Andy Fastow’s CFO Magazine Moment

Dang it, I should have posted this on October 1. This is the infamous CFO magazine article, published in 1999, that featured our [misunderstood? brilliant? criminal? hapless? nicholas-cage-caliber-cray-cray?] financier. Enjoy!

Category: CAPITAL STRUCTURE MANAGEMENT How Enron financed its amazing transformation from pipelines to piping hot.
Russ Banham – CFO Magazine
October 1, 1999

When Andrew S. Fastow, the 37-year-old CFO of Enron Corp., boasts that “our story is one of a kind,” he’s not kidding. In just 14 years, Enron has grown from a heavily regulated domestic natural-gas pipeline business to a fully integrated global energy company with thriving activities in natural gas, electricity, infrastructure development, marketing and trading, energy financing, and risk management. And much of that growth has been fueled by unique financing techniques pioneered by Fastow.

“When I came here in 1990, Enron was a company with a $3.5 billion market capitalization,” says Fastow. “Today, we’re around $35 billion, and that’s without issuing a whole lot of equity. We’ve increased shareholder value, grown the balance sheet, maintained a stable outlook from the rating agencies, and achieved a low cost of capital.”

In fact, when energy stock analysts look for paradigm companies to vaunt, they point resolutely in the direction of Houston-based Enron, with $31 billion in revenues last year. And when they seek to explain how Enron has remade itself so completely, they point to “remarkably innovative financing.” Says Ted A. Izatt, senior vice president at Lehman Brothers Inc. in New York: “Thanks to Andy Fastow, Enron has been able to develop all these different businesses, which require huge amounts of capital, without diluting the stock price or deteriorating its credit quality– both of which actually have gone up. He has invented a groundbreaking strategy.”

Fastow’s expert balancing act, in fact, has earned him this year’s CFO Excellence Award for Capital Structure Management. “We needed someone to rethink the entire financing structure at Enron from soup to nuts,” says Jeffrey K. Skilling, Enron president and chief operating officer. “We didn’t want someone stuck in the past, since the industry of yesterday is no longer. Andy has the intelligence and the youthful exuberance to think in new ways. He deserves every accolade tossed his way.”

Looming Legacy
Enron’s challenge in entering multiple deregulating energy markets has been to secure the necessary capital without sacrificing its credit rating. And that challenge was particularly apparent in 1997 when the company’s debt load, as a result of enormous growth, was higher than was consistent with its BBB+ credit rating. “Retaining a high investment grade rating was critical to the success of our energy franchises,” Skilling says. “If we were downgraded, we could lose critical market share in North America.”

One option was to post significant collateral to continue doing deals, anathema to both Skilling and CEO Kenneth L. Lay. So instead Fastow, who at the time was the company’s senior vice president of finance, reorganized finance into an internal capital-raising machine. “We transformed finance into a merchant organization, one engaged in the intermediation of both commodity and capital risk positions,” he recalls, adding “Essentially, we would buy and sell risk positions.”

Such a transformation, however, required a team of finance personnel with the skill sets to develop capital structuring and structured finance deals. Consequently, Fastow tripled the staffing devoted to the company’s financing activities to more than 100, culling a diverse group of financial experts from commercial banking, investment banking, corporate finance, and the rating agencies. Their mandate: sell capital risk so it becomes a competitive advantage.

The upside potential of such an endeavor–for both the company and the team–were huge. The natural-gas and electricity industry, in all practical respects, is the largest and fastest- growing industry in the world today, in terms of both capital investment and revenue. But to launch an energy trading operation required a reservoir of capital just to get started. And therein lay the rub: Conventional financing techniques would jeopardize its BBB+ rating from Standard & Poor’s and other agencies, raising the cost of capital.

“We couldn’t just issue equity and dilute shareholders in the near term,” he says. “On the other hand, we couldn’t jeopardize our rating by issuing debt, which would raise the cost of capital and hinder our energy trading operations.” Plus, he says, “there was a one- to-three-year lag time” before Enron would receive any cash flow from its investments.

“Here we were, this big company by any standard,” he says, “with $31 billion of assets on the balance sheet and $50 million off the balance sheet, yet we were anemic relative to the opportunities.”

Walking the Tightrope
To solve the dilemma, Fastow first decided to capture the attention of the rating agencies, sending a message that Enron placed a high importance on its credit rating. The way he would do that, he planned, was to issue equity. Two months after he was named CFO in March 1998, Fastow delivered the strategy to Enron’s senior management. At first, they were disinclined. “Historically, we had been a company that traded on an earnings-per-share multiple,” Skilling notes. “Frankly, we were reluctant to dilute the share price. But Andy convinced us–and, ultimately, the market– that issuing equity would be accretive to shareholders if a comprehensive road show was organized.”

Subsequently, Enron issued 17.2 million shares to raise more than $800 million in equity, its first significant public offering of common stock in five years, with no share-price dilution. The rating agencies responded enthusiastically. “Andy has made it clear that maintaining the credit quality of the company is job one,” says Ron Barone, a director at New York­based Standard & Poor’s. “He’s been able to get the company to focus on cash flow to maintain credit quality, as opposed to managing the balance sheet, which Enron does well anyway. Cash is king, and Andy knows that.”

The second part of the action plan was the sale of assets. Under Fastow’s direction, each business unit was required to identify strategic assets that would remain in the portfolio. Others determined to be nonstrategic were put on the block. In 1998, Enron reduced its portfolio by a third, selling more than $1 billion of assets–a mix of power plants, pipelines, and subordinated- debt investments–with no negative earnings impact. “For every dollar I sold down, I reinvested it easily in a manner to generate higher returns, which then increased the return on equity and earnings,” Fastow says.

He then turned his attention to new forms of capital raising, creating an asset- securitization program in mid-1998. The first target was CoGen Technologies, a $1.1 billion acquisition. “This was a unique idea,” Skilling says. “Andy saw that the off-take contracts provided enough headroom to pay for the entire acquisition via a securitization of the contracts. This enabled the company to achieve an incredibly low cost of capital, while allowing 100 percent debt financing with no negative credit impact.”

Other innovative financing deals followed. Fastow financed two acquisitions–the $1.3 billion purchase of Elektro, Brazil’s sixth- largest electricity distributor, and the $2.2 billion purchase of Wessex Water Plc, a U.K.- based water company–through a contingent equity issue that was used as collateral for a nonrecourse debt issue. Shareholders were informed that the acquisition financing for Wessex would be replaced with permanent financing on terms that would maintain the company’s capital structure. “Under Andy’s direction, we issued mandatory convertible preferred shares into a trust,” Skilling explains. “Those trust assets were then used as collateral for a $1.5 billion 144A debt offering.”

Enron then committed to issue an initial public offering on the water company, or the trust would sell securities within three years. As a result, the company received equity treatment from the rating agencies, while raising capital at debt pricing in one of the largest 144A transactions ever executed. Astonishingly to all but Fastow, the company achieved debtlike financing on an equity issue that was nondilutive. And an IPO was filed within six months of the Wessex acquisition.

Numbers Tell the Story
Despite the traditional rules of financing, Fastow reduced the balance-sheet debt, maintained the credit rating, and reduced the cost of capital while simultaneously growing the balance sheet. In just the last two years, Enron has nearly doubled its total assets from $16 billion to $30 billion–without shareholder dilution and without a drop in the company’s credit rating. “He has successfully financed billions of dollars in a manner that has held credit quality,” says S&P’s Barone. “And that is not an easy thing to do. It is a testament to Andy’s focus on cash flow and his ability to think outside the box.”

Highlights of Andy Fastow’s Testimony

One of the last issues raised in Fastow’s testimony was a series of calls from Skilling in October 2001, after Skilling had resigned, asking Fastow “why Enron wasn’t telling its story,” when The Wall Street Journal was writing about LJM. Skilling said that “all the transactions were proper and fully disclosed,” and that “shareholders should give us medals for doing all these deals,” Fastow testified. On redirect by prosecutor John Hueston, Fastow said he didn’t believe Skilling was urging him to go public about their alleged secret deals, but rather “The way I heard it was, ‘Toe the party line’ ” about LJM, he said.

* * *

Ken Lay’s lawyer Mike Ramsey asked Fastow on cross-examination,”In connection with stealing from Enron, you were just looking Mr. Lay in the face and telling him a lie?” Fastow replied: “Yes, I was not loyal to him or Enron when I committed those crimes.”

* * *

Skilling’s attorney Daniel Petrocelli questioned Fastow about the authenticity of the “global galactic” memo. “Is there some possibility, sir, that later on, having perhaps lost or tossed out the original, you went back and recreated or reconstructed the list?,” Petrocelli asked. “No, sir,” Fastow replied.

* * *

Petrocelli also asked Fastow whether he was “100% certain” that the initials on the global galactic list were indeed those of former top Enron accountant Richard Causey. “I recall being there when Mr. Causey initialed them, seeing him do that,” Fastow said.

* * *

Fastow testified about a list known as “global galactic,” that documented profits promised to partnerships run by Fastow when they did deals with Enron. “We had side agreements. That’s how we did business. This was a list of side agreements after the agreements had been entered into,” Fastow said. “Because the list was getting long, this was my way of keeping track of it, and [assuring] Mr. Causey, he was keeping track of it the same way.”

* * *

Fastow testified that Causey not only approved global galactic but assured him Skilling was on board. But Petrocelli pointed out that Skilling didn’t initial the document. “If you really wanted to be sure Mr. Skilling was on board, you could have taken the 60 seconds to walk from your office to his office, show him these pieces of paper and have him initial them,” Petrocelli said. “I suppose so,” Fastow replied, adding, “It never dawned on me that it would be necessary to do so.”

* * *

Petrocelli asked Fastow about the infamous Nigerian barge deal involving LJM2 and four former Merrill Lynch employees who served prison sentences over their involvement in the deal. “I believe I would not have acquired the barges without that bear hug” from Skilling, Fastow said. “I did that largely based on my understanding that LJM2 would have a similar guarantee from Mr. Skilling that it would be taken out in the future if necessary without a loss and its rate of return.”

* * *

Fastow testified that former chairman Ken Lay was at a meeting in August 2001 in which he heard about a “hole in earnings” at Enron, just days before he gave a BusinessWeek interview claiming Enron was in its “best shape” ever. Fastow said of the Lay interview, “I think most of the statements in there are false.”

* * *

In a heated cross-examination by Skilling lawyer Daniel Petrocelli, Fastow admitted, “I believe I was extremely greedy, and that I lost my moral compass, and I’ve done terrible things that I very much regret.”

* * *

Petrocelli, at one point, told Fastow that his answers sounded well-rehearsed, to which Fastow replied: “With all due respect, your questions sound very rehearsed to me.” Petrocelli shot back, “We’re talking about the fact that your wife, because of your conduct, spent one year doing hard time. And you think that’s funny?” Fastow answered, “No, sir, it is not funny at all.”

* * *

Lay opted to characterize a loss on an investment in the third quarter of 2001 as “nonrecurring,” even though a gain on the same holding was earlier characterized as “recurring,” Fastow testified, adding, “I thought that was an incorrect accounting treatment.”

* * *

By October 2001, Enron’s suppliers refused to trade with the company and Fastow testified that he feared the company would collapse and that he and an aide went to Lay to warn him. “I said I thought this was a death spiral, a serious risk of bankruptcy. I said the majority of trades being done were to unwind positions.”

* * *

“Within the culture of corruption Enron had, a culture that rewarded financial reporting rather than rewarding economic value, I believed I was being a hero. I was not. It was not a good thing. That’s why I’m here today.”

* * *

LJM1, was designed to help the company “solve a problem,” Fastow testified. “We were doing this to inflate our earnings, and I don’t think we wanted to show people what we were doing.”

* * *

Fastow quoted Skilling as saying, “Get me as much of that juice as you can,” after Fastow informed him that more money would need to be raised to continue making deals like LJM1.

* * *

Fastow testified that partnerships like the LJMs were willing to do deals that Enron “just couldn’t do with others” because they were too risky or didn’t make economic sense.

* * *

Fastow testified about pressure from Skilling to have one of the LJMs buy a minority stake in a Brazilian power plant owned by Enron because Enron’s South American unit was struggling to meet its earnings target. “I told him it was a piece of s–t, and no one would buy it,” Fastow said, adding that he relented, in part, because Skilling assured him he wouldn’t lose money on the deal. Fastow testified that there were many more “bear-hug” guarantees like this from Skilling in mid-2000.

* * *

Fastow testified that the LJMs were legal and did many legal deals, but “certain things I did as general partner of LJM were illegal.”

* * *

Skilling was concerned, Fastow testified, that off-balance-sheet deals like the LJMs would “attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses.”

* * *

Fastow tearfully admitted that he “misled” his wife about some of the money the couple earned from Enron-related deals. “She would not, in my opinion, have signed a fraudulent tax return,” Fastow said. Lea Fastow served one year in federal prison for filing a false tax return.

* * *

Fastow said he instructed Michael Kopper to send $10,000 checks to each of his sons. The checks were portrayed as gifts to the boys, but really they were proceeds from a business deal. “I shouldn’t have. It was the wrong thing to do.”

Judge Hoyt: Crazy & Racist

Judge Kenneth Hoyt, who oversaw the case against Andy Fastow, is a googler’s dream. Even more than Judge Gilmore, who consistently rates at the very bottom of judges in the US, Judge Hoyt is amazing for his entertainment value. For instance, Hoyt, who is African-American, has refused to accept evidence about the rate of lupus among blacks “because white people wrote it.” He has denied that race is a factor in sickle cell anemia – a condition that affects only black people.

He also claims physical differences among races were the product of their environments. “Why do you think Chinese people are short? Because there is so much damn wind over there they need to be short,” he was quoted as saying a few years ago. “Why are they so tall in Africa? Because they need to be tall. It’s environmental.

“I mean, you don’t jump up and get a banana off a tree if you’re only 4 feet. If you’re 7 feet tall and you’re standing in China, then you’re going to get blown away by that Siberian wind, aren’t you?”

Our judicial system at work, ladies and gents.

James Derrick Asks Andy Fastow About His Involvement In LJM

This looks like Enron General Counsel James Derrick has sent a memo to V&E attorney James Dilg proposing language to ask Andy Fastow about his involvement in LJM.

I’m not positive that’s what’s going on but that’s what it looks like.

On The Hunt For Fastow News

The media is desperate for news about Fastow. At least two people have told me that reporters have called their attorney’s office to find out anything they can about him. This is funny. The dude is still basically in prison. His life hasn’t changed much. Some, granted, but not tremendously. So there really isn’t any “news” except that he’s at a the halfway house. That’s the news. That’s it. That’s all you’re getting for the time being. When he’s released, it will be interesting to see if he so much as utters, “excuse me,” for stepping on a reporter’s foot. My guess is he’s not saying a word to anyone for a long time.

Searching For Andy Fastow

Andy Fastow has a really sweet face. It looks lived in. And his eyes look very wise, like an old man. I have the feeling he has what my grandmother would have called an “old soul.” I’ve looked at his face for a long time, trying to see something in it that would make me know, deep in my bones, who he is. I’ve searched for answers (notably here but search my blog for “andy fastow” and you’ll see about 15 pages of posts about him.)

For a long time, I believed he was this very complex person who had compartmentalized his life to such a degree that he could, for instance, be a terrific husband (which itself turned out to be a complex and complicated notion) and at the same time a brilliant criminal mastermind. I thought he was too complex to be evil, and too sophisticated to be anything less than elegant in his criminality. This was supported by friends of Andy who would tell me how he kept toys and candy in his drawers at work. How he was the biggest goofball you ever saw in your life… but refused to acknowledge an underling at a Christmas party. He loved his wife passionately, devotedly for twenty years… then started seeing someone else. He considered himself Jeff Skilling’s biggest fan at Enron… then lied to his face, over and over again. He was well compensated at Enron, and married an heiress… then stole millions. That sort of division, the lack of coherence, attracts me. I want to know how and why a person behaves that way. I wanted to know him.

But then some of the same friends, and some of people who knew him but didn’t think of him as a friend at all, kept trying to tell me that the mystery that was so obvious to me was just not there. There was nothing really interesting about him. Someone who hated Andy at Enron finally had enough of me waxing poetic about the man and said that I had to get over the thinking he was more than a simple, common criminal.

It really struck me because first of all, this person worked shoulder to shoulder with Andy every day for many years. He knew Andy as well as anyone at Enron possibly could. And then his friends began to say the same thing. They just sort of felt a quiet dullness about his crimes. They could see him doing it. It didn’t seem that out of character. “He’s a jerk” was a phrase I heard a lot, usually uttered in a flat, nonjudgemental voice. Simply stating a fact.

I fought against this one-dimensional view of Andy Fastow. I wanted to believe he was more and bigger and better and deeper. But eventually, I came to realize the evidence didn’t lead me there.

I’ve come to believe that Andy Fastow was deeply insecure. All the darkness I mistook for complexity is probably his profound unwillingness to actually show himself to anyone completely. I think he stole money because he was jealous of the traders and wanted to earn big money. Ken Rice and Kevin Hannon were big shots, and friends of Andy, and they, with Jeff Skilling, were sort of the It boys. They had money and success and visibility. I think it appealed to Andy so much that he just grabbed it in the quickest way he could. His insecurity was probably not entirely unfounded. I think he began to do transactions that might be risky, but Enron tolerated it because, well he was the CFO and he had the support of the board. They gave him a wide berth. His incompetence, mixed with his aggressive bullying of anyone who rose any doubts about his deals, was kindling at Enron.

I wonder what he felt the first time he did something he knew was illegal. I wonder if he was elated or grim. I wonder if his heart was pounding. If his breathing was rapid and shallow. If his cheeks burned with shame. If his mind was filled with sudden images of the SEC knocking on his door. I wonder if he looked at everyone differently the next day. They had been his coworkers and bosses and peers on Tuesday. By Wednesday they were victims.

When he was fired from Enron in October 2001, I think he knew that it was all over for Enron. I like to think – based on absolutely nothing but the same part of me that really wants him to be this complicated, complex, brilliant man -that he looked at what he had done and was horrified. That he saw it, clearly, maybe for the first time. That he crawled inside himself and felt as much bitter rage at himself as his body could stand.

That would be enough punishment for me. Because once you acknowledge those parts of yourself that you don’t want anyone else to see, nobody ever has to punish you again. You punish yourself.

Andy is progressing toward freedom and a normal life. I am actually curious to see what he will do. Will he vanish into the mists of time as a trivia question, or will he come back louder and bigger than ever, doing the rubber chicken circuit and giving talks warning the graduating MBA 2020 class at Tufts not to step over that fine line that divides the immoral from the righteous?

That’s the thing about Andy Fastow. You think you’ve nailed him down somewhat, and then he surprises you again. I think enough people are curious that he will have a second act. And, oh, I hope it is a good one.

Michael Kopper’s Notes To Fastow Re: Chewco

Michael Kopper wrote an analysis of the distributions/purchase of Chewco’s interest in Jedi. Michael Kopper could be a novelist; his thoughts are clear, each one in a neat paragraph. Brilliant. In my opinion, this is a really cool document.

Willful Blindness: Enron Didn’t Have It

A few days ago, I mentioned the journalist who wrote a book about “willful blindness”. She is on a media tour now, hawking her book, and CNN plays the straightman to her insanity. To whit:

CNN: Where did the idea of “willful blindness” start for you?

Margaret Heffernan: I read the transcript of the trial of Jeffrey Skilling and Kenneth Lay and in the instructions to the jury, the judge cited the legal concept of willful blindness — that if there is information that you could have known, and should have known, but somehow managed not to know, the law treats you as though you did know it.

Reading the transcripts is a good start to learning about the Enron case. But I find both the question and the answer bizarre. Who gets all excited about the notion of willful blindness? It’s like getting excited about irony — excited enough to write a book about it.

She continues:

I thought of all the other areas in which willful blindness has a role, both in history and in the present day. Most major accidents, disasters and crimes play out in full public view — the question is not what’s hidden and secret, but how can this happen in public and nobody do anything? To relate it back to Enron, I kept thinking — how could Ken Lay not know how dishonest his company was?

Well there are three really good answers to that and none of them have to do with willful blindness. The first is that the “dishonest” bits of the company were hidden from him. He could not be expected to know if something was hidden from him.

Secondly, as a leader of the company, he was responsible for the vision and strategy of the company – not the everyday tasks of everyone inside the company. It would be unreasonable to hold any executive responsible for the crimes of an employee and neither Dr. Lay nor Jeff Skilling had any reason to insist on audits for every one of Enron’s employees.

Lastly, the company was not dishonest. Any fraud that happened at Enron was the result of a very small group of people in Andy Fastow’s group, Global Finance. It wasn’t endemic through the company.

Anyone who read the Skilling/Lay trial transcripts should have been able to see this. Perhaps her failing was simply… willful blindness.

Moronic Journalist Makes Up Crap About Jeff Skilling and Ken Lay

Another day, another idiot. This time, it is one shilling a book called “Willful Blindness” and it’s described thusly:

In “Willful Blindness” journalist and businesswoman Margaret Heffernan asks, “Why, as individuals, companies and countries, do we so regularly look at the mirror and ask how, ‘How could we have been so blind?’ “
When she asked people about the concept of ‘willful blindness,’ they gave examples on their own – abuse, divorce, Ponzi schemes, subprime mortgages. “Almost everyone mentioned the Iraq war and global warming: big public blunders caused or exacerbated by a reluctance to confront uncomfortable facts.”

So this book is basically a giant dumping ground for leftist politics. Got it. Oh and by the way, global warming? Not a man-made thing. Moving on.

She was first introduced to the term when writing a play for the BBC on the failed energy company, Enron.

I just want to savor that thought for a moment. Writing a play for the BBC about Enron. Hm. Has anyone ever seen this play? I can’t imagine why it isn’t a household name… which isn’t even mentioned in the article.

The legal description for the term “willful blindness,” as described by the judge, was: ‘You are responsible if you could have known, and should have known, something that instead you strove not to see.’

What judge? Judge Lake? In the jury instructions, Judge Lake said “willful blindness,” meaning ignorance of a conspiracy, doesn’t count as ignorance if it was intentional. “You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been been obvious to him … Knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.”

I am not sure that Lake used the explicit term “should have known” and I am almost certain he never said “strove not to see.” But this is just Enron, so I guess it’s okay for journalists to be sloppy with their work.

In the case of Enron, (Chief Executive Jeffrey) Skilling and (Chairman Kenneth) Lay could have known, and had the opportunity to know, just how rotten their company was.”

Really? How about some proof. How about actually giving us an example of “just how rotten their company was”? And for that matter, when was the opportunity to know given to Jeff and Ken Lay? Andy Fastow said that he kept his deceit hidden from Jeff Skilling. What was Jeff supposed to do, audit his own CFO for no reason whatsoever?

She doesn’t bother to give examples or proof. Why bother, it’s just Enron, right? Everybody “knows” that was rotten. No need for facts or anything.

My Enron Movie, Part One

A certain someone and I have been playing a game for almost three years now. Ever so often, we think about who we would cast to play various people in a limitless-budget production of the real Enron story.

Today, I’m coming clean with some of my choices (and his).

Ken Lay should be played by Jeff Bridges.

Jeff Skilling is a little more difficult to cast, but I think I’ve settled on Sean Penn. Sean Penn doesn’t have Jeff’s build, which bothers me because Jeff actually has a lot of physical presence, but Penn is a magnificent actor and I think he’d capture Jeff’s crystal-bright intelligence, and the hidden sadness. It should be noted that I chose an unconventional picture of Jeff Skilling. I could have found one of him smiling and non-threatening, but I like this one because it’s unguarded. He’s angry and sad as he leaves the court house — exactly as any reasonable person would be.

For Andy Fastow, Kevin Spacey. Kevin Spacey is edgy, I can’t get comfortable watching Kevin Spacey, he’s strange and unknowable, and I think he could bring that to a portrayal of Andy Fastow. I have never seen Kevin Spacey clown around in a movie and I think it would be vital to show that silly side of Andy. But I think Kevin Spacey can handle it.

Ben Glisan is the easiest one of all the Enron execs to cast. He shall be played by Ben Affleck. I decree it, thus it shall be so! They have more than just a passing resemblance, and I think Ben Affleck could capture Ben perfectly.

Ken Rice has to be played by Gerard Butler. They have the same physique and their faces have a passing resemblance, but more importantly and I think Gerard Butler can capture Ken’s coolness and complexity. We must work on getting rid of that Scottish accent, however.

These graphic things take forever to make so I’ll have to get to part two tomorrow.

Ebbers and Fastow

For a time, Andy Fastow, the former CFO of Enron, and Bernie Ebbers, the former CEO of WorldCom were housed in the same prison camp in Oakdale, Louisiana. I sometimes wonder if they ever met or became friends, and if so, that pleases me. I think Andy must be quite unique in prison, like all of the Enron men, and I wish for him to have someone intelligent and with whom he might reasonably establish a friendship.

We Owe Andy Fastow A Huge Apology

It would appear Enron-haters (including the DOJ) should be eating crow right now because as of today, Andy Fastow has been proven to be the visionary beyond anything we could have predicted in 2000 and 2001. Today, the Fed bought $600 billion government bonds in an effort to stimulate the comatose economy, thereby validating many of the most-criticized transactions that Fastow undertook while at Enron. (Sidebar: it might be valuable to think why the Fed is having to buy such massive bonds. Our last few bond auctions have been dismal failures. Nobody wants our debt – not even China, or largest creditor, or Japan, our second largest creditor. Thus, our own government is forced to step in to supply the “demand” that is missing in the marketplace. This is not good economic policy.)

Fastow is often accused of using Enron stock as a guarantor of LJM’s investments, then generally buying and selling products to himself (dark fiber springs to mind) using LJM to keep bad debt off the books.

If this was illegal or unethical, I ask why the Fed is doing it. The Fed is, obviously, the federal government. This would be the Enron actor. The Treasury is also the Fed. This would be LJM. The Fed is basically buying a worthless product – bonds – on the promise that they will be worth more in the future. Meanwhile, the Treasury gets to say that it has “sold” $600 billion of bonds – it looks excellent on the balance sheet. (Incidentally, they do this all the time. It’s only caught our attention because the amount is enough to make even governments blush.)

Granted, Fastow’s transactions were a little more complicated than that but that’s the gist of them.

To add a piquant twist to all this, consider: Andy Fastow is in prison. The DOJ – also part of the government – put him there. The same government that is playing numbers games and saying hocus pocus, abracadabra, while it steals from us put Andy Fastow in prison for doing something similar on a much smaller scale. Fastow never had the power to cause inflation, or the power to depress job creation, as the Treasury and Fed can.

Why is this kind of fraud okay when the government does it? Who is going to put them in jail?

Andy Fastow was apparently a visionary financier. We owe him an apology.

An Example of Conflict of Interest

I found this in a public filing today:

Related party transactions
At June 30, 2010, the Company owed (amount deleted) to (deleted) (purchased by deleted in 2009), a former related party with common directors and officers. These fees relate to general and administrative expenses for the purposes of sharing the same office space and equipment.

A director of the Company is a partner at a law firm that provides legal services to the Company. For the six months ended June 30, 2010, no fees (June 30, 2009 – nil) were charged for services provided from the firm.

All related party transactions are conducted in the normal course of business operations and are measured at the exchange amount, which is established and agreed to based on standard rates, time spent and costs incurred.

And yet nobody seems too concerned about this. It did make me think about Andy Fastow and how people make such a huge big deal out of the fact that he was both an officer at Enron and LJM – a relationship that some may think was a conflict of interest.

But in this modern example, he’s a LAWYER providing legal advice to a company where he is also the director. That seems to me much more problematic.

I guess if anything happens at Enron, it’s automatically controversial. But if it happens anywhere else, it’s just business.

Hypocritical much?