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This article from NYTimes.com
has been sent to you by dcherry@bpa.gov. FYI dcherry@bpa.gov /-------------------- advertisement -----------------------\ Special Offer to NY Times customers: Spend $100 & ship free at Starbucks.com http://www.nytimes.com/ads/starbucks/email.html \----------------------------------------------------------/ Foundation Gives Way on Chief's Big Dream November 29, 2001 By JOHN SCHWARTZ and RICHARD A. OPPEL Jr. Well before anyone could imagine that Enron might collapse, Kenneth L. Lay was stumped. In an interview in August, he dismissed questions about a vague clause in the energy company's annual report that hinted at bigger problems if its stock price or credit rating fell below certain levels. "I just can't help you on that," he said. Pressed further on questions about a bewildering constellation of business partnerships that involved Enron's former chief financial officer, he said, "You're getting way over my head." At the least, Mr. Lay - a man of big ideas, a crusader for free markets, a risk taker in the Texas wildcatter tradition - had taken his eye off the ball. While he was busy befriending the nation's most powerful politicians, erecting one of the tallest buildings in Houston and pasting Enron's logo on the city's new ballpark, the little things were turning out to be Mr. Lay's big problems. One after another, disclosures spilled out of his company over the last month: the partnerships had hidden billions in debt; years of Enron's reported profits had been exaggerated; the government was investigating. Rivals were shunning Enron's energy trading desks, which Mr. Lay had built into the world's leaders. And sure enough, the stock price tumbled day after day, and credit agencies lowered Enron's ratings once and then yesterday again, turning the company's debt to junk and its shares into a penny stock. Three weeks ago, Mr. Lay tried to salvage his creation by selling it to Dynegy, his Houston rival. Yesterday, Dynegy pulled out of the deal. Deprived of enough information, and then repelled by what they learned, the free markets in which Mr. Lay had put so much faith all but destroyed, in a matter of weeks, everything he had built. "If they had been going a slower speed, the results would not have been disastrous," said Bob McNair, a Houston energy entrepreneur who sold the bulk of his own company to Enron three years ago. But Enron, he said in an interview this month, was like a race car, and the markets like an unforgiving track. "It's a lot harder to keep it on the track at 200 miles per hour," he said. "You hit a bump and you're off the track." From his youth, Mr. Lay, 59, had nurtured an abiding faith in the markets' wisdom. He studied economics at the University of Missouri, living at home to save on room and board, and eventually earned a Ph.D. in the subject. As a naval officer serving in the Pentagon, he worked to develop more efficient accounting systems. Later, he served as an aide to a federal government regulator for the natural gas industry - a market that Enron would come to dominate. Moving into the private sector, he worked his way up the ranks of the natural gas industry, becoming chief executive in 1984 of the Houston Natural Gas Corporation, a big regional pipeline operator. He engineered its merger with Internorth, an Omaha pipeline company, and then became chief executive of the combined company and changed its name to Enron. Mr. Lay saw Enron's mission as far more than being a conduit for fuel. At the time, gas prices were regulated and pipelines played a relatively passive role; buyers and sellers could not cut deals on the fly. But as oil prices plunged in the mid-80's and gas users began switching to cheaper fuel oil, Mr. Lay returned to Washington to argue, successfully, for rules changes that he said would save the pipeline business by allowing operators to shop for the best deals from both gas producers and utilities. The new flexibility brought the threat of chaos, however, as natural gas prices began fluctuating wildly. That is when the new Enron was truly born. To help customers shield themselves from risk, Mr. Lay's Enron developed hedging contracts for gas like those traded in the markets for corn and copper and winter wheat. Its innovative "gas bank" let utilities lock up the long-term prices that they craved; Enron lined up the gas supplies from producers, arranged for delivery - and took a cut of every deal. That business became the forerunner of Enron's entry into hundreds of other markets, helping customers obtain supplies and manage risks in products ranging from electric power to pulp and paper and, most recently, fast broadband access to the Internet. Trading soon provided more of the company's profits than the traditional natural gas business. While other companies, including Dynegy, focused on accumulating hard assets like pipelines, turbines and gas fields, Enron increasingly saw itself as a pure trading company with an almost limitless future. "There is a very reasonable chance that we will become the biggest corporation in the world," Mr. Lay's handpicked successor as Enron's chief executive, Jeffrey K. Skilling, told the authors of a book, just published, about business on the Internet. Even the book's title, "Radical E: From GE to Enron - Lessons on How to Rule the Web" (PricewaterhouseCoopers), showed the cachet the company had attained. Enron, the authors wrote, was "creating a culture in which radical and creative thinking is encouraged and rewarded." Mr. Skilling abruptly resigned in August, after just six months on the job, propelling Mr. Lay back into the gritty details of Enron's businesses that he had sought to leave to others. As the company grew, he had become increasingly involved in public affairs, serving as host when a global economic conference was held in Houston in 1990 and when the Republican National Convention came to the city in 1992. Like the leaders of many big Texas businesses - the construction colossus Brown & Root after World War II or Ross Perot's Electronic Data Systems in the 1960's - Mr. Lay knew the value of courting politicians and policy makers. He played golf with President Bill Clinton; became good friends with the Texas governor, Ann Richards; and supported Senator Phil Gramm of Texas, whose wife, Wendy, a former chairwoman of the Commodities Futures Trading Commission, joined Enron's board. "He's a stand-up guy," said Ms. Richards, now a business consultant in New York. Asked to be more specific, she said, "He's at the meeting" - meaning she could count on Mr. Lay to become directly involved with whatever she asked him to do, and not just sign onto a project for show. Mr. Lay's deepest political ties were with the Bush family. In the 1980's, he became a major fund-raiser for George H. W. Bush. When Mr. Bush lost his 1992 campaign for re- election as president, Mr. Lay brought a number of senior Bush aides to Enron as directors or consultants, including James A. Baker III, the former secretary of state, and Robert A. Mosbacher, the former secretary of commerce. Mr. Lay also cultivated Mr. Bush's son George W. long before he was considered a serious national candidate. After the younger Mr. Bush's election as Texas governor in 1994, Mr. Lay became head of the Governor's Business Council, an important advisory post. The bond with President Bush is personal. As governor, Mr. Bush sent Mr. Lay a kidding note in 1997. "One of the sad things about old friends is that they seem to be getting older - just like you!" he wrote. "55 years old. Wow! That is really old. Thank goodness you have such a young, beautiful wife," he added, a reference to Mr. Lay's wife, Linda. In 1999, Mr. Lay sent a handwritten Christmas note to Mr. Bush and his wife, Laura. "Linda and I are so proud of both of you and look forward to seeing both of you in the White House," he wrote. Yesterday, the White House press secretary, Ari Fleischer, said the Treasury Department was monitoring Enron's downfall for its effect on the market. Asked if the president himself had any reaction, Mr. Fleisher said, "The president's reaction is that it should be monitored." In some ways, Enron's collapse was one more example of the bursting of the Internet bubble. But Mr. Lay was not some stylish dot-com brat; by all accounts, he is an immensely likable product of Middle America. Growing up in tiny Rush Hill, Mo., he was driving a tractor by age 12 and salting away savings. By 16, his sister Sharon recalled this week, "he was bucking bales" - that is, loading hay - "and had two jobs in the summer, painting houses." "I don't think you could ever say that he did something the easy way," she said. That work ethic ran in the family. Mr. Lay's father was a minister who also sold farm equipment. The family's finances were spotty, "at times no money, at times some money," Ms. Lay recalled. Still, the Lays took in people from their church who were in need. Over the last decade or so, Mr. Lay earned some $300 million from Enron, mostly by exercising stock options. Earlier this month, when employees grew incensed at the prospect of his collecting a big severance package with the company's sale to Dynegy, he volunteered to walk away from $60 million in payments. Mr. McNair, the Houston entrepreneur, who has known Mr. Lay for years, suggested that perhaps everything had not been disclosed to him. "Maybe the people who reported to him told him what they wanted him to hear, but they weren't telling him everything," he said. Mr. McNair said he spoke to Mr. Lay recently and found him "somewhat in a state of shock." Mr. McNair added, "He's devastated." In the end, it seems, the man whose company did so much to help others manage their risk could not manage his own. http://www.nytimes.com/2001/11/29/business/29LAY.html?ex=1008076920&;ei=1&en=edb180383864356b HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact Alyson Racer at alyson@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2001 The New York Times Company
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