Sunday, Feb. 10, 2002
How Fastow Helped Enron Fall
Andrew Fastow built a reputation as Enron's financial wizard. Though he's refusing to testify, it's clear he was in over his head
BY BILL SAPORITO

The Enron employees who filed into a hotel meeting room on Oct. 23 were understandably nervous. Just days before, the energy-trading company had announced a $618 million loss for the third quarter, tied in part to the unraveling of one of its partnerships, and chief executive Ken Lay had called an all-hands meeting to reassure workers about the future. The affable Lay told everyone that if operating earnings were on target, as it appeared they would be, bonuses would be paid. The questions that followed veered toward the trivial--the Christmas party, parking privileges--until one persistent energy trader started drilling for details about Enron's myriad, murky off-the-books enterprises.

The trader, Jim Schwieger, challenged Lay. Why, he asked, was chief financial officer Andrew Fastow sharing the stage--and gainfully employed--considering that he had just blown half a billion dollars mismanaging several Enron partnerships and earned $30 million doing it? Lay put his arm around Fastow and proclaimed his "unequivocal trust" in the CFO. The partnership accounting was complex stuff, Lay explained, but Fastow was on top of it--or he'd be in big trouble. A day after that buddy-buddy display, Fastow was history.

Not long afterward, so was Enron. The company's Chapter 11 filing leaves banks, pension plans and other lenders with at least $5 billion at risk. More than 4,000 Enron employees have lost their jobs and 401(k) savings. The collapse is still reverberating in the stock market, which has dropped some $200 billion in value since Enron's Dec. 2 filing, amid fears that other Enrons are lurking out there.

Fastow and at least six others involved in his financial gaming, all with jobs or spouses at Enron, made at least $42 million on investments totaling $161,000--sometimes literally overnight--while the flawed partnerships they hawked to outfits from the MacArthur Foundation to the Arkansas Teacher Retirement System were collapsing in value.

Fastow was called to explain himself in front of a seething congressional committee probing Enron's failure last week. But he declined to testify, citing his Fifth Amendment right against self-incrimination. Says his spokesman, Gordon Andrew: "Our position remains that Mr. Fastow acted with the full knowledge and approval of Enron's board of directors, its office of the chairman, which included Mr. Lay and Mr. Skilling, and its internal and external auditors and legal advisers." His former boss, Jeffrey Skilling, who quit as Enron CEO last August, had no such hesitation, insisting to his incredulous interrogators that things had gone swimmingly on his watch.

The tale of Andy Fastow's rise from a plodding loan consolidator to financial genius at one of the country's coolest companies wasn't what it appeared to be. Then again, neither was Enron. "Fastow could talk the talk, but there's pretty clear evidence now he couldn't walk the walk," says an Enron insider. Fastow and his team "were all caught up in the facade of greatness."

In the company's fat days, Fastow earned a reputation as a money wizard who constructed the complex financial vehicles that Enron drove on the road to explosive growth. Skilling wanted an "asset-light" company that could rapidly exploit deregulating markets for energy, water, broadband capacity and anything else that could be traded. So beginning in 1993, Fastow created hundreds of "special-purpose entities" designed to transfer Enron's debt to an outside company and get it off the books--without giving up control of the assets that stood behind the debt.

The challenge for Enron was to enter the burgeoning deregulated energy markets without sacrificing its credit rating by carrying too much debt on the books. So Fastow got creative. He tripled his staff, to more than 100, hiring various banking experts and giving them the task of selling and buying capital risk. "They were all young kids, 28 to 32, with great pedigrees, and they started coming up with these fancy derivatives," says Houston lawyer Tom Bilek, who interviewed dozens of former Fastow associates before suing Enron's management. "But Fastow was the boy genius setting all these SPEs up."

The people who sat across the negotiating table from Fastow as he pitched Enron's deals, and the people who worked with him, were never as impressed with him as they were with his boss and mentor, Skilling. It was Skilling who provided the strategic vision behind Enron, who transformed its old gas-pipeline culture into a swaggering, rule-breaking, dealmaking cult that ultimately mislaid its analytical skills and perhaps its moral compass. Skilling, a Harvard M.B.A. and former McKinsey & Co. consultant, had a high-wattage intellect that always impressed. Even when he was a student, people who met him knew he would do something big.

Fastow was never considered a big man on campus, not even at his suburban New Jersey high school. A teacher there remembers Fastow only as a slacker who tried to talk him into raising his grades. Hardly anyone at Northwestern University's Kellogg School of Management can even recall him from his years as an M.B.A. student. The response is similar at Tufts, where he studied Chinese and economics as an undergrad and played a little trombone and tennis on the side. Most Enron employees didn't know who he was until relatively recently. As head of Enron Capital Management--his job in 1997 and '98, when he was named CFO--he wielded his power across a very narrow band. In contrast to the avuncular Lay and the brilliant Skilling, Fastow was a PowerPoint executive whose number-crunching talent far exceeded his managerial and people skills. Indeed, when Fastow was charged with running an actual business--he was named managing director of Enron Energy Services in 1996--he botched it, and Skilling had to reel him back to finance.

In the hallways, colleagues respected and even feared Fastow's power--but not his presence. A former executive says he was never sure what Fastow was thinking other than how a particular project would affect his career. But, in the words of another former Enron manager, "he was Skilling's fair-haired boy."

Fastow is married to a woman he met at Tufts, Lea Weingarten, whose family built a supermarket and real estate empire based in Houston. They were not social climbers, for good reason. "Lea is from an old Houston family," says Marti Mayo, executive director of the Contemporary Arts Museum. "She didn't need to move anywhere. She was there." For most of the Roaring Nineties, the Fastows did not play the power couple; instead they lived like other professionals in the West University area and raised two children. They worked together at Enron's finance divisions in the early '90s, before Lea left to focus on the kids. They were just beginning to live rich--they are building a $1.3 million home in the city's old-money River Oaks section--and he tooled around town in a Porsche 911.

Their passion is modern art, and they donated $25,000 to the Menil Collection, one of the city's contemporary-art museums. They were accumulating edgy contemporary art--not just for themselves but also for Enron's new 40-story Cesar Pelli skyscraper. Lea took charge of the firm's art purchases, which included sculptures by Claes Oldenburg and Martin Puryear. The Fastows had plans to be big givers; they channeled $4.5 million, reaped from a $25,000 investment in one of his deals, to the Fastow Family Foundation.

Friends and acquaintances saw Fastow as a low-key family man. Attorney Robert Lapin, who has known him for a dozen years, calls him "modest, unassuming, not at all self-aggrandizing." At his temple, Congregation Or Ami, Fastow spent time helping shape some of the congregation's education programs along nontraditional lines. Says Rabbi Shaul Osadchey: "He was one of those people who could think outside the box."

That may be why Skilling hired him in 1990 from Continental Illinois, a Chicago thrift that failed in the mid-'80s savings-and-loan bust. Fastow had a skill Skilling needed; he did asset "securitization," a means for banks to sell off risk in the form of securities backed by mortgages or other obligations.

There is nothing inherently sinister about special-purpose entities, and Enron's initial investors did well because the deals were straightforward. CalPERS, the California state pension system and one of the nation's largest institutional investors, put $250 million into an spe called jedi i, which invested in natural gas projects. CalPERS got back $433 million, a spiffy 73% return over four years.

But Fastow and his investors got spe-deep in trouble. As the volume of deals increased to meet Skilling's aggressive growth targets, the returns got thinner and thinner, and the hard assets behind the first partnerships were later supplanted by stock or guarantees from Enron.

Fastow worked hard to enrich himself and others who could be of use to him. One was Enron lawyer Kristina Mordaunt, who in March 2000 was invited into a Fastow venture called Southampton Place. She put down $5,800, expecting to make a little money over time, her lawyer Hayden Burns tells Time. Only a few weeks later, she got a call from Michael Kopper, a Fastow associate, who said the deal was winding down. When Mordaunt opened her bank statement in April, she saw a deposit for $1 million. The Powers report of Enron's special directors committee suggests Mordaunt was cut into the deal to secure her loyalty. Burns says his client did nothing in return for the windfall. She wasn't the only winner in Southampton Place: Fastow and Kopper each turned a $25,000 investment into $4.5 million.

When Fastow and Skilling went back to CalPERS in 1997 with jedi ii, the natural gas projects had been replaced by unspecified energy projects. CalPERS pulled out of jedi ii in October 2000 to invest in something simpler and more transparent, and Fastow scrambled to set up an entity to take its place. Known as Chewco, it was a partnership controlled by Enron employees, including Kopper. According to the Powers report, Chewco and similar partnerships were engaged in shuffling assets to cover losses and create illusory profits. As a result, Enron overstated earnings by $1 billion from the third quarter of 2000 through the third quarter of 2001.

Fastow sat at the crossroads of Enron's duplicity, and Richard Buy, Enron's chief risk manager, found himself increasingly at odds with Fastow as the pressure to do deals mounted. "Rick's group and the dealmakers were constantly in conflict," says a former finance executive. In the past couple of years, the risk-evaluation structures that had been put in place were compromised, the former executive asserts. Challenging Fastow's deals got Buy, who reported to Fastow, a ticket to corporate Siberia. Similarly, Fastow had the power to overwhelm potential whistle-blowers like Jordan Mintz, a former Enron attorney who told congressional panelists that he raised warnings about Fastow's potential conflicts of interest.

Fastow became so convinced of his own importance that he told the board of directors the partnerships couldn't exist without his working both sides of the table. He "presented his participation as something he did not desire personally but was necessary to attract investors," states the Powers report.

For a financial man, this is the height of hubris. Money seeks its highest reward. If Fastow's deals were really good enough and transparent enough, investors would have come running. And Enron's stock would still be flying. You don't have to be a financial genius to understand that.

--Reported by Cathy Booth Thomas/Dallas, Jyoti Thottam/Houston, Julie Rawe/New York and Michael Weisskopf/Washington