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Authors: Kurt Eichenwald
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losses in the oil-trading business seemed far larger than the directors believed, but that point went by with little comment.
Instead, Mick Seidl held up the report as evidence that the swirl of suspicions about the goings-on in oil trading could be dispelled. “While there appear to have been some errors in judgment, there are no indications that anything was done for personal gain,” he said.
The directors asked questions signaling deep discomfort with Mastroeni. Lay listened, disturbed by the direction of the discussion. Before the meeting, Borget had called him personally, pleading to save Mastroeni’s job. The unit wouldn’t work without him, Borget had said, and Lay took the warnings seriously. It was clear to him that he needed to make a decisive move to avert an action by the directors. He began to speak.
“I hear your concerns, and I understand them. But I’ve made the decision. I’ve got to put my CEO hat on and do what is in the best interest of Enron. We cannot afford to be disrupting our trading operations unnecessarily. It is too important to our financial performance.”
Lay’s tone was resolute. “I’ve decided we’re not firing anyone. But we willmake changes. We will keep Tom Mastroeni on the payroll, but he will be relieved of his financial responsibilities. We’re going to name a new chief financial officer for the unit and move that person up there to take control. And all of the banking and financial activities will report through Houston from now on. That’s my decision.”
Ron Roskens, one of the directors, was the first to respond. “Well, I have to tell you, this bothers me.”
Other directors agreed, but Lay held firm. None of the directors seemed willing to start up the sort of battle that had infected Enron in the years before. So, with their reservations clear, the committee voted to back Lay.
After so many months of controversy, the oil-trading-unit scandal appeared all but over.
Lay stretched out his legs as he sat in a soft, upholstered seat on an Enron corporate jet. It was the afternoon of October 9, 1987. He and a few colleagues were somewhere over the Atlantic, flying back from meetings with European investors. Lay was feeling a little sleepy when he noticed one of the pilots coming his way.
“Mr. Lay?” the pilot said. “We just got a message from Mr. Seidl. He’s getting on a plane, and he’s going to meet you in Gander.” Lay nodded. “Okay, thanks.”
This wasn’t good. Lay and the others were already on their way to Houston. What could be so urgent that his president would fly to meet him at a refueling stop in Newfoundland?
More than an hour later, the plane landed at the Gander International Airport. Lay and the other executives traveling with him—Forrest Hoglund from the oil and gas group and Kern, who had recently been named chief financial officer of that division—huddled in a corner of the terminal, waiting for Seidl. His plane arrived in less than an hour, and Seidl hustled off, finding his colleagues at a small table. He grabbed a chair and sat down with them.
“I was just up in New York with Lou Borget,” Seidl said. He had gone there for a social lunch at the Pierre Hotel, hoping to repair the relations strained by the investigations months before. But over the meal Borget had dropped a bombshell. His group’s bets on the direction of oil prices had been going badly. The group had been trading on expectations that prices would fall, but then they rose. When Borget doubled his bet, hoping to make up the loss, they rose again. To hide the problem, Seidl said, Valhalla kept two sets of books, never revealing their position to Houston.
“Now the trading desk has got some very, very large exposed positions that we didn’t know about,” Seidl said.
“How much are we talking about?” Lay asked.
Seidl took a breath. “Hundreds of millions, maybe more than a billion if the market goes the wrong way.”
Lay was speechless.
A billion
Instead, Mick Seidl held up the report as evidence that the swirl of suspicions about the goings-on in oil trading could be dispelled. “While there appear to have been some errors in judgment, there are no indications that anything was done for personal gain,” he said.
The directors asked questions signaling deep discomfort with Mastroeni. Lay listened, disturbed by the direction of the discussion. Before the meeting, Borget had called him personally, pleading to save Mastroeni’s job. The unit wouldn’t work without him, Borget had said, and Lay took the warnings seriously. It was clear to him that he needed to make a decisive move to avert an action by the directors. He began to speak.
“I hear your concerns, and I understand them. But I’ve made the decision. I’ve got to put my CEO hat on and do what is in the best interest of Enron. We cannot afford to be disrupting our trading operations unnecessarily. It is too important to our financial performance.”
Lay’s tone was resolute. “I’ve decided we’re not firing anyone. But we willmake changes. We will keep Tom Mastroeni on the payroll, but he will be relieved of his financial responsibilities. We’re going to name a new chief financial officer for the unit and move that person up there to take control. And all of the banking and financial activities will report through Houston from now on. That’s my decision.”
Ron Roskens, one of the directors, was the first to respond. “Well, I have to tell you, this bothers me.”
Other directors agreed, but Lay held firm. None of the directors seemed willing to start up the sort of battle that had infected Enron in the years before. So, with their reservations clear, the committee voted to back Lay.
After so many months of controversy, the oil-trading-unit scandal appeared all but over.
Lay stretched out his legs as he sat in a soft, upholstered seat on an Enron corporate jet. It was the afternoon of October 9, 1987. He and a few colleagues were somewhere over the Atlantic, flying back from meetings with European investors. Lay was feeling a little sleepy when he noticed one of the pilots coming his way.
“Mr. Lay?” the pilot said. “We just got a message from Mr. Seidl. He’s getting on a plane, and he’s going to meet you in Gander.” Lay nodded. “Okay, thanks.”
This wasn’t good. Lay and the others were already on their way to Houston. What could be so urgent that his president would fly to meet him at a refueling stop in Newfoundland?
More than an hour later, the plane landed at the Gander International Airport. Lay and the other executives traveling with him—Forrest Hoglund from the oil and gas group and Kern, who had recently been named chief financial officer of that division—huddled in a corner of the terminal, waiting for Seidl. His plane arrived in less than an hour, and Seidl hustled off, finding his colleagues at a small table. He grabbed a chair and sat down with them.
“I was just up in New York with Lou Borget,” Seidl said. He had gone there for a social lunch at the Pierre Hotel, hoping to repair the relations strained by the investigations months before. But over the meal Borget had dropped a bombshell. His group’s bets on the direction of oil prices had been going badly. The group had been trading on expectations that prices would fall, but then they rose. When Borget doubled his bet, hoping to make up the loss, they rose again. To hide the problem, Seidl said, Valhalla kept two sets of books, never revealing their position to Houston.
“Now the trading desk has got some very, very large exposed positions that we didn’t know about,” Seidl said.
“How much are we talking about?” Lay asked.
Seidl took a breath. “Hundreds of millions, maybe more than a billion if the market goes the wrong way.”
Lay was speechless.
A billion
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