Message-ID: <23481634.1075853058920.JavaMail.evans@thyme> Date: Wed, 24 Oct 2001 14:59:23 -0700 (PDT) From: shelley.corman@enron.com To: kay.miller@enron.com, w..mcgowan@enron.com, steve.january@enron.com, lynn.blair@enron.com, mary.darveaux@enron.com Subject: Texas Monthly November 2001: How Enron Blew It Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Corman, Shelley X-To: Miller, Mary Kay , McGowan, Mike W. , January, Steve , Blair, Lynn , Darveaux, Mary X-cc: X-bcc: X-Folder: \LBLAIR (Non-Privileged)\Blair, Lynn\Deleted Items X-Origin: Blair-L X-FileName: LBLAIR (Non-Privileged).pst Here is the other article=20 How Enron Blew It Less than a year ago, the Houston-based energy behemoth had everything: mon= ey, power, glitz, smarts, new ideas, and a CEO who wanted to make it the mo= st important company in the world. Now its stock is down, wall street is be= arish, and the CEO is gone. What went wrong? by Mimi Swartz THE ENRON SKYSCRAPER NEAR THE SOUTH END OF HOUSTON'S DOWNTOWN feels like th= e international headquarters of the best and the brightest. The lobby in no= way resembles the hushed, understated entryways of the old-fashioned oil c= ompanies, like Shell and Texaco nearby. Enron, in contrast, throbs with mod= ernity. The people hustling in and out of the elevators are black, white, b= rown; Asian, Middle Eastern, European, African, as well as American-born. T= hey are young, mostly under 35, and dressed in the aggressively casual unif= orm of the tech industry-the guys wear khakis, polo shirts, and Banana Repu= blic button-downs. Almost preposterously fit, they move through the buildin= g intently, like winners. Enron is nothing if not energetic: A Big Brother-= size TV screen frantically reports on the stock market near a bank of eleva= tors, while another hefty black television relaying the same news greets pe= ople entering from the garage. A sculpture of the corporate symbol, an E ti= pped at a jaunty angle, radiates colors as it spins frenetically on its axi= s; a Starbucks concession on the ground floor keeps everyone properly caffe= inated. Multicolored, inspirational flags hang from the ceiling, congratula= ting Enron on its diversity and its values; one more giant banner between e= levator banks declares Enron's simple if grandiose goal: "From the World's = Leading Energy Company to . . . The World's Leading Company!" For a while, that future seemed guaranteed, as Enron transformed itself fro= m a stodgy, troubled pipeline company in 1985 to a trading colossus in 2000= . It was a Wall Street darling, with a stock price that increased 1,700 per= cent in that sixteen-year period, with revenues that increased from $40 bil= lion to $100 billion. "The very mention of the company in energy circles th= roughout the world creates reactions ranging from paralyzing fear to envy,"= notes a 2001 report from Global Change Associates, a firm that provides ma= rket intelligence to the energy business. This Enron was largely the creation of Jeff Skilling, a visionary determine= d to transform American business. Hired sixteen years ago as a consultant b= y then-CEO Ken Lay, Skilling helped build a company that disdained the old = formula of finding energy in the ground, hauling it in pipelines, and then = selling it to refineries and other customers. Instead, it evolved into a co= mpany that could trade and market energy in all its forms, from natural gas= to electricity, from wind to water. If you had a risky drilling venture, E= nron would fund it for a piece of the action. If you wanted your megacorpor= ation's energy needs analyzed and streamlined, Enron could do the job. If y= ou were a Third World country with a pitiful infrastructure and burgeoning = power needs, Enron was there to build and build. Basically, if an idea was = new and potentially-and fantastically-lucrative, Enron wanted the first cra= ck. And with each success, Enron became ever more certain of its destiny. T= he company would be the bridge between the old economy and the high-tech wo= rld, and in February of this year, Skilling reaped his reward when he succe= eded Lay as chief executive officer. Enron, says Skilling, "was a great mar= riage of the risk-taking mentality of the oil patch with the risk-taking me= ntality of the financial markets." The Enron story reflects the culture that drove American business at the en= d of the twentieth century. Like the high-tech companies it emulated, Enron= was going to reinvent the American business model and, in turn, the Americ= an economy. Maybe it was natural that this Brave New World also produced a = culture that was based on absolutes: not just the old versus the new, but t= he best versus the mediocre, the risk takers versus the complacent-those wh= o could see the future versus those who could not. The key was investing in= the right kind of intellectual capital. With the best and the brightest, a= company couldn't possibly go wrong. Or could it? Today Enron's stock trades at around $35, down from a high of = $80 in January. The press cast Enron as the archvillain of California's ene= rgy crisis last spring, and Skilling caught a blueberry pie in the face for= his relentless defense of the free market. A long-troubled power plant pro= ject in India threatened the company's global ambitions. Telecommunications= , in which Enron was heavily invested, imploded. Wall Street analysts who o= nce touted the company questioned its accounting practices. Some of the cha= nge in Enron's fortunes can be attributed to the economic downturn in uncer= tain times that has afflicted all of American business. But the culture tha= t the company created and lived by cannot escape blame. ENRON, JEFF SKILLING SAYS, HAD "a totally different way of thinking about b= usiness-we got it." At Enron, in fact, you either "got it" or you were gone= -it was as simple as black and white. It is not coincidental, then, that th= e color scheme of Skilling's River Oaks mansion mirrors the corporation he = once headed. Here, the living room's white walls shimmer against the mahoga= ny floors. Black leather trims the edge of snowy carpets. Billowy sofas set= off the jet-black baby grand. In the entry, white orchids cascade from a b= lack vase on a black pedestal table that in turn pools onto cold, white mar= ble. There is only one off-color note: After almost twenty years, Jeff Skil= ling is no longer associated with Enron, having resigned abruptly after jus= t six months as CEO. Once, Skilling was hailed as the next Jack Welch (Gene= ral Electric's masterful CEO), as one of Worth magazine's best CEO's in Ame= rica (anointed in 2001), and even as a daredevil who hosted the kind of unc= hained adventure junkets in which, a friend told BusinessWeek, "someone cou= ld actually get killed." Today, he sounds more like Ebenezer Scrooge on Chr= istmas morning. "I had no idea what I'd let go of," Skilling says of all th= e personal sacrifices he made while retooling Enron.=20 From a black chair in the white library, across from a huge black and white= photograph of his daughter and two sons, Skilling clarifies. The demands o= f working 24-7 for Enron caused him to ignore his personal finances. Divorc= ed, he lived in a 2,200-square-foot house without a microwave or a dishwash= er. He almost missed his brother's wedding. "Learning a foreign language-I = never learned a foreign language!" he exclaims. He never once took his youn= gest son to school. "I'm interested in the kids. You don't do kids in fifte= en-minute scheduling." Travel: "You can't go to Africa for a week and get a= nything out of it!" Skilling includes the study of architecture and design = on his list of missed opportunities, then he stops and sighs. "I'm not sure= that fulfillment in life is compatible with a CEO's job," he says, finally= . Then his eyes lock on mine, and his voice, which had softened, regains it= s pragmatic edge. "It would have been easy to stay," he says. "But that wou= ld not have been good for me."=20 He's a smallish, ruddy-faced man who keeps himself at fighting weight, hand= some in the way of corporate titans, with piercing cheekbones and that assi= duously stolid gaze. But the impatience Skilling once reserved for cautious= underlings and dull-witted utility company executives is now targeted at r= eporters who have labeled his resignation "bizarre" and associates who are = bitterly skeptical of his need for family time. His shrug stretches the lim= its of his shimmering blue button-down, and his matching blue eyes look put= upon. "I'm surprised," he says, "that people have so much trouble understa= nding this." PEOPLE WHO PASSED THROUGH DOWNTOWN HOUSTON in the late eighties or early ni= neties couldn't help but notice a funny and, for its time, novel scene unfo= lding throughout the workday at the base of the Enron Building. From nine t= o five and before and after, you could see people slipping out of the prist= ine silver skyscraper to smoke. They perched on the chrome banisters or lur= ked near the glass doors at the entry, puffing like mad. They always looked= hurried and furtive, even ashamed. Whatever people knew about Enron in tho= se days (and most people didn't know much), it was often associated with th= at scene: Enron boasted one of the first nonsmoking corporate headquarters = in Houston, and there couldn't have been clearer evidence of its break with= the energy world of the past. What macho engineer would have put up with s= uch humiliation? But this company was a child of another time, that period in the mid-eighti= es when chaos enveloped the gas business. Federal deregulation of natural g= as turned a steady, secure industry, in which gas pipeline companies freque= ntly enjoyed a monopoly in portions of the areas that they served, into a v= olatile free-for-all. The situation was compounded five years later by fede= ral deregulation of the pipeline business. So it happened that a gentlemanl= y gas pipeline company, Houston Natural Gas (HNG) found itself under attack= from Coastal Corporation, Oscar Wyatt's less than gentlemanly firm. HNG wa= s then run by Lay, a sturdy, taciturn former economics professor and Transc= o chief operating officer who had a passion for military strategy. (His doc= toral thesis at the University of Houston was on supply and demand in the V= ietnam War.) Lay, who was from Missouri and never succumbed-at least outwar= dly-to Texas brashness, had done well enough: Thanks to canny expansions, H= NG's pipelines stretched from Florida to California and throughout the stat= e of Texas. HNG fended off Coastal, but to protect the company from other takeover atte= mpts, Lay nimbly engineered the sale of HNG in 1985 to a friendly Nebraska = pipeline concern called InterNorth, one of the largest pipeline companies i= n the country at the time. Then, a funny thing happened: HNG started acting= in a way that would characterize the company for years to come-a lot like = Coastal. What the Nebraskans blithely labeled "the purchase" was being call= ed "the merger" back in Houston, and before long, following some particular= ly brutal politicking between Omaha and Houston, the company's center of gr= avity started shifting toward Texas, and shortly after that, Ken Lay was ru= nning a new company called Enron. "Over time it became clear that Lay had a= better vision of the future," says one person associated with Enron at tha= t time. "He never fought change. He embraced change." Lay had won, but what exactly did that mean? Enron was saddled with massive= debt from the takeover attempt, and thanks to deregulation, no longer had = exclusive use of its pipelines. Without new ideas-for that matter, a whole = new business plan-the company could be finished before it really even got s= tarted.=20 LIKE MANY PEOPLE WHO TEAMED UP WITH ENRON IN THE EIGHTIES, Jeff Skilling ha= d spent a lot of time in the Midwest, and he was self-made-at fourteen he h= ad been the chief production director at a start-up TV station in Aurora, I= llinois. (His mother would drop him off there every day after school.) "I l= iked being successful when I was working, and I was smart," he told Busines= sWeek earlier this year. But unlike many of his Enron colleagues, Skilling = wasn't deliberate and soft-spoken and happy to go home at five o'clock; he = was anxious and excitable, and nothing, but nothing excited him more than w= hat he would come to call "intellectual capital." He loved being smart, and= he loved being surrounded by smart people. He graduated from Southern Meth= odist University, went into banking-assets and liability management-and too= k on Harvard Business School, where he graduated in the top 5 percent of hi= s class. Then Skilling took the next step on what was then the new, souped-= up path to American success: He joined Manhattan's McKinsey and Company as = a business consultant, and that is where Ken Lay found him in 1985.=20 It is often said of Lay that his instincts for hiring the best are flawless= , and his choice of Skilling probably saved the company. Skilling was above= all an expert at markets and how they worked. While everyone else was worr= ying about the gluts and the shortages that defined the gas industry, he al= one saw the parallels between gas and other businesses. And so in a world w= here credit was nearly impossible to come by, Skilling came up with what he= called the Gas Bank, which contractually guaranteed both the supply and th= e price of gas to a network of suppliers and consumers. Enron would not be = a broker but a banker. It would buy and sell the gas itself and assume the = risk involved. And Enron would make money on transactions, much like an inv= estment bank would. Skilling worked up some numbers and found them "absolutely compelling." The= n the McKinsey consultant took the idea to a meeting of about 25 Enron exec= utives. He had a one-page presentation. "Almost to a person," Skilling says= , "they thought it was stupid." Almost. After Skilling left the meeting dej= ected, he walked Ken Lay to an elevator and apologized. Lay listened and th= en said, "Let's go." The Gas Bank was not an overnight success. For months Skilling woke up in a= cold sweat, sure he had ruined not only his career but the careers of doze= ns of colleagues who had assisted him. In fact, he had come upon one of tho= se divides that seem to define his life: "I believed this whole world would= be different, a huge breakthrough" is the way Skilling puts it today, and = even if he is typically immodest, he was right. Fairly soon after launching= , the company sold $800 million worth of gas in a week. True to Skilling's = character, success turned out to be a matter of old versus new: He says the= joke around Enron was that if a company's CEO was under fifty, "We were in= ." And he was in too: In 1990 Skilling finally left McKinsey and joined Enr= on as the head of Enron Finance Corporation, a new division created just fo= r him. In 1991 that company closed a deal that earned $11 million in profit= . After that, says Skilling, "we never looked back." Skilling and Lay also realized that the Gas Bank couldn't work unless it ha= d a trading component. Myriad trades were needed to build the market that w= ould make the project go. But by buying and selling enormous quantities of = gas, Enron not only constructed a market but almost instantly came to domin= ate it. The company had the best contacts, the best intelligence, and the b= est access to supplies. That, in turn, attracted more customers who wanted = to be part of the play. With so many customers in its pocket, Enron could b= etter predict the direction of the market and could use that knowledge to m= ake trades for its own benefit-Enron could in effect bet on which way the p= rice of gas would go, as one might do with pork bellies or soybeans, but wi= th startling accuracy, thereby generating profits higher than anyone could = have ever imagined. THIS CHANGE COULD NEVER HAVE OCCURRED without another change Skilling had m= ade: He created, within Enron, a new culture to match its new trading busin= ess. The idea was to build a "knowledge-based business," which demanded a s= kill set not exactly prized by Enron's employees from the old HNG days. Mos= t were deliberate, cautious, responsible, somewhat defensive people, most o= f them men, of course-the kind of people you'd expect to find working in an= industry regulated by the federal government. But now the company needed b= older people for its bold new era: that included anyone who wanted to make = money-lots of money-for themselves and for the company. "Enron was going to= create a niche for itself or die," one former executive explains. "The peo= ple who had narrow views eventually were forced out, because if they had na= rrow views about other things, they had narrow views about the market." Skilling wanted smart people but not just any smart people. He wanted the s= martest people from schools like Harvard, Stanford, and maybe, Rice. And be= cause his firm was now acting more like a bank than a pipeline company, he = wanted to draw from the pool of recruits that would be attracted to the big= gest and best investment banks, like Merrill Lynch or Credit Suisse First B= oston. In addition to being smart, Enron people were also supposed to be "a= ggressive." You were right for Enron if you didn't want to wait until you w= ere thirty to close your own deals or move up in an organization.=20 You could see what he was looking for on "Super Saturdays" at the Houston h= eadquarters: eight fifty-minute interviews with ten minute breaks in betwee= n-the company might herd as many as four hundred people through in just one= day. They were scored from 1 to 5 on their smarts, their problem-solving a= bility, their passion for hard work, and what at Enron was called "a sense = of urgency." People who scored less than 2.5 were scratched. The shrewdest = candidates knew how to work Enron before they were even hired: These were t= he types that automatically turned down the company's first offer, knowing = Enron would come back with more. The starting salary was around $80,000. Ma= ybe it wasn't a fortune-yet-but the signing bonus, about $20,000, was more = than enough for a lease on the obligatory Porsche Boxster or one of the lof= ts being renovated close to downtown. (Enron people didn't live in far-flun= g suburbs. Suburbs were uncool and too far from the office.) For the lucky winners, Enron offered the corporate equivalent of a gifted-a= nd-talented program. New associates learned the latest techniques for struc= turing energy deals, and there were rotations at Enron offices around the g= lobe. The hours were long, but every possible need was taken care of. A com= pany concierge handled all the things important people couldn't be bothered= with: picking up dry cleaning or prescriptions, shining shoes, cleaning th= e house, planning a vacation. Of course, a lot of people who worked for Enr= on never got to take vacations-they were too busy making money-but they cou= ld use the company gym and the company's personal trainers. If they were ov= erweight or wanted to quit smoking, they could join Enron's Wellness Progra= m. Massages were offered six days a week, from seven in the morning until t= en at night. "They were so cutting edge," rhapsodizes someone involved with= the company health care program at the time. "They really thought about th= e psychology and what it took to keep these people going." Skilling handed out titles analogous to those at Wall Street firms-analysts= , associates, directors, and managing directors-but everyone knew that thos= e titles didn't really matter. Money did. Instead of competitive salaries a= nd decent bonuses, Enron offered competitive salaries and merit-based bonus= es-with no cap. "If you really worked hard and delivered results, you could= make a lot of money," says Ken Rice, who stayed with Enron for 21 years un= til resigning recently as the head of the company's faltering broadband div= ision. Or, as the saying goes, you got to eat what you killed. Gas traders = with two or three years of experience could wind up with a $1 million bonus= . And the more you produced, the closer you got to Jeff: Real hot dogs join= ed him glacier hiking in Patagonia, Land Cruiser racing in Australia, or of= f-road motorcycling in a re-creation of the Baja 1,000 race, ending at a sp= ectacular Mexican villa. "Every time he'd speak, I'd believe everything he'= d say," one loyalist says.=20 And why not? By 1995 Enron had become North America's largest natural-gas m= erchant, controlling 20 percent of the market. But at a company where the b= uzzword was "aggressive," that was no place to stop: Skilling and Lay belie= ved the Gas Bank model could easily be applied to the electricity business.= Firmly committed to the notion that a deregulated market meant better serv= ice at lower prices for consumers (and untold profits for Enron), they bega= n barnstorming the country, pressing their case with entrenched power compa= ny presidents (who, with their multimillion-dollar salaries and monopoly se= rvice areas, had little incentive to change) and energy regulators (who wer= e somewhat more receptive, thanks in part to Enron's generous lobbying effo= rts). But the biggest winner of all was probably Jeff Skilling. In 1997 Ken Lay m= ade him the president and chief operating officer of the company. By then, = the division known as Enron Capital and Trade Resources was the nations lar= gest wholesale buyer and seller of natural gas and electricity. The divisio= n had grown from two hundred to two thousand employees, and revenues from $= 2 billion to $7 billion. "Mr. Skilling's experience so far with the turmoil= in the industry has convinced him that he is on the right track," the New = York Times noted. Everyone would certainly have thought so: Enron and Skill= ing had totally transformed one industry and were well on their way to tran= sforming another. "FIRING UP AN IDEA MACHINE; Enron Is Encouraging the Entrepreneurs Within,"= sang the New York Times in 1999. "In the staid world of regulated utilitie= s and energy companies, Enron Corp is that gate-crashing Elvis," crowed For= tune in 2000. Wall Street was demanding tech-size growth on a tech timetabl= e, and Enron, in 2000, obliged with second quarter earnings of $289 million= , up 30 percent from the previous year. That year the company seemed to dis= cover a market a minute: Under Skilling, Enron was trading coal, paper, ste= el, and even weather. No one blinked when a London wine bar became an Enron= client. People drank more in warm weather than cold, so why not buy a hedg= e against the usual winter downturn? But most exciting to the financial world was Enron's entry into high-tech c= ommunications. Because of the company's marketing dominance, EnronOnline be= came another overnight success, handling $335 billion in commodity trades o= nline in 2000. Enron, as usual, made its money on the spread between the bi= d price and the asking price. Then there was the broadband business: To Enr= on, trading excess capacity in large, high-speed fiber-optic networks (empt= y lanes on the fabled information highway) wasn't that different from tradi= ng the capacity of natural gas pipelines. So Enron created a market for wha= t the industry calls bandwidth. Soon after, it also announced a twenty-year= deal with Blockbuster to deliver movies on demand electronically to people= in their homes. Enron looked like a company that couldn't lose. "Its strat= egy of building businesses, shedding hard assets, and trading various commo= dities can help it do well even in an uncertain market," BusinessWeek insis= ted. There was, however, another reason Enron did so well in such a short time: = the company's hard-nosed approach toward its customers. The old notion of c= ustomer service was based on the long haul-you had to nurse and coddle cust= omers to keep them. But Enron had new markets and new ideas-customers had t= o come to it. Over time, the company stopping referring to its business cli= ents as customers and began calling them "counterparties." Skilling wanted the biggest profits on the shortest timetable: Gains were m= aximized by creating, owning, and then abandoning a market before it became= overtaxed and overregulated. So if you wanted to launch a high-risk ventur= e quickly-such as Zilkha Energy's new high-tech approach to drilling for oi= l-you got your financing from Enron because a bank would take forever to un= derwrite the project, if it ever would. But because Enron invented its mark= ets and subsequently dominated them, Enron could set the terms of its deals= , from the timeline to the method of accounting to whether the deal happene= d at all.=20 While many businesses used what was known in the industry as "mark-to-marke= t accounting," for instance, Enron used it on an unprecedented scale. The c= ompany priced their deals at current market value-but it was always Enron's= idea of the market value; companies that balked at their pricing didn't ge= t deals. And while old-fashioned companies spread their profits out like an= nuities over a period of years, Enron took most of its profit up-front. How= ever many millions would be made on a deal that covered several years, they= went on the books in the current year. If a few analysts thought there mig= ht be something fishy about what they called "subjective accounting," inves= tors didn't particularly care as long as the profits rolled in. As the mark= et fluctuated and the landscape changed, the company might abandon a projec= t that had been in the works for months because its profit margins weren't = going to be high enough. "Enron is known for leaving people at the altar," = says one former employee. Winning the highest possible profits for the comp= any could even extend to Enron's attitude toward charity. When a fundraiser= for the Houston READ Commission, a literacy group, called on Enron for a c= ontribution, it was suggested that he start raising money for Enron's compe= ting literacy charity: "Even the person who was supposed to give money away= for Enron was supposed to make money for Enron," he says. As Enron became more and more successful, the culture Skilling had created = took on a dark side: The competition turned inward. As one member of the En= ron family put it, "It became a company full of mercenaries." The change st= arted at the bottom. As Enron's domination of the energy market grew, most = of the recruiting frills fell away. New associates were treated much like t= he commodities the company traded. Global Change's Enron spies reported ove= rhearing orders like "I need a smart person-go buy me one" or "Buy me an in= telligent slave, quick." Enron had never been the kind of place where peopl= e sang to you on your birthday, but now the workaholism bordered on self-pa= rody: A Random Acts of Kindness program lasted only a few months. It was to= o disruptive. People couldn't get their work done. And, of course, Enron had a program for institutionalizing creative tension= . The Performance Review Committee, which had initially been installed by S= killing in the Capital group, became known as the harshest forced ranking s= ystem in the country. Employees were rated on a scale of one to five, and t= hose with fives were usually gone within six months. (The PRC's nickname qu= ickly became "rank and yank.") It was a point of pride that Skilling's divi= sion replaced 15 percent of its workforce every year. As one Skilling assoc= iate put it, "Jeff viewed this like turning over the inventory in a grocery= store." Skilling's approach to business-get in and get out-had become Enro= n's attitude toward its workers. In time, it would become many workers' att= itude toward the company. Teamwork, never that valuable in a trading cultur= e, went the way of the eyeshade and the abacus. If protocol required an Enr= on higher-up to come from Europe to help with a project in the Third World,= he might help-or he might not, depending on whether another, potentially m= ore lucrative project was pending elsewhere. Everyone felt the pressure to perform on a massive scale at massive speed: = "They were so goal oriented toward immediate gratification that they lost s= ight of the future," says one former employee. Anyone who couldn't close de= als within a quarter was punished with bad PRC scores, as were the higher-u= ps who had backed them. Past errors and old grudges were dredged up so ofte= n as new ammunition in PRC meetings that the phrase "No old tapes" became a= n Enron clich?. "People went from being geniuses to idiots overnight," says= one former Enron executive. In such a hothouse, paranoia flowered. New contracts contained highly restr= ictive confidentiality agreements about anything pertaining to the company.= E-mail was monitored. A former executive routinely carried two laptops, on= e for the company and one for himself. People may have been rich at Enron, = but they weren't necessarily happy. One recruiter described the culture thi= s way: "They roll you over and slit your throat and watch your eyes while y= ou bleed to death." BEFORE JEFF SKILLING COULD TRANSFORM ENRON from the world's leading energy = company into the world's leading company, he had to make one more change: J= ust as he had done ten years before, Skilling had to purge the company of i= ts remaining old order. Where Enron once prized cautious executives who dea= lt with tangible assets like pipelines, it now valued bold executives who d= ealt with intangible assets. Pipelines, power plants-they may have been Enr= on's pride, but Skilling wanted them gone. Expensive, long-term building pr= ojects had no place when Wall Street was devoted to quick profits and enorm= ous returns on investment capital, and Skilling knew it. "It wasn't the tim= e for long-term approaches," an Enron executive says of Wall Street's mood.= "It was the technology era." To rid Enron of the last vestiges of its past, Skilling had to take on Rebe= cca Mark, long considered his rival for the CEO's job. Mark was for many ye= ars the poster child for the Enron way: Young, attractive, aggressive-her n= ickname was Mark the Shark-she came from sturdy Midwestern stock but had th= e requisite Harvard MBA. Mark was largely responsible for the success of En= ron International, the asset-heavy side of the company where she developed = $20 billion worth of gas and power plants, which accounted for 40 percent o= f Enron's profits in 1998. For this she reaped breathtaking compensation-on= e Enron executive estimated $10 million-and adoring press clips, including = two appearances on Fortune's list of the fifty most powerful women in corpo= rate America. But then Mark ran into trouble with a gas-fired power plant in Dabhol, Indi= a, one of the largest ever constructed. She had played the game the Enron w= ay: Taking Enron into a new market, she had finagled low import taxes (20 p= ercent instead of the usual 53) and hung in through 24 lawsuits and three c= hanges in government. But the time and expense needed to make India and oth= er Enron plants around the globe successful did not mesh with Enron's goals= , and Skilling's impatience with Mark grew. Forcing Mark out, however, was no easy matter. Key executives left, divisio= ns were dismantled, but she remained. The truth was Enron didn't mind firin= g lower-level employees, but it hated to fire the kind of aggressive, relen= tless people it tended to promote. The company preferred humiliation-keepin= g a director in his cubicle, say, but failing to include him in the glamour= deals, or kicking someone upstairs with a fancy title. (One particularly d= ifficult executive won a few years at graduate school, gratis.) A company a= s smart as Enron could probably deduce too that dispatching one of the most= visible businesswomen in the country would provoke a public-relations disa= ster. So Lay and Skilling did something classically Enronian: They gave Mar= k her own company. Despite Skilling's contempt for asset-heavy businesses, = Enron spent more than $2 billion to buy a run-of-the-mill British water uti= lity that could serve as Enron's entry into the emerging world of water pri= vatization. Mark was put in charge of making Enron, yes, the world's greate= st water company. Azurix, as the new business was called, looked like anoth= er sure thing: Its IPO in 1999 raised $695 million.=20 But Mark had to succeed on Enron's increasingly abbreviated timetable in a = business fraught with political and emotional complexities. Water is not li= ke gas or electricity-owners and governments are a lot less willing to give= it up, even for lots of money. The company stumbled, layoffs commenced, an= d confidence evaporated. By August 2000 the stock price, which had started = out at $19, had fallen to $5. Mark's resignation followed, and Azurix, much= diminished, was folded into Enron. "I think it's best for Rebecca to start= afresh," Lay, who had been a mentor to Mark, told the Wall Street Journal.= Or as one critic put it, "They were more interested in destroying the old = culture than running a business."=20 As 2000 drew to a close, Skilling was in total command. In December Ken Lay= announced the inevitable: "The best time for the succession to occur is wh= en the company is doing well," he told the press. "Enron is doing extremely= well now." In February 2001 Jeff Skilling took over the CEO's job. ALMOST IMMEDIATELY THE TROUBLE STARTED. Enron's domination of the electric-= power market made it an instant target in the California deregulation debac= le. Both PBS's Frontline and the New York Times took on Enron, portraying t= he company as a heartless colossus that used its influence in Washington (L= ay and Enron's political action committee are the top contributors to Georg= e W. Bush) to force old people on fixed incomes to choose between buying fo= od or electricity. Skilling and Lay appeared on camera singing belligerent = anthems to the free market, while another memorable scene juxtaposed one of= the company's jackallike traders against a hapless state employee in Calif= ornia, as both tried to buy power online. The Times reported that Lay had t= ried to persuade a new federal commissioner to change his views on energy d= eregulation. The bad press was, to say the least, ironic: Just as the media= was pounding Enron for its omnipotence, Wall Street was discovering its we= aknesses. By late March the stock price had slid to $50 a share from $80 in= January. Within Enron, the asset-based divisions took the rap for the decline. (The = India plant continued to be enormously costly, at least in part because of = constant turnover within Enron's management team.) But the California situa= tion was more visible and therefore more damaging, despite Enron's claim th= at the state had never built enough power plants to service its population = and never properly managed those it had. "For three months Gray Davis did a= very good job of blaming us," says Mark Palmer, a vice president for corpo= rate communications. "We were a Texas company. There was a Texan in the Whi= te House. California was a state that didn't put him in office, and his big= gest contributor was a Texas energy company. Performance is going to take c= are of our stock price. The truth will take care of Gray Davis." (Californi= a utilities still owe Enron $500 million, another reason stockholders might= be panicky.) But more problematic than the crisis itself was Skilling's al= l too apparent lack of contrition. Facing down his critics, he cracked a jo= ke comparing California with the Titanic. ("At least the Titanic went down = with its lights on.") But the biggest problem was Enron's telecommunications division, which had = been responsible for at least one third of its heady stock price. Investors= believed that Enron could revolutionize high-speed communications, just as= it had revolutionized gas and power. Enron estimated the global market for= buying and selling space over fiber-optic cable would grow from $155 billi= on in 2001 to $383 billion by 2004-but then the tech bubble burst. So too d= id the much-hyped movies-on-demand deal with Blockbuster. For the first tim= e in its confoundingly successful life, Enron had nothing new to take to ma= rket. Like the popular high school girl who suddenly packs on a few pounds,= Enron suddenly looked less alluring to Wall Street. Skilling launched a campaign to keep Enron's most important cheerleaders, t= he stock analysts, in the tent, but he wasn't cut out to be a supplicant. D= uring the reporting of first quarter profits, he called an analyst who chal= lenged Enron's financial reporting an "asshole." When the company reported = hefty second quarter profits, many analysts questioned whether those profit= s had come from the generation of new business or from the sale of old asse= ts. Ignoring the growing chorus critical of Enron's accounting, Skilling pr= omised, as he always had, that innovations were just around the corner. "Th= ere wasn't any positive news," Carol Coale, of Prudential Financial, says n= ow. "Basically, he talked me out of a downgrade." The business press, so generous in the past, turned surly. Fortune had aske= d in March whether Enron was overpriced. ("Start with a pretty straightforw= ard question: How exactly does Enron make its money?") The routine cashing = in of stock options that were about to expire by key executives was portray= ed in the media as a fire sale. (Skilling had sold $33 million worth, Ken L= ay and Ken Rice close to four times that amount.) Then the Wall Street Jour= nal reported on a fund run by the CFO that had been a source of strife with= in the company. (It was essentially risk management against Enron's possibl= e failures.) Every negative story seemed to produce a concurrent drop in th= e stock price: By late August it had fallen below $40. Enron, so institutio= nally unforgiving, finally got a taste of its own medicine. "When Wall Stre= et is in love with a stock, they're forgiving of something like accounting,= " says Carol Coale. "When a company falls out of favor, all these issues ca= rry more weight." This fact was not lost on people inside the company, who suddenly started e= xperiencing an attack of conscience. Those who had looked the other way as = the most powerful Enron executives dumped their wives and married their sec= retaries or carried on flagrant interoffice affairs now saw the error of th= eir ways. "It just created an attitude," one executive still at Enron says.= "If senior people are doing that, why are we held to a higher standard? Th= ere was a real culture of 'We're above everyone else.'"=20 Loyalty had never been prized at Enron, so there was no reason to expect it= now. An old-fashioned, slow-moving company like Exxon could demand hardshi= p duty in Baku with the promise of greater rewards down the road. "But," as= one Houston oilman explains, "if you have to negotiate a hardship duty wit= h someone who doesn't have loyalty and has money, then you have a corporati= on that's better suited for good times than bad." As it turned out, that description applied to Jeff Skilling too. As the sto= ck price stubbornly refused to ascend, he made no secret of his unhappiness= and frustration. Then, after a trip to visit the families of three employe= es killed at a plant in England, he had an epiphany: Life was short; for hi= m, Enron was over. Ever stoic, Ken Lay returned to the CEO's office, named = a new president, arranged a trip to New York to calm analysts and investors= , and promised a kinder, gentler Enron in the future. Trading anything and = everything was out. The company, Lay says, will still innovate but "innovat= e much closer to our core." As for the culture: "Things like the Performanc= e Review Committee, I think we could have applied better. By trying to cate= gorize people into so many different categories, you ended up creating a mo= rale problem." That Skilling's supposedly brilliant colleagues were as shocked at the news= of his departure as the rest of the business community may be testament to= their lack of emotional intelligence. Despite Skilling's lengthy tenure wi= th Enron, he'd always been contemptuous of the long haul; he'd always belie= ved in cutting losses and moving on. But now that he was abandoning them wh= en the company was in trouble, it was different. "Even Jeff's biggest detra= ctors wouldn't have wanted him to walk out the door," one loyalist admits. But on the day we meet, Skilling is looking forward, not back. "Look," he s= ays with finality, "ninety percent of my net worth is in Enron. Were my int= erests aligned with the shareholders? Absolutely." Free of falling stock prices and shareholder pressures, he is nestling hims= elf back into the world of ideas. His eyes flash as he talks about new tech= nologies. "The first wave never gets it right," he says. "The stand-alone d= ot-coms didn't work, but the technological applications will create a secon= d wave that will change the world." Houston, he promises, will become the w= orld's center of commodity trading, and he intends to be a part of it. In f= act, he is already shopping for office space. "This is the second wave, and Enron's got it," he says, almost breathless. = "There are thousands of people running around the streets of Houston that g= et it."