Clearly there is a problem in paradise that Ken Lay knows to
some extent that Enron is not doing well enough to sustain
his expectations and visions and his persona - his ego is
such that he cannot make the mid-course corrections because
if he does that, he really needs to abandon or step away
from his vision of the world’s leading energy company or
world’s leading company. It’s just too much for him to
do. There’s not one cost cutting memo from Ken Lay between
1988 and 2001 for example - because first movers - you don’t
have to worry about costs. But the leading vision needs
help and Ken and the Board make an extraordinary decision to
waive the company’s Code of Conduct for Enron’s Chief
Financial Officer, Andy Fastow. This begins a process that
turns out to be Enron’s greatest mistake.
the waiver not been granted, Enron would have had to face
some very harsh times and Ken Lay’s visions of becoming the
World’s leading energy company and much less the leading
company would have had to be tabled or abandoned. This
could not be accepted by Ken. It would be an embarrassment
a thousand or a million times greater than the Enron name
change ‘Enteron’. So Enron in small steps - and then
greater and greater steps becomes a company at war with
conclude - to understand and resolve the Ken Lay paradox.
It’s very complicated but it’s happened and it has to be
explained. We have to learn from it. We can make some
lemonade out of the lemons. But what we need at this point
is the rest of the story - beginning right now a few blocks
away. We need to have Jeff Skilling explain how and why
the job in retrospect was too big for him. And how and why
did he begin to cut corners. Where did the slippery slopes
begin and when did they get out of control. We need a
process analysis - step to step. Jeff, what were your
problems as CEO and what were the problems you inherited?
What weren’t your problems?
Ken Lay, we need to get back to this sort of analysis that
Ken gave before the bankruptcy during the Dynergy mergers
where Ken Lay said in a very forthright way, “Enron has
major problems”. But this is just the beginning. There
needs to be a lot more explanation than what we’ve had so
far. We need to get away from this - to this.
Ken Lay paradox can be understood as the story of over
ambition and slippery slopes, the things we all know about.
But it’s also the story of philosophical fraud and there’s a
whole tradition in philosophy called ‘Objectivism’ that’s
very important. It was a member of the Objectivist school
that first saw - and I remember nearly falling out of my
chair when I read the analysis at 10:30 one night in maybe
February 2002 that before Enron’s financial bankruptcy,
there was philosophical bankruptcy. That Enron was engaged
in a shared narrative - a fake reality. So the Enron story
- the Ken Lay paradox is the story of philosophical fraud -
a term I think we need to add to our vocabulary. But it’s
also the story of political capitalism - the unholy way of
creating new profit centers and gaming existing regulation.
And this is why my book is tentatively titled, ‘Political
Capitalism: Ensel, Enron and Beyond’.
Questions and Answers
you, knowing Ken Lay as you do, believe that deep in his
heart, he believes he is innocent of the charges that he is
on trial for today?
You’re asking me to do some psychoanalysis here. There is a
question of delusion and delusion is a form of - it can get
the point of mental illness. If you believe that Ken Lay
was delusional - that he just really did not see the
situation, what he should have done or what you would have
this person do is to get professional help. You go through
intervention and you come to understand reality and from
there you move back up. Is Ken Lay delusional? There were
a number of times when I met with him towards the end when
he seemed pretty oblivious to things. To the extent he was
delusional, I wish everything could have been handled
differently. I wish that he could have gone into
interventionism and from the very beginning - taken some
blame, assigned the blame to Jeff Skilling and to get the
truth out there. And I hope that we can get to this truth
during the trial and certainly after. And maybe the whole
truth will come out many years from now in a biography or
describing Key Lay, you used the adjectives enabler,
charmer, confidant, dreamer, great storyteller, ‘always in
spin mode’ and rule breaker. How do you see those words
meeting up with the fiduciary role of a Chairman and CEO who
should be a steward of the company’s assets?
have to be wonderful delegator. You have to pick the great
people around you - and the decision to choose Jeff Skilling
over Rich Kinder was a very tragic one.
your role working closely with Ken Lay did you see this
pattern all along or did it develop at some point in time
that you can identify?
a historian, it takes me a minimum of six months to
understand things after they have occurred so I can’t look
back and precisely identify a moment but it’s a path
dependence - it’s a process and to really get the story you
have to look at the little decisions and see how they grew
to big decisions. One example would be when the Board of
Directors allowed Ken Lay to award the travel business to
his sister. You know, ‘He’s a Great Man of the industry and
why not? Keep the Great Man happy’. But when the Board
makes little decisions like that and it leads to the huge
decision of waiving the Code of Conduct for Andy Fastow, you
have to understand that it’s a process analysis. So we’ve
got to - it’s a good question, we have to get to the small
beginnings and see how they grew.
what extent did Ken Lay and Jeff Skilling’s push to make
Enron the most highly leveraged company lead to it’s
I’ll just let the facts speak for themselves there.
You mentioned a speech that Ken Lay was scheduled to give in
November 2001. What are the highlights of his revolutionary
There are lots of numbers in here on volumes and how
everything Enron is doing is going that way [up]. total
revenues; positions in gas and electricity volumes - lot of
volumes, volumes, volumes; new products; Average daily
transactions. Market capitalization.. uh oh, uh oh.. we’re
going the other way here [down]. But current challenges,
general market, Enron broadband services, Deball? -
California power crisis, Zurich’s management changes, loss
of investor confidence. Hey - that’s a lot. But I cannot
remember if Ken Lay approved this or not - this might have
just come from other speeches - but a lot of problems. And
then, what do we do to regain market confidence; Continue to
meet financial targets; Improve communications; Drive more
open financial disclosure; Continue to reposition
underperforming assets; Implement better internal blocking
and tackling - sounds like they are trying to back to
what degree do you believe that deregulation of the
California’s energy markets added to Enron’s problems?
Well no, it helped Enron in tremendous ways but then it
added to Enron’s problems in other ways. They had a fixed
retail price and an unregulated wholesale price. Utilities
had to buy volumes so Enron and others could make the
wholesale price go up as high as it could - where normally
retail prices go up to knock wholesale prices down. So this
was a regulatory opportunity to make money that wouldn’t
have existed in the market. Now - to the extent that the
California debacle slowed down mandatory open access at the
retail level, it certainly did take away a major profit
opportunity for Enron - major.
And a final question. What would you do today specifically
if you could go back and make a life change before 1998.
Before 1998? Or would I stay at Enron? I would have
stayed at Enron. I would have sold all our stock after my
wife couldn’t go to sleep at $4.00 a share. But the Enron
experience for me as I think 95% or 99% of the Enron
employees would say was great until the final months. But
in retrospect, it was too good to be true. I’m not sure if
some of the jobs were adding shareholder wealth in
retrospect. It was in a sense too good to be true.