous in the past, turned surly. Fortune had aske=
d in March whether Enron was overpriced. ("Start with a pretty straightforw=
ard question: How exactly does Enron make its money?") The routine cashing =
in of stock options that were about to expire by key executives was portray=
ed in the media as a fire sale. (Skilling had sold $33 million worth, Ken L=
ay and Ken Rice close to four times that amount.) Then the Wall Street Jour=
nal reported on a fund run by the CFO that had been a source of strife with=
in the company. (It was essentially risk management against Enron's possibl=
e failures.) Every negative story seemed to produce a concurrent drop in th=
e stock price: By late August it had fallen below $40. Enron, so institutio=
nally unforgiving, finally got a taste of its own medicine. "When Wall Stre=
et is in love with a stock, they're forgiving of something like accounting,=
" says Carol Coale. "When a company falls out of favor, all these issues ca=
rry more weight."

This fact was not lost on people inside the company, who suddenly started e=
xperiencing an attack of conscience. Those who had looked the other way as =
the most powerful Enron executives dumped their wives and married their sec=
retaries or carried on flagrant interoffice affairs now saw the error of th=
eir ways. "It just created an attitude," one executive still at Enron says.=
"If senior people are doing that, why are we held to a higher standard? Th=
ere was a real culture of 'We're above everyone else.'"=20

Loyalty had never been prized at Enron, so there was no reason to expect it=
now. An old-fashioned, slow-moving company like Exxon could demand hardshi=
p duty in Baku with the promise of greater rewards down the road. "But," as=
one Houston oilman explains, "if you have to negotiate a hardship duty wit=
h someone who doesn't have loyalty and has money, then you have a corporati=
on that's better suited for good times than bad."

As it turned out, that description applied to Jeff Skilling too. As the sto=
ck price stubbornly refused to ascend, he made no secret of his unhappiness=
and frustration. Then, after a trip to visit the families of three employe=
es killed at a plant in England, he had an epiphany: Life was short; for hi=
m, Enron was over. Ever stoic, Ken Lay returned to the CEO's office, named =
a new president, arranged a trip to New York to calm analysts and investors=
, and promised a kinder, gentler Enron in the future. Trading anything and =
everything was out. The company, Lay says, will still innovate but "innovat=
e much closer to our core." As for the culture: "Things like the Performanc=
e Review Committee, I think we could have applied better. By trying to cate=
gorize people into so many different categories, you ended up creating a mo=
rale problem."

That Skilling's supposedly brilliant colleagues were as shocked at the news=
of his departure as the rest of the business community may be testament to=
their lack of emotional intelligence. Despite Skilling's lengthy tenure wi=
th Enron, he'd always been contemptuous of the long haul; he'd always belie=
ved in cutting losses and moving on. But now that he was abandoning them wh=
en the company was in trouble, it was different. "Even Jeff's biggest detra=
ctors wouldn't have wanted him to walk out the door," one loyalist admits.

But on the day we meet, Skilling is looking forward, not back. "Look," he s=
ays with finality, "ninety percent of my net worth is in Enron. Were my int=
erests aligned with the shareholders? Absolutely."

Free of falling stock prices and shareholder pressures, he is nestling hims=
elf back into the world of ideas. His eyes flash as he talks about new tech=
nologies. "The first wave never gets it right," he says. "The stand-alone d=
ot-coms didn't work, but the technological applications will create a secon=
d wave that will change the world." Houston, he promises, will become the w=
orld's center of commodity trading, and he intends to be a part of it. In f=
act, he is already shopping for office space.

"This is the second wave, and Enron's got it," he says, almost breathless. =
"There are thousands of people running around the streets of Houston that g=
et it."