13
Oct
2014

The Last Chance

With Jeff Skilling out and Ken Lay back in, this was Enron’s last chance to turn itself into prada candy 30ml. Did it really even have a chance? Not according to Sherron Watkins, an Enron vice president, who was Fastow’s “’eyes and ears,’ in corporate development.” Watkins conducted a report on everything from the losses hidden by special-purpose entities and the “shenanigans at broadband,” to Arthur Andersen’s perfume for women.

Ken Lay was under a lot of stress that quarter; Not only was there Watkin’s report to think about, he also had a very difficult board meeting to deal with. Enron was announcing the termination of the raptors in an attempt to avoid addressing the fact that the previous financial statements were wrong. This would allow them to report a $1.2 balance-sheet error as “a simple equity reduction.” (Pg 368) Arguably, their biggest problem was yet to come.

It came in the form of two reporters, John Emshwiller and Rebecca Smith from the Wall Street Journal. They were responsible for exposing Fastow’s double-agent status as he quietly profited from both LJM and Enron. Enron’s stock value continued to plummet. The article also awoke the sleeping SEC who subsequently initiated an informal inquiry into the partnership. When asked about his profits from LJM, Fastow admitted to having made $45 million. Astonishingly, he actually made $60.6 million. The next day, Enron’s president and COO, Greg Whalley, fired him unceremoniously on the spot.

For the first time, Enron acknowledged that it was drowning, but by the time they called for help, there was no one around who was willing to save them. In exchange for a loan, Enron had to offer its most precious possession, “full access to its secret trading books.” This kept them afloat but just long enough to make “one more desperate Hail Mary pass – a last-ditch deal, code-named Project Notre Dame.” (Pg 391) The deal involved an acquisition by Dynergy, one of Enron’s main competitors who jumped at the chance to buy a company that was once worth $70 million, for the new price of $10 million. It wasn’t much; Lay would not have the same control over the company and the name Enron would be lost, but at least the “core energy-trading operation” would be preserved. Furthermore, the deal would allow Enron to give investors a little good news for a change.

Unfortunately, the Dynergy deal dissolved as Enron’s credit rating fell “deep into junk-company territory.” Suddenly they had an extra $3.9 billion in debt and Enron Online had a closing share of 61 cents. (Pg 403) It was only a matter of time before Enron would declare bankruptcy. It eventually happened on December 2nd, 2001 at 2 a.m. Funnily enough, after Enron’s bankruptcy, Dynergy was also found to have created an SPE to create cash flow. They were fined $5 million to settle charges.