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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



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