Enron redux

Living in the Enron Dream World

By JOSEPH NOCERA
THIS past Tuesday, Kenneth L. Lay, the disgraced former chairman of Enron, gave a remarkable speech before a hometown crowd in Houston. It's not every day that a prominent white-collar defendant makes an impassioned public defense barely a month before his criminal trial is set to start. That sort of thing tends to tick off prosecutors, not to mention judges.

Then there was the matter of the speech's content. Aggressively self-pitying would sum up the tone of Mr. Lay's remarks. "Of anything and everything that I could imagine might happen to me in my lifetime," Mr. Lay said, according to a text of his speech posted on his Web site, "the one thing I would have never even remotely speculated about was that some day I would become entangled in our country's criminal justice system."

He then went on to lay out his belief that a huge miscarriage of justice had taken place, largely because the "political and public hysteria" over Enron's failure had prompted the Justice Department's Enron Task Force to search for scalps among victimized Enron executives like, well, himself.

"Contrary to popular belief today," he said, "I firmly believe that Enron was a great company. Although, like most companies, it was not without some problems, Enron was a strong, profitable, growing company even into the fourth quarter of 2001."

As he has done consistently since Enron's downfall, Mr. Lay assigned none of the blame for what happened to himself, pointing his finger instead at Enron's former chief financial officer, Andrew S. Fastow, whose secret partnerships and pocket-lining side deals, according to Mr. Lay, caused the banks to lose confidence in the company once they were exposed, after which it lost its access to the capital markets and was doomed.

"The Enron Task Force investigation," Mr. Lay said, "is largely a case about normal business activities typically engaged in on a daily basis by corporate officers of publicly held companies throughout the country." The task force, he added, was trying to "criminalize these very same business activities."

He concluded by asking former Enron employees - the same people who lost everything when the company crashed to earth - to stand alongside him and proclaim "the truth": that Enron was "a real company, a substantial company, an honest company, a company that had a vision and values, a company that changed industries and markets for the better, a company that we were all proud to work for."

"A great company?" "A strong, growing, profitable company?" "A real company, a substantial company, an honest company?" Who is he trying to kid?

Actually, I know who he's trying to kid: himself. He's been kidding himself ever since Enron began its downward spiral in the summer of 2001. Indeed, it was precisely Mr. Lay's inability to look the thing straight in the eye and admit what Enron really was - a corporate version of three-card monte - that has gotten him in so much trouble.

Let's skip over the single stupidest thing Mr. Lay did during all the years he ran Enron, for which he can blame no one but himself. With the board's backing, Mr. Lay granted Mr. Fastow's request that he be exempt from the company's conflict of interest rules so that he could manage - and profit from - a series of partnerships that existed solely to conduct transactions with Enron. Even a saint shouldn't be put in the position of negotiating on both sides of a deal, and Mr. Fastow was hardly a saint.

Let's also skip over the reason Mr. Fastow set up the partnerships, which seems to have escaped Mr. Lay. They were vehicles that Enron absolutely had to have to disguise its true financial condition. With the help of the Fastow partnerships - and Mr. Fastow's willing accomplices on Wall Street - Enron hid billions of dollars in debt, created illusory cash flow, and ginned up profits that never really existed.

An argument can be made, certainly, that this or that transaction amounted to "normal business activity," but taken together, their fundamental purpose was to paper over the fact that more cash was going out the door than was coming in. Far from tearing down Enron, Mr. Fastow was actually propping it up. Sure, he was skimming a little off the top for himself, but that was hardly the central problem.

Finally, let's take Mr. Lay at his word that he was clueless about the shell game that was going on just outside his door. After all, the Justice Department appears to have accepted Mr. Lay's argument that he was merely asleep at the switch, as opposed to criminally negligent, for the great bulk of Enron's sordid history.

But in the months before Enron went bankrupt, everything changed for Mr. Lay - and it is his actions during that narrow time frame that got him indicted. Before that time, Mr. Lay could fuss over fabric swatches for the new company airplane while Mr. Skilling ran the show, an anecdote recounted in "The Smartest Guys in the Room" (a book, it should be noted, that I played a role in creating, and in which I have a financial interest).

But from August to December 2001, all of Enron's problems were put right under Mr. Lay's nose. He couldn't avoid them. And given the choice between telling the truth to investors or continuing to pretend that Enron was a "strong, growing, profitable company," Mr. Lay opted for the latter. Let me put it another way. He lied through his teeth.

You remember those final months of the Enron debacle, don't you? Mr. Skilling, who, after years as the company's president, had assumed the title of chief executive just that February, suddenly quit late in the summer of 2001. As the stock swooned, and Wall Street began to ask tough questions about the company's condition, Mr. Lay assumed the chief executive position. He seemed to believe that his mere return as C.E.O. would be all it took to get the ship back on course.

But he was badly mistaken. By then, he company's water business had collapsed. Its broadband business was on life support. Sherron Watkins had written her infamous memo, outlining the accounting scams that had gone on under Mr. Fastow, and the likelihood that they would soon unravel. One such scam, called the Raptors, was already coming apart, which meant the company was going to have to take a huge hit to its earnings, possibly even a restatement. Arthur Andersen, Enron's craven accountants, had found a $1.2 billion mistake on the company's balance sheet. And on, and on.

And in the face of all those problems - problems that were being explained to him, in detail, by underlings; problems that were surely going to require the company to take an enormous loss in the next quarter - Mr. Lay told the world that everything was just fine. "My personal belief is that Enron stock is an incredible bargain at current prices," he told employees on Sept. 26. The third quarter, he added, "is looking great; we're going to hit our numbers."

Repeatedly in those final months, Mr. Lay took the same message to Wall Street. Never once that entire time - not after the disastrous third quarter, not after Mr. Fastow's partnerships were exposed, not after Mr. Fastow himself was finally fired, not even in the final days before the bankruptcy filing - did Mr. Lay try to tell the truth about Enron. He's right to say that the banks had lost confidence in the company. But it wasn't only because of the revelations about Mr. Fastow's partnerships. It was also because the banks stopped believing Mr. Lay.

To my mind, the reason Mr. Lay couldn't admit the truth was because he has always taken the view that perception is reality. If he could convince people that Enron was the greatest company ever, then it surely was - and never mind that its profits were largely fiction. Mr. Lay's belief in the power of public relations is the reason he gave a news conference the day after he was indicted. And it's the reason he made that speech in Houston this week. He seems to believe that if he says something often enough, and loudly enough, it will become true.

Does Mr. Lay know, in his heart of hearts, that he lied about Enron in those final months? I don't know. As the saying goes, a good con man always believes his own con. In any case, that's what the Enron trial will try to ascertain.

I do know this, though. Once the trial starts next month, Mr. Lay will finally have to leave the public relations dream world he's existed in for so long. No more hometown audiences applauding politely at his spin. Instead, he will face hostile questions from prosecutors, he'll be shown hard evidence of the Enron fraud, and he'll hear the testimony of former executives who will testify against him - starting with Mr. Fastow. He won't like that reality one bit. But then, reality has never been Mr. Lay's strong suit.