[Senate Hearing 107-1141]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1141
 
                   COLLAPSE OF THE ENRON CORPORATION

=======================================================================







                                HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2002

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

















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           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona, Ranking 
JOHN D. ROCKEFELLER IV, West             Republican
    Virginia                         TED STEVENS, Alaska
JOHN F. KERRY, Massachusetts         CONRAD BURNS, Montana
JOHN B. BREAUX, Louisiana            TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota        KAY BAILEY HUTCHISON, Texas
RON WYDEN, Oregon                    OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 SAM BROWNBACK, Kansas
BARBARA BOXER, California            GORDON SMITH, Oregon
JOHN EDWARDS, North Carolina         PETER G. FITZGERALD, Illinois
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
BILL NELSON, Florida                 GEORGE ALLEN, Virginia

               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel


























                            C O N T E N T S

                              ----------                              

                                                                   Page

Hearing held on February 26, 2002................................     1
Statement of Senator Allen.......................................     9
Statement of Senator Boxer.......................................     8
Statement of Senator Breaux......................................     7
Statement of Senator Burns.......................................     6
    Prepared statement...........................................     6
Statement of Senator Carnahan....................................     7
Statement of Senator Cleland.....................................     5
Statement of Senator Dorgan......................................     1
Statement of Senator Fitzgerald..................................     3
    Prepared statement...........................................     4
Statement of Senator Hutchison...................................    53
Statement of Senator McCain......................................     2
Statement of Senator Nelson......................................    17
Statement of Senator Rockefeller.................................     9
    Prepared statement...........................................    10
Statement of Senator Snowe.......................................    16
    Prepared statement...........................................    16
Statement of Senator Wyden.......................................     5

                               Witnesses

McMahon, Jeffrey, President and Chief Operating Officer, Enron 
  Corporation....................................................    14
     Prepared statement..........................................    15
Skilling, Jeffrey, former Chief Executive Officer, Enron 
  Corporation, 
  accompanied by Bruce Hiler, Esq., O'Melveny & Myers............    18
Watkins, Sherron, Vice President of Corporate Development, Enron 
  Corporation, accompanied by Philip Hilder, Esq.................    10
     Prepared statement..........................................    13



















                   COLLAPSE OF THE ENRON CORPORATION

                              ----------                              


                       TUESDAY, FEBRUARY 26, 2002

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SD-253, Russell Senate Office Building, Hon. Byron L. Dorgan, 
presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. I call the hearing to order. We would ask 
for order in the hearing room.
    This morning the Committee continues its examination of 
what has happened with respect to the Enron Corporation. We 
have had two previous hearings. Previously, we heard from a 
number of Enron employees, retirees, and investors, many of 
whom lost their life savings when this corporation collapsed.
    Today, we hope to begin the process of hearing from some of 
those who worked inside the Enron Corporation. We will hear 
from Ms. Sherron Watkins. She is the employee who wrote the 
memo to Mr. Lay last August saying that Enron was in danger of 
imploding ``in a wave of accounting scandals.'' She continues 
to be employed by the Enron Corporation.
    We also will hear from Mr. McMahon. Mr. McMahon is the 
former Treasurer of the Enron Corporation and now serves as 
President and Chief Operating Officer. Finally, we will hear 
from Mr. Skilling who is a former CEO of Enron.
    Some 10 weeks ago, as we began the inquiry, Ms. Janice 
Farmer sat at our witness table. She was an Enron employee and 
told us how the bankruptcy of Enron had demolished her life 
savings. This is a case of America's largest corporate 
bankruptcy. It is not unusual that, in our system, or in our 
society, enterprises would file for bankruptcy. It is unusual 
that we have had a corporation file for bankruptcy and a 
subsequent investigation, called the Powers Report, launched by 
the Board of Directors of that corporation, saying what they 
found inside the corporation was ``appalling.''
    It is also the case that the people at the top in this 
corporation, officers and members of the Board of Directors, 
made a substantial amount of money, tens of millions of dollars 
in some cases, while people at the bottom, employees and 
investors, lost their life savings in many instances.
    The question here is what happened? How did it happen? Who 
was responsible for it happening? And what can we do to prevent 
this sort of thing from happening again?
    I have said previously--and let me mention again how 
important this is--the method by which we accumulate capital in 
this country is to have an investor in Bismarck, North Dakota, 
or anywhere in the country for that matter, buy a share of 
stock based on the belief that the financial statement 
represented by that corporation and approved by its accountants 
is a fair and honest representation of what is happening inside 
that corporation.
    If that trust is broken--and I believe that it was in this 
situation--when that trust is broken, it undermines the method 
by which we accumulate capital for our system of capitalism. I 
think we must find out what happened. Where were the 
accountants? Where was the law firm? Where were the security 
analysts? Where were the officers and directors of the company? 
And how do we prevent this sort of thing from happening again?
    It is my hope, following recognition of the Ranking Member 
of the Full Committee and Subcommittee, that we could limit 
opening statements to a minute or so for those who have opening 
statements and then go right to the witnesses. We do have a 
vote that will occur at 10 o'clock. It is my intention that we 
would break for 15 minutes during that vote and then come back 
and proceed.
    Let me call on Senator McCain for his opening statement.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Senator Dorgan, for chairing 
this hearing, and I thank the witnesses for appearing before us 
today.
    Enron has drawn an enormous level of public and 
Congressional interest because the story of this one company 
challenges fundamental assumptions about our economic system. 
One such assumption is that the public receives accurate 
assessments of a company's financial health and that they rely 
on this information to make rational investment decisions. 
Enron's collapse raises serious doubts about whether existing 
financial disclosure rules and accounting standards enable the 
public to get an accurate or even a rough idea about companies' 
true financial condition.
    Another assumption is that there are adequate gatekeepers 
in place to filter financial information and ensure its 
integrity. Enron has proven this assumption wrong. Gatekeepers 
within the company failed, external gatekeepers in the form of 
auditors and financial analysts failed, and Congress failed.
    Enron's bankruptcy dramatically illustrates that the 
corporate interests and public interests cannot be assumed to 
be the same. Enron has given all of us a costly lesson in 
showing that we cannot rely on a system that lacks adequate 
regulation and that depends solely on conscience and good 
judgment.
    I hope our witnesses are able to explain to this Committee 
what went so terribly wrong with Enron and what you would have 
done or would have us do differently to ensure this story is 
not repeated.
    Thank you.
    Senator Dorgan. Senator McCain, thank you very much.
    Before I call on the Ranking Member of the Consumer Affairs 
Subcommittee, let me say that there are more than eight Members 
present and Sherron Watkins has requested the Committee issue a 
friendly subpoena compelling her testimony before the Committee 
today. I would move that the Chairman be authorized to issue a 
subpoena on behalf of the Committee. All those in favor say 
aye.
    [A chorus of ayes].
    Senator Dorgan. Opposed, no.
    [No response].
    Senator Dorgan. The motion is agreed to.
    Let me call on Senator Fitzgerald.

            STATEMENT OF HON. PETER G. FITZGERALD, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman.
    Ms. Watkins, Mr. McMahon, thank you for being here today.
    Mr. Skilling, I want to thank you very much for appearing 
and agreeing to testify. Some of your Enron colleagues who were 
also asked to testify have made a different choice. Watching 
them, I have to believe that you are aware that your voluntary 
appearance before this Committee entails a measure of risk and 
that you therefore must be somewhat anxious. Consequently, 
whatever role you may have played in the collapse of Enron, I 
think there is at least something to be said for your 
willingness to talk about what happened to your company.
    I do, however, approach your testimony with some 
skepticism. Appearing before the House, you disclaimed 
responsibility. That disclaimer encouraged the perception that 
Mr. Andrew Fastow played perhaps the pivotal role in the 
collapse of the company. But if the theory is that Fastow went 
rogue somewhere deep in the jungles of Enron and was the 
assault agent of the apocalypse, I just do not buy it.
    As Senators, we are intensely interested not just in 
individual responsibility, but also in what appears to have 
been a systemic collapse of controls, a spectacular corporate 
implosion--and the collapse of controls occured both within the 
company at all levels of risk management and external to the 
company, as Senators McCain and Dorgan have already indicated.
    We also saw the collapse of controls outside the 
corporation, whether by the rating agencies, the auditing 
firms, the law firms, the analysts, and even at the end of the 
day, the SEC.
    Our purpose then is to figure out how JEDIs, LJMs, Raptors, 
and a Chewco turned the whole world on its head. We have a 
chess game here, Mr. Skilling, and the challenge is to find a 
way to check every single one of the moves you made on that 
Enron Board.
    As part of that effort, this Committee thought it important 
to ask both you and Mr. Lay, as central figures in this drama, 
to tell us what you know.
    Now, Mr. Skilling, we are witnessing a tale of two CEOs. As 
you may know, your predecessor and successor, Mr. Lay, chose 
not to speak. Mr. Lay walked away. But that was only one 
possible choice. You have chosen differently and this Committee 
is pleased that the Fifth Amendment flu has not claimed another 
victim. Your willingness to testify is appreciated and I am 
sure there are many advising you to remain silent.
    Mr. Skilling, I think there may be a great deal you can 
tell us about your days at Enron that would both help this 
Committee and this country. I look forward to your testimony.
    Senator Dorgan. Senator Fitzgerald, thank you very much.
    For those of you who have just arrived, I had asked that if 
we could perhaps, for those who do have opening statements, 
limit them to a minute so that we can begin the testimony. We 
had rather good opening statements when Mr. Lay appeared.
    Senator Fitzgerald. Mr. Chairman, could I get permission or 
consent of the Committee to enter my full statement in the 
record, as I abbreviated it somewhat?
    Senator Dorgan. Without objection.
    [The prepared statement of Senator Fitzgerald follows:]
            Prepared Statement of Hon. Peter G. Fitzgerald 
                       U.S. Senator from Illinois
    Mr. Skilling, I want to thank you very much for appearing and 
agreeing to testify today. Some of your Enron colleagues who were also 
asked to testify have made a different choice. Watching them, I have to 
believe that you are aware that your voluntary appearance before this 
committee entails a measure of risk and that you therefore must be 
somewhat anxious. Consequently, whatever your role may have been in the 
collapse of Enron, I think there is at least something to be said for 
your willingness to talk about what happened to your company.
    I do, however, approach your testimony with some skepticism. 
Appearing before the House, you disclaimed responsibility. That 
disclaimer encouraged the perception that Mr. Andrew Fastow played 
perhaps the pivotal role in the collapse of the company. But if the 
theory is that Fastow went rogue somewhere deep in the jungles of 
Enron--and was the sole agent of the apocalypse--I just don't buy it.
    As Senators, we are intensely interested not just in individual 
responsibility, but also in what appears to have been a systemic 
collapse of controls--a spectacular corporate implosion. It's a 
collapse that appears to have been both intra- and inter-institutional. 
Within Enron itself, we see a fundamental collapse of control beginning 
with the employees explicitly charged with managing Enron's many off-
the-books partnerships. We see a collapse of control at the level of 
top management--including the Chairman and the CEO--charged with 
overseeing the employees managing the partnerships. We see a collapse 
of control by the Board of Directors charged with monitoring the 
performance of the Chairman and CEO who are, in turn, charged with 
monitoring the performance of the employees monitoring the performance 
of these partnerships. That's just within the confines of Enron itself.
    Then we see a collapse of controls at a macro level--by the very 
institutions that are supposed to ensure the integrity of the capital 
markets. The United States has a whole industry--the accounting 
industry--to audit publicly traded corporations. Enron busted through 
the auditors. Investment and lending institutions played a role as 
well, improvidently extending capital and credit for ventures they 
apparently didn't understand and about which they failed to ask 
pertinent questions. Enron busted through the banks. Stock analysts are 
supposed to monitor the direction of the companies they follow and warn 
investors of potential pitfalls. Enron busted through the analysts. 
Rating agencies play a critical role in evaluating the financial 
condition of publicly traded companies and in warning investors of 
negative trends. Enron busted through the agencies. Finally, we have a 
Securities Exchange Commission, which polices the financial markets and 
protects investors. Apparently, not even the SEC could stop an Enron.
    Our purpose, then, is to figure out how JEDIs, LJMs, Raptors and a 
Chewco turned a whole world on its head. We have a chess game here, Mr. 
Skilling, and our challenge is to find a way to check every single one 
of the moves you made on that Enron board. As part of that effort, this 
Committee thought it important to ask both you and Mr. Lay, as central 
figures in this drama, to tell us what you know.
    Now, Mr. Skilling, we are witnessing a tale of two CEOs. As you may 
know, your predecessor--and successor--Mr. Lay, chose not to speak. Mr. 
Lay walked away. But that was only one possible choice. You have chosen 
differently, and this committee is pleased that the Fifth Amendment flu 
hasn't claimed another victim. Your willingness to testify is 
appreciated when I'm sure there are many advising you to remain silent.
    Mr. Skilling, I think there may be a great deal you can tell us 
about your days at Enron that would help both this committee and the 
country. I look forward to your testimony.

    Senator Dorgan. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman.
    I think it particularly important this morning that we 
examine the relationship between Mr. McMahon and Mr. Fastow. I 
would like to just go through the list of people that say that 
Mr. Skilling knew or was warned about the partnerships that 
were managed by Mr. Fastow. Mr. McMahon has said he complained 
personally to Mr. Skilling about his concerns with the Fastow 
partnerships. According to Ms. Watkins, J. Clifford Baxter told 
her that he had met with Mr. Skilling repeatedly to express his 
concerns about the partnerships. In an interview with the law 
firm Vinson & Elkins, Enron's Chief Risk Officer said that he 
talked to Mr. Skilling as far back as 2000 about the mounting 
risks of the Raptor partnerships. Ken Lay told internal 
investigators that Mr. Skilling knew the details of many of the 
key partnerships and even presented the idea for one of them to 
the Board of Directors. The Powers Report states that Mr. 
Skilling, Ken Lay, and the rest of the Board agreed and 
understood, and Mr. Skilling was the senior member of 
management responsible for the LJM partnership, and Mr. 
Skilling certainly knew or should have known the magnitude and 
the risks associated with these transactions.
    It is clear that there was a long record of individuals 
right at the center of the company who were saying that you, 
Mr. Skilling, were aware of this. I think what I want to 
examine, because you have said that you have done nothing wrong 
and that you did not know about much of this, is really how 
many warnings would have been needed in order to have you take 
seriously the threats that so many around you were talking 
about. I hope we will get to examine that and other issues.
    Thank you for the chance to make this statement.
    Senator Dorgan. Senator Cleland.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Mr. Skilling and those of you who are 
willing to testify today, thank you for appearing before us. I 
might say, I am sure this is an unreal feeling for you, an 
unreal experience. In many ways it is an unreal experience for 
me. I just want you to know where I am coming from. My state, 
particularly the 262,000 teachers and the well over 100,000 
retired state employees, lost $127 million, Mr. Skilling, due 
to the failures, I think, of leadership and openness and in 
effect the lying, cheating, and stealing of the top officials 
of Enron.
    I will be asking questions today, not so much on my behalf, 
but on behalf of the teachers, the retired employees, and the 
people in Georgia who worked for Enron, who believed in you and 
your leadership team, many of whom have had to declare personal 
bankruptcy because your company went bankrupt due to the 
bankrupt leadership of that company.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Mr. Chairman, I will just submit my 
statement for the full record. I want to thank the executives 
for appearing here today. I appreciate that very much, and the 
willingness to answer some of the questions that will be asked 
by this panel.
    I still think we are boiling down to answer the three W's: 
not only what, but when it was apparent that we had really 
serious internal problems, and why the management acted as they 
did. Also I believe we are here to listen and make judgment, 
was it the failure of the laws that are in place now and what 
we should do from here on. I will tell you, no matter what 
happens after this, all the problems that harmed the retirement 
funds, investors, and employees, will not suddenly be gone 
after these hearings are over or after the dust has settled 
from the Enron collapse.
    I think it is incumbent on us to take the information 
gained here and more information from the agencies that were 
involved in the enforcement of those regulations to do what is 
necessary to protect the American people. I think our system is 
at stake here and that it is up to us to make sure that it 
works in case this happens again.
    Now, I know how the panel that is before us today feels 
this morning. I went stone broke once, too. But I did not have 
as many moving parts as it appears that this case might have 
had. But nonetheless, I believe that we have to take and judge 
from what we gather today and prevent that the protection of 
the system is in place and the confidence is restored in the 
American system, which has served more people in this country 
than any other system that has ever been invented on this 
planet.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Senator Burns follows:]
               Prepared Statement of Hon. Conrad Burns, 
                       U.S. Senator from Montana
    Thank you Mr. Chairman for holding this hearing. I welcome our 
three witnesses and I look forward to their testimony today. I have a 
few brief remarks I would like to offer for the record.
    As in our previous hearings, I am hopeful that the information 
offered today can further enlighten this committee and the American 
people of the events that led to Enron's collapse. I am hopeful we can 
answer to the 4 Ws. Not only What, but When it was apparent that there 
were these internal problems, Why management acted they way they did, 
and Who were the principals. I believe we should be here to listen and 
be prepared to act based on the information collected and on the facts 
as they are known.
    As I have stated before, Congress is tasked with a responsibility 
to the American people. We are not here to judge or convict but we are 
here to ensure the American people that when a circumstance such as 
this, the folks that are at the helm do the right thing and that is 
protect those who have little to control the situation or have the 
ability to protect themselves. I consider this an extremely important 
task as our Nation's economy and the basic principles of capitalism 
have been jeopardized by the Enron collapse.
    We must find out which rules were bent or broken along the way, and 
the rules that should have been in place but did not exist. Once these 
important questions have been answered, we can address policy concerns 
at the SEC, FASB and other agencies with jurisdiction, or ultimately, 
Congress. In short, Congress WILL take action to make sure this 
collapse and the ramification can be prevented.
    In conclusion, I believe that it is important to remember we cannot 
legislate morality, that is something we expect of all Americans 
regardless of whether they are powerful corporate executives or blue 
collar workers working to put food on their family's table. In this 
case it is evident we can write out an extensive list of people to 
blame and Enron's employees won't suddenly have a solid future. Private 
investors won't magically see their stock gain value. Retirees' 401(k) 
plans won't suddenly re-appear. I don't think it is out of line to ask 
the important question of what now? What are Enron's plans for break-up 
and their actions and plans for former and present employees who lost 
so much. I believe we need to constantly remind ourselves that this is 
not about Enron executives, this is about the Nation's economy and 
investor confidence.

    Senator Dorgan. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Just very briefly, Mr. Chairman, thank you.
    I think when you have a bad event, a lot of times there is 
a tendency for the people who surround the bad event to all 
say: I do not know how it happened, I do not know when it 
happened, and I do not know why it happened; it just happened. 
Well, things do not just happen.
    There are reasons for things that are bad--how they occur, 
when they occur, and why they occur. I think it is important 
for this Committee to really find out what happened, to find 
out what the Federal role is in seeing that the laws that 
protect the American people are, in fact, the right laws, and 
if they need to be changed, that we do our very best to make 
sure that they are, in fact, changed. That is what we are 
trying to find out.
    There are other venues for other activities surrounding 
this situation, but we need to know what happened and how and 
where and why.
    Thank you.
    Senator Dorgan. Senator Carnahan.

               STATEMENT OF HON. JEAN CARNAHAN, 
                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman.
    This Committee has an extraordinary opportunity today. The 
three who have agreed to testify can help us unravel the 
tangled events that ensnared Enron. As top executives, they 
should have been able to give a reasonable explanation of why 
America's seventh largest company collapsed in a wave of 
accounting scandals, as predicted by one of these witnesses.
    Each of these witnesses has testified already before the 
House. Their testimony on different days presented conflicting 
accounts, and we did not receive a true picture. Today, these 
witnesses have a duty to explain what they knew and how they 
responded to what they knew.
    I realize the painstaking work of investigating Enron's 
collapse and the accountability will fall to others--the 
Securities and Exchange Commission, the Justice Department, the 
the Federal courts--but the job of this Committee is also 
important. Congress is responsible for crafting the laws that 
govern our financial markets and overseeing the enforcement of 
these laws by the Executive Branch. But, Members of Congress 
also serve as representatives of the people of this nation, and 
they want to know why this happened.
    They want to know if it is happening elsewhere, and they 
want to know if it will happen again. It is in the public 
interest to know why jobs were lost, why savings evaporated, 
and why confidence was shattered.
    Mr. Skilling, if you plan to tell this Committee that you 
did not understand Enron's true financial condition, then you 
will need to explain why, why you failed to understand things 
that any diligent CEO would have understood. If you insist that 
you were unaware of the company's financial condition, then I 
hope that you are prepared to explain why you portrayed 
yourself as someone who did.
    I look forward to hearing from each of the witnesses today, 
and I thank them for agreeing to testify. I hope you have come 
here today armed only with the truth and ready to bear that 
burden for us with a sincere heart. Thank you.
    Senator Dorgan. Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Thank you, Mr. Chairman, for your leadership 
on this issue.
    Mr. Skilling, when it is my turn to question I am going to 
talk about the energy crisis that California experienced. Just 
to give you a little heads up of the line of my questioning, I 
want to tell you a little bit about the story that is beginning 
to emerge to Californians, the way we are seeing this crisis. 
This is how we see it. We see that Enron got out from 
governmental oversight at both the state and Federal level, and 
worked very aggressively to get out from under that oversight. 
The sole exception was the Federal Energy Regulatory 
Commission.
    Mr. Chairman, I have asked them, the FERC, to give us a 
list of meetings that they have had with Enron. They put 
together a list from their recollection, and we see that there 
are 25 meetings in the period of time in which Californians 
were desperate for them to act. I am going to question you 
about this aggressive lobbying with FERC decisionmakers.
    We also hear from Enron traders--that is t-r-a-d-e-r-s--
that Enron jammed transmission lines, used futures and 
derivatives to, according to California State Senator Joe Dunn, 
possibly buy and sell the same electricity 15 times, in an 
effort to inflate prices.
    As you answer these questions, I hope that you will realize 
that at the time you were making jokes about California, we 
were realizing that energy is a necessity, not a luxury, and we 
were worried, Mr. Skilling, in the summer that elderly people 
in the inland parts of my state might lose their air 
conditioning and literally face death. The agriculture industry 
in my state was fearful that loss of refrigeration would cause 
economic devastation. Silicon Valley put solving the energy 
crisis as its number one priority in order to keep the 
information economy flowing. In the winter months, as we still 
were getting no relief from FERC, we feared that freezing 
temperatures would harm our people, particularly the elderly 
and frail.
    From everything I can put together, Mr. Skilling, you 
helped cause these anxieties while you laughed about it. The 
people of California were not laughing then. They are not 
laughing now. Our state wants justice, and I hope that today 
maybe we can get on that path to justice.
    Thank you.
    Senator Dorgan. Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman.
    I agree with Senator Breaux's view. Whether anybody was 
deliberate and willful in their deceit and fraud, or simply 
negligent will be determined not in this Committee, but rather 
in a criminal or civil proceeding in the courts. The larger 
issue is that there are many people who lost much of their 
investments, such as savings for their children's college 
education or their retirement, because they believed that Enron 
was a sound investment. That is the larger issue here because 
it is a matter of confidence for the American people as to the 
reliability and the credibility of the information about the 
company's financial condition. They need a clear and fully 
accurate description of assets and liabilities, cash-flow, true 
revenues, and true costs and obligations.
    Mr. Chairman, a reliable accounting system is the linchpin 
of our free market system. This is not just about individual 
investors. It relates to the retirement systems in various 
companies, various state organizations, as well as even 
investment advisers who were misled as to the actual economic 
viability of Enron.
    I appreciate Ms. Watkins, Mr. Skilling, and Mr. McMahon 
coming here today. I hope that in the midst of all this, our 
witnesses will tell us what they believe could have and should 
have been done differently to have prevented the chicanery and 
deceit that robbed so many investors of their savings. We need 
to learn from this so that we can make changes in laws that 
would be appropriate and practical to make sure that investors 
and their advisers have full access to information about 
companies. That should be the goal of this Committee: To learn 
what went wrong and how it can be prevented in the future.
    I thank these witnesses here for hopefully sharing with us 
what they think can be done, because this is about more than 
Enron in the views of most people in this country. Hopefully, 
there will be remedies. But we need to move forward to make 
sure that something like this cannot happen again.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Mr. Chairman, I will put my statement 
in the record and note also that I strongly associate my views 
with those expressed by Senator Carnahan, Senator Burns, and 
Senator Allen.
    Thank you.
    [The prepared statement of Senator Rockefeller follows:]
          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia
    Thank you, Mr. Chairman, for holding this hearing. I will not offer 
an opening statement, except to say that I hope we all realize the 
primary reason we should be conducting this inquiry is to make sure 
that the types of things that happened to the employees, retirees, and 
investors of Enron do not happen to anyone else whose life's savings 
are invested in a major corporation.
    This is not about partisanship, and it is not about which Member of 
Congress took campaign contributions from which company or which 
executive. This is very simply an investigation that is most relevant 
as a cautionary tale. Like all Americans, we should be angry about what 
Enron did, but let's dedicate ourselves to conducting an investigation 
the intent of which is to prevent this from happening again.

    Senator Dorgan. Let me observe that this is the Congress, 
and not a criminal justice system proceeding. It is not a 
prosecution; it is a search for the truth in a congressional 
hearing. Those are very different approaches. We have three 
people to testify today who have testified previously on 
different occasions, and we have heard three very different 
stories about what happened inside the Enron Corporation. I 
welcome the opportunity to take the testimony today from these 
three:
    Ms. Sherron Watkins, Vice President of Corporate 
Development, Enron Corporation; Mr. Jeffrey McMahon, President 
and Chief Operating Officer, Enron Corporation; and Mr. Jeffrey 
Skilling, former Chief Executive Officer of the Enron 
Corporation.
    The witnesses know that it is our intention to take 
testimony today under oath. If there are no objections to that, 
by the rules of this Committee, you are also advised that you 
are entitled to be advised by counsel during your testimony. I 
would ask that when I call on you to begin your testimony that 
you identify your counsel for us.
    I would like, if we could, to have the three witnesses rise 
and raise your right hand, and I will give you the oath:
    Do you swear that the testimony you are about to give is 
the truth, the whole truth, and nothing but the truth?
    Ms. Watkins. I do.
    Mr. Skilling. I do.
    Mr. McMahon. I do.
    Senator Dorgan. You may be seated. You are under oath and 
recognized for opening remarks.
    We will begin the opening remarks with Ms. Watkins. Ms. 
Watkins, why do you not proceed and identify your counsel for 
the Committee.

         STATEMENT OF SHERRON WATKINS, VICE PRESIDENT 
         OF CORPORATE DEVELOPMENT, ENRON CORPORATION; 
               ACCOMPANIED BY PHILIP HILDER, ESQ.

    Ms. Watkins. My counsel is Mr. Philip Hilder.
    Senator Dorgan. Would you pull the microphone very close to 
you while you are presenting testimony. Thank you very much.
    Ms. Watkins. Good morning, Mr. Chairman, Members of the 
Committee. I am Sherron Watkins and I thank you for the 
opportunity to speak to you this morning. I am currently 
employed by Enron Corporation as a Vice President. By way of 
background, I hold a master's degree in professional accounting 
from the University of Texas at Austin, and I have been a 
certified public accountant since 1983.
    I began my career in 1982 at Arthur Andersen as an auditor. 
I spent eight years at Andersen in both the Houston and New 
York offices. I joined New York-based MG Trade Finance in 1990 
to manage their commodity-backed finance assets, a position I 
held until October 1993.
    In October 1993, I was hired by Mr. Andrew Fastow and moved 
back to Houston to manage Enron's newly formed partnership with 
CalPERS, California Public Employee Retirement System. The 
partnership was called the Joint Energy Development Investments 
Limited Partnership, or JEDI. I held the JEDI portfolio 
management position until the end of 1996.
    Senator Allen. Mr. Chairman, it is really hard to hear 
because of the noise in the hall, and Ms. Watkins we really 
want to hear you.
    Senator Dorgan. Senator Allen is correct. Let us ask that 
we close the door. Do we have security at the door? If we could 
ask that the door be closed and remain closed.
    Ms. Watkins, if you would pull the microphone as close as 
you can and speak up, the Committee would very much appreciate 
it.
    Ms. Watkins. Just continuing with my testimony: From 1997 
until early 2000, I worked for Enron International, primarily 
in the mergers and acquisitions group, which is also known as 
the corporate development group. In early 2000, I transferred 
to Enron Broadband Services, where I worked until June of 2001 
in a variety of roles.
    In mid- to late June of 2001, I went to work directly for 
Mr. Fastow, assisting in the corporate development work that 
had recently been put under his supervision upon the 
resignation of Cliff Baxter in May of 2001. I worked for Mr. 
Fastow in this new role until August of 2001. I have since been 
reassigned to the human resources group with a variety of 
roles.
    While working for Mr. Fastow in 2001, I was charged with 
reviewing all assets that Enron considered for sale and 
determining the likely economic impact of the sale. As part of 
the sale analysis, I reviewed the estimated book values and 
market values of each asset. A number of assets were hedged 
with an entity called Raptor. Any asset that was hedged should, 
for the most part, have a locked-in sales value for Enron. 
Meaning that despite current market prices, Enron should 
realize the hedged price that it held with Raptor.
    It was my understanding that the Raptor special purpose 
entities were owned by LJM, the partnership owned by Mr. 
Fastow. In completing my work, certain Enron business units 
provided me with analyses that showed that certain of the 
hedged losses incurred by Raptor were actually coming back to 
Enron. The general explanation was that the Enron stock 
backstopping the Raptor hedge had declined in value such that 
Raptor would have a shortfall and would be unable to fully 
cover the hedged price that it owed to Enron.
    I was highly alarmed by the information I was receiving. My 
understanding as an accountant is that a company could never 
use its own stock to generate a gain or avoid a loss on its 
income statement. I continued to ask questions and seek 
answers, primarily from former coworkers in the Global Finance 
group or in the business units that had hedged assets with 
Raptor. I never heard reassuring explanations.
    I was not comfortable confronting either Mr. Skilling or 
Mr. Fastow with my concerns. To do so, I believed, would have 
been a job-terminating move.
    On August 14, 2001, I was informed of Mr. Skilling's sudden 
resignation and felt compelled to inform Mr. Lay of the 
accounting problems that faced him. I sent Mr. Lay an anonymous 
letter on August 15, 2001, in response to a request for 
questions for an upcoming all-employee meeting to be held 
August 16 to address Mr. Skilling's departure. At the all-
employee meeting, Mr. Lay commented that our vision and values 
had slipped and that any employee who was truly concerned about 
anything at Enron, please bring those concerns to him or any 
number of the top management, including Cindy Olson, Steve 
Kean, and others.
    On August 16, I met with Ms. Olson to show her a copy of 
the letter and discuss it with her. She encouraged me to meet 
with Mr. Lay personally. Since Mr. Lay was traveling for the 
rest of the week, she said the meeting would probably take 
place the week of August 20.
    I met with Mr. Lay on the afternoon of Wednesday, August 
22, 2001. The meeting lasted just over one-half hour. I 
provided him with memos I had drafted to help explain the 
problems facing the company. Additionally, I provided an 
analysis of the Raptor entity economics and a presentation 
prepared by Enron's risk assessment and control group.
    I primarily used the memo titled ``Summary of Raptor 
Oddities'' as talking points with Mr. Lay. My main point to Mr. 
Lay was that by this time Raptor owed Enron in excess of $700 
million under certain hedging agreements. My understanding was 
that the Raptor entities basically had no other assets aside 
from these hedging activities. Therefore, they had collectively 
lost over $700 million. I urged Mr. Lay to find out who lost 
that money. If he discovered that the loss would be borne by 
Enron shareholders via an issuance of stock in the future, then 
I thought we had a very large problem on our hands.
    I gave Mr. Lay my opinion that it is never appropriate for 
a company to use its stock to affect the income statement.
    At the conclusion of the meeting, Mr. Lay assured me that 
he would look into my concerns. I also requested a transfer as 
I was uncomfortable remaining as a direct report to Mr. Fastow.
    I fully expected Mr. Lay to conduct a thorough 
investigation into my concerns. I was disappointed that such 
was not the case. I was incredibly frustrated with Mr. Lay's 
actions or lack thereof. I believed that Enron had a brief 
window to salvage itself this last fall, and we missed that 
opportunity because of Mr. Lay's failure to recognize or accept 
that the company had manipulated its financial statements.
    I intend to fully cooperate with this Committee and welcome 
the opportunity to answer any questions the Senators may have.
    [The prepared statement of Ms. Watkins follows:]
                Prepared Statement of Sherron Watkins, 
          Vice President of Corporate Development, Enron Corp.
    Good Morning Mr. Chairman, Members of the Committee. I am Sherron 
Watkins. Thank you for the opportunity to address the Committee this 
morning.
                               background
    I am currently employed by Enron Corporation as a Vice President. 
By way of background, I hold a master's degree in professional 
accounting from the University of Texas at Austin and have been a 
certified public accountant since 1983.
     I began my career in 1982 at Arthur Andersen as an 
auditor. I spent 8 years at Andersen in both the Houston and New York 
offices.
     I joined New York-based MG Trade Finance in 1990 to manage 
their portfolio of commodity-backed finance assets--a position I held 
until October 1993.
     In October 1993, I was hired by Mr. Andrew Fastow and 
moved back to Houston to manage Enron's newly formed partnership with 
CalPERS, the California Public Employee Retirement System. The 
partnership was called the Joint Energy Development Investments Limited 
Partnership or JEDI. I held the JEDI portfolio management position 
until the end of 1996.
     From 1997 until early 2000, I worked for Enron 
International, working primarily in the mergers and acquisitions group, 
which is also known as the corporate development group.
     In early 2000, I transferred to Enron Broadband Services 
where I worked until early June of 2001 in a variety of roles.
     In mid to late June of 2001, I went to work directly for 
Mr. Fastow, assisting in the corporate development work that had been 
put under his supervision after Cliff Baxter retired in May of 2001. I 
worked for Mr. Fastow in this new role until late August 2001.
     I have since been reassigned into the human resources 
group with a variety of assignments.
                      discovery of raptor problems
     While working for Mr. Fastow in 2001, I was charged with 
reviewing all assets that Enron considered for sale and determining the 
likely economic impact of a sale. As part of the sale analysis I 
reviewed the estimated book values and market values of each asset.
     A number of assets were hedged with an entity called 
Raptor. Any asset that was hedged should, for the most part, have a 
locked-in sales value for Enron. Meaning that despite current market 
prices, Enron should realize the hedged price with Raptor.
     It was my understanding that the Raptor special purpose 
entities were owned by LJM; the partnership run by Mr. Fastow.
     In completing my work, certain Enron business units 
provided me with analyses that showed certain hedged losses incurred by 
Raptor were actually coming back to Enron. The general explanation was 
that the Enron stock backstopping the Raptor hedge had declined in 
value such that Raptor would have a shortfall and would be unable to 
fully cover the hedge price that it owed to Enron.
     I was highly alarmed by the information I was receiving. 
My understanding as an accountant is that a company could never use its 
own stock to generate a gain or avoid a loss on its income statement. I 
continued to ask questions and seek answers, primarily from former co-
workers in the Global Finance group or in the business units that had 
hedged assets with Raptor. I never heard reassuring explanations.
             events leading to my memos to mr. kenneth lay
     I was not comfortable confronting either Mr. Skilling or 
Mr. Fastow with my concerns. To do so, I believed would have been a job 
terminating move.
     On August 14, 2001, I was informed of Mr. Skilling's 
sudden resignation and felt compelled to inform Mr. Lay of the 
accounting problems that faced Enron.
     I sent Mr. Lay an anonymous letter on August 15, 2001 in 
response to a request for questions for an upcoming all-employee 
meeting to be held August 16th to address Mr. Skilling's departure.
     At the all-employee meeting Mr. Lay commented that our 
visions and values had slipped and that if any employee was truly 
troubled by anything at Enron, please bring those concerns to him or 
any number of the top management including Cindy Olson, Steve Kean and 
others.
     On August 16th, I met with Ms. Olson to show her a copy of 
the letter and discuss it with her. She encouraged me to meet with Mr. 
Lay personally. Since Mr. Lay was traveling through the rest of the 
week, she said the meeting would probably take place the week of August 
20.
     I met with Mr. Lay on the afternoon of Wednesday, August 
22, 2001. The meeting lasted just over one-half hour. I provided him 
with memos I had drafted to help explain the problems facing the 
company. Additionally, I provided an analysis of the Raptor entity 
economics and a presentation prepared by Enron's risk assessment and 
control group.
     I primarily used the memo titled Summary of Raptor 
Oddities as talking points with Mr. Lay. My main point to Mr. Lay, was 
that by this time, Raptor owed Enron in excess of $700 million under 
certain hedging agreements. My understanding was that the Raptor 
entities basically had no other business aside from these hedges; 
therefore they had collectively lost over $700 million. I urged Mr. Lay 
to find out who lost that money. If he discovered that this loss would 
be borne by Enron shareholders via an issuance of stock in the future, 
then I thought we had a large problem on our hands.
     I gave Mr. Lay my opinion that it is never appropriate for 
a company to use its stock to affect the income statement.
     At the conclusion of the meeting, Mr. Lay assured me that 
he would look into my concerns. I also requested a transfer as I was 
uncomfortable remaining as a direct report to Mr. Fastow.
     I fully expected Mr. Lay to conduct a thorough 
investigation into my concerns. I was disappointed that such was not 
the case. I was incredibly frustrated with Mr. Lay's actions or lack 
thereof. I believe that Enron had a brief window to salvage itself this 
past fall and we missed that opportunity because of Mr. Lay's failure 
to recognize or accept that the company had manipulated its financial 
statements.
    I intend to fully cooperate with the Committee and welcome the 
opportunity to answer any questions the Senators may have at this time.

    Senator Dorgan. Thank you, Ms. Watkins.
    Next we will hear from Mr. Jeffrey McMahon, the President 
and Chief Executive Officer of Enron. Good morning. Excuse me, 
the President and Chief Operating Officer. I should not elevate 
you at this hearing.

  STATEMENT OF JEFFREY McMAHON, PRESIDENT AND CHIEF OPERATING 
                   OFFICER, ENRON CORPORATION

    Mr. McMahon. Good morning, Mr. Chairman and Members of the 
Committee. My name is Jeff McMahon. I am currently the 
President and Chief Operating Officer of Enron Corp. I have 
been an employee of Enron since 1994. From late October of last 
year until early this month, I served as Chief Financial 
Officer of the company. Before that, I was President and Chief 
Executive Officer of Enron's Industrial Markets Group. From 
1998 until March 2000, I was the Treasurer of Enron Corp. 
Before that, I served as Chief Financial Officer of its 
European Operations.
    As the Committee knows, earlier this month I was named 
President and Chief Operating Officer, at the same time that 
Steve Cooper was named the new interim Chief Executive Officer 
and Chief Restructuring Officer of the company. As part of the 
new management team at Enron, my focus is on the future--the 
future of the business, the future of our nearly 20,000 
existing employees worldwide who are looking for continued 
employment, the future of our over 8,000 retirees who are 
looking for continued retirement benefits from the company, and 
the various other stakeholders, including our creditors and 
former employees who have an interest in Enron's future.
    Working closely with the Board of Directors and the 
Creditors Committee, we are developing a restructuring plan 
designed to bring the company out of bankruptcy and preserve 
value for the company's creditors, employees, and stakeholders. 
I believe that Enron can emerge from bankruptcy by returning to 
its roots. As Mr. Cooper expressed at the announcement of his 
appointment as interim CEO, a reorganized Enron will be 
dedicated primarily to the movement of natural gas and the 
generation of electricity related to gas assets that Enron 
currently owns.
    With respect to the issues the Committee is examining, as 
the Chairman knows, I've been fully and freely cooperating with 
this and other congressional committees in this matter, and I 
welcome today's opportunity to answer, to the best of my 
ability, questions the Committee may have about past events at 
Enron or our future direction.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. McMahon follows:]
 Prepared Statement of Jeffrey McMahon, President and Chief Operating 
                       Officer, Enron Corporation
    Good morning. Mr. Chairman and Members of the Committee, my name is 
Jeff McMahon. I am currently the President and Chief Operating Officer 
of Enron Corp. I have been an employee of Enron since 1994. From late 
October of last year until early this month, I served as Chief 
Financial Officer of the company. Before that, I was President and 
Chief Executive Officer of Enron's Industrial Markets Group. From 1998 
until March 2000, I was Treasurer of Enron Corp. Before that, I served 
as Chief Financial Officer of its European Operations.
    As the Committee knows, earlier this month I was named as President 
and COO, at the same time Stephen Cooper was named the new interim 
Chief Executive Officer of the company. As part of the new management 
team at Enron, my focus is on the future--the future of the business, 
the future of our nearly 20,000 existing employees worldwide who are 
looking for continued employment, the future of our over 8,000 retirees 
who are looking for continued retirement benefits from the company, and 
the various other stakeholders, including our creditors, who have an 
interest in Enron's future.
    Working closely with the Board of Directors and the Creditors 
Committee, we are developing a restructuring plan designed to bring the 
company out of bankruptcy and preserve value for the company's 
creditors, its employees and its stakeholders. I believe that Enron can 
emerge from bankruptcy by returning to its roots. As Mr. Cooper 
expressed at the announcement of his appointment as new interim CEO, 
our reorganized business will be dedicated primarily to the movement of 
natural gas and the generation of electricity.
    With respect to the issues the committee is examining, as the 
Chairman knows, I have been fully and freely cooperating with this and 
other congressional committees in this matter. I welcome today's 
opportunity to answer, to the best of my ability, questions the 
committee may have about the past events at Enron or our future 
direction.
    Thank you, Mr. Chairman.

    Senator Dorgan. Mr. McMahon, thank you very much.
    It is my understanding that a vote has just started on the 
floor of the Senate. I think we would be advised to take a 15-
minute recess. There is only one vote. Members of the Committee 
will be able to vote and come back and reconvene immediately.
    The hearing will stand in recess for 15 minutes.
    [Recess from 10:05 a.m. to 10:20 a.m.]
    Senator Dorgan. The hearing will reconvene and come to 
order.
    Senator Snowe, you were not here when we did opening 
statements. We attempted to limit them to one minute. Let me 
recognize you before I recognize Mr. Skilling.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. I thank you, Mr. Chairman, and I ask to 
include my entire statement in the record.
    Senator Dorgan. Without objection.
    Senator Snowe. Given the unprecedented collapse of Enron, 
resulting in the largest bankruptcy in the history of this 
country, and given the impact that it has had on dedicated and 
trusted employees who lost their 401(k) savings at the same 
time many officials at the top levels of the company were 
enriched, and given the impact on investors who were led 
astray, it is certainly appropriate that we continue to conduct 
these hearings.
    Hopefully, these hearings will lead closer to the truth. We 
certainly do not know whether it will or not. But I do know 
this: I wish there had been more Ms. Watkins and Mr. McMahon in 
the organization, because it might have well prevented this 
catastrophic demise of one of the largest companies in America.
    There are many plausibility issues here, Mr. Skilling, and 
I hope that you will address them today. As I said when Mr. Lay 
was before this Committee several weeks ago, there is a 
plausibility gap between the facts as we know them and the 
assertions and the denials that have been made by many of you 
at the top of this company. Many of those conflicts are not 
inconsequential when we are talking about contradictions and 
inconsistencies. Many of those have been underscored by the 
Powers Report.
    So I hope that we will be able to be in a position here 
today to begin to clarify many of these issues, because 
clearly, accountability and responsibility does rest with those 
at the higher levels of the company. Certainly that does start 
with you in the time period that you were CEO.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Snowe follows:]
             Prepared Statement of Hon. Olympia J. Snowe, 
                        U.S. Senator from Maine
    Thank you, Mr. Chairman, for holding this hearing today. I would 
also like to thank Ms. Watkins, Mr. McMahon, and Mr. Skilling for 
appearing before us after testifying in the House on separate occasions 
previously.
    As I noted at the February 12 hearing when former Enron CEO and 
Chairman Ken Lay invoked the Fifth Amendment and declined to testify, 
the fall of the colossal Enron enterprise is not a run-of-the-mill 
business bankruptcy. A company that once boasted over $100 billion in 
revenues rapidly disintegrated into bankruptcy losing $67 billion in 
investor money and nearly $1 billion in the retirement plans of its own 
loyal employees.
    Given this unprecedented collapse and the impact it has had on 
dedicated employees and misinformed investors alike, the American 
people have a great many questions--and it is our obligation to try to 
get to the bottom of what went wrong. The testimony of today's 
witnesses will hopefully provide us with some of these answers--and, in 
the process, provide us with insight on how to prevent a repeat 
performance of this tragedy in the future.
    As we turn to our witnesses, I would first like to commend Ms. 
Watkins for her bravery in bringing her concerns to the attention of 
Mr. Lay in August, and for not mincing words in warning him that Enron 
could ``implode in a wave of accounting scandals.'' Given that her 
concerns proved prescient, I look forward to hearing more about her 
role in informing Ken Lay of the accounting indiscretions occurring in 
Mr. Fastow's Finance department, and the subsequent actions that were 
taken in response to those concerns.
    I also look forward to hearing the testimony of Mr. McMahon who, as 
far as we know, was the first to approach Jeff Skilling about his 
serious concerns with the conflict of interest presented by Mr. 
Fastow's involvement with the LJM partnerships. Given that the LJM 
partnerships accounted for at least 40 percent of Enron's reported pre-
tax income by 2000, I look forward to learning more about Mr. McMahon's 
meeting with Mr. Skilling.
    Finally, because accountability and responsibility starts at the 
top, Mr. Skilling's testimony is of particular interest--especially 
when considering that he resigned from Enron shortly before its 
collapse and claims no knowledge of the financial dealings that brought 
Enron down. I believe it is incumbent upon the former COO and CEO to 
prove the validity of his claims given the conflicting findings of the 
Powers Report and other witnesses, conflicts that are not 
inconsequential.
    For instance, during his testimony before the House Energy and 
Commerce Subcommittee on Oversight and Investigations, Mr. Skilling 
stated that he was ``not aware of any financing arrangements designed 
to conceal liabilities or inflate profitability.'' However, the Powers 
Report--in reviewing the minutes of the May 1, 2000, Board meeting 
attended by Mr. Skilling--found notes indicating that the Board and 
Enron management were aware that Raptor I was not a true economic hedge 
and that it did not ``transfer economic risk but transfers profit and 
loss volatility.'' Isn't this a method of masking debts that really do 
exist while creating profits that don't exist?
    In addition, as outlined earlier, Mr. Skilling seemingly ignored 
the concerns of Enron Treasurer Jeff McMahon during a meeting on March 
16, 2000. And not only were his conflict of interest concerns ignored, 
but shortly after the meeting, Mr. McMahon was transferred to a post in 
the company where he would have no contact with Andrew Fastow and his 
partnerships. Was that just a coincidence or a sinister effort to push 
aside one who dared question the financial structure that ultimately 
brought Enron down?
    Furthermore, Mr. Skilling essentially claimed to not be fully aware 
of Mr. Fastow's dealings with the LJM partnerships despite the fact 
that controls were specifically put in the place by the Board of 
Directors and management to ensure that Mr. Fastow's allegiance to 
Enron--and not his own personal financial gains--remained foremost.
    The bottom line is that Mr. Skilling's explanation of events--while 
perhaps convenient for his purposes--lacks plausibility given the 
conflicting findings and statements of others. Hopefully today's 
hearing will bring us closer to the truth in terms of what Mr. Skilling 
knew and when he knew it--and ultimately bring us closer to unraveling 
the tragic events that unfolded at Enron so that they are never 
repeated again.
    Thank you, Mr. Chairman.

    Senator Dorgan. Senator Snowe, thank you.
    Senator Nelson, we allowed one minute for opening 
statements. Do you have a statement?

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, I would like to continue with 
my interest in finding out what happened to many of these state 
pension funds around the nation. That will be part of my line 
of questioning, particularly the fact that the Florida pension 
fund bought almost 3 million shares during a 3-week period 
while the stock was dropping like a rock, whereas the money 
manager, Alliance Capital Management that had handled other 
pension funds--for example, New York--sold their Enron shares 
in August, but were purchasing shares for the Florida 
retirement fund starting on October 22 in that 3-week period, 
just extraordinarily defying logic.
    So, I will follow up with that at the appropriate time.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Nelson, thank you.
    Mr. Skilling, why do you not proceed, and would you 
introduce your counsel as well.

          STATEMENT OF JEFFREY SKILLING, FORMER CHIEF

       EXECUTIVE OFFICER, ENRON CORPORATION; ACCOMPANIED

            BY BRUCE HILER, ESQ., O'MELVENY & MYERS

    Mr. Skilling. Yes, Mr. Chairman. This is my counsel, Mr. 
Bruce Hiler, who represents O'Melveny & Myers.
    Should I go ahead?
    Senator Dorgan. Please proceed.
    Mr. Skilling. Mr. Chairman, distinguished Senators: My name 
is Jeff Skilling. I worked at Enron for 10 years, spent my last 
6 months there as CEO. I left the company in August of 2001.
    The bankruptcy of Enron has been devastating to its 
employees, its shareholders, and many others who were connected 
in one way or another to this once-fine institution. As I did 
when I appeared before Congress, I want to apologize to all of 
those affected people for what Enron has come to symbolize. I 
know that no words can repair the harm that has been done and, 
as hard and as difficult as these past few months have been for 
me and my family, I know that many others have suffered far, 
far worse.
    I am here today to do my best to help answer the legitimate 
questions on everyone's mind regarding what happened at Enron. 
Let me begin with a recap of what I understand about what Enron 
has said in recent SEC filings.
    First, there has been a restatement of three items, none of 
which affected cash-flow or future period earnings. Second, 
there may have been self-dealing by a small number of 
executives, among whom I have not and cannot be counted.
    But, in addition to those statements, there is also a raft 
of currently unproven assertions of additional accounting 
issues, the primary ones relating to something called the 
Raptor hedges. What do we know about these hedges? We know that 
the company's accountants, Arthur Andersen, agreed with the 
treatment of these transactions all the way up to their 
technical group in Chicago. We also know that the Powers team 
hired another accountant that apparently disagrees with 
Andersen, and I take it also that Ms. Watkins also disagrees 
with Andersen.
    If the focus of this hearing is a game of dueling 
accountants, I will state right now that I am not an accountant 
and probably have little to add to that debate between experts.
    I know that you will be asking questions about who did what 
at Enron, but I hope in addition to those technical issues you 
will also ask about how a company as strong as Enron can be 
bankrupted by what I call a run on the bank. I have some 
thoughts that I think a number of you have asked for that might 
be helpful and are important to the financial system.
    But before we start, there are a few things I think this 
record should reflect. I will not respond to all the outrageous 
things said about me in this process because some have been so 
silly that they merit no response. Three others, however, do 
merit a response:
    First, I have not lied to the Congress or anyone else about 
my recollection of events while I was at Enron.
    Second, I never duped Ken Lay. I heard Ms. Watkins testify 
to her opinion. I have no idea what the basis is for that 
opinion.
    Third, I do not believe that my testimony is contradicted 
by or is materially different than the testimony of either Mr. 
McMahon or Mr. Mintz, for both of whom I have a tremendous 
amount of respect.
    And now, finally, a few observations about this 
congressional process to which I and others have been 
subjected. What has happened thus far, primarily in the House, 
should be cause for concern of every American. The entire 
management and Board of Enron has been labeled everything from 
hucksters to criminals, with a complete disregard for the facts 
and evidence assembled. These untruths shatter lives and they 
do nothing to advance the public understanding of what happened 
at Enron. The framers of the Bill of Rights are watching.
    My dilemma, like that of other innocents called before 
these committees, is whether to take refuge in constitutional 
protections to avoid your questions or stand on the 
constitutional presumption of innocence to proclaim the truth.
    I am here and prepared to answer the Committee's questions 
because I have nothing to hide. I take and will continue to 
take full responsibility for my actions as a senior executive 
of Enron Corporation.
    While I worked at Enron, I served the shareholders and the 
Board of Directors faithfully. When I left Enron on August 14, 
I did not believe the company was in financial peril and I have 
no knowledge of any--and had no knowledge, of any wrongdoing by 
its employees.
    Common decency suggests that I be treated as innocent until 
proven otherwise. Common sense suggests that accusations made 
now, before the facts are in, are likely to be wrong. 
Unfortunately, neither common decency nor common sense will 
carry the day in this politicized process.
    I am nonetheless hopeful that today we can get past the 
rhetoric and focus on the facts. Frankly, based on this 
morning's opening statements, I believe that we may actually 
have a constructive dialog today, and I hope that's the case.
    Mr. Chairman, unlike so many others so much less fortunate 
than me, I am not a victim here. But also unlike others, I am 
not one of the perpetrators, either. What I know I am prepared 
to tell. What I do not know, I do not know either because it 
was kept from me or it never happened at all, like so many of 
these supposed facts thrown around since my hearings before the 
House subcommittee.
    With that, Mr. Chairman, I'm prepared to answer your 
questions to the best of my abilities.
    Senator Dorgan. Mr. Skilling, thank you very much.
    First let me say that decency and common sense will prevail 
here. This also is a search for the truth, as I have indicated 
previously. The truth has proved to be rather elusive with 
respect to what happened inside the corporation.
    Mr. Skilling, you know that the Board of Directors 
commissioned a study to examine what was happening inside the 
Enron Corporation. Mr. Powers testified before this Committee 
and said what the Board of Directors found in the Powers study 
was ``appalling.'' That seems to me to be at odds with your 
testimony, because your testimony suggests: ``When I left, 
nothing really was happening, there was nothing untoward that 
was happening inside the company.''
    That is, of course, at odds with what the Board of 
Directors of the corporation itself found following your 
departure.
    I am going to ask a series of questions, as will my 
colleagues, and we want to try to understand what all three of 
you are saying. All three of you were in this corporation for 
some length of time. This corporation has effectively collapsed 
and filed for bankruptcy and is now struggling to recover from 
that.
    Let me ask a few questions. We will go around several 
times, and we will have plenty of time.
    Ms. Watkins, you said that you met with Mr. Lay for an hour 
or about an hour, I believe, when you took to Mr. Lay your 
memorandum, which I have read a couple of times. That was a 
one-hour meeting?
    Ms. Watkins. It was approximately a half-an-hour.
    Senator Dorgan. A half-an-hour. Did you sense from that 
meeting that Mr. Lay knew what you were talking about? Did he 
get it?
    Ms. Watkins. He certainly knew that I was concerned, that 
my concerns were real. And I did feel at the end of the meeting 
that he was going to conduct a thorough investigation.
    Senator Dorgan. Ms. Watkins, you indicated in your 
memorandum, you talked about you are nervous that ``we will 
implode in a wave of accounting scandals.'' The business world 
``will consider the past successes as nothing but an elaborate 
accounting hoax.''
    Then when you testified before the House you said that the 
transactions that you were concerned about here were pretty 
common knowledge within Enron. Tell me about common knowledge? 
Would you believe that the upper echelon of Enron would know 
what was happening with respect to the creation of these 
partnerships, including Mr. Skilling, Mr. McMahon, Mr. Lay, and 
others? When you say common knowledge, would you describe that 
for us?
    Ms. Watkins. Throughout the Global Finance group, as well 
as upper management, I believe it was well understood that the 
Raptor entities were primarily backstopped with Enron stock. It 
wasn't a hidden fact. I do think certain people thought it was 
some magic structure that was acceptable. But others that had 
some concerns about it kept their concerns mainly to 
themselves.
    Senator Dorgan. When you say upper management, do you 
believe that would include Mr. Skilling?
    Ms. Watkins. Yes, I do.
    Senator Dorgan. Yet Mr. Skilling testifies that he really 
did not know much about this at all. I am going to go through a 
list of Board meetings and so on at some later time.
    But, we have a circumstance where you went to Mr. Lay with 
a memorandum, a now famous memorandum. You said there are very 
serious problems. The language you used is quite remarkable--
``accounting hoax,'' ``accounting scandals,'' and so on. You 
say ``common knowledge.'' So do you believe that includes Mr. 
Lay? Obviously it includes Mr. Lay after you addressed him with 
respect to the memorandum. Did it before that point, in your 
judgment?
    Ms. Watkins. During our meeting he recollected that the 
Raptor structures had been presented to the Board. He believed 
that they had been gone over in somewhat detail, that Arthur 
Andersen had blessed them. And he asked me: ``Are you certain 
there could be something wrong with these structures?''
    My point to him was: ``Yes, there is something wrong when 
an entity owes us $700 million, we have booked that in the 
income statement, we have a receivable from that entity, and 
they're going to pay us back by cashing in our own stock.''
    Senator Dorgan. Mr. Skilling, were you aware of that 
structure? We're talking now about the structure. Were you 
aware of that structure?
    Mr. Skilling. Yes. I was in the Board meeting that Ms. 
Watkins talked about in May of 2000 when the Raptor transaction 
was presented. In that Board meeting, there was a relatively 
detailed description of the transaction, including a motion 
that would essentially approve or set up the original Raptor 
transactions, and that was approved by the Board of Directors.
    Senator Dorgan. Is it your contention that that structure 
was appropriate, inasmuch as Ms. Watkins and others and those 
of us in Congress now see that what was backstopping that 
partnership was Enron stock? Is it your contention that you 
knew of it, and it was appropriate?
    Mr. Skilling. I relied on our accountants, who, in fact, I 
believe it's very clear--I've seen the minutes of that Board 
meeting, and it's very clear that Mr. Rick Causey, who was the 
Chief Accounting Officer of the company, represented that 
Arthur Andersen and our lawyers had taken a very hard look at 
this structure, and they believed it was appropriate.
    Senator Dorgan. So you're saying that Arthur Andersen 
informed the top executives of the corporation that this was an 
appropriate structure? You knew about it, therefore, believed 
it was okay because your accountants said it was all right; is 
that the case?
    Mr. Skilling. The structure was presented to the Board of 
Directors. Mr. Causey said the accountants had looked at it and 
had signed off on it, and the Board approved that structure.
    Senator Dorgan. I am going to go into a different 
direction, then I will come back, and we will have several 
rounds of questions.
    Could you move the microphone just a bit closer.
    Mr. Skilling. Yes, sir.
    Senator Dorgan. I want to talk about some things I think 
you have said that you did not know about. You say you did know 
about that structure. Disclosures about Mr. Fastow are 
interesting and also I think lead to the use of the word 
``appalling'' in the Powers Report. Mr. Fastow has an equity 
position in partnerships, makes $30 million in commissions, 
invests $25,000 and 60 days later takes out $4.5 million. It 
seems to be a corrupt system.
    I am wondering, did you know about what Mr. Fastow was 
doing with respect to the creation of these partnerships, his 
stake in those partnerships, and what he was doing with respect 
to the personal financing?
    Mr. Skilling. All my recollection is that a lot of issues 
related to LJM2 and LJM1, which were affiliated party 
transactions, were discussed in depth at the Board of Directors 
meeting, including the issue that there would be a potential 
conflict of interest created by having Mr. Fastow participate 
in that, in those partnerships, and it was believed that the 
controls that were approved and put in place for LJM2 would 
eliminate that conflict of interest.
    LJM1 was a little bit different in that the actual 
transaction, the hedging transaction, was approved, so there 
was no ongoing issue. That transaction was approved based on a 
fairness opinion that had been received from an accounting 
firm, that they said this was a reasonable transaction for 
Enron Corporation. So I and the other Board members believed 
that was adequate protection for our shareholders and approved 
it.
    Senator Dorgan. Are you surprised by what you have since 
learned about Mr. Fastow's compensation?
    Mr. Skilling. I can only tell you what I know. I have read 
a tremendous amount. I have read conflicting things in the 
newspapers. To the extent that the compensation was as some 
newspapers have published, of that order of magnitude, yes, I 
was surprised.
    Senator Dorgan. Let me just ask a brief question of Mr. 
McMahon. Then I am going to come back on a second round and ask 
a series of questions of Mr. Skilling and Ms. Watkins.
    Mr. McMahon, you are currently employed by the Enron 
Corporation. We know that there has been shredding of documents 
going on at the Enron Corporation. Can you tell me what records 
were destroyed, what kind of internal investigation has been 
conducted, and what should we learn about and what should we 
know about the records that were destroyed?
    Mr. McMahon. Currently, I don't believe we do know what 
records are destroyed. We, as I understand it, have cooperated 
fully with the FBI, who has come in and done some work in the 
building, interviewed a lot of our employees who were on the 
floors where this shredding may have occurred. As I understand 
it, our internal legal counsel and external legal counsel are 
also looking into the document shredding allegations.
    So at this point, we don't know exactly the outcome of 
that. We have secured the building, though, as soon as we were 
made aware of it, so the shredders were secured and were 
removed from the building. Prior to that, the legal group, as 
soon as the investigations began, sent out many emails to all 
employees requesting them to retain and protect documents.
    Senator Dorgan. Mr. McMahon, Mr. Skilling said that he has 
great respect for you. It is the case, is it not, that you went 
to Mr. Skilling to express your concerns about what was 
happening inside the corporation?
    Mr. McMahon. Yes, it was. In March 2000, I had a 
conversation with Mr. Skilling.
    Senator Dorgan. What was the response to that conversation? 
Can you describe the conversation generally and tell us what 
the response was?
    Mr. McMahon. Generally, at the time--and let me step back 
and kind of give you the perspective of the organization.
    I was, at that point in time, Treasurer of Enron Corp., and 
I was reporting to the then-Chief Financial Officer, Mr. 
Fastow. There were two groups reporting to Mr. Fastow at the 
time. My group was one and then Mr. Cooper's group, which was 
responsible for structured financing. In that fell the LJM 
partnerships which Mr. Fastow was a principal in.
    The short of it is the conflict of interests, as Mr. 
Skilling just described, manifested themselves in my area on a 
daily basis, where we had Enron employees negotiating on behalf 
of Enron and LJM to do transactions, and it was causing some 
problems internally within the organization. So after many 
meetings with Mr. Fastow and many meetings with other members 
of senior management, I felt that I needed to talk to Mr. 
Skilling about those conflicts and how I saw that they should 
be fixed.
    Senator Dorgan. So you took your concerns to Mr. Skilling. 
What happened as a result of that?
    Mr. McMahon. We had about a 30-minute meeting, as I recall, 
and Mr. Skilling listened intently to my concerns, and at the 
end of the meeting he indicated to me that he would remedy the 
situation and fix the problems.
    Senator Dorgan. Did you lose your job as corporate 
treasurer shortly thereafter?
    Mr. McMahon. About two or three weeks later, I was offered 
a job internally to move to a different group.
    Senator Dorgan. Do you think it was a result of your 
meeting with Mr. Skilling?
    Mr. McMahon. Certainly at the time I did not have that 
view. I had been approached around the same time by the then-
head of that division, who asked to recruit me in there, and I 
ultimately turned it down. But shortly after meeting with Mr. 
Skilling, I did have a meeting with Mr. Fastow, who was then my 
boss, who indicated to me that he had spoken to Mr. Skilling 
about our conversation and he was concerned whether we could 
actually work together again. So when that opportunity did 
arise, I did ultimately take it.
    Senator Dorgan. But I mean, you are trying to put an 
awfully good face on this. It appears to me that you went to 
Mr. Skilling and said there are real problems here and the 
result is you were transferred. Do you disagree with that?
    Mr. McMahon. I think that's a correct statement of the 
facts. I certainly don't have any knowledge that that was a 
direct result of that meeting.
    Senator Dorgan. Mr. Skilling, do you recall that meeting 
when Mr. McMahon came to you and said there are serious 
problems?
    Mr. Skilling. Mr. Chairman, I remember the meeting with Mr. 
McMahon, yes.
    Senator Dorgan. And do you remember the meeting the same 
way Mr. McMahon describes it?
    Mr. Skilling. Well, you know, everybody--when you have two 
people that are in the same meeting, each will have a somewhat 
different recollection. This was about two years ago. It was my 
recollection that when Jeff came in, there was a concern about 
the conflict leading to an impact on compensation, and I've 
stated that before. I've stated that in the House.
    And I mean that in no way in a derisory way to Mr. McMahon. 
He was raising an issue, his concern about compensation, 
because of this structural conflict issue that we had. As you 
know, we had procedures within the Board that the Board had 
approved to eliminate what we believed was the conflict of 
interest. When Jeff came to me, he was suggesting that he 
needed my support to ensure that, in addition to the procedures 
that were in place, he would need my support to ensure that he 
was not damaged by this conflict.
    It's my recollection that I assured him very strongly, very 
strongly, that I was totally on his side and that the way 
compensation was determined at Enron Corporation, it was 
determined by something called a performance review committee, 
and there are typically 24 people on the performance review 
committee. And I said, if Mr. Fastow is concerned, there will 
be 23 people in that room that are cheering you on, and I said 
it will not impact and I support you in your compensation.
    Senator Dorgan. Well, Mr. Skilling, it seems to me that 
what Mr. McMahon is saying about that day is at odds with what 
you are saying when you say: I left that company, I had no idea 
there was anything going on that was a problem. It appears to 
me Mr. McMahon said he came to talk to you about these 
problems, and you are taking us off into a compensation issue. 
I understand that.
    But we need to get to the bottom of it. I'll come back 
around with a whole series of questions, but it seems to me 
that this is at odds with what Mr. McMahon said the meeting was 
about. If Mr. McMahon, in fact, did represent these problems to 
you, I would like very much for you to tell the Congress: I was 
aware of them and did nothing. If that is the case, let us hear 
that.
    Mr. Skilling. Mr. Chairman, I absolutely disagree with 
that. I think----
    Senator Dorgan. You disagree with Mr. McMahon?
    Mr. Skilling. Sir?
    Senator Dorgan. You disagree with Mr. McMahon's statement?
    Mr. Skilling. No, I disagree with your statement, if you 
said that I heard that there were issues and did nothing about 
them. What I did in my recollection is I absolutely told Jeff 
that I would support him, as he asked. And I believe--actually, 
I didn't even remember this until the testimony in the House, I 
guess it was the testimony in the House, where Mr. McMahon 
mentioned that Joe Sutton visited him after that. I think I 
kind of vaguely recollect going to Joe and saying: ``Can you 
please go in there and make sure that this is all taken care 
of?''
    I actually vaguely remember also going to Mr. Fastow and 
putting him on notice that there was an issue here and asking 
him to do what he needed to do to ensure that this was not a 
problem for Jeff.
    Senator Dorgan. I will inquire further about that.
    Senator McCain.
    Senator McCain. I want to thank the witnesses for being 
here.
    Ms. Watkins, you have described Mr. Skilling as an intense, 
hands-on manager and testified before the House Energy and 
Commerce Committee that he was aware of the Raptor 
transactions. Is it possible, in your view, that Mr. Skilling 
was not aware of the accounting improprieties of the 
partnerships that led to the collapse of Enron?
    Ms. Watkins. In my opinion, Mr. Skilling was aware of the 
problems. It was--the Raptors had to be restructured the first 
quarter of 2001, his first quarter as CEO. The Powers Report 
highlights that several people recollect that Mr. Skilling was 
putting this as one of his highest priorities and had various 
individual meetings with people to see about that 
restructuring.
    I'm certain that Mr. Skilling is right when he says he's 
not an expert on accounting matters. However, he did always 
look to the market as a checkpoint--rationale--to determine 
what we were doing. I think, in my opinion, he would be very 
aware that the hedges that we were achieving with Raptor could 
not have been achieved with an unrelated outside third party.
    Senator McCain. Mr. Skilling, I would be glad to give you 
an opportunity to respond to that statement by Ms. Watkins.
    Mr. Skilling. As I've said, I was familiar with the Raptor 
transaction as it was approved by the Board of Directors and 
understood in the terms that were presented to the Board of 
Directors how that transaction operated. I believed, based on 
the representations of our accountants, that this was an 
entirely appropriate structure. And I think there's a 
representation in the minutes very clearly to that effect.
    When Ms. Watkins talks about a restructuring, or the fact 
that what I knew or didn't know, my only recollection of the 
restructuring of the Raptors is that I was told that they were 
restructuring the Raptors. I asked if the accountants had 
signed off on it, if it looked okay, and I was told that it was 
and went along with it.
    Senator McCain. Was it your responsibility to know?
    Mr. Skilling. Sorry?
    Senator McCain. Was it your responsibility to know?
    Mr. Skilling. As I said, Senator, I am not an accountant. 
These are highly, highly--I think if you'll look in the October 
minutes at the structure of Raptor, this is a complex, complex 
structure, and it took, I think, quite some time for Arthur 
Andersen. As I recall, this was even taken to the Arthur 
Andersen technical group in Chicago because it was so 
technical. And they signed off and said that they thought this 
was an appropriate accounting treatment.
    Senator McCain. I'd like to move to the issue of broadband. 
Are you familiar with Mr. Scott Bolton? He was the manager of 
government relations.
    Mr. Skilling. I'm sorry, I don't recall him.
    Senator McCain. Well, on March 9, Blockbuster and Enron 
officially called off their movie-on-demand partnership. Do you 
recall that?
    Mr. Skilling. I don't recall the exact date, but I do 
recall the Blockbuster transaction unraveling, yes, sir.
    Senator McCain. And you remember that the stock price 
dropped after that?
    Mr. Skilling. I'd have to go back and look, but that's 
probably right, yes.
    Senator McCain. At the Board meeting on March 16 following 
the March 9 calling off of the partnership with Blockbuster, 
you noted that analysts and portfolio managers in Boston had 
questioned you on the decline in the telecommunications market 
and how it would affect Enron's broadband business. You told 
the Board that ``the development of the business would be 
slower than originally expected.'' Do you recall that?
    Mr. Skilling. No, I don't recall that specifically.
    Senator McCain. You do not recall that. About the same 
time, according to Mr. Bolton, you flew to Portland, Oregon, to 
meet privately with Enron broadband executives and employees. 
You told him the business ``faced a `complete meltdown,' '' 
Bolton recalled. There was no demand for high speed internet 
services and prices were plummeting. Do you recall that?
    Mr. Skilling. What was the date on that, sir?
    Senator McCain. Some time in March of 2001.
    Mr. Skilling. March of 2001. Yes, I recall a trip to 
Portland.
    Senator McCain. Do you recall saying that the broadband 
business faced a ``complete breakdown''?
    Mr. Skilling. I think the actual term that I used was that 
the broadband industry, the high speed data interchange 
industry, was facing a meltdown. At that time, we believed that 
that might have been positive development for Enron, because as 
prices dropped we believed there would be more capacity 
available to create a traded market in bandwidth.
    So we believed very strongly that, in fact, our entire 
strategy--and people talked about our strategy in broadband--
our strategy was predicated on a bandwidth glut. We were a low 
or modest asset investment strategy, assuming that we could 
create a market and a tradeable market for broadband. So as 
this market price started to decline late in the first quarter 
of 2001, quite frankly, we thought that was a good sign.
    Now, the other side--there were two sides of this. That was 
the trading side of the business, the merchant side of the 
business. I believed that that would be beneficial for the 
trading and merchant side of the business. The content side of 
the business, which is what you're reacting to or asking about 
as it relates to the Blockbuster business, the reason the 
Blockbuster arrangement terminated was that Blockbuster was not 
able to get some of the content that we thought that they would 
be able to provide us and we believed we could get that content 
more effectively by directly contacting the studios.
    So it was our belief at that time that we would be able to 
get the content; we just had to go direct to the studios rather 
than working through Blockbuster.
    Senator McCain. And in New Orleans at the end of the month, 
you said publicly that the broadband operation was going full-
speed, ``pedal to the metal.''
    Mr. Skilling. Yes, sir, and we believed very strongly that 
the traded market, the market of creating a commodity market 
from bandwidth, was progressing well, was progressing much----
    Senator McCain. Was that an accurate assessment?
    Mr. Skilling. The market was progressing much more quickly 
than the electricity market that I had also been involved in 
the starting of back in the mid-1990s. So I felt pretty good 
about the rate of progress.
    Senator McCain. Has your good feeling been substantiated by 
subsequent events as far as broadband is concerned?
    Mr. Skilling. No. Subsequent to that--in fact, in the next 
several months--this meltdown began to have some very, very 
serious consequences for credit of counterparties in the 
marketplace. It got to the point that you could not sign a 
long-term deal for bandwidth because there were no creditworthy 
counterparties.
    That is what hurt our business, and at that point we 
significantly retrenched, cut our capital budget by I believe 
75 percent, and began redeploying people. In fact, I believe 
Ms. Watkins, the reason that she moved from the 
telecommunications business to Mr. Baxter's area is that we 
were trying desperately to move our people out of the broadband 
business once we realized that there was a serious credit 
problem there that we just really couldn't contain.
    Senator McCain. I see that my time has expired, but I want 
to point out that I understand you told the Board that business 
would be slower than originally expected, then you went to 
Portland and said that there would be a complete meltdown, but 
in New Orleans you said the broadband operation was going full-
speed ``pedal to the metal.''
    Mr. Skilling. Mr. Senator----
    Senator McCain. I find those statements contradictory.
    Mr. Skilling. They're not contradictory.
    Senator McCain. If I could finish before you respond. And 
certainly not in keeping with subsequent events, which prove 
your statement about a complete meltdown throughout broadband 
was far more accurate than ``pedal to the metal.''
    Mr. Skilling. Again, I don't think that the concepts are 
inconsistent at all. We believed--in fact, you can go back 
further in time and look at all of the representations that we 
made to analysts--that our strategy in the broadband business 
was predicated on a glut in bandwidth capacity. You can talk to 
anybody in the industry. We were the first people to talk about 
that.
    There was a meltdown. Prices were collapsing, starting in 
kind of that March timeframe, March of 2001. That we believed 
was exactly what we had predicted, exactly what we had 
projected, and we thought that that would lead to the growth of 
the market.
    We built the natural gas wholesale business at a time when 
gas prices were plunging. We built the electric business at a 
time when electricity prices were plunging. That is not at all 
inconsistent with the view that we were going to aggressively 
build this wholesale side of the business, because it was 
turning out the way we expected.
    Now, subsequently, it went from a meltdown to--I don't know 
that anybody has seen in the history of business--I'm kind of a 
history of business buff. I'm not sure there has ever been an 
industry in history that has experienced the change of fortunes 
that has occurred to the long distance fiber optic business in 
the last year-and-a-half. That was unforeseen. It went a lot 
further. And we reacted very quickly to it. By July, we began a 
significant--June, we began a significant reduction in our 
capital budget and started moving people as best we could out 
of that business into other growing Enron businesses.
    Senator McCain. My time has expired. I thank you, Mr. 
Chairman. I thank the witness.
    Senator Dorgan. Senator Fitzgerald.
    Senator Fitzgerald. Thank you, Mr. Chairman.
    Mr. Chairman, I have an advance copy of an article that is 
going to be published in Vanity Fair magazine in their April 
2002 edition. It is by Marie Brenner, and I am wondering if I 
could introduce this into the record. I would like to examine 
the witnesses about this.
    Senator Dorgan. Without objection.\*\
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    \*\ The information referred to has been retained in the Committee 
files.
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    Senator Fitzgerald. Thank you.
    Mr. McMahon, the article that I have just introduced in the 
record describes some transactions that occurred within Enron 
back in the late 1980s and it is my understanding that at that 
time you were employed with the firm of Arthur Andersen. Is 
that correct?
    Mr. McMahon. I'm not sure what time period you're talking 
about in the 1980s, but I was employed with Arthur Andersen 
from I believe 1982 to 1988 or 1989, somewhere around there.
    Senator Fitzgerald. Were you, while you were at Arthur 
Andersen, involved in an investigation into some 
misappropriated funds at a company called Enron Oil?
    Mr. McMahon. Yes, I was.
    Senator Fitzgerald. According to Marie Brenner's article in 
Vanity Fair--and Marie Brenner is a Columbia University adjunct 
professor--the issue with the company in 1987 involved the 
misappropriation of moneys by two traders at that Enron 
subsidiary, Enron Oil, and that both the Enron auditors and the 
Arthur Andersen auditors who looked into the matter were in 
complete agreement. The auditors adamantly told Mr. Ken Lay 
that the two rogue traders should be fired.
    Is that your recollection, Mr. McMahon?
    Mr. McMahon. My recollection of that--it's quite some time 
ago--I was a manager at Arthur Andersen on that subsidiary 
audit of Enron, which was in New York. And my recollection is 
that we found that the senior management of that organization 
had been misreporting its trading activities to the parent in 
Houston, the corporate parent. We did issue a report expressing 
the breakdown of controls and the concerns we had. I don't 
recall whether the report suggested that the senior management 
should be terminated, but I believe they were terminated the 
day the problems were discovered, is my recollection.
    Senator Fitzgerald. Well, this article claims that the 
auditors recommended to Lay that the two rogue traders be fired 
and it was instead decided that those involved would be kept on 
the Enron payroll. They eventually wound up being convicted of 
various crimes such as fraud and tax evasion and served jail 
time and probation time. According to a former Enron auditor 
quoted in the article, ``Lay read the report and he read his 
budget and estimated how much they, the two rogue executives, 
made and if they were fired what he could lose. My conclusion 
was that this guy is a guy who puts earnings before scruples 
rather than reacting to the dishonesty right in front of him.''
    But you, Mr. McMahon, you do not have any recollection of 
both the Enron internal auditors and Arthur Andersen auditors 
recommending that the rogue traders be fired?
    Mr. McMahon. My recollection, Senator, is that they were 
fired as soon as the problems were discovered, because I spent 
most of my year up in Valhalla, New York, that year, and the 
two top executives that were accused of this were not in the 
office.
    Senator Fitzgerald. There was not any period of time that 
they were kept on the payroll after it became clear that there 
had been misappropriation of funds?
    Mr. McMahon. Actually, I don't know how long they were kept 
on the payroll. They certainly were not operating out of that 
office once the auditors got there.
    Senator Fitzgerald. So you did not draw any conclusions 
about Mr. Lay from that incident?
    Mr. McMahon. No. I think our view at the firm at the time 
was that this was, in fact, rogue traders who had violated a 
corporate policy, and ultimately, that business unit was shut 
down by Enron, as I recall, and rolled under another senior 
executive based in Houston.
    Senator Fitzgerald. Mr. Skilling, I appreciate your 
testifying today. You made it quite clear in your testimony 
before the House and again this morning that you were aware of 
no accounting improprieties and that you relied on the 
representation of Enron's auditors, Arthur Andersen, your 
accountants, in telling you that the accounting was appropriate 
for the Raptors transactions. And you were aware of the Raptors 
transactions, but you believed the accounting was appropriate. 
Is that correct?
    Mr. Skilling. I was aware--yes, that is correct.
    Senator Fitzgerald. Were you, on the other hand--leaving 
aside whether the accounting was appropriate--were you aware 
that the structure of the transactions entailed a degree of 
risk for Enron?
    Mr. Skilling. No, sir. What was presented to the Board and 
the general concept, as I understand it, of the Raptors was 
that there would be an entity established, there would be value 
put in the entity, we would attract third-party equity capital 
into that entity, and that entity would write a derivative that 
would basically hedge some of our high technology----
    Senator Fitzgerald. What was your understanding of how the 
Raptors were capitalized?
    Mr. Skilling. There was third-party equity from the 
outside.
    Senator Fitzgerald. Entirely with third-party equity? That 
was your understanding?
    Mr. Skilling. No, it was my understanding that there was 
some Enron equity involved.
    Senator Fitzgerald. What was the Enron equity?
    Mr. Skilling. I don't know, sir.
    Senator Fitzgerald. You didn't know? You didn't know what--
did Enron put its own stock into the Raptors?
    Mr. Skilling. I believe if you go back to the Board minutes 
where it was approved, that would have laid out in detail what 
the specifics----
    Senator Fitzgerald. And you were aware Enron had issued its 
own stock to the Raptors, were you not?
    Mr. Skilling. You cannot issue stock to the Raptors without 
having approval of the Board of Directors, is my understanding.
    Senator Fitzgerald. So you were aware of that?
    Mr. Skilling. If it's in the minutes.
    Senator Fitzgerald. You were aware that Enron had issued 
its own stock. And they issued a lot of stock, did they not, to 
the Raptors?
    Mr. Skilling. I don't know, sir.
    Senator Fitzgerald. Did you ever look into it?
    Mr. Skilling. As I said, I had no reason to think there was 
a problem. My accountants and internal people told me that the 
hedges were in place and good.
    Senator Fitzgerald. If they had come to you and said they 
had to double the amount of Enron's allowable outstanding 
shares so they could issue them all to the Raptors, would that 
have concerned you?
    Mr. Skilling. I think if they had come to me and said that, 
probably my first question would have been, is this okay, are 
the accountants okay with it? If they said it's fine, I 
probably would have said okay.
    Senator Fitzgerald. So you did not see issuing stock as 
being at all risky to capitalize the Raptors with even an 
unlimited amount of Enron stock?
    Mr. Skilling. See it as risky? Quite frankly, as long as 
the accountants had told me that they thought this was an 
appropriate structure, I felt comfortable with it.
    Senator Fitzgerald. As long as the accounting was okay, you 
weren't concerned about risk? Risk is something different than 
the accounting.
    Mr. Skilling. Well, no, sir. Senator, I think you can ask 
anyone, you can ask everyone sitting at this table. If there 
was anybody that was concerned about protecting the company 
against economic risk, it was me. I absolutely was concerned 
about protecting the company from risk.
    Senator Fitzgerald. But you saw nothing risky in issuing 
even an unlimited amount of Enron stock to these other 
entities?
    Mr. Skilling. I thought the transaction was an appropriate 
transaction, Senator.
    Senator Fitzgerald. I am not asking whether it is 
appropriate. I am asking whether----
    Mr. Hiler. Senator, with all due respect. Senator, I am 
sorry. I apologize for interrupting, but I do not think he has 
testified that he did or did not see a problem with issuing an 
unlimited amount of stock. He is trying to give you his best 
recollection, and he has said that whatever the minutes 
reflect, he probably would have heard. And I think he can tell 
you whether he has a recollection of an unlimited amount of 
stock or a little stock or however much stock was going to be 
issued, as long as he has a recollection of it.
    Senator Fitzgerald. I just want to nail down: In your mind, 
was it--not whether it was appropriate or not from an 
accounting standpoint, but was it risky at all to issue Enron's 
own stock to the Raptors?
    Mr. Skilling. Again, it was my understanding that the 
purpose and the function of the Raptors was to provide hedges 
for highly volatile technology investments that we had made. So 
I believed that we were reducing the risk to the company 
absolutely.
    Senator Fitzgerald. Even though it was backed by Enron's 
own stock?
    Mr. Skilling. There was third-party equity involved as 
well, Senator.
    Senator Fitzgerald. But that was a small percentage, was it 
not?
    Mr. Skilling. Again, I know what the concept was that was 
presented to the Board of Directors. I was not involved in the 
specific negotiations of the structures, the pricing of the 
structures. I was under the impression, as were many people in 
the company, as was the Board of Directors, that this was a 
hedge of those highly volatile technology investments.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Skilling, in my opening statement I went through the 
barrage of warnings that you seem to have gotten from high-
level insiders at Enron. I would like to ask some more about 
what happened after Mr. McMahon warned you. You said this 
morning that you went to Mr. Fastow. Did you specifically in 
that conversation with Mr. Fastow talk about the conflict of 
interest questions in the partnerships that Mr. McMahon talked 
about?
    Mr. Skilling. Mr. Senator, you said that I'd received a 
bunch of warnings. I don't recall any of these being--the ones 
you mentioned, quite frankly--being in the form of a warning.
    Senator Wyden. All those people who said that they were 
warning you. Ms. Watkins--I went through----
    Mr. Skilling. Ms. Watkins did not talk to me, Senator.
    Senator Wyden. Well, Ms. Watkins said, and I quote here: 
``Ms. Watkins said that Clifford Baxter told her that he met 
with you repeatedly to express his concern about the 
partnerships.''
    Mr. Skilling. In my House testimony I've been very clear on 
my recollection of the discussion that I had with Cliff. As I 
mentioned in that discussion, Cliff had expressed--Cliff and 
Andy had a--they didn't like each other. They had a very 
strained personal relationship, and Cliff's issue had nothing 
to do with the appropriateness or inappropriateness of the 
transaction. It had everything to do----
    Senator Wyden. Let us talk about your conversation with Mr. 
Fastow about whether conflicts of interest at the partnerships 
were mentioned after Mr. McMahon came to you.
    Mr. Skilling. I'm sorry; say again?
    Senator Wyden. Were conflicts of interest discussed with 
Mr. Fastow after Mr. McMahon came to you and raised those 
questions specifically?
    Mr. Skilling. We discussed the conflicts of interest 
embedded in LJM at virtually every Board meeting of the 
company, and most of those were subsequent to that meeting. 
That was in March 2000. That was very early in the process.
    There were very few transactions in the LJM transaction or 
in the LJM structure. So we had lots of discussions and they 
are documented in the Board of Directors meetings--minutes.
    Senator Wyden. Well, I am concerned because after Mr. 
McMahon stated his concerns, you continued to put a lot of 
confidence in somebody who seems to be at the heart of the 
conflict questions. I think what I would like to ask you is 
what did you see in Mr. Fastow that made you have faith in him 
that he could resolve these questions and protect the interests 
of all concerned?
    Mr. Skilling. Senator, you can look at the minutes of the 
October 1999 Board meeting and Finance Committee meetings. We 
dealt explicitly with the issue of conflict of interest created 
by the LJM partnerships and put in place a system of controls 
to offset those conflicts, and I felt comfortable, as did the 
Board, that those conflict control mechanisms were in place.
    Jeff raised a different issue in my mind. The issue was 
related to how these conflicts of interest might impact 
compensation of people in his position. I assured Mr. McMahon 
that it would not impact his compensation, and I think 
subsequent to that, as I've mentioned--and again, I have only a 
general recollection of this--I believe I did talk to Mr. 
Sutton, who was Vice Chairman of the company, and asked him to 
look into the concerns, any other concerns that Jeff had 
related to that. And I talked to Mr. Fastow and put him on 
notice that there had been a complaint and that I expected him 
to deal with it.
    Senator Wyden. Mr. McMahon, my understanding is that your 
concerns went to conflicts of interest at the partnerships and 
not just conflicts of interest involving this compensation 
issue. Could you clarify that?
    Mr. McMahon. The meeting I had with Jeff was--again as he 
indicated, the Board had approved the conflict of interest 
existing. My issue was really the process internally on how 
that conflict was managed. You had the CFO of the company who 
had a personal interest in a partnership outside the company.
    People who worked for him were negotiating both on behalf 
of Enron and on behalf of the partnership, and it created not 
only a conflict at the CFO level, but it created conflicts 
within the organization because that CFO had a very large 
impact on their compensation, on their promotion capabilities, 
et cetera, et cetera, et cetera.
    So that was my discussion with Mr. Skilling, was how that 
conflict between Mr. Fastow and his partnership manifested 
itself within the day-to-day operations of the organization. So 
my issue was process-driven more so than anything else, 
Senator.
    Senator Wyden. Do you want to respond to that, Mr. 
Skilling? Because it seems to me that when Mr. McMahon brings 
you a fundamental issue about conflict you go to the person who 
has got the biggest conflict.
    Mr. Skilling. I concur with what Jeff just said. He came to 
me with a process issue and raised some issues about 
compensation. I believe that I had resolved that by telling 
Jeff I would totally support him in the compensation issues 
related to this.
    On the issues of people negotiating, or what I might call 
logistics of the process--as Jeff said, he was concerned about 
the process--again, I recall I spoke to Mr. Sutton, who was 
Vice Chairman of the company, and asked him to get with Jeff 
and see if we could deal with that. Now, in addition to that, I 
did go to Andy and put Andy on notice that a problem had been 
raised and I expected the controls to be operated effectively. 
That's my best recollection of what happened, Senator. I 
believed we addressed the problem.
    Senator Wyden. Now, in the meetings of the October 6 Board-
Finance Committee discussion, Mr. Fastow discussed how to 
mitigate potential conflicts and ``Messrs. Buy, Causey, and 
Skilling approve all transactions between the company and the 
LJM funds.'' Did you approve all the transactions?
    Mr. Skilling. No, sir.
    Senator Wyden. Now, Jordan Mintz, an Enron lawyer, 
testified that he tried to get you to sign approval sheets for 
the LJM deals and reminded you that your signature was 
required. I understand that you have said that you did not 
believe that your signature was required; is that correct?
    Mr. Skilling. Well, you've asked a couple of questions 
there. One question was what did Mr. Mintz say. Frankly, I 
don't believe that is Mr. Mintz' testimony, so I'd like you to 
give it to me again.
    Senator Wyden. That was the testimony.
    Mr. Skilling. Can you give it to me again? Do you have a 
specific reference, sir?
    Senator Wyden. He testified that he tried to get you to 
sign approval sheets for the LJM deals and reminded you that 
your signature was required.
    Mr. Skilling. Do you want to--can we bring forward and pass 
out to the Members of the Committee Mr. Mintz's specific memo? 
Also, Mr. Mintz had another memo, which I have seen 
subsequently. And by the way, I also thank the staff of the 
House committee, because I think they have done a pretty good 
job getting documents, and it's been interesting to see a lot 
of the documents.
    But there are two memos from Mr. Mintz. The first one lays 
out what the process is that the Board approved, and if you 
would like a copy of that I'd like to send it to you.
    Senator Wyden. All right, let us do this, Mr. Skilling. 
Even if you did not believe your approval was required----
    Mr. Skilling. My approval, Mr. Senator, was not required. 
In the October 1999 Board minutes there is a very, very clear 
description of what the approval process is, and my name is not 
on it. Now, subsequent to that, as Mister--and I think you'll 
see it in Mister--would you look at this, rather than----
    Senator Wyden. Sure.
    Mr. Skilling. This is an LJM approval process sheet. This 
is to Messrs. Buy and Causey, March 8, 2001. So this is 
subsequent. This is March 8, 2001, subsequent to the October 
Board meeting. The title of this memo is ``LJM Approval 
Process--Transaction Substantiation.'' And this is from Jordan 
Mintz.
    The thing says, and here's what it says. They have an 
``Overview'' and it says: ``In order to address these three 
critical and overlapping concerns''--the concerns basically 
related to conflicts of interest--``the Board has previously 
approved the following procedures and controls.'' Now, this is 
the head of Global Finance, legal:
    Number 1: ``Enron and LJM are not obligated to one another 
to transact.''
    Number 2: ``Enron's Chief Accounting and Risk officers are 
to review and approve the terms of all transactions Enron or an 
affiliate enters into with LJM.''
    Number 3: ``The Board's Audit and Compliance Committee 
shall annually review all transactions completed that year and 
make any recommendations they deem appropriate.''
    Number 4: ``The Board is to determine, also annually, that 
Andrew Fastow's controlling position at LJM and his involvement 
as a counterparty to Enron does not adversely affect the best 
interests of the company.''
    Period. That is the process. This is the head of the legal 
department of Enron Global Finance laying out what the Board 
procedures are. That's what the Board procedures are. 
Subsequently, there was an LJM subsequent or supplemental 
approval sheet that was come up with, and oftentimes or 
sometimes they had my name on that sheet.
    Mr. Mintz did not deliver those sheets to me. If Mr. Mintz 
had delivered those sheets to me and if I had looked at them 
and I saw Mr. Causey's signature and saw Mr. Buy's signature 
and saw the appropriate signatures within the company, I 
absolutely would have signed those and had no problem 
whatsoever in signing them. I did not receive those documents.
    Senator Wyden. My time is up for this round, but I want to 
finish with just one question, because it looks to me when you 
examine the minutes and all of these associated other documents 
that you had a responsibility as the Chief Executive Officer to 
understand who was specifically designated by the Board to 
police Mr. Fastow's activities. Do you disagree that you were 
given that responsibility as Chief Executive Officer?
    Mr. Skilling. I can't be any more clear about this. You say 
going through the minutes and going through the documents. 
Well, let's go through the minutes and let's go through the 
documents. We did that. I just told you.
    Senator Wyden. I will tell you, having read from the 
minutes specifically, it says Messrs. Buy, Causey, and Skilling 
are to approve all transactions with the LJM funds.
    Mr. Skilling. Okay, now back up. Back up. That is the 
October 2000 Board meeting, is it not? This is Mr. Fastow's 
representation of the process that was in place. I believe it's 
a Finance Committee meeting, is it not?
    Senator Wyden. Right.
    Mr. Skilling. And who is making that statement?
    Senator Wyden. I just gave it to you.
    Mr. Skilling. No, who made the statement?
    Senator Wyden. According to the minutes, Mr. Fastow.
    Mr. Skilling. Mr. Fastow represented that that's what the 
process was. Mr. Fastow was in error. I've got something here 
from the General Counsel of Global Finance that lays out in 
absolute clear, clear specific terms what that process was. If 
you go back to the October 1999, minutes for the Board of 
Directors where LJM was approved, you will find that that 
process is very clearly specified, and it's the process I just 
described to you.
    Senator Wyden. Mr. Skilling, any way you parse this, you 
had the responsibility as the CEO to watchdog this area of 
conflicts and I see absolutely no evidence that that was done, 
in spite of this small barrage of warnings.
    We will have another round.
    Mr. Skilling. Mr. Senator, may I respond to that? Mr. 
Senator, we had two organizational units that were charged with 
reviewing these LJM transactions and the conflicts generated. 
One was our internal accounting group. We had 600 lawyers in 
that internal accounting group. Our Risk Control Group under 
Rick Buy, we probably had 250 people that worked in that 
organization. They reported directly to the audit committee of 
the Board of Directors.
    Did I feel comfortable that these transactions were being 
properly vetted by those two huge organizations? Yes, sir, I 
did. Did I feel that the process that was in place was an 
adequate process to eliminate these conflicts of interest? Yes, 
sir, I did.
    Senator Dorgan. Senator Cleland.
    Senator Cleland. Thank you very much, Mr. Chairman.
    Mr. Skilling, I am going to give you what in basketball 
terms is just a free throw here, just a free shot.
    Mr. Skilling. Thank you.
    Senator Wyden. I am just trying to understand all of this. 
Just literally here, not as an expert in your business--you all 
are--not as a business person, but as somebody who does 
represent hundreds of thousands of people, people in my state, 
that were hurt by actions taken at Enron and by the Enron 
implosion, on behalf of my school teachers, on behalf of my 
state employees, on behalf of Enron employees who went bankrupt 
because they put their 401(k) and life savings into Enron stock 
and are now sacking groceries at Kroger. On their behalf: In 
your opinion, what happened to cause this collapse?
    Mr. Skilling. Boy, I'll tell you, I appreciate the 
question, and I'm surprised that more people haven't asked the 
question before. I believe that this was a classic run on the 
bank. There is a problem that I believe is what the economists 
call a systemic problem that's in our economy today, that I 
think you all ought to be addressing. What the systemic problem 
is is there is something called MAC clauses that have started 
creeping into financing in all levels of organizations in all 
sorts of different financial transactions.
    The derivatives business--you are all familiar with the 
derivatives business. Worldwide it is probably a couple hundred 
trillion dollars of contracts that are outstanding. Most of 
those contracts conform to ISDA standards. ISDA is the 
International Swap Dealers Association. All of those contracts 
have something called a material adverse change clause in them.
    What's happened is that in the old days, in the 1880s, when 
there was a run on the bank, it was the bank that went under. 
What happens now is the banks can pull their money out of a 
company that is threatened, and if somebody walks in claiming 
an accounting fraud, is tantamount to walking in, in the 
business world, is tantamount to walking into a crowded theater 
and screaming ``Fire.'' Everybody runs for the exits.
    And there are these triggers in all of these financial 
contracts, in all of these loans, that mean that even a modest 
problem that can be dealt with--these are not big numbers in 
the grand scheme of Enron Corporation if we had time.
    This is my hypothesis. I wasn't there. But I think if the 
company had some time and had access to some liquidity, I think 
the company would have been fine. And I think that's the issue. 
We have allowed a change in the--when they set up the Federal 
Reserve Board, the Federal Reserve Board and deposit insurance 
was to try to keep runs on the bank--the reason you don't want 
to have a run on the bank is because if there was a run on the 
bank, the banks started pulling money out of the real economy 
and they stopped lending or they started taking back their 
loans.
    We have it now automatically built into the contracts, 
material adverse change clauses, which means if anything 
happens to the borrower the bank can come in and pull their 
money back. You know the old story about the bear, the two guys 
talking about the bear? The one guy says: ``If a bear comes, 
just run like hell.'' The second guy says: ``You can't outrun a 
bear.'' The other guy says: ``I don't have to outrun the bear; 
I just have to outrun you.''
    You have a situation where the banks get an automatic 
trigger and they start sucking liquidity out of a company. It 
is very, very difficult to replace that liquidity. If I were in 
charge of the world, probably what I would do is I would 
mandate that federally-insured deposit institutions have to 
strike those contract structures from their lending and from 
their swap agreements.
    I think this is--it's my hypothesis. You may look at it and 
find out it's just totally not true. But it was a run on the 
bank. It was a liquidity problem.
    Senator Cleland. But are we not talking a little bit more 
than about George Bailey, Jimmy Stewart, and ``It's a Wonderful 
Life''? I mean, we are talking a little more about that than I 
think you admitted to.
    Do you see any problem with the whole Andersen relationship 
that seems to have been part of the whole systemic problem that 
you describe, so that the people that are supposed to be 
outside the tent checking the people inside the tent were 
inside the tent playing the game?
    Mr. Skilling. I, like many other people, relied on the 
advice that I got from Arthur Andersen. If there is an issue 
there--and I know you all are looking at it--I think that is 
clearly something that should be looked at.
    Senator Cleland. Ms. Watkins, you have seen this from the 
inside. You had guts enough to write a memo. You have described 
Enron leadership, the leadership culture there, as arrogant, 
intimidating, but you had enough courage to fight through that. 
What is your understanding of what went wrong at Enron?
    Ms. Watkins. The accounting questions--on October 16 when 
we had what was virtually an unexplainable income statement 
writedown, as well as a $1.2 billion reduction of shareholders 
equity, those were related to the Raptor transactions, to LJM2. 
It was not a typical writedown, where you've paid too much for 
an asset, it's not worth what you paid for it, and you write it 
down. It was really effectively unwinding these Raptor 
transactions.
    In my opinion, we could not explain it to the investor 
community, because to do so would highlight the fact that we 
really probably needed to restate earnings in 2000 and the 
first part of 2001.
    I think Mr. Skilling is correct that what killed the 
company was a run on the bank. I don't know that it was from 
bankers. I think it was actually from our trade creditors, the 
people that we owed money under gas contracts and power 
contracts, that closed out the contracts and requested their 
cash. They were uncertain about our future. They had a legal 
right to close those contracts and so they did.
    I stated in my earlier testimony, I think if Mr. Lay had 
been able to recognize the gravity of financial statement 
manipulation and the loss of trust in the investor community 
when there's even a hint at financial statement manipulation, 
he would have better planned for the ensuing crisis that hit 
the company. We, I believe, went into that crisis in late 
October totally unprepared. We did not shore up any kind of 
equity or debt financing. There was a run on the bank. I think 
we went through billions of cash in a very short period of 
time, and once we lost our investment grade rating two large 
tranches of debt became immediately due, and that was the end.
    Senator Cleland. Teddy Roosevelt once said that ``the 
leader works in the open and the boss is covert. The leader 
leads and the boss drives.'' One of the problems that I saw 
initially with the Enron leadership was, as I said at the first 
hearing here, that in combat, officers eat last, but in this 
mortal combat of economic competition it seemed that the Enron 
officers ate first. This whole culture of intimidation of 
arrogance, covert operations, the off the books, this whole 
sense of not leadership, but bossism, do you think that got 
Enron in trouble?
    Ms. Watkins. Yes, I do, because I think it led good people 
astray in the fact that they did not question structures that 
they were not comfortable with. I think Senator Fitzgerald has 
mentioned this Vanity Fair article. I understand there are some 
quotes in that about Mr. Skilling's intimidating practices, and 
they're worth reading.
    Senator Cleland. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Burns.
    Senator Burns. Thank you, Mr. Chairman. I have just two 
questions.
    Ms. Watkins, can you give me what and when triggered your 
concerns that the company was going down the wrong road; what 
heightened your concerns that the company could implode if they 
stayed on the same path? Could you give me a timeframe in 
there? What triggered your curiosity, what happened at what 
point?
    Ms. Watkins. Okay. When I was pulling together the economic 
analysis of our assets held for sale for Mr. Fastow, which 
began in mid- to late June and continued through August of 
2001, there were a number of assets, most notably of ET and the 
New Power Company, that were hedged with Raptor. The hedged 
prices were not what the business units said Enron could 
achieve, and they explained the structure to me, explained that 
the structures were backstopped by Enron stock. Enron's stock 
price had declined and the Raptor entities were basically going 
bankrupt, and they were going to be unable to pay Enron the 
money that Raptor owed Enron.
    Well, it concerned me greatly that you can never use your 
stock to affect your income statement. I believe that I--before 
I went to Mr. Lay, I actually also went to Rex Rogers, who is 
an Associate General Counsel for Enron Corp. under Jim Derek. I 
told him--I think this might also be in some of the notes----
    Senator Burns. Was that conversation before you had the 
conversation with Mr. Skilling?
    Ms. Watkins. I did not have a conversation with Mr. 
Skilling. I had a conversation with Mr. Lay on the 22nd.
    Senator Burns. Okay.
    Ms. Watkins. But when I talked to Mr. Rogers, I told him 
that when I found this in July my first reaction was to start 
to hunt for another job. I did not want to work for such an 
unethical company. My goal was to find a job and get up the 
courage to go talk to Mr. Skilling and tell him to stop this; 
he put this in motion; he needs to find a way of fixing it.
    When he suddenly and shockingly resigned August 14, I felt 
compelled that I had to warn Mr. Lay that--Mr. Lay had no idea 
what was facing the company when this stock would have to be 
delivered to Raptor some time in 2002 and 2003.
    Senator Burns. Was that the only conversation you had 
outside your office with that counsel?
    Ms. Watkins. I also met with Mr. McMahon for an hour-and-a-
half on August 21. That is when I discovered that Mr. McMahon 
had had a conversation with Mr. Skilling and that his concerns 
were not addressed. A few weeks later, he got a new job offer 
and felt like that was in his best interests to take that 
offer.
    It's notable that Mr. McMahon's replacement was Mr. Ben 
Glisson, effectively letting the foxes into the henhouse. Mr. 
Glisson, as we all now know, was an investor in the LJM 
partnerships.
    Senator Burns. My question now kind of addresses the 
concerns that most of us around here have, in that we all had 
organizations in our own states that lost money. And as I made 
in my statement--the point of my statement--I think we should 
be looking here to the outcome of this.
    Mr. McMahon, you said that there is a chance that Enron can 
survive and regain some position in the corporate world, that 
it could survive. What do you point to to base your conclusion?
    Mr. McMahon. The conclusion that--or the facts that I point 
to--to base that conclusion on are several. Well, first off, 
let me state, if there is a reorganized entity here, it will 
look nothing like its predecessor. For all intents and 
purposes, the entire merchant business--energy business--of 
Enron is gone. It was sold recently through the bankruptcy 
court, and what's left is in wind-down mode.
    So what we are looking to is to find the best way to 
maximize recovery for our creditors and other stakeholders. 
Both Steve Cooper, who is the CEO, and myself believe that it's 
a combination of selling certain assets as well as reorganizing 
around other assets, because we think potentially that there's 
a more--that there's a higher value creation or preservation in 
that scheme. And what to reorganize around is still being 
debated right now internally, but it's likely to be our 
pipelines and power stations that we have.
    Senator Burns. This may be inappropriate, but what are some 
of those assets?
    Mr. McMahon. Well, what's left with Enron outside of 
wholesale, or outside the merchant business, are interstate gas 
pipelines. There's a utility in Portland, Oregon. And there's 
several utility-type assets in South America and Europe.
    Senator Burns. Has Enron completely separated itself from 
the broadband services?
    Mr. McMahon. It's certainly in liquidation. We may still 
have some assets that are left, but they're on the market to be 
liquidated.
    Senator Burns. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Boxer.
    Senator Boxer. Mr. Skilling, Senator Cleland gave you a 
chance to get a softball, and, if I might say, your answer 
stunned me. This was your chance to tell us what went wrong in 
the company, how you might do something different. And you know 
what you said? It's those MAC clauses--that stands for material 
adverse changes--that allowed the banks--federally-insured 
banks, Mr. Chairman--to pull out of this company. And you said 
if you ran the world, you would change that.
    Well, you're a good, smart student of history, and we saw 
what happened during the Depression. That's when our 
predecessors decided it was important to federally insure 
banks. I want to say to you, if that's your answer, I hope no 
one on this Committee takes your advice, because we'd have 
banks going broke, and we'd have this government going broke 
because we would force them to stick with a company that was 
essentially a shell game, which apparently you didn't get. But 
your Vice President did. I am absolutely stunned with that 
answer.
    When you answered Senator McCain--he was asking you a 
series of questions--you said: ``This is very complex.'' This 
is very complex. One of the things I've learned, in years of 
getting batted around in politics, is that when somebody tells 
you, ``This is very complex,'' you've got to dig behind that. 
How complex is it to know what was going on? I want to tell 
you, if you look at Ms. Watkins' testimony, she says it in a 
sentence, ``My understanding as an accountant,'' she says, ``is 
that a company could never use its own stock to generate a gain 
or avoid a loss on its income statement.'' Is that true?
    Mr. Skilling. Um.
    Senator Boxer. Were you aware of that?
    Mr. Skilling. I am not an accountant.
    Senator Boxer. I didn't ask you that. Is her statement 
true?
    Mr. Skilling. I think I'd have to be an accountant to know 
if it's true. I don't----
    Senator Boxer. Wait a minute. You have to be an accountant 
to know that a company could never use its own stock to 
generate a gain or avoid a loss in an income statement. What 
was your education, Mr. Skilling? I know I read that it was 
pretty good. What----
    Mr. Skilling. I have a master's in business administration.
    Senator Boxer. A master's in business administration. And 
yet you didn't know this simple fact. Is that correct? You're 
saying you were ignorant of that fact that Mr. Watkins has told 
us.
    Mr. Skilling. Well----
    Senator Boxer. It's not complicated.
    Mr. Skilling. I'll give you two----
    Senator Boxer. Even----
    Mr. Skilling. I'll give you two----
    Senator Boxer [continuing]. Those of us up here understand 
very clearly.
    Mr. Skilling. Okay, well----
    Senator Boxer. The company can never----
    Mr. Skilling. Well, just a second, Senator. Let me give 
you----
    Senator Boxer [continuing]. Its' own stock to generate a 
gain or avoid a loss. And you're saying--getting your 
master's--and where did you go to school?
    Mr. Skilling. Harvard Business School.
    Senator Boxer. Okay. In Harvard Business School, you did 
not know this. Is that correct?
    Mr. Skilling. I did not know that there is an absolute 
prohibition on it, because I--you know, I--again, I am not an 
accountant, but I know of at least one case where that's not 
true--at least one case.
    Now, I'd also suggest that you go through Mr. Duncan's 
notes that he gave to Vinson & Elkins where he described the 
accounting rationale, and I think you'll find that he has a 
rationale. And if you want an example of a case where equity 
can be used----
    Senator Boxer. That's okay.
    Mr. Skilling. No, Senator----
    Senator Boxer. I----
    Mr. Skilling. Senator, may I answer the question?
    Senator Boxer. Yes.
    Mr. Skilling. [Inaudible]. Answer, all right? There are 
cases where you can use equity to impact your income statement. 
And the most egregious, or the one that's used by every 
corporation in the world, is executive stock options. As a 
matter of fact, I think FASB [Financial Accounting Standards 
Board] tried to change that, and you introduced legislation in 
1994 to keep that exemption.
    Essentially, what you do is you issue stock options to 
reduce compensation expense and, therefore, increase your 
profitability. That's one exception. So that is clearly a case 
where equity can be used to impact your income statement.
    Are there other exceptions? I don't know. I'm not an 
accountant. I would guess there are. If you read Mr. Duncan's 
testimony, I think he--he had a logic--he had a set of logic 
that was consistent with his view that this was an entirely 
appropriate transaction.
    Senator Boxer. Yes, I think we understand stock options.
    I wanted to ask Ms. Watkins--you said that you didn't want 
to go to Mr. Skilling. Why? What was your issue?
    Ms. Watkins. I did believe it would be a job-terminating 
move.
    Senator Boxer. Say that again.
    Ms. Watkins. I believed that it would be a fruitless 
effort. And I believe that now even more than I did in late 
July and early August.
    Senator Boxer. Why do you think that Mr. Skilling would 
have fired you?
    Ms. Watkins. I look at his actions, rather than listen to 
his words. I mean, I've learned on August 21 that Mr. McMahon 
went to Mr. Skilling with some very serious concerns. I've seen 
the notes from the House testimony. He talks about Andy wearing 
two hats, that his compensation from LJM could be quite high. 
His testimony is that Mr. Skilling said he would fix it.
    Well, there is no evidence that he ever fixed it. In fact, 
he put Mr. Ben Glisson in charge of, sort of, guarding the 
henhouse, and that was letting two foxes in the henhouse.
    Senator Boxer. So you figured because of what had come 
before, that had you gone to Mr. Skilling with this very simple 
statement that you made----
    Ms. Watkins. I----
    Senator Boxer. By the way, do you stand by that despite 
what----
    Ms. Watkins. I do. I believe that Mr. Andy Fastow would not 
have put his hands in the Enron candy jar without an explicit 
or implicit approval to do so by Mr. Skilling.
    Senator Boxer. Okay.
    Mr. Skilling, you didn't have written testimony, but I took 
some notes, and your opening statement was extremely 
compassionate to the employees. I want to show you a tape--and 
I believe we have it ready to go--which was a meeting that took 
place in 2000. December? Is that the right date?
    Recorded Voice: I'll be honest with you guys----
    Senator Boxer. 1999.
    Recorded Voice: [Inaudible]. Employees eligible for the 
employee referral program, and I don't know why they can't be. 
I don't know that that was ever determined. So I would say, 
yes, they are, absolutely. [Inaudible.] Should we--listen to 
this--should we invest all of our 401(k) in Enron stock? 
Absolutely. Don't you guys agree?
    Senator Boxer. Okay. So that, at the end of 1999, you 
agreed, by laughing and shaking your head, that the employees 
should, in fact, invest their money in Enron. I think anyone 
seeing that would say that you were nodding in agreement.
    Why is it that you had begun unloading your stock pretty 
heavily before that date, and yet led the employees to think 
they should keep buying stock?
    Mr. Skilling. Ms. Senator, I have been a major shareholder 
in Enron Corporation. I am currently a major shareholder in 
Enron Corporation. Enron Corporation has constituted virtually 
90 percent of my net worth from the entire time that I worked 
for the company. I was a strong believer in Enron Corporation. 
Now, you can take the videotape to mean what you want it to 
mean. I was a supporter of Enron Corporation.
    Senator Boxer. Yes, but----
    Mr. Skilling. I believed----
    Senator Boxer [continuing]. How much had you unloaded by 
that point?
    Mr. Skilling. The term ``unloaded'' I think is a little bit 
of a----
    Senator Boxer. Well, I'll say it in a more direct way. How 
many shares had you sold up to that point? How much of your own 
money had you pulled out of that stock at the time that you 
shook your head and said yes to the question, which was, 
``Should we buy--put all of our money--all''--and you know what 
happened to those people. They lost everything. You had a 
chance to be honest with them, and you shook your head, yes. 
How much, in your recollection, had you already sold?
    Mr. Skilling. As I--you know, obviously, I feel terrible 
about what happened to the employees. I think if you--if you--
if we want to do a dueling videos, also there's a videotape of 
an employee meeting two months later where I go, in pretty 
excruciating detail, what some of the issues are that the 
company is dealing with. I think I was open to employees, and I 
think as long as I was----
    Senator Boxer. Okay, but you don't have the answer, so let 
me put it in the record. In 1999, the same year that tape was 
recorded--and you can look at it over and over again--you 
agreed----
    Mr. Skilling. I thought you said it was 2000.
    Senator Boxer. This was in 1999--the end of 1999. By 2000--
--
    Mr. Skilling. You're saying this is December----
    Senator Boxer. Yes.
    Mr. Skilling. December 1999?
    Senator Boxer. Yes. I'll just put it in the record because 
my time is up.
    [The material is not available.]
    The insider records show you had sold more than 513,000 
shares of Enron for $22 million at a time when you were nodding 
in agreement for those people to put everything in their 401(k) 
into the company. I just want to get that in the record.
    Senator Dorgan. Senator Breaux.
    Mr. Skilling. Excuse me. May I--I would like to see the 
basis for that number. You're saying in the year 1999----
    Senator Boxer. Yes.
    Mr. Skilling. I sold 500,000 shares of Enron stock?
    Senator Boxer. Yes. We have the records, sir. We'll send 
them over to you during the----
    Mr. Skilling. Right, and then we'll send you records, too, 
because I believe that that number's incorrect.
    Senator Boxer. Okay. We'll show you the records.
    Senator Dorgan. Senator Breaux.
    Senator McCain. Could I ask----
    Senator Dorgan. Senator McCain.
    Senator McCain. Isn't it true that in the year 2000, you 
received $5.6 million as a bonus; and in 1999, $3 million as a 
bonus; in 1998, $2.25 million as a bonus?
    Mr. Skilling. I don't recall.
    Senator McCain. You don't recall what you received as a 
bonus? $5.6 million?
    Mr. Skilling. I don't recall. I'm sorry.
    Senator McCain. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Breaux.
    Senator Breaux. Boy, I would have remembered mine.
    [Laughter.]
    Senator Breaux. Thank all of you for being with us.
    Mr. Skilling, you said in your testimony that you are 
somewhat of a business history buff. Can you think of a bigger 
mess in business than we have here with the Enron situation in 
recent history?
    Mr. Skilling. In recent history? Or do you want me to go 
back in time? I think there have been a lot of times when there 
have been panics that have led to cascading problems in the 
economy, and I think you see some of the signs of that starting 
to happen here, as well.
    Senator Breaux. But I mean by any measurement. This one of 
the biggest and largest business failures in terms of the size 
of the company and the number of people that have been 
affected, that I can certainly remember. I'm not a business 
history buff, but it seems to me that----
    Mr. Skilling. I just don't know, Senator.
    Senator Breaux. Well, I think it's the biggest mess we've 
had in business failures in a long time because of the extent 
of the failures and the number of people and the number of 
states that have been affected by it and the fact that it's the 
subject of every talk show in this country today. I mean, we've 
got a mess on our hands, and how we handle it, I think, is 
incredibly important.
    I'd like to ask you--I mean, Monday morning quarterbacking 
is generally not a good thing to participate in, but in this 
case I think that perhaps it could be helpful. You made a 
number of statements, Mr. Skilling, about, ``I don't remember. 
I relied on advice of attorneys. I relied on the advice of 
Arthur Andersen,'' et cetera, et cetera, while you were 
President, Chief Operating Officer and CEO of Enron. Looking 
back at all of this, can you tell the Committee what you would 
have done differently during your period in those various 
positions?
    Mr. Skilling. Well, it--you know, I've said before--I've 
gone back and tried to think what I would do differently, given 
the facts I had at the time. And I--you know, quite frankly, 
I--there's nothing I can come up with and--that I would think 
I'd do different, given the facts I had at the time. That--
obviously, there have been a whole lot more facts subsequent 
to----
    Senator Breaux. Well, can't you look back and say, ``Look, 
I would have instituted a system to make sure that--as the 
Chief Operating Officer--that I was given the facts''? You 
know, it's one thing to say that, ``I didn't get the 
information that I should have.''
    Mr. Skilling.  Yes.
    Senator Breaux. But as Chief Operating Officer, isn't it 
your responsibility--or CEO or President--to set up a mechanism 
to ensure that, in fact, you did get the information? It's not 
enough, I think, to say, ``They didn't tell me.'' Why didn't 
you have a system that assured you, as Chief Operating Officer, 
that you were informed?
    Mr. Skilling. I believed we had a good control system in 
place. In fact, I think if you compare the number of people 
involved in our control system, the reporting structure for 
that control system, I think you'll find that it is far more 
invasive than any other company that I'm aware of. The company 
spent a lot of time on controls. It turned out that something 
went wrong.
    And in retrospect, what I wish--you know, in retrospect, I 
wish I'd never heard of LJM. And--but at the time, with the 
facts we had, the information we had, it looked like something 
that was in the interests of our shareholders.
    Senator Breaux. You mentioned that Enron's failure was due 
to a classic run on the bank type of situation that had 
developed. It seems to me if that's true, that you were one of 
the major contributors to the run on the bank by your abrupt 
resignation, and the selling of $66 million worth of stock 
during a period when you were running the company and claiming 
the stock was undervalued. As the Chief Operating Officer, you 
were selling huge amounts of stock while you were telling the 
general public and Enron employees that the stock is really 
undervalued.
    Were you not contributing to the so-called run on the bank 
at Enron by your actions in selling your own stock and abruptly 
resigning?
    Mr. Skilling. We've talked about the reasons for my 
abruptly resigning. I resigned--I don't know that most people 
would characterize it as abrupt, but I resigned for reasons 
unrelated to Enron Corporation.
    And so, in retrospect, you know, I've made clear that when 
this thing broke out, when we started to see the drain of 
liquidity in the company that occurred after, I believe it was, 
October 23, I called Mr. Lay and offered to come back to the 
company at no compensation to do what I could, if I could do 
anything, to help remedy the situation.
    Senator Breaux. Ms. Watkins, thank you for being with us. 
You mentioned in the memorandum, the seven-page memorandum that 
you had sent out, that you were incredibly nervous ``that we 
will implode in a wave of accounting scandals.'' I guess what 
I'm trying to figure out, did you think that the accounting 
structures that the company had entered into in all the 
offshore investments, the special purpose entities--if you read 
where they were located, it sounded like you were reading the 
United Nations' roll call or something. They were all over the 
world. Were you saying, when you suggested accounting scandals, 
that the structures themselves were illegal they way they were 
set up? What were you saying when you were talking about 
accounting scandals? I think that Mr. Skilling would say that 
Arthur Andersen said all these things were appropriate and 
proper and legal. So, what were you talking about when you 
talked about accounting scandals?
    Ms. Watkins. My concern was with the Raptor special purpose 
entities. Enron did use a number of offshore special purpose 
entities in structuring its international assets. I think those 
are fairly legitimate. Quite often it was to give us all kinds 
of alternatives--if we ever decided to sell the asset, that we 
had a subsidiary that might appeal to a European buyer or a 
U.S. buyer or an Asian buyer. My concern was with the Raptor 
special purpose entities.
    And the problem that--when any company has doubts about 
whether or not it has manipulated its financial statements, it 
goes through a severe crisis. Waste Management had such a 
similar problem. But with Waste Management, if they're rolling 
down your street and picking up your garbage, you don't mind 
that they might be in financial trouble. You still pay them the 
monthly fee.
    Our problem was that 90 percent of Enron's business was 
primarily trading, and that business could dry up in a 
heartbeat if our trade counterparties were not completely 
certain of our financial health. The problem is that a customer 
doesn't know whether they're going to owe us money or we're 
going to owe them money. It all depends on future gas and 
electricity prices. So that's why I felt we were particularly 
vulnerable to a financial accounting scandal.
    Senator Breaux. Did you think that the structures, in 
particular, the Raptor structures, were improperly set up, or 
were you concerned just about the risk it had put Enron at by 
participating in them?
    Ms. Watkins. My opinion was that it was--it could not be 
appropriate. I did vet my concerns with Mr. James Hecker, a 
former mentor of mine at Arthur Andersen. I spoke to him for 
approximately 48 minutes on August 20. I hadn't been in 
accounting for about ten years, so I wanted to make sure that 
the accounting rules hadn't changed materially since I was last 
in accounting. And his words to me were, ``Any accounting 
treatment must be clearly defensible if fully exposed.'' And I 
felt like these Raptor transactions, if fully exposed--if fully 
explained to an investor, they would be horrified.
    Senator Breaux. And that's what you conveyed to Mr. Lay?
    Ms. Watkins. Yes, and I also participated in a three-hour 
interview with Vinson & Elkins on September 10. Their interview 
notes from that were part of the documents released by the 
House. I've reviewed those notes. And in my opinion, Vinson & 
Elkins understood my concern about the crisis facing the 
company.
    Senator Breaux. My final point is that it seems to me 
before all of this you had some of the finest and wisest 
advisors in the world working at Enron. Arthur Andersen's 
reputation prior to this certainly was excellent. The law firm 
of Vinson & Elkins has the same type of reputation. I just 
can't figure out how, with those advisors, not telling folks at 
Enron that, ``Hey, you can't do this'' seemed appropriate. 
You're paying them a lot of money to give you the best advice 
possible, and either they were not giving you the best advice, 
they were totally wrong, or they were so much part of Enron's 
culture that they were part of the problem, too. I'm not sure 
which it is.
    Thank you.
    Senator Dorgan. Senator Carnahan.
    Senator Carnahan. Thank you, Mr. Chairman.
    Mr. Skilling, Ms. Watkins just testified that you always 
look to the market for guidance. If so, why didn't the fact 
that the value of Enron stock had dropped by 50 percent not 
strike you as a problem? And how could you think that Enron, 
under those circumstances, was perfectly healthy when you left 
the company?
    Mr. Skilling. Well, Senator, I was, you know, clearly aware 
of the drop in the stock price, but there are things other than 
a drop in the stock price to make difference. I mean, the 
reason the stock price dropped--there were basically three 
reasons.
    The first one was that the collapse in optical fiber stock 
started in March--February and March of the year 2001. We were 
viewed as a player in that optical fiber business, and that 
immediately hit our stock. The second thing was the litigation 
and temperature related to the India power facility, as I'm 
sure you've all heard, was growing in ferocity, and there was a 
great deal of controversy and noise about that, which also hurt 
the stock. And then the last thing, which I think probably was 
also important, because of the California power problems, there 
was a fear that the wholesale markets might put in price caps 
and re-regulate the natural gas industry, and I think that was 
viewed as negative for Enron in the long term.
    Now, all of those things being said, on the inside, having 
looked at it, we made some tremendous progress in that time 
period. First of all, the broadband business, we had staunched 
the flow. You know, by the time I left, in August, we had 
significantly reduced the capital budget. We had redeployed a 
lot of people out of the business. So we had reduced the burn 
rate, and we felt we could wait it out--you know, that we could 
wait out this problem in the broadband business.
    The India problem--the Prime Minister from India was 
visiting the United States in September, and there was some 
thought that he might offer a resolution of that problem that 
would be acceptable to Enron.
    The third thing was that our wholesale business, which is 
really the core of our business, had had the best quarter in 
history. I mean, the wholesale business was doing extremely 
well and, from an earnings standpoint, just was extremely 
profitable.
    So the outside world, I think, was seeing broadband, was 
seeing India and potential regulatory issues. What we were 
seeing inside is that we had solidified a lot of our 
businesses, and our core businesses were extremely strong.
    Senator Carnahan. But how could you say that the company 
was in good financial condition when you left, under those 
circumstances?
    Mr. Skilling. I felt that having made the changes that we 
made in the broadband business, the strength of the wholesale 
business, the fact that we were potentially going to be 
resolving the India situation--all of those things made me feel 
that the company was in good shape. And I believed, when I left 
on August 14, that the financial statements of the company were 
an accurate representation of my understanding of what the 
financial condition of the company was.
    Senator Carnahan. When you left, you never really gave a 
credible explanation--when you left in August. You claimed that 
you believe that the company was in sound financial condition 
at the time and that you simply left for personal reasons. 
Frankly, I don't find that a convincing argument. You had spent 
a decade working your way up through the company to this 
pinnacle of power. And yet, on August 14, just six months after 
you became CEO, you abruptly resigned. It looks suspiciously as 
if you realized that the company was coming apart, and you 
jumped ship.
    Can you offer this Committee some explanation of what 
changed in your personal life in August that made you so 
determined to leave this dream job? Why did you not resign in 
June? Why did you not wait until October? Why was this the date 
selected?
    Mr. Skilling. I had personal reasons. You may not find them 
credible, but they are the reason that I left Enron 
Corporation.
    Now, you say it was the perfect job. To be quite frank, I 
was tired. I was flat-out tired. This may be a perfect job for 
some people. It was not the perfect job for me. And there were 
a lot of people in the company that knew that I was tired and 
that this was not something that was particularly important.
    I had issues in my family that were more important for me. 
I mean, I had spent, as you said, the last ten years of my 
life--I think most people at this table will tell you that my 
car was there first thing in the morning, and my car was the 
last car to leave at night--I had spent ten years working very, 
very hard to build this company, and I had missed a lot. I had 
a clear imbalance in my priorities in life, and I had neglected 
some things that needed to be dealt with at that time.
    That is the reason I left the company. I did not leave the 
company because I thought the company was in imminent financial 
danger.
    Senator Carnahan. I have one other question. Mr. Skilling, 
I'm perplexed by your purported recollection of the meeting 
that you had with Mr. McMahon in March of 2000. Mr. McMahon 
claims to have told you that he could not continue to work with 
Mr. Fastow without compromising his integrity. You said that 
you believed that this was a conversation about compensation. 
If an employee comes to you and says that his compensation 
would be higher if he compromised his integrity, doesn't this 
set off some alarm bells for you? Why did you take no action to 
rectify the fundamental conflict that was raised by Mr. 
McMahon?
    Mr. Skilling. There is no time--no time when I've been at 
Enron Corporation when I have asked anyone to compromise their 
integrity. It just doesn't happen.
    My interpretation--and again, this is just, you know, two 
people remembering a meeting--a half-an-hour meeting two years 
ago--my recollection is that Jeff said that he was concerned 
about the conflicts that were in place as it related to his 
personal situation, and he asked me for my support for him, and 
that, if I did that, he was comfortable doing what he needed to 
do to maintain his integrity. And that's my interpretation of 
it, Senator. It was a long time ago.
    Senator Carnahan. Well, according to Mr. McMahon's notes, 
he--as his talking points to you, he says, ``I find myself 
negotiating with Andy on Enron matters and am pressured to do 
deals that I do not believe are in the best interests of the 
shareholders.''
    Mr. Skilling.  Yes, and I've seen this note, and I think 
there are two pieces on this page. The first piece is, Jeff 
relates to an untenable situation. And I am sympathetic to the 
untenable situation. And he says, ``Here are the requests or 
options.'' And there were two options that Jeff presented in 
this paper.
    And again, I don't specifically recall this discussion. I 
just recall my impression or interpretation of what occurred in 
the discussion. But request for option number one was, ``In 
order to continue to do this, I must know I have support from 
you and there won't be ramifications--believe it already has 
affected my compensation--or need to let me out of the 
situation and move to a different job.'' I personally--there is 
no question, given those two alternatives, that I would have 
suggested to Jeff that I would support him in any way possible 
for him to carry out any belief--any ethical duties or beliefs 
that he had as an individual.
    I mean, that just--I don't think--I don't think my 
description of that session or that meeting is at all in 
conflict with Mr. McMahon. I think we both came out of it--I 
felt that we had discussed it, and I felt that we had resolved 
the issue, and I had called people to help resolve the issue. 
And Mr. McMahon did not come back to me subsequent to that. Mr. 
Glisson did not come to me and say that they were having a 
problem.
    As Ms. Watkins points out, Mr. Glisson, as it turns out, 
had an equity interest in one of the structures. I was not 
aware of that--I mean, absolutely not aware of that. So I would 
have expected, if Mr. Glisson had any concerns about any 
operation of the Global Finance group that he would have come 
to me, as well, and we would have sorted it out.
    Senator Dorgan. The time of the Senator is expired.
    Senator Carnahan. Thank you. I just fear that you reduced a 
conversation about character to a conversation about money, and 
that was my concern. I'm concerned that the bankruptcy of this 
company does not compare with the bankruptcy of character that 
occurred in the executive suite.
    Senator Dorgan. I thank the Senator.
    The Senator from Virginia.
    Senator Allen. Thank you, Mr. Chairman. I'd like to follow 
up on Senator Burns' and Senator Breaux's very logical, 
commonsense statements and questions of you all so that we can 
maybe draw some conclusions here on what ought to be done in 
the future to prevent this. I'm not sure you can prevent bad 
business judgments, but at least let people understand and know 
what sort of investment they're making and assess for 
themselves the risks of various corporations in which they may 
wish to invest.
    Now, Ms. Watkins, I'm not going to ask you for a legal 
conclusion, but do you believe that Enron engaged in accounting 
practices which, in effect, whether by design or otherwise, hid 
expensive or underperforming investments from investors by 
keeping these liabilities off the books?
    Ms. Watkins. My concerns were primarily with what I saw as 
income statement manipulation. I believe, in the memos that I 
gave Mr. Lay, I was concerned that Avici within Enron Broadband 
and the New Power Company, was hedged. That was an Enron Energy 
Services investment. By hiding the losses that those business 
units were achieving--or having occurred in those stocks, it 
made those two business units look more profitable for a longer 
period of time. It let us enjoy a very large multiple, because 
those were our growth businesses, for a longer period of time. 
And I believe investors were hurt by those income statement 
manipulations.
    Senator Allen. Now, Mr. McMahon, per Ms. Watkins' memo, did 
you have any concerns regarding Enron's accounting practices 
and the use of these special purpose entities to move assets 
off Enron's balance sheet and, thereby, hide the debt 
obligation or the profitability of the company from investors? 
Did you have concerns about that?
    Mr. McMahon. When Ms. Watkins showed me her memo, actually 
the items in there I was unfamiliar with, but the allegations 
that she made in that memo were concerning to me, and I 
encouraged her, as others did, to see Mr. Lay about it.
    Senator Allen. At any point in this whole matter could 
anyone have stopped this from becoming a full-blown 
catastrophe?
    Mr. McMahon. That's a difficult question. I think it goes 
back toward really what caused it and how could it have been 
prevented. And I became CFO of the company on October 24, when 
Mr. Fastow left the company, so my perspective is somewhat 
limited here, but I would probably echo both Mr. Skilling and 
Ms. Watkins' testimony in that I think there was a big 
liquidity draw. I'm not sure what the cause was. I think 
there's still a lot of facts that are yet to come out about 
what happened at Enron and what the cause was.
    But as--from my perspective, as a finance person, I saw a 
balance sheet--or a financial condition that was fairly weak 
and couldn't withstand much stress, and it was getting an awful 
lot of stress in the market at that point in time.
    Senator Allen. Mr. Skilling, in your testimony, you said 
you relied on the advice of attorneys and accountants who told 
you that these special purpose entities and activities were 
appropriate. In other words, they were technically legal.
    But again, let's get to the lessons learned. Mr. Skilling, 
do you actually think that during all of this, the true 
financial condition of Enron was being accurately reported?
    Mr. Skilling. First of all, I think you've made a 
suggestion or an insinuation that there might have been 
something illegal.
    Senator Allen. I'm not saying it was illegal. Let's assume 
that everything, as far as accounting practices, auditing, and 
counsel was technically legal. Assuming that's so, were 
investors who were thinking to invest and maybe did invest in 
Enron stock getting a true picture of the financial condition 
of Enron?
    Mr. Skilling. I believe the financial statements were an 
accurate representation of my understanding of the financial 
condition of the company.
    I'd like to address--as you brought it up, I'd like address 
one of those issues. There's been a lot in the press, and I 
think your question suggests, that there's some issue of hiding 
debt, that--the use of off-balance sheet or special purpose 
entities had its intent in hiding debt. And all I can do is--I 
can refer you to page 78 of the year 2000 10-K. There's a 
section that's called ``unconsolidated equity affiliates.'' 
Unconsolidated equity affiliates would be partnerships and 
special purpose entities that were not consolidated into 
Enron's balance sheet.
    There's a two-page description of the earnings that were 
appropriate--or associated with those vehicles. And on the 
second page----
    Senator Allen. Alright, let me interrupt.
    Mr. Skilling [continuing]. It shows the full balance 
sheet----
    Senator Allen. What----
    Mr. Skilling. Senator, please.
    Senator Allen. I just want--I want you to----
    Mr. Skilling. This chart shows exactly--exactly what the 
total amount of the outstanding liabilities were that were non-
consolidated liabilities. So the whole issue of hiding debt, 
it's not an--it was in the 10-K. Anyone reading the 10-K would 
have a hard time missing this page.
    Senator Allen. Okay. Thank you, Mr. Skilling. A lot of 
people must have missed it.
    Now, to all three of you all----
    [Laughter.]
    Senator Allen [continuing]. What changes in law would any 
of you suggest--whether it's SEC regulations or rules, whether 
it's accounting or auditing standards--that would give 
investors better information?
    Mr. Skilling. Again, I think to the extent that we in 
management and shareholders relied on our professional 
accountants, to the extent that we were not getting accurate 
information from the accountants, for whatever reason, I think 
that certainly is worthy of investigation by this group.
    I also believe that this group should look into this issue 
of liquidity and how that happened, because there was a 
serious, severe liquidity drain. And I think a lot of it was 
imbedded in these derivative contracts in the standard--is the 
forms that I think just--I don't think that's a real good idea.
    I think we've got a systemic problem that's come in the 
last 10 or 15 years in this country, and we're now starting to 
see it spread. I mean, now they're going after IBM. They're 
going after GE. They're going after Computer Associates. 
They're going after Qwest. And it's okay to go after them and 
challenge their accounting. That's okay. But if, by doing that, 
you set off a chain reaction, a nuclear reaction, that drains 
liquidities from these companies, ultimately a lot of people 
are going to get hurt.
    And maybe we can look at Enron as the canary in the mine 
field--or the coal mine. You know, they used to bring a canary 
down to see if there was--yeah. Maybe that's the issue, you 
know, and something that people ought to be looking at. I 
personally--I'm concerned about it.
    Senator Allen. Ms. Watkins.
    Ms. Watkins. My personal opinion, as an investor in the 
U.S. stock market, is that the accounting firms and their 
clients have grown too cozy. And I understand there are 
proposals to limit the amount of auditing and consulting work. 
But my personal opinion is that I would feel better if public 
companies were required to rotate their accounting firms for 
periods as short as every three years.
    Mr. McMahon. I like--I think--if there is an issue, I think 
that's something that certainly ought to be--three years might 
be a little bit tight, but----
    Senator Allen. What about information, as far as these off 
balance sheet transactions?
    Ms. Watkins. I think that certain of the special purpose 
entities that are off balance sheet that have any kind of call 
back to the company that is of any significance--for instance, 
right now I think it is a very legitimate structure to pledge 
your stock as a backstop. You push assets off. You've got debt 
that should be non-recourse just to those assets in a special 
purpose entity. But it is currently acceptable to also put a 
call back into the company's stock and still have that be off 
balance sheet, and I think that rule needs to be looked at.
    Senator Allen. Mr. McMahon, do you have any suggestions of 
improvements to inform prospective investors?
    Mr. McMahon. Again, not speaking of any particular company, 
Enron or not, I believe financial statements are very difficult 
to read right now. I think it stems from management's 
discussion and analysis, recurring and nonrecurring earnings, 
off balance sheet items scattered about the footnotes, 
guarantees, other places. If I were to recommend anything to 
this Committee, I would suggest some form of mechanism to 
improve and actually expedite the investor's ability to read 
and understand financial statements.
    Senator Allen. Thank you, Mr. Chairman.
    Senator Dorgan. Thank you.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. I want to take the 
discussion, Mr. Chairman, in a different direction.
    There were some 33 public pension funds that had a 
considerable loss as a result of the fall of Enron's stock, but 
one in particular that is my state, suffered the loss when the 
stock was dropping. I'd like to go back to the statement that 
both of you, Mr. Skilling and Ms. Watkins, testified to, that 
you thought that the problem was a run on the bank, the fact 
that the stock was dropping because banks were calling the 
loans, and you pointed out this material adverse change, or 
MAC.
    So, on the basis of what you said, then it would seem--and 
also, I think you said something to the effect, Mr. Skilling, 
that if the company had had time, it would be okay. So the idea 
would be, as the stock was dropping, there would have been 
clearly an incentive from the corporate executives or Board 
members to want to get the stock price back up so the banks 
would not call in their loans.
    So, as we're trying to get into this Florida situation, 
what I'd like to know from any of you, do you have any 
knowledge of any communication from the company, from its 
executives, from Board members, to any institutional investors, 
including Florida and the Florida Retirement System that said, 
in effect, ``Help us. The company is going to be okay. Buy the 
stock now so it will get the price back up.''
    Let's start with you, Ms. Watkins. Do you have any 
information?
    Ms. Watkins. My concern was with how we fell so fast into 
bankruptcy has less to do with the stock price and more to do 
with our trade counterparty payables. We had approximately $16 
billion of receivables on our balance sheet as well as $15 
billion of payables. The problem that you have with uncertainty 
about our future financial health was that, on the liability 
side, those customers closed out their contracts--a number of 
them did--and demanded payment, and several billion dollars 
went out of the company in a very short period of time.
    The only way to combat that is to quantify to the investing 
public what our problem is. What I wanted to see happen is that 
we would restate, come clean, explain our problems, accrue a 
large liability on the balance sheet for shareholder 
litigation--quantify the size of our problem for the market so 
that it would become comfortable that we had a life ahead of us 
and that they would, you know, cease to close out--or seek to 
close out the commodity trade payables with us.
    Senator Nelson. Thank you for your opinion. Did you have 
any information of any knowledge, any information, any 
communication being shared from Enron, its officers, its 
principals, its Board members to institutional investors to 
buy?
    Ms. Watkins. No. No, I don't think so.
    Senator Nelson. Mr. Skilling.
    Mr. Skilling. Senator, I left the company on August 14, so 
I wouldn't know what happened.
    Senator Nelson. Yes, I understand.
    Mr. McMahon.
    Mr. McMahon. I have no knowledge of that kind of 
communication either.
    Senator Nelson. Did you know a fellow named Frank Savage, 
Mr. Skilling?
    Mr. Skilling. Yes, sir. Mr. Savage is a Board member. I 
don't know if he's--I guess he's not a Board member now, but he 
was a Board member of Enron Corporation.
    Senator Nelson. Were you aware that, back in August--up 
until about August, that he was a principal and officer in one 
of these outside money-management firms?
    Mr. Skilling. I can't tell you which one, but, yes, I 
believe he was in the money-management business.
    Senator Nelson. Tell me about some of these partnerships. 
At one point, you all were not only going to finance energy, 
but you were looking into other commodities, including water. 
What was that all about?
    Mr. Skilling. Well, there were basically two businesses in 
Enron--three businesses in Enron. There were, kind of, the 
regulated businesses. There was our international development 
business. And there was our merchant business, our wholesale 
business. The rates of return on assets in the international 
business were not compensatory, and so we were trying to reduce 
the size of that business.
    There was a team of people on the international side that 
believed that there was an opportunity to do much the same 
thing, but more profitably, in the water business. And so it 
was discussed with the Board that this would be an alternative, 
and we went into that--we decided to try that business.
    Senator Nelson. And was there a fellow named Kinder that 
headed up that subsidiary for Enron?
    Mr. Skilling. No. Rich Kinder was President before I was 
President of Enron Corporation. The person that headed up the 
water business was Rebecca Mark.
    Senator Nelson. And what was that water business, as it 
originally related to Florida and the Everglades restoration?
    Mr. Skilling. Oh, I don't know, sir. I was--actually, I was 
on the Board of the Zurichs, and I can vaguely recollect that 
they would share with us a number of different projects that 
they were interested in and that they were pursuing, and I--you 
know, I vaguely remember something in Florida, but I don't know 
the specifics.
    Senator Nelson. So going back to my original question, I'll 
conclude with this, Mr. Chairman. With regard to any 
communication, whether you were at the company or not, your 
testimony is that you know of no communication from the 
company, under the conditions in which the stock was dropping 
in October, to purchase the stock by outside investors--in 
particular, institutional investors. Is that the testimony of 
each of the three of you?
    Mr. Skilling. Yes.
    Ms. Watkins. Yes.
    Mr. McMahon. Yes.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman. I apologize for 
being so late. I was the author of a bill called Transitions to 
Teachers and had an event with the First Lady this morning to 
announce a program in the District of Columbia. So I'm very 
sorry.
    But I am advised by my staff that several of the questions 
that I had have been asked already, so I'm going to try not to 
duplicate questions. I would like to focus somewhat on where we 
are now and on the future, Mr. McMahon, since you are in charge 
now.
    I have met with the Enron employees, and I've heard their 
concerns. Certainly I've listened to much of the testimony from 
other hearings, but this is my line of questioning today. And 
it is, what is the company doing now with regard to the 
employees who were not able to get even their severance pay?
    Obviously, you have given retention bonuses to people to 
keep them, and that's not an illegitimate thing to do to try to 
keep the company going. But thousands of people were not even 
able to get the severance pay to which they were entitled under 
the company rules. They have no standing in court, I'm told, 
because they are the very last in line as an unsecured 
creditor.
    Is the company going to try to give the severance pay that 
is owed to the former employees? Is that even on your radar 
screen?
    Mr. McMahon. Well, there's no question. I think what's 
happened to, obviously, the former employees is a tragedy, and 
we are very concerned about that. The ability for the company 
to pay any amounts under severance is a matter of law. It's in 
the bankruptcy court, so it's not necessarily within our 
control.
    We are looking at, from a legal perspective, what options 
we have and what ability we have to make some type of severance 
payments to the employees. That work is ongoing currently as we 
speak. That would ultimately have to be discussed with the 
Creditors Committee, as well, and then that would have to be 
approved by the court.
    So it's a process that's not completely in the company's 
control. And as I understand it, as we've advised from the 
legal counsel, the severance plan that Enron had terminated 
upon the bankruptcy. And that's what has prevented us from 
making payments to the employees, as I understand it. And so we 
are exploring all the options we have, now that we're under the 
bankruptcy rules, to try and do something for these employees.
    Now, above and beyond severance, we are holding some 
programs in Houston for job fairs and what-not, so we're doing 
everything we can as an institution, short of making these 
payments, which, at this point, we're prohibited from making.
    Senator Hutchison. But you are looking at a possibility of 
trying to keep that commitment, if you can get the other 
creditors to work with you in the bankruptcy court?
    Mr. McMahon. Yeah----
    Senator Hutchison [continuing]. To those who were 
terminated by the bankruptcy?
    Mr. McMahon. Correct. The way I would characterize it is, 
we're exploring all the options that we have as a company, 
under the bankruptcy laws, to be able to make severance 
payments. And once we finish that legal work, the analysis, 
we'll bring it to the Creditors Committee with a 
recommendation. But unfortunately----
    Senator Hutchison. Are you going to make an effort to try 
to put them in a first-in-line situation rather than a last-in-
line situation?
    Mr. McMahon. Well, again, unfortunately that's a bankruptcy 
law question which I can't control. What we are trying to do is 
to----
    Senator Hutchison. But are you going to try to do that? Is 
that what you want to do if it can be done legally?
    Mr. McMahon. Absolutely. We want to do everything we can do 
for the former employees who were severed as part of this 
process. And unfortunately, we're in the box of working through 
the bankruptcy process, and we're going to have to do that.
    Senator Hutchison. Well, let me ask you this. How many 
employees were let go before the filing of bankruptcy?
    Mr. McMahon. I'm not sure if I understand your question. 
The vast majority of the employees were let go a day or two 
after the bankruptcy.
    Senator Hutchison. Is there anyone else on the panel who 
could tell me if there were a number of employees who were 
severed before the bankruptcy, that might have a better case 
for the company to meet their commitment? Does anyone else on 
the panel know?
    Ms. Watkins. I'm not really aware, but I think, as Mr. 
McMahon points out, that there were--and Mr. Skilling, as 
well--there was some downsizing going on in the broadband 
group. Those people, if they still have outstanding severance 
payments, I guess, would have a claim in the bankruptcy estate 
for those payments.
    Senator Hutchison. But the company would have the ability 
to meet its commitment if they were severed before the 
bankruptcy? Or did bankruptcy eliminate all of your options?
    Mr. McMahon. Unfortunately for those employees, the 
obligation--they were--anyone severed prior to the bankruptcy--
again, as I understand it; I'm not an attorney--but they have--
since the severance plan was active when they were terminated, 
they are due their severance. The bankruptcy, though, puts them 
as a general unsecured creditor, and all those obligations 
right now are stayed as part of the bankruptcy, as any other 
obligation for Enron is.
    Senator Hutchison. Let me ask you, I'm not sure if anyone 
asked this before, but I have introduced a pension reform bill 
that includes more transparency and more information to 
employees, but does not discourage companies from offering 
401(k)s, because I think 401(k)s are a great vehicle for 
retirement security for millions of Americans. But my bill also 
addresses the issue of auditing and consulting.
    And I was general counsel of a bank holding company, and it 
was just a policy that we didn't have the auditors also giving 
us consulting advice. And I just wanted to ask you--also you, 
Mr. Skilling--if you think that we ought to pass a law that 
would prohibit that mix as a conflict or potential conflict.
    Mr. McMahon. I think the relationship between audit 
clients, from an independent audit perspective, as well as 
separate accounting consultation, is something that I think 
that the Senate should look at, frankly. It would appear to be 
a conflict from the outset. And how that conflict is managed 
between the firms is probably something that should be 
reviewed.
    At Enron, going forward, we are looking to institute some 
best practices in a variety of places. And this is one where 
we're looking. Obviously, we're in need of new auditors. We've 
replaced our accounting personnel internally, as well. And we 
want to go forward with something that's best practices. So 
we're, as an institution, looking forward to that, as well.
    Senator Hutchison. Are you, in your company, doing what 
several other companies are doing voluntarily, are you going to 
make a policy not to have the same firm do your auditing 
function and your consulting?
    Mr. McMahon. We're unfortunately not that far in the 
thought process, because we don't have auditors yet. And 
actually, the person who we just put in charge of our 
accounting has only been doing it for a week or so. But, the 
thought process we want to go through is, what type of areas, 
going forward as a new company, as a reorganized company, can 
we have best practices?
    Senator Hutchison. Do you have an opinion, as the CEO of 
the company? Are you going to make a recommendation to the 
Board on that subject?
    Mr. McMahon. My personal opinion, at this point in time--
and this is subject to, I think, a lot of internal discussion 
as well as external. Ms. Watkins testified earlier that auditor 
rotations is something that she recommends, and I tend to fall 
in that camp as well. Every X amount of years it probably makes 
sense to bring in a new set of eyes and look through the books.
    One area that I think Enron historically could have done 
better is--as I understand, we outsource most of the internal 
audit function to our external auditors. And I think on a go-
forward basis, that's not something I would recommend either. 
As far as consulting, if you change over your auditors every 
couple of years, maybe that's not as big of an issue. So that's 
the kind of discussion we're going to have internally.
    Senator Hutchison. I know my time is up. Could I just ask 
Mr. Skilling and Ms. Watkins or anyone else to address that 
last question?
    Ms. Watkins. What I've said previously is that I would like 
to see public companies rotate their accounting firms for 
periods as short as once every three years. I think the largest 
deterrent to problems such as what Enron has faced is another 
pair of eyes--a second, you know, look. You are likely to be 
more conservative and less aggressive in the accounting 
treatments you adopt when you know another accounting firm is 
going to be taking over your client and your work in less than 
three years.
    Senator Hutchison. You think rotating alleviates the need 
for the division between the firms doing the consulting and the 
auditing?
    Ms. Watkins. Yes, I do.
    Senator Hutchison. Mr. Skilling.
    Mr. Skilling. I agree with Ms. Watkins. I think there are a 
lot of efficiencies--or at least I think the accounting firms--
Jeff and Sherron both work for accounting firms, so I'm not as 
familiar with them, but the argument they've made is that if 
you can do consulting and the auditing, it's much more 
efficient, because the people know what's going on. And so I 
don't know that that's a huge problem, but I would agree with 
Ms. Watkins that now, in retrospect, I think it would be a good 
idea.
    I think three years may be too short, because in something 
like Enron, it was a huge company, and you'd have to have 
hundreds of people going out and hundreds of people coming, and 
I don't know quite how you'd manage that every three years. But 
some sort of rotation is probably a good idea.
    Senator Hutchison. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Snowe.
    Senator Snowe. Thank you, Mr. Chairman. I'm sorry that I 
was unable to be here for the entire questioning, but I've got 
dual responsibilities.
    Mr. Skilling, I'm interested to know what was the role of 
CEO at Enron, I heard you say that you're not an accountant, 
but that you relied on accountants for their advice and pretty 
much presumed that they were correct. There was no skepticism 
and there was no questioning. You were at Board meetings 
obviously, as the CEO, you were present at the Board meetings 
that had been referred to--for example, the one in February 
2001. Is that correct?
    Mr. Skilling. February 2001?
    Senator Snowe. Yes.
    Mr. Hiler. Senator, can I just--for purposes of 
clarification, please, I think you indicated something about 
that he may have indicated that accounting practices were not 
questioned, or there was no skepticism, or as to whatever the 
auditor said, and I don't believe he testified to that. I just 
wanted to make the record clear, because there are a lot of 
questions, as there were in the House, where there are double 
premises to the questions or characterizations with which we 
don't agree, and then my client is asked to answer a question 
yes or no, and it unfortunately could appear that he's agreeing 
with the characterization.
    Senator Snowe. Well, we're just asking questions about 
these particular partnerships and accounting practices, whether 
it's LJM or Chewco or Raptors or whatever. So would it be 
correct to say that there was any questions about them, or not?
    Mr. Skilling. It would be my assumption--we had an 
accounting organization of hundreds of people. I would assume 
there are all sorts of questions that were asked of the 
auditors about all accounting issues inside of the company.
    Senator Snowe. I guess what I'm trying to understand--
because I'm having difficulty understanding how this all 
worked, is what was the role of your position in the company 
[inaudible]. Generally, I would presume that a Board of 
Directors meeting is a pretty important event for a CEO. Is 
that not correct? I mean, you had four or five meetings a year?
    Mr. Skilling. A Board of Directors meeting, yes--I mean----
    Senator Snowe. Right. So some of these issues obviously 
were raised. I mean, some of--and you were in and out of some 
of these meetings. Is that correct?
    Mr. Skilling. Which issues?
    Senator Snowe. Concerning some of the LJM transactions and 
Raptors.
    Mr. Skilling. Absolutely. As I testified, I think we talked 
about the LJM structures in multiple Board meetings and 
conflicts and the process we put in place. The Board of 
Directors actually approved the structuring of the Raptor 
transactions. So, yes, there was a tremendous amount of time 
spent on those.
    Senator Snowe. Okay. So you were familiar with the agenda 
and what was going to be discussed at these Board of Directors 
meetings. Is that correct?
    Mr. Skilling. I think technically the Chairman of the Board 
sets the agenda for the Board meetings. But----
    Senator Snowe. Yes, but doesn't generally the CEO work with 
the Chairman of the Board prior to that meeting?
    Mr. Skilling. Well, typically--you know, we had committee 
meetings. And then you'd have the Board meeting. I believe the 
agenda for the Board meeting was determined by the Chairman of 
the company. And I believe the agenda of the subcommittees was 
set by--I don't know this as fact, but I believe it was set by 
the--whoever the Chairman of that subcommittee was. So if you 
had the Compensation Committee, the head of the Compensation 
Committee would set the agenda for the meeting.
    Senator Snowe. But would you go over the agenda? I'm just--
you know, for example, in some of these meetings--and I know it 
might have been prior to the--I might be wrong in this, but 
when Mr.--when the power went out, and you were in and out of 
the room, and Mr. Fastow was making his presentation--I don't 
know if it was LJM2 partnership and you were in and out of----
    Mr. Skilling. It was actually a presentation proposing an 
LJM3 partnership, which, in fact, never occurred.
    Senator Snowe. Okay. But generally, the CEO is very well 
aware of what's going to be discussed.
    Mr. Skilling. I was not the Chief Executive Officer at that 
time for that meeting. I became Chief Executive----
    Senator Snowe. Chief Operating Officer. You're right.
    Mr. Hiler. For the record, if I might, and so we're all 
clear, that was also a Finance Committee meeting, I believe 
that October 2000 meeting that he testified about the lights 
being in and out. He was not a member of the Finance Committee, 
although he may have been there. So in terms of distinguishing 
that from a Board meeting, it may be important.
    Senator Snowe. Okay. But, I guess the point is here that 
there's a question of whether or not--to what extent you might 
have been aware of the nature of these transactions that might 
imperil the company. But you're generally saying you had no 
awareness. Is that correct?
    Mr. Skilling. No, I didn't say that. I said that, at 
multiple Board meetings, we spent a lot of time--it's in the 
minutes. You'll see that there's an enormous amount of time 
that was spent discussing--for example, in LJM1, the actual 
specifics of the transaction that was approved by the Board. 
When LJM2 was approved, there was a long discussion of the 
potential conflicts of interest that would be created and what 
sort of process we needed to put in place to eliminate those 
conflicts of interest.
    In the Raptor transactions, there's--I think it's in the 
Board minutes, you'll see that there's actually a Board--what 
do you call it? It's a resolution, thank you--a full resolution 
that actually put in place the mechanics or the structure in 
place----
    Senator Snowe. Right.
    Mr. Skilling [continuing]. Of Raptor. So, yes, the Board 
spent a significant amount of time----
    Senator Snowe. And you're saying in the Raptors that you 
were obviously directly involved in that, were you not?
    Mr. Skilling. I was--yeah, I was in the Board meeting, yes.
    Senator Snowe. Were you directly involved? I mean, 
obviously, you were at the meeting.
    Mr. Skilling. I was at the Board meeting, I would have been 
involved.
    Senator Snowe. Okay, because the Powers Report said the 
Raptors were created in response to Skilling's desire to divide 
the mechanism that would allow Enron to hedge a portion of its 
merchant investment portfolio.
    Mr. Skilling. Yes.
    Senator Snowe. And you're saying that your signature was 
not required for----
    Mr. Skilling. Well, what the--I think what the Powers 
Report is referring to, which is absolutely true, is we had a 
large portion of our business was mark-to-market or fair-value 
accounting. For any of the mark-to-market or fair-value 
accounting areas of the company, I insisted that we hedge those 
positions. And we used to have discussions about the mechanics 
of hedging our natural gas portfolios, our electricity 
portfolios--we got in pulp and paper, how we hedged that--our 
telecommunications portfolios.
    And this related to the equity investments we were making, 
and I was very interested in getting a hedge on those, because 
I believed that--I mean, we'd made some tremendous investments. 
We'd invested--I don't even know what the number is, $40 or $50 
million--and they were worth half-a-billion dollars. And so, I 
was very adamant that we needed to come up with some mechanism 
to hedge those.
    And we looked at a couple of different alternatives for 
hedging those and decided, upon discussions with our technical 
people and our accountants and lawyers, that the Raptors 
structure was the best one.
    Senator Snowe. But I guess the fact is that you had no 
question--I mean, you might have had some questions on the 
mechanics and so on, but not in terms of what these 
partnerships might represent--and the fact that you deferred to 
accountants, with respect to their recommendation. Is that 
correct?
    Mr. Skilling. We looked, as the Board and management always 
looks to their accountants to tell us what the accounting 
structure is, as we look to our lawyers to approve whether the 
contracts are correctly drafted and enforced--yes.
    Senator Snowe. Well, there was an article that was written 
in Fortune magazine back in December by Bethany McClain, and 
she talks about a meeting--I gather it was an analyst 
conversation--in which she raised, I think--she said, ``fairly 
standard queries in an effort to understand fairly 
incomprehensible financial statements. The response from Enron 
was anything but standard. Skilling quickly became frustrated 
and said the line of inquiry was unethical and hung up the 
phone.''
    I guess the point is, here, you relied on accountants for 
their best analysis of these partnerships. Why would you 
question an analyst or a reporter with respect to your 
financial transactions that they may be relying on accountants 
or other experts to try to understand Enron's financial 
statement?
    Mr. Skilling. Is what you're asking is why did I call 
Bethany McClain unethical? Is that the question?
    Senator Snowe. Yes.
    Mr. Skilling. Um.
    Senator Snowe. Obviously, she had some legitimate 
inquiries. The line of questioning was unethical.
    Mr. Skilling. There's--and I don't know if we want to----
    Senator Snowe. And she made the----
    Mr. Skilling. I don't know if we want to waste the time of 
this Committee. It's----
    Senator Snowe. Well----
    Mr. Skilling. I am under oath in the House describing that 
telephone conversation. There have been a number of things that 
have happened subsequent to that, so I guess I have some 
additional information. But Ms. McClain had been working on the 
article--I said, in my testimony at the House, for a week. I 
think she came out in Fortune magazine the next week and said, 
no, that she'd actually been working on it for a month. So I'm 
sorry, it was a month that she was working on it, not a week.
    She called up and said that she wanted my comments as she 
was finishing that article and needed 15 minutes of my time. 
And as I recall, that meeting was set up--it was on a--I think 
it was a Monday or a Tuesday, and we carved 15 minutes out of 
my calendar, which sometimes is a very tough thing to do. So we 
carved 15 minutes out of my calendar.
    Ms. McClain called me and started asking some very 
technical questions about our accounting. I said, ``Look, you 
know, I've got 6 minutes left now before I have to leave for a 
meeting, and I'm not an accountant. I think we need to get our 
accounting people and our risk-management people and our 
finance people together with you to describe the specifics of 
what you're asking.'' And she said, ``Well, we're going to run 
the story anyway.'' And I said, ``If you do that, I think 
that's unethical.''
    And she said that she would give us one more day--I think 
either she did or our PR people followed up afterwards. And we 
sent our Chief Accounting Officer, our Chief Financial Officer, 
and our head of Government Relations to New York to meet with 
her personally to answer. They spent, I think, a full day, or 
four or five hours that day, discussing the specific questions 
she had.
    I believe that that was ethical at that point, to listen. 
You know, not--I mean, you all, I'm sure, in your business have 
been ambushed by reporters before, and this struck me as a 
potential ambush. I asked them to please give us time and let 
us get the appropriate people to answer the question to New 
York to answer questions.
    Senator Snowe. Well, I guess it gets back to the whole 
issue of why none of these events raised a red flag. I think 
it's just very difficult to comprehend, to be honest with you. 
And, you know, these rewriting of losses--I mean, just shortly 
after your departure--I mean, significant write-downs. And not 
to be aware at all, in any way, at any level about the impact 
of these partnerships on the financial picture of this company 
is just really hard to understand. You may well say that you 
didn't understand, you didn't know, you didn't realize, or 
whatever, but it's such a massive scale, and I think that's the 
difficulty understanding--comprehending your lack of awareness.
    Mr. Skilling. Senator, I think you can go back again and 
look at the dates. I left Enron Corporation on August 14. Ms. 
Watkins had not yet made public her concerns. You can look at 
the Vinson & Elkins interview of the head of Arthur Andersen's 
account of Enron. And I think that was in early September--and 
he said that it was entirely appropriate and done properly. So 
the fact that I had no reason to believe that there was a 
problem there is not particularly surprising, I don't think.
    Senator Snowe. Thank you.
    Senator Dorgan. Mr. Skilling, did you have any equity 
shares or any investment in any of the partnerships that have 
been discussed?
    Mr. Skilling. No, I did not.
    Senator Dorgan. None.
    Mr. Hiler. Excuse me. I'm sorry. Could we----
    Senator Dorgan. Oh, yeah. Yeah, let's all be specific.
    Mr. Hiler. Which ones? LJM? Raptor?
    Senator Dorgan. Did you have any investment in any of the 
partnerships, the SPEs, that were affiliated with the company?
    Mr. Skilling. No, I did not.
    Senator Dorgan. Alright. Mr. Skilling, I've sat here now 
for a couple of hours, and I'll tell you, it is unbelievable to 
me what we've heard. Let me describe a bit of it to you.
    You say: ``I left Enron on August 14, 2001, for personal 
reasons.'' You're quoted in two different places as saying 
that. Well, Mr. Lay says that he pressured you about that, and 
you said that you were under a lot of pressure. Enron's stock 
price was dropping, and you could not do anything about it. And 
you said to The Wall Street Journal, ``I don't think I would 
have felt the pressure to leave if the stock price had stayed 
up.'' Does that sound like somebody who left for personal 
reasons?
    Mr. Skilling. Senator, I think I'd like to see Mr. Lay's 
testimony, because I think it's very clear in the discussion 
that Mr. Lay had with the Special Committee that I had confided 
in him a number of personal reasons that were important for me, 
and that's why I was leaving, and he accepted those reasons.
    Senator Dorgan. Did The Wall Street Journal misquote you, 
then?
    Mr. Skilling. I talked to The Wall Street Journal probably 
two--I think it was two days after I had left, and we had a 
discussion that lasted probably a half an hour, probably----
    Senator Dorgan. Is it a misquote?
    Mr. Skilling. I'm sorry?
    Senator Dorgan. Is it a misquote?
    Mr. Skilling. I think it was a mis-context. A personal 
decision takes into account many, many factors. I absolutely 
can admit to you that I was frustrated with the stock price. I 
thought the company was in good shape and could not--it was 
bothering me that, in spite of the condition I thought the 
company was in, the stock price was going down. I found that--
--
    Senator Dorgan. You've told us that. But let me just say--
you said, ``I did not believe the company was in financial 
peril.'' Let me read to you from the Powers Report, just a bit. 
Here's what the Board of Directors, which is the best face 
you're going to put on this--the Board of Directors of the 
company commissioned this study. This is a best-face study. 
Here's what they say: ``The partnerships [inaudible] LJM1 and 2 
were used by management to enter into transactions it could not 
or would not do with unrelated commercial entities. They were 
designed to accomplish favorable financial results, not to 
achieve bonafide economic objectives or to transfer risk. Some 
transactions were designed so that had they followed applicable 
accounting rules, Enron could have kept assets and liabilities, 
especially debt, off its balance sheet. But the transactions 
did not follow the rules. They allowed Enron to conceal from 
the market very large losses resulting from Enron's merchant 
investments by creating an appearance that those investments 
were hedged--that is that a third party was obligated to pay 
Enron the amount of the losses--when, in fact, the third party 
was simply an entity in which only Enron had a substantial 
economic stake. We believe these transactions resulted in Enron 
reporting earnings from the third quarter of 2000 through the 
third quarter of 2001 that were almost $1 billion higher than 
should have been reported.''
    Mr. Skilling, what is unbelievable to me is that a CEO 
says, ``When I left, things were just fine,'' and, ``I have no 
knowledge of any of this.'' Is it the case that you have no 
knowledge that any of this was going on, that Mr. Fastow was a 
renegade running off by himself? You didn't know that Chewco 
didn't meet the 3-percent test?
    Mr. Skilling. [Inaudible].
    Senator Dorgan. Do you tell us that you were in charge of 
the company but had no knowledge of this?
    Mr. Skilling. Okay, let's----
    Senator Dorgan. Is that what we're to believe?
    Mr. Skilling [continuing]. Let's go through the specifics. 
Start with Chewco. Did I know that Chewco was undercapitalized? 
No, sir, I did not know Chewco was undercapitalized.
    Senator Dorgan. So did someone lie to you about that? If 
so, who?
    Mr. Skilling. The accountants believed that it was properly 
capitalized. And, as I understand it, Enron's--and this--I've 
just----
    Senator Dorgan. The accountants have said that they were 
lied to.
    Mr. Skilling. You'll have to ask the accountants. I can't 
speak for the accountants. I did not know.
    Senator Dorgan. But you can speak for the company.
    Mr. Skilling. I can speak for myself. If you asked me did I 
know----
    Senator Dorgan. You were the CEO of the company. You can 
speak for the company at that point.
    Mr. Skilling. I can speak for myself. I can speak as Chief 
Operating Officer of the company. I did not know--personally 
did not know that Chewco was undercapitalized.
    Senator Dorgan. Now that you know, was your exit statement 
an appropriate one?
    Mr. Skilling. I'm sorry?
    Senator Dorgan. Your exit statement, that things were just 
fine when you left Enron--was that appropriate, now that you 
know what you know?
    Mr. Skilling. Well, in fact, dealing specifically with 
Chewco, what ended up happening is they reconsolidated Chewco. 
That would have no--essentially all you're doing is bringing--
it's an accounting adjustment. It wouldn't have an impact on 
cash flow or earnings.
    Senator Dorgan. I'm not talking just about Chewco. I'm 
talking about the Board of Directors report. The Board of 
Directors report said that you were heading a company that was 
reporting earnings that it didn't earn and keeping debt off the 
books that, in fact, related to risk for the company.
    Mr. Skilling. Mr. Chairman, all I can tell you is that the 
accountants signed off that they were accurate records. I 
believed they were the accurate representation of the 
financial----
    Senator Dorgan. Ms. Watkins, what's wrong with that 
statement: ``Gee, the accountants told me it was fine, so it 
was fine''?
    Ms. Watkins. The concern I have is that I do agree with Mr. 
Skilling that he was quite concerned about the risk inherent in 
our merchant equity portfolio. If we made an investment, that 
investment went up and we wrote that up. He was very concerned 
that we might also have to write it down.
    I worked with him on a committee in 1996 where we tried to 
devise equity hedging methods for our investments. We tried 
things like puts on the S&P, shorting a basket of expiration 
and production companies. Nothing quite got us dollar-for-
dollar coverage.
    After I left that position at the end of 1996, my 
understanding is that several other people, at Mr. Skilling's 
behest, tried to find a way of hedging our equity investments. 
When you attempt to go to outside third parties in 1996 and 
1997 and 1998, and you can't find a way of doing it, and then 
miraculously you've got a dollar-for-dollar hedge from Mr. 
Fastow's related-party partnership that would have been a very, 
very high risk venture. I find it hard to believe that Mr. 
Skilling was not aware that something was amiss, that this 
could not be legitimate.
    Senator Dorgan. Mr. Skilling, let me ask if you are aware 
of a May 6, 2001, piece--it's called Off Wall Street--in 
which----
    Mr. Skilling. I'm sorry, I can't see it, Senator.
    Senator Dorgan. Alright, I can send it to you. But Off Wall 
Street recommended a strong sell position for Enron, a target 
of $30 per share. Were you familiar with that in May of 2001?
    Mr. Skilling. Who was it?
    Senator Dorgan. It's called Off Wall Street Consulting 
Group.
    Mr. Skilling. I don't know them. May I ask a favor?
    Senator Dorgan. Yes.
    Mr. Skilling. May I address the comments Ms. Watkins just 
made?
    Senator Dorgan. Alright.
    Mr. Skilling. Ms. Watkins is correct, that we would not 
have been able to go outside and directly hedge the high-
technology investments. It had nothing to do with the fact that 
that wasn't available. It had everything to do with the fact 
that we were under hold agreements with those stocks because we 
had made venture capital investments.
    So we had two alternatives at that point. One was to do 
what we call a low-correlation hedge, which is what Ms. Watkins 
is talking about--that we used to execute in the oil and gas 
business. That means you can't do a one-for-one tie. And so, 
what you do is, if you own a bunch of high-technology fiber 
optic companies, you short a basket of fiber optic companies. 
And it's not a one-to-one correlation. In retrospect, it would 
have been a fantastic correlation. It would have completely 
hedged the position.
    At that time, we also had people working on other 
alternatives. And the other alternative was the Raptor 
structure. A Raptor structure is a different kind of hedge. In 
most hedges, if you go to Goldman Sachs and you buy a put on a 
company, they effectively go into the marketplace and offset 
that with a direct transaction that is an offset transaction to 
that.
    There's another way that you could write a derivative, and 
that is if you put capital into a business, and they're 
basically writing--in the industry, it's called a ``naked 
hedge.'' A naked hedge.
    So we--basically, we could either do a low-correlation 
hedge, which would have worked out fine, or we could have done 
this thing, which was called a ``naked hedge.'' And you take 
credit risk on a naked hedge. And we just looked at the two of 
those and decided--our technical people thought that that was 
the better hedge to enter into.
    So, did I believe this was an appropriate hedge? Yes, I 
absolutely did. And if the accountants had ever, at any time, 
suggested that this was inappropriate for any reason, we would 
have just gone to a low-correlation hedge, as we did in the oil 
and gas business. That was the standard hedging structure that 
we used at that time.
    Senator Dorgan. Mr. Skilling, you seem to know more about 
accounting and finance than you let on when you describe these 
hedge transactions.
    Mr. Skilling. I know about the derivatives. I know about 
the finance business, because I spent a lot of time in the 
finance business. I do not--I'd like to say one other thing. We 
were asking about what needs to be done. I also agree with Ms. 
Watkins in her testimony in front of the House that the 
accounting profession has gone through a morphing. It's gone 
from a morphing of logic to something that looks more like the 
tax code. And it's gotten to the point where I think someone in 
anyone's position has to be a specialist to understand the 
mechanics of what's going on, because there are so many rules 
that have been promulgated. And that's something you might want 
to think about. We ought to go back to the European structure, 
where it's more what makes sense than what the specific rules 
are that govern transactions.
    Senator Dorgan. But, Mr. Skilling, with due respect, I'm 
not going to ask you what needs to be done. I'm much more 
interested in asking you what was done and was not done inside 
that corporation. I'll get advice on what we ought to do in the 
future from others.
    But let me ask a question about compensation that relates 
to your resignation and other things that were going on inside 
the company. I described the Powers Report, which I think is 
the best face you can put on what was going on in the company, 
and it described something rotten, in my judgment. Now, during 
that period of time, February 1999 to June 2001, did you 
convert stock worth $66 million at that point? Did you sell $66 
million in stock sales?
    Mr. Skilling. What was the timeframe?
    Senator Dorgan. February 1999 to June 2001.
    Mr. Skilling. 2001. I don't know, but--I don't have the 
records with me.
    Senator Dorgan. Would that be surprising to you learn that 
you did that?
    Mr. Skilling. No, that would--no, that would not be 
surprising.
    Senator Dorgan. And do you consider $66 million a great 
deal of money?
    Mr. Skilling. Yes, it is, sir.
    Senator Dorgan. Do you still have most of that?
    Mr. Skilling. Yes, I do.
    Senator Dorgan. Uh-huh. And how do you feel about that and 
the employees, one of which wrote me recently--they had 
$330,000 in his 401(k) account--his entire life savings--worked 
many years for your company, lives in the State of North 
Dakota--that $330,000 is now worth $1,700. You still have most 
of your $66 million. That family has lost their life savings. 
How do we reconcile this? How is it that the people at the top 
got wealthy, and the people at the bottom got broke?
    Mr. Skilling. Well, if--I guess a couple of answers to it. 
I had a--I had a program for many, many years of selling a 
modest portion of my stock. And over many years that's added up 
to that number that you've talked about, Senator.
    I think most employees also sold stock options and stock as 
those became due, as they--you know, as they matured. So I 
would guess that most people did, in fact, over the years, if 
they were diversifying and prudently managing their investments 
probably did sell some of their Enron stock. I feel terrible 
that people that held the stock held the stock at the beginning 
of this year.
    I had stock and options worth $170 million, which is a 
whole lot of money. And I sold $15 million under an SEC 10(b)5 
plan between January and when I left the company on August 14--
$15 million out of $171 million. I think if I thought that 
there was a concern, I would imagine any economic advisor would 
say you probably should have sold more, diversified more.
    But I think it's very tough. I mean, I don't know what to 
say to the employees.
    Senator Dorgan. Have you donated any of that money to the 
employees' fund?
    Mr. Skilling. I can't do anything at this point. I think at 
this point I have 36 separate plaintiffs' lawsuits against me. 
It's my expectation that I will probably spend the next five to 
ten years of my life battling those lawsuits. I don't know if 
I'll have anything at the end of that, and I can't transfer 
anything now, because at this point that would be considered--
it's a legal issue that I'm going to have to deal with, but 
it's going to be a long, drawn-out process.
    Senator Dorgan. One final question. I assume you probably 
regret the joke that you told in Las Vegas about the Titanic 
and the State of California. You were quoted as saying: ``You 
know the difference between the Titanic and the State of 
California? When the Titanic went down, the lights were still 
on,'' which I assume you regret saying now.
    But it occurs to me that, at least from those of us who are 
examining what happened at Enron--if one were to make a similar 
comparison, in the Titanic, the captain went down with the 
ship. In Enron, it looks to me like the captain first gave 
himself and some friends a bonus, then lowered himself and the 
top folks down in the lifeboat, and then hollered up and said, 
``By the way, everything is going to be just fine.''
    Do you now regret what you said about the Titanic and 
California, given what's happened with Enron itself?
    Mr. Skilling. Okay, two issues. One on regretting the joke, 
and I will address that.
    The second one is--I think is a pretty bad analogy, 
Senator, because I wasn't on the Titanic. I got off in Ireland 
because I was on vacation in Ireland, and the Titanic went on 
to run into some troubles later on. I think that's a better 
analogy.
    As far as the joke related to the Titanic, all I can say is 
that that was at a time of very, very frayed tempers as a 
result of the situation that was going on in the State of 
California. One week prior to that meeting in Las Vegas where I 
made that statement, the highest law official in the State of 
California, Attorney General Bill Lockyer said, and let me 
quote: ``I would love to personally escort Ken Lay to an 8-by-
10 cell that he could share with a tattooed dude who says, 
quote, `Hi, my name is Spike, honey.' ''
    That was May 22, 2001. That was the kind of stuff that was 
going on. Can you imagine what tempers were like? I know Mr. 
Lay. I've worked with Mr. Lay for a long time. Mr. Lay doesn't 
deserve a prison rape or the suggestion by the top law 
enforcement official in the State of California that he be 
raped in prison when he hadn't been charged with anything and 
hadn't been found guilty of any issue.
    Senator Dorgan. Let me inquire before we continue, is there 
anyone on the panel that would require a 5-minute break at this 
moment? If not, we will continue.
    Senator Fitzgerald.
    Mr. Hiler. Mr. Chairman----
    Senator Dorgan. Pardon me?
    Mr. Hiler. Can we take a 5-minute break?
    Senator Dorgan. Alright, we'll stand in recess for 5 
minutes.
    [Recess].
    Senator Dorgan. The Senator from Illinois.
    Senator Fitzgerald. Thank you, Mr. Chairman.
    Mr. Skilling, I was glad that you recognized the issue 
about stock options and the expense for them not having to 
appear on the income statement. I've actually introduced a bill 
that would require companies to expense those options.
    I wanted to ask you a little bit about the budgets within 
Enron. Were there earnings budgets within Enron? And, if so, 
who put together those budgets and who enforced those budgets 
or tried to make sure the various divisions met their budget 
numbers?
    Mr. Skilling. The process we had, I think, was probably----
    Senator Fitzgerald. Could you pull the microphone close? 
Thank you.
    Mr. Skilling. I think the process we had was fairly 
standard. We'd do an annual budget for the upcoming year where 
each of the business units would build up, you know, from what 
they thought they could accomplish in the upcoming year. And 
all those were consolidated, and that was approved by the Board 
of Directors as the budget for the upcoming year.
    And then every quarter, we had a forecast, and the forecast 
was a basically a rolling forecast so that as each day passed 
by and there was updates on how the markets were working and 
how we were doing in the markets, the forecasts would be 
adjusted so that, for example, if one of the business units was 
having trouble--like in Brazil, for example--we had a lot of 
troubles in Brazil--as their numbers went down, but somebody 
else was doing better because of whatever----
    Senator Fitzgerald. Were you ever involved in approving any 
budgets for any of the divisions of Enron?
    Mr. Skilling. The budgets went to the Board of Directors 
for approval.
    Senator Fitzgerald. Did they go to you first?
    Mr. Skilling. We prepared--we, meaning Ken and I, would sit 
through all the budget--each of the individual business units 
would come in, and they would----
    Senator Fitzgerald. Did you and Mr. Lay ever ask any of the 
divisions to budget to earn more monies than they had proposed?
    Mr. Skilling. Yes, sir.
    Senator Fitzgerald. You did. Often? Or was that a rare 
occasion that you would ask them?
    Mr. Skilling. Well, I think--you know, you use business 
judgment, and there were some times--there's a term in the 
budgeting process that's called ``sandbagging,'' you know, and 
if you had a reason to believe that a business had better 
prospects, you'd say, ``I think you guys are undershooting what 
you can actually accomplish.'' But it didn't mean that they 
were stuck with that. During the upcoming year, then, as each 
forecast was done, if it turned out that there was a problem in 
the business or there was an opportunity in a business, then 
those numbers would be adjusted.
    Senator Fitzgerald. So you and Mr. Lay would approve the 
budgets and then they would go to a Board for further approval?
    Mr. Skilling. Yes, sir.
    Senator Fitzgerald. And were there ever occasions when 
certain units weren't meeting their budgets?
    Mr. Skilling. Yes, sir.
    Senator Fitzgerald. And would you ever--what would you do 
if certain units weren't meeting their budgets? Would you just 
say, ``That's okay,'' or would you ever ask them to--you know, 
``Come on, meet your budget. You guys got to get the revenues 
up, the sales up. You've got to meet your budgets for the 
year.''
    Mr. Skilling. Well, what we would do is--I would typically 
meet, and Ken would meet, and others of top management would 
meet with each of the individual strategic business units. 
These are the product-market businesses in each of them. And if 
one product-market group was not performing, there would be a 
review, either by their boss or their boss--depending on how--
you know, what the situation was.
    Senator Fitzgerald. Did you and Mr. Lay ever pressure any 
unit to----
    Mr. Hiler. Senator, I'm sorry. With all due respect, I 
apologize for interrupting. Could he answer that? I think it's 
important to go through the whole----
    Senator Fitzgerald. Yeah, but he's answering more than I've 
asked, and I have other questions. I'd like if he could answer 
my question specifically and not waste the five minutes I have 
getting off onto irrelevancies.
    Mr. Skilling. I don't believe it's irrelevant, because the 
purpose of these meetings that I was just describing is--
there's one of two things going on. Either the business unit 
has a problem in the marketplace or a business unit has a 
problem in execution. And what we were trying to do is just 
separate those.
    If there's a problem in the marketplace, there's nothing 
you can do about it. And so you just--okay, fine. If it's an 
execution problem, it might mean that they needed more people 
or they needed more resources or you needed to change 
management.
    So what you would try to do is divine what's the basis of 
the problem if there was a problem and then come up with a 
remedial action to----
    Senator Fitzgerald. Did you ever pressure any units to 
increase their earnings to as to meet their budgets?
    Mr. Skilling. I would not use that term at all. I think 
what we did is--we went through--in the budgeting process, if a 
business unit had a problem and they were working hard on the 
problem, that was fine. And then what we did is--we'd look 
elsewhere in the organization for someone whose market was 
doing better than we expected, to offset that.
    Senator Fitzgerald. Would compensation be affected with any 
unit if they didn't meet their budget?
    Mr. Skilling. We had a compensation system that did not 
have a formulaic component. In other words, the specific 
profitability of a business unit did not dictate what your 
bonus was. In fact, if you look at the people who are in our 
number one category, our best people, my recollection is that 
probably half of them were in business units that were losing 
money. And we'd put good people in businesses that were just 
starting up or businesses that had problems. And if we didn't 
pay them because they were in one of those businesses, they'd 
leave, and we didn't--certainly didn't want our good people to 
leave.
    Senator Fitzgerald. Now, also--another area I want to ask 
you about, Mr. Skilling, is valuations. There's been a lot of 
testimony that the LJMs and other partnerships were set up in 
order to--both to hedge certain investments in Enron's 
portfolio, but also to buy certain assets from Enron. Enron 
would, from time to time, sell assets to these partnerships. 
Who would ensure that the valuation of the asset sold to the 
partnerships was appropriate and fair, from Enron's standpoint 
if you're selling an asset to a partnership?
    Mr. Skilling. The process that was established left it to 
Rick Causey, who was head of our accounting group, and Rick 
Buy, who is head of our Risk Assessment and Control Group, to 
determine the reasonableness of the transaction. The Risk 
Assessment and Control Group had several hundred--I don't--
maybe 300 analysts. They would do the analysis of the assets to 
determine----
    Senator Fitzgerald. Was there a maximum level of authority 
for those two?
    Mr. Skilling. I'm sorry?
    Senator Fitzgerald. For Mr. Causey and Mr. Buy. Did they 
have a--could they value any sale of any asset that Enron owned 
and no one else would have to review that?
    Mr. Skilling. Under the terms of the LJM process, they had 
to review and sign-off on those transactions. If the 
transaction involved a cash outlay of a certain amount or a 
sale of a certain amount, there was a hierarchy of sign-off 
within the company that would be necessary. So----
    Senator Fitzgerald. At what level did your sign-off kick 
in?
    Mr. Skilling. Oh, it changed over the time I was there. I'm 
guessing probably, at the end--I don't know the exact number--
say $50 million or $60 million.
    Senator Fitzgerald. So $60 million. Now, on the sale of the 
Enron----
    Mr. Skilling. I'm sorry. That would be for a purchase. For 
a sale, I don't--I think that the authority levels were higher, 
because, you know, we tended to prefer sales to purchases.
    Senator Fitzgerald. And you're not sure what that was.
    Mr. Skilling. I don't remember.
    Senator Fitzgerald. Now, do you recall the sale of Enron's 
business with Blockbuster Video--the Enron broadband video 
business that they sold to the partnership called Braveheart?
    Mr. Skilling. Was LJM involved in Braveheart?
    Senator Fitzgerald. Pardon?
    Mr. Skilling. Was LJM involved in Braveheart?
    Senator Fitzgerald. No. I didn't say that it was.
    Mr. Skilling. Oh, okay. I thought you said--I thought that 
it was a sale to a partnership.
    Senator Fitzgerald. No. No, I'm just wondering if you 
recall the sale of Enron's broadband video business with 
Blockbuster to the partnership known as Braveheart.
    Mr. Skilling. No, I didn't know that it was sold to a 
partnership named Braveheart, but I am familiar----
    Senator Fitzgerald. Who did you think it was sold to?
    Mr. Skilling. I just didn't recall. But I am aware of the 
sale of a portion of the content business.
    Senator Fitzgerald. Were you aware that it was sold to a 
partnership, Braveheart, that apparently had received an 
investment of $115 million from the Canadian Imperial Bank of 
Commerce?
    Mr. Skilling. No, sir. I would have been aware of the fact 
that a sale was made and--I don't--I wouldn't typically be 
involved in the details of negotiating the transaction----
    Senator Fitzgerald. Enron took $110 million in earnings 
over two quarters for that transaction. You wouldn't have been 
aware of a transaction that would have comprised $110 million 
worth of Enron earnings?
    Mr. Skilling. No, I didn't say that. I was aware of the 
sale of the content business--a portion of the content 
business. I thought what you were asking me was--did I know 
that it was being sold to a specific partnership and there's a 
specific financial institution involved. That would not be a 
level of detail that I would typically----
    Senator Fitzgerald. Alright, you were aware it was sold, 
but you didn't know it was sold to.
    Mr. Skilling. I wouldn't know the specifics of the 
transaction.
    Senator Fitzgerald. Okay, and have you heard of the 
Braveheart partnership?
    Mr. Skilling. Yes.
    Senator Fitzgerald. Are you----
    Mr. Skilling. I have not heard of the Braveheart 
partnership. I've heard of a term--I've read in the newspaper, 
like everyone else--where they call it Braveheart. I did not 
know it was its own stand-alone partnership.
    Senator Fitzgerald. Well, I guess my time is up. Thank you.
    Senator Dorgan. Senator Wyden.
    Senator Wyden. Thank you.
    Mr. Skilling, over the last four hours, you've essentially 
made two arguments to the Committee. You said that you moved 
aggressively to manage economic risk, and you said that you 
relied on your people. Those are essentially the two arguments 
that you've made to us.
    My question to begin this round with is, given the fact 
that the stock price essentially fell by half during your 
watch, wouldn't that have been the point where you would stop 
relying on other people and go out and independently 
investigate all of these problems and try to get to the bottom 
of them?
    Mr. Skilling. Well, as I said, Senator, my assessment of 
the reason that the stock price was going down in that time 
period was three things. One was the meltdown in the broadband 
business. The second one was the problems we were having with 
our India project. And the third one was the situation in 
California--the California energy situation.
    On all three of those things, I personally got very 
involved. In the broadband business, we worked to reduce the 
capital expenditures in the business. We ended up redeploying a 
large portion of the people from that business. On India, we 
had meetings, I think, probably every week-and-a-half to two 
weeks to talk about what our approach would be to the project 
and how we would manage that. And in California, we spent 
enormous amounts of time trying to understand what our 
positions were--risk positions were in California and how we 
would manage them.
    Senator Wyden. What's troubling to me about that is, you're 
essentially saying all of these reasons that the company 
collapsed are external--they're outside the company. Yet all of 
these high level people in Enron are saying there are internal 
problems.
    Mr. Skilling. No, sir. I----
    Senator Wyden. Do you still believe there weren't any 
internal problems that you should have been tackling?
    Mr. Skilling. No, sir. I believe that this--when I 
mentioned this run on the bank--I mean, a run on the bank just 
doesn't happen. Subsequent to when I left the company, there 
was a loss of confidence in the company that led to the run on 
the bank. Was that related to the LJM partnerships and some of 
the off-balance-sheet vehicles? I think that probably had a 
significant piece to do with it, because it seemed to be what 
the press was focusing----
    Senator Wyden. Let's stay with your role, then. That's 
helpful.
    Mr. McMahon, you did bring to Mr. Skilling your concerns 
about the various processes and your concerns specifically 
about the shortcomings involved. Mr. Skilling has said today 
that he went to Mr. Fastow, and he felt that those concerns 
were addressed. What evidence did you see that Mr. Skilling, on 
his watch, adequately moved to address these conflict-of-
interest issues?
    Mr. McMahon. Well, there's a couple of issues. One, I know 
firsthand Mr. Skilling--well, I guess not firsthand--secondhand 
that Mr. Skilling did, in fact, have a conversation with Mr. 
Fastow, as Mr. Fastow, as soon as that conversation was over, 
called me to his office immediately to tell me that he was 
concerned whether we could continue to work together anymore. 
So clearly there's--a conversation was had between Mr. Skilling 
and Mr. Fastow.
    And even prior to that, Mr. Sutton, who was Vice Chairman 
of the company, a day after I met with Mr. Skilling, called me 
into a meeting and said that he had been delegated by Mr. 
Skilling with the job of dealing with this conflict. So I do 
know he had some conversations with people after our meeting.
    Senator Wyden. Are you saying, then, to the Committee, you 
are satisfied that Mr. Skilling moved to deal with these 
conflicts-of-interest questions?
    Mr. McMahon. I don't think I'm saying that. Frankly, within 
three or four weeks after all that, I found myself in a 
different job in the company, and a new treasurer was brought 
on, and I just wasn't close to the situation anymore. So I 
really don't know what occurred after that point in time.
    Senator Wyden. Mr. Skilling, again using the Powers Report, 
it contrasts pretty sharply with what you've said about the 
processes for dealing with conflicts, and the processes that 
were in place with respect to the company overall. The Powers 
Report says that company insiders were enriched by tens of 
millions of dollars at the expense of shareholders. That 
doesn't sound to me like the conflict-of-interest processes and 
other processes were working particularly well. Do you? You 
said the processes were in place, that you trusted them.
    Mr. Skilling. Yes, sir, that's what I've said. If it turns 
out that one penny was taken from Enron shareholders that was 
not deserved by anyone, I would be angry about that. I have no 
more information about the specifics of the numbers you just 
mentioned than you do. I read the same newspapers.
    I think--I think it ought to be looked at. And if, for any 
reason, Enron's shareholders were abused, then there ought to 
be appropriate action taken.
    Senator Wyden. With respect to your duties at the company, 
at this point, it is not clear how you spent your time. I mean, 
you have talked, for example, about how this was a new company, 
this was a company with, ``light assets,'' and certainly there 
are a lot of people in my home state now that wish they had 
hard assets and had seen some hard profits. But, you talked 
about this being a new company. You said that, in effect, you 
relied on others, that there were processes in place.
    Tell us what you did, in your view, to make these 
substantial sums. I've gathered there are some reports that you 
made $100 million as the top officer of Enron. I don't know 
whether that's correct or not. But what, in your view, given 
the fact that you didn't do any independent inquiry of the 
conflicts of interest, that you relied on what people were 
telling you, we saw working-class people get shellacked by it--
what did you exactly do to earn these very significant sums at 
the company?
    Mr. Skilling. Senator, I described this to the Securities 
and Exchange Commission. Let me see if I can do it quickly, 
because I know you're in a rush on this. But I would say, by 
the time I became CEO, probably 40 percent of my time was 
involved in strategic business decisionmaking. I tried to meet 
with each of our strategic business units, each of our 
businesses.
    And I think at that time, if you look at--we had five 
segments, there were multiple businesses within each of those 
segments--we probably had 40 to 50 businesses that were 
operating inside the company. I would try to meet with those 
businesses on a frequent basis to understand what was going on, 
which markets they were going after, what problems they had, 
what resources they needed to be successful, and so forth. And 
that involved enormous travel. I was probably out of town 50 
percent of the time visiting businesses. We had operations in 
Europe. We had operations in Asia, operations in South America. 
That was 40 percent of the time.
    Thirty percent of the time was various policy issues. Our 
trading controls policy, for example, was a very complex, very 
time-consuming process where we were managing the positions and 
exposures that could be taken by various groups within the 
company, and that had to be reviewed on a daily basis to 
understand what the issues were so that we could manage that.
    Also, with those policy issues, personnel--I would imagine 
of that 30 percent on policy, 20 percent of the time was spent 
in discussions with our key people or trying to attract new 
talent to the company or redeploying people from one 
organizational unit to another to help keep the businesses 
growing. So that was about 70 percent of the time. And I'll 
tell you, that was a lot of hard work.
    The third component, probably 30 percent of the time are 
what I would call special issues that were kind of timely 
issues that needed to be dealt with. And when I became Chief 
Operating Officer, that was primarily JBLOC, which was a large 
contract we had some serious problems with in the United 
Kingdom that needed to be negotiated in 1998 and 1999, reducing 
the amount of capital we were spending in the international 
markets because we were not earning compensatory rate of return 
on that business. 1999 and 2000, it was the startup of our 
broadband business and trying to get that up and running and a 
number of new businesses. In fact, Jeff ran our new industrial 
products business where we were starting to take the same 
business model--we had natural gas and electricity--and move it 
to some new--some other businesses.
    And then in the year 2001, dealing with California, dealing 
with the broadband business that we had an issue with, and 
trying to sell and monetize international assets so we could 
bring more liquidity to the company.
    Senator Wyden. Well, those all look like useful strategic 
kinds of matters, but it sure looks to me like they're nowhere 
near as important as having in place a strategy for dealing 
with these conflicts of interest that look like they were just 
oozing all over the place. And----
    Mr. Skilling. Sir, we--I mean, we did. We had a control 
system in place that we believed--the Board and we believed 
would manage it. And you, again, go back to the minutes, and 
you'll see that we spent a lot of time talking about it. We 
were aware of it. We spent a lot of effort to manage that 
conflict. We did spend time on it.
    Senator Wyden. I want to ask one other question. You'll 
obviously have to convince a lot of courts and a lot of 
governmental agencies, but it certainly runs contrary to those 
people who were inside the company, who ticked off warning 
after warning. I outlined that four hours ago, and that's why 
it is so hard and so implausible to believe what we're hearing 
today.
    One question for you, Ms. Watkins. I wrote a law a number 
of years ago that requires accountants to look for fraud and to 
have in place rules to bring it to the attention of government 
regulators. Now, you had some dealings with accountants all 
through the process, and you thought, by your words, that Enron 
was going to implode in accounting scandals.
    I'm not going to ask you to comment on the law and be a 
lawyer, but does it sound to you like the company was complying 
in a, sort of, conceptual way with a set of rules and laws that 
say you've got to look for fraud and bring them to the 
attention of management and, if not corrected, to the 
regulators?
    Ms. Watkins. Well, what concerns me about some of the 
things that have come to light since this past fall, mainly 
from the documents from the various congressional inquiries 
into Enron, is that Enron itself had as one of its main risks 
associated with the Raptor deals is accounting scrutiny. 
Additionally, we have discovered that Arthur Andersen had a 
memo to the files dated February 2001 where they were concerned 
about the propriety of this. I do not understand why Andersen 
did not go to Enron's Audit Committee with their concerns. I am 
concerned any time that accounting scrutiny is at the top of 
the list of a risk associated with a structure.
    Senator Wyden. Well, what is important about that is there 
is a Federal law on the books, it was on the books all through 
that, that requires that when Arthur Andersen has any reason to 
believe that there is questionable activity, potentially 
fraudulent activity, that they do just what you were talking 
about. I appreciate your confirming certainly my opinion at 
this point that they should have done it and it was not done.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Boxer.
    Senator Boxer. Thank you.
    Mr. Skilling, you worked very hard at Enron; and given your 
own testimony, night and day. One of the reasons you left, you 
were working too hard. We understand what that is to not have 
enough time for family, et cetera. You're also very smart. And 
that's why I do not believe you when you say you did not know 
what was going on, because you had people with lesser 
education; you had people with less access to the documents, 
less access to the meetings, to the people making the 
decisions, who knew exactly what was happening.
    I showed you a videotape where you and Ms. Olson tell 
employees in December 1999 to put all their 401(k) plan monies 
into Enron. She turned to you after she said absolutely do it, 
you smiled and nodded very, very clearly. At that time, you had 
sold over 500,000 shares of stock for $21,928,000.
    When I said that, you questioned me. We got the actual SEC 
filings with your signatures on them. I would like to put those 
in the record if I might, the SEC filings. That was a third, 
Mr. Skilling, a third of the stock you would eventually sell. 
So it was not just a little bit of the stock. At the time when 
you were telling your hard working employees, for whom you 
profess to feel much grief and sorrow right now, to put all 
their 401(k) monies into Enron, you had already sold a third of 
the stock you would eventually sell.
    And I want to point out that Ms. Olson, Mr. Chairman, Ms. 
Olson, who led the cheering rally there for Enron stock, two 
months after she told people to put their money in Enron stock 
she started to sell off her stock as well. I ask unanimous 
consent to put that filing into the record.
    Senator Dorgan. Without objection.
    Senator Boxer. Mr. Chairman, as a Member of the Consumer 
Affairs Subcommittee of the Commerce Committee, I care about 
the little guy. And I will tell you if you look at this, it is 
asymmetry here. The people who put their money into the 401(k) 
plans lost about a billion, the insiders gained about a 
billion. That is asymmetry. That is an unfair share of pain, 
suffering, and loss of dreams, and that is why I think it is so 
important that we hold this hearing. Let us not forget why we 
are here.
    Now I just want to follow up on my Chairman's comments on 
the Off Wall Street Consulting Group. Mr. Skilling, do you know 
this group? Have you ever heard of them?
    Mr. Skilling. I do not.
    Senator Boxer. You've never heard of them?
    Mr. Skilling. I do not think so. I do not recall.
    Senator Boxer. You do not recall. Did anyone in your 
company talk to you about what they said? This was May 2001, 
before you left the company in August 2001. They put out a 
scathing evaluation of the company which I'll read a little 
synopsis of.
    Mr. Skilling. I may have seen it, I do not recall.
    Senator Boxer. You may have seen it?
    Mr. Skilling. Yeah.
    Senator Dorgan. If you'll refrain, let me ask that a copy 
of that be delivered, because I did ask a question about it, as 
well. And let us just ask that a copy be delivered.
    Senator Boxer. There is a really important reason why I'm 
talking to you about this. Maybe your lawyer has that.
    Mr. Skilling. I'm sorry? Oh.
    Senator Boxer. I'm asking you about this because you left 
the company in August. You said it was in great shape. You kept 
on selling your stocks before that time. You had really 
unloaded everything you were going to by that date. And here 
comes this analysis, and if I could show you page 4 at the 
top--we'll start at page 3 at the very bottom, because you keep 
saying it is complex, what happened. Well, this is a clear 
explanation of what happened.
    Mr. Skilling. I've got no page 4.
    Mr. Hiler. Excuse me. We do not----
    Senator Boxer. I'm sorry. It says ``Because margins''--it's 
actually----
    Mr. Skilling. I've got page 1, 2, 6.
    Senator Boxer. Oh, he is missing page 3. Well, it is okay. 
I'm only reading one sentence on page 3 and then we'll get to 
page 4.
    Mr. Skilling. I'd like to see that if that is possible.
    Mr. Hiler. We do not have page 4.
    Senator Boxer. He needs page 3 and 4.
    Mr. Skilling. I've just got pages----
    Mr. Hiler. We have 1, 2, 6----
    Mr. Skilling. I'm missing 3, 4 and 5.
    Senator Boxer. Sorry about that.
    Mr. Hiler. That is okay.
    Senator Boxer. We apologize.
    Mr. Hiler. While we're waiting for that, ma'am----
    Senator Boxer. No, it is right here. I just do not want to 
lose my track.
    Mr. Hiler. Okay. Sorry.
    Senator Boxer. Page 3. This is the analyst writing: 
``Because margins on Enron's incremental business are so thin, 
and because it now takes''--follow this--``about $2.1 billion 
in additional revenues----''
    Mr. Skilling. I'm sorry, I'm----
    Senator Boxer  [continuing]. ``Just to generate----
    Mr. Skilling. We were having a little altercation over 
here.
    Senator Boxer. All right. I'll start again.
    Mr. Skilling. Start over again.
    Senator Boxer. Page 2 bottom.
    Mr. Skilling. Yeah.
    Senator Boxer. ``Because''--this is the analyst from this--
I understand that it is a very well respected group. ``Because 
margins on Enron's incremental business are so thin, and 
because it now takes about $2.1 billion in additional 
revenues.''
    Mr. Skilling. I'm not catching it. On page--bottom of page 
2?
    Senator Boxer. It is the bottom of page 3----
    Mr. Skilling. Page 3, Okay.
    Senator Boxer [continuing]. The last----
    Mr. Skilling. All right. Okay, gotcha.
    Senator Boxer. I'm going to just start again. I hope I can 
add on a couple of minutes here.
    Mr. Skilling. Okay.
    Senator Boxer. ``Because margins on Enron's incremental 
business are so thin, and because it now takes about $2.1 
billion in additional revenues just to generate an additional 
penny of after-tax earnings, it probably should come as no 
surprise that Enron management appears to have resorted to a 
variety of transactions that are of questionable quality and 
sustainability to manage and to boost its earnings. These 
transactions appear to be purposely obscured in Enron's public 
reporting.''
    I would ask unanimous consent that the summary of the 
report be placed in the record.
    [The information provided follows:]
                                Summary
    Enron's business model has been evolving toward trading and risk 
management services mainly for the energy market. Enron has been 
abandoning its energy producing physical assets in favor of trading 
assets.
    Recently, Enron has had the best of both worlds. Booming energy 
markets have maximized the value of its remaining physical assets, 
while high prices and increased volatility have created trading 
opportunities that have allowed the company to increase revenue very 
substantially. After growing revenue by about $l0B year over year in 
both 1998 and 1999, revenue growth exploded in 2000, as revenue rose to 
$100B from $40B in 1999.
    When revenue increased by $11B in 1998 versus 1997, gross profit 
increased by $2B. When revenue increased by $9B in 1999 versus 1998, 
gross profit increased by $0.5B. However, when revenue increased by 
$60B in 2000 versus 1999, gross profit rose by only another $0.5B.
    Gross margin as a percent of sales dropped from 13.3 percent in 
1999 to 6.2 percent in 2000. However, the incremental gross margin 
dollars generated by the incremental sales year over year was just 1.52 
percent of the incremental sales. Gross margins have not been released 
for Q1 01, but operating profit rose by just $429M, only 1 percent of 
the year over year sales increase of $37B.
    Enron's Wholesale segment accounted for 95 percent of Enron's $l00B 
of revenue and 71 percent of its IBITDA in 2000, versus 90 percent of 
revenue and 55 percent of IBITDA in 1999. In Q1 01, Wholesale was 97 
percent of revenue and 95 percent of total IBIT. ENE total IBIT was 
just 1.6 percent of total revenue in Q1 01 versus 4.7 percent in Q1 00.
    Wholesale, and trading in particular, has clearly become the Enron 
story. The Wholesale division combines the results of Enron's trading 
and risk management business with results of various physical assets 
that the company own or controls. Enron does not break out gross margin 
or operating profit by these two types of Wholesale operations. 
EnronOnline, the company's on line trading division, was clearly a 
principal driver of revenue growth in 2000.
    ``Street'' analysts expect ENE to generate about $54M of 
incremental net income for the balance of the year 2001 versus the last 
nine months of 2000. However, the ``street'' also estimates only $20B 
of incremental revenue for the balance of 2001 versus 2000. In our 
opinion, ``Street'' analysts may not have grasped ENE's business model. 
By our estimate, ENE would have to increase revenue by $45B over the 
comparable period in 2000 to make consensus estimates. This would be 
$7B higher our current estimated increase of $38B.
    For 2002, ``street'' analysts expect ENE to generate incremental 
net income of about $475M versus 2001. This is based on total revenue 
estimates of just $l26B, which is only a $12B increase over current 
2001 estimates of $112B. The ``street's'' 2002 projection is $60B under 
our revenue projections for 2002, but consensus EPS estimates are much 
higher than ours. We estimate that ENE would have to increase revenue 
by about $90B (based on 2001 analyst expectations for revenue of $112B) 
to meet their EPS estimates. We expect Enron will miss this $215B of 
needed revenue by approximately $30B in 2002.
    Actually, there arc few ``street'' revenue estimates for Enron. 
``Street'' analysts prefer to estimate operating profit, although it is 
not clear how they obtain their results. The revenue estimates that do 
exist appear to be far too low, as we have shown. Analysts have not 
understood to what extent trading would become the main driver of 
Enron's business. This may also lead them to miss evaluate the company.
    If analysts understood that increased volume of trading was driving 
much of the bottom line increase, they would need to think about the 
huge revenue increases needed to meet their earnings targets. They 
would begin to realize, as we have shown, that increased trading 
appears to result in lower margins. It has diminishing returns. 
Investors would then also see bow slim margins have become and they 
would understand that if trading increases still more, which it will 
have to do to increase profit, profit margins should become slimmer 
still. Such low margins have important implications for the company's 
balance sheet, its return on assets and invested capital and, 
importantly, on its risk profile. We think an understanding of Enron's 
business model would lead investors to award a much lower multiple to 
Enron's forecasted EPS.
    Industry sources say that Enron traders make large directional 
bets, and that they think that Enron is especially long gas and power. 
Enron's portfolio of long and short positions is ``globally'' balanced, 
that is to say that individual positions may not be specifically offset 
with an opposite position. These sources say that this is the main 
source of the risk, and that counterparty risk is not a major issue in 
general (though the PG&E receivable may be a problem, as we discuss). 
We note that a $21B long position and a $20B short position in the 
Wholesale division sits on top of total company equity of just $11B. 
Total assets are $65B. Hedge fund managers know that it is possible to 
lose money on both long and short positions at the same time. Enron's 
Wholesale portfolio is about 200 percent long and 200 percent short and 
leverage is increasing. According to energy traders, some of these 
positions could experience swings of 25 percent of their value. 
Notional single position sizes can be in the hundreds of million of 
dollars.
    Very high revenue increases are largely generated by increased 
opportunities that result from high prices and by very high volatility 
in energy markets. Although the risk of less volatility, with the 
result that ENE would experience a significant decrease in its 
earnings, may now seem remote, the peak in volatility may occur this 
summer. We doubt that volatility can increase after this summer, even 
in the West. Industry observers predict high volatility to remain for a 
couple of years in the West, until more supply comes on line. However, 
they expect volatility in other parts of the country to decrease. Even 
this summer's widely anticipated New York energy crisis may not live up 
to expectations. It depends on the weather. But even if New York's 
energy market is volatile this summer, it should be temporary. Over 
all, except in the West, volatility will probably decline, though New 
York may remain tight. Declining volatility is a major risk for Enron, 
as it reduces the opportunity for trading profits. We will discuss 
volatility and prices in detail.
    There is also risk in doing longer duration deals to make up for 
lower trading profit. Longer deals are more profitable because the 
total value of the discounted cash flows is higher. However, as the 
duration gets longer the risk also increases. The future cash flows 
become less predictable. As money managers know, a 30 year bond is more 
volatile than a two year bond. The changes in the value of the 
securities held by Enron pose a risk to future earnings.
    Because margins on Enron's incremental business are so thin, and 
because it now takes about $2.1B in additional revenues just to 
generate an additional penny of after tax earnings, it probably should 
come as no surprise that Enron management appears to have resorted to a 
variety of transactions that are of questionable quality and 
sustainability to manage and to boost its earnings. These transactions 
appear to be purposely obscured in Enron's public reporting. They 
include related party transactions whose total earnings impact is 
difficult to gauge, and they include gain on sale items that are of 
questionable quality and where the buyer appears to have recourse. In 
the past, when Enron management has been questioned about some of these 
transactions, it has not been forthcoming.
    By our estimate, about $0.41, or 28 percent, of EPS in 2000 came 
from gains on sale of securitized assets, some or all of which may have 
recourse to Enron, and related party transactions. Gains on sale of 
securitized assets accounted for about $0.33, or 22 percent of 2000 
EPS, by our estimate. About $0.08 of the $0.33 appears to be due to an 
unusual related party, called Whitewing, which we discuss below. Other 
related party transactions accounted for another $0.08 of the $0.41, or 
5 percent of EPS in 2000. The fact that many of the gains on sales 
transactions also appear to have recourse to Enron casts their quality 
into doubt. Enron's balance sheet reflects swaps that insure the buyer 
of these securitizations against some amount of loss. We go into detail 
on these transactions below.
    Finally, we come to the issue of ENE's valuation. Some estimates of 
Enron's value seem simply arbitrary, while some others attempt to use a 
``market driven'' price to earnings multiple based on future earnings 
by segment. First, we can not agree with ``street'' analyst EPS growth 
projections because we expect lower prices and lower volatility. 
However, even if Enron were to generate the massive revenue increases 
required to hit EPS expectations, given the added risk from the balance 
sheet and from decreased volatility, the very high so-called ``market 
multiples'' that are being awarded to the business are inappropriate.
    For example, one analyst estimates that the Wholesale group will 
produce about 82 percent of total year 2001 IBIT. He then extrapolates 
that Wholesale will earn $1.48 of his $1.80 2001 estimate. The analyst 
applies an arbitrary 35x multiple to those earnings, though even by his 
aggressive estimate they will grow at 20 percent per year in 2002. He 
thus values Wholesale at $52 per share in 2001, which is still only 58 
percent of his total valuation of $90. He then adds Broadband, which is 
even more arbitrarily valued at $30 in 2001 and $34 in 2002, even 
though it loses money. This so-called analysis is typical of current 
``Street'' thinking.
    Goldman Sachs, by contrast, sells for just 16x 2001 estimated EPS, 
16x 2002 EPS, and 7.65x EBITDA. Few would argue that Enron has a 
business franchise equal to Goldman. However, using Goldman as a yard 
stick, as we explain below, we estimate that ENE might be worth between 
7.65x TTM EBTDA, or about 15x EPS. That would put Enron's total value 
between $23 and $30 per share. We also do a separate segment analysis 
below. By this method, we estimate that the Wholesale division might be 
worth $19.50 per share. Retail, pipeline, and Portland General may be 
worth $9. We value Broadband at about $1.75. We deduct $3 for the cost 
to operate these businesses at the corporate level. We arrive at a 
value of $27 per share by this method.

    Senator Boxer. Now this is not complicated to read this, 
and this is a respected company. Do you recall ever having seen 
this, seen excerpts of it, heard it discussed in any way by 
your colleagues or others?
    Mr. Skilling. Senator, I do not recall specifically. I do 
not know if they are respected analysts. I do not know, I'll 
take your word for it that they knew what they were doing, 
but--which may end up being a mistake, but this is just 
absolute, absolutely, fundamentally incorrect.
    Senator Boxer. What is incorrect?
    Mr. Skilling. The concept of declining margins. It is 
fundamentally incorrect.
    Senator Boxer. So this analyst who predicted the demise of 
Enron was incorrect?
    Mr. Skilling. No, this analyst said--and because--and this 
has been something--and I do not know this specific firm, but 
there are a number of firms that began to comment on a drop of 
margins in the company. And the reason that they got that is 
when energy prices quadrupled, natural gas and electricity 
prices quadrupled. We do not own generating facilities, or own 
very few. We do not own oil or gas production.
    Senator Boxer. Sir. Mr. Skilling, I appreciate that you do 
not agree with this. I'm not asking you that.
    Mr. Skilling. No, no, wait. Our margins----
    Senator Boxer. You--no, no, no, sir. I have a reason----
    Mr. Skilling. I want--Senator, you have----
    Senator Boxer. My question----
    Mr. Skilling [continuing]. Asked me a very----
    Senator Boxer [continuing]. Had nothing to do with whether 
you agree.
    Mr. Hiler. Senator, I'm sorry. With all due respect----
    Senator Boxer. I simply asked if you recalled it.
    Mr. Hiler. He is trying to answer your question.
    Mr. Skilling. I'm trying to answer.
    Senator Boxer. No, no, that was not my question. My 
question simply was----
    Mr. Skilling. The question is this is absolutely in error. 
I think----
    Senator Boxer. But I did not ask you----
    Mr. Skilling [continuing]. The intent is to suggest that I 
have some information from reading this that impacted my 
decision----
    Senator Boxer.  No, that was not----
    Mr. Skilling [continuing]. To sell stock.
    Senator Boxer [continuing]. What I asked.
    Mr. Hiler. Senator, my--Senator, with all due respect, my--
--
    Senator Boxer. Mr. Chairman, I've asked a simple question.
    Senator Dorgan. Let us let Senator Boxer ask the question--
--
    Senator Boxer. Let me ask it again. I never asked what you 
thought of this. I asked if you had seen it, discussed it, 
heard it discussed with your colleagues. That is all I want to 
know, not whether you----
    Mr. Skilling. No, I do not recall specifically seeing this 
document. I have seen documents and analyst comments that 
similarly raised an issue of declining margins which I 
fundamentally disagree with.
    Senator Boxer. I respect that. Okay. Now are you aware that 
the person who wrote this was demoted?
    Mr. Skilling. Demoted?
    Senator Boxer. Yes, demoted in his company.
    [Mr. Skilling shakes head].
    Senator Boxer. Okay. Mr. Chairman, my time is up. Can I 
stay for another round?
    Senator Dorgan. Of course.
    Senator Boxer. Thank you.
    Senator Dorgan. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    Ms. Watkins, I have a series of questions that I'd like to 
get for the record, so if I could address you.
    Ms. Watkins. Okay.
    Senator Nelson. Could you specifically describe the 
difference between the so-called off-the-books partnership and 
other Enron partnerships that may have been publicly traded, of 
which we're told that they number several thousand?
    Ms. Watkins. Are you referring to the special purpose 
entities that Enron routinely uses to fund certain assets?
    Senator Nelson. I'm talking about a number of partnerships. 
In some cases the on-the-books ones were the ones that were 
traded on stock exchanges. And I wanted you to describe the 
difference between the off-the-books and the on-the-books 
partnerships, of which we've been told there were about 3,000.
    Ms. Watkins. Well, there are--we had equity investments. 
Typically those were in public or private companies, not always 
partnerships, but those were in our merchant portfolio that we 
would fair value, or write up to their fair market value.
    As to the numbers in the press, about 3,000, you know, 
special purpose entities, I'm not specifically aware. All I can 
speak to is different transactions that I might have worked on. 
We might set up as much as three or four for an international 
investment. And, as I mentioned before, it was to give us all 
kinds of alternatives if and when we ever wanted to sell that 
investment that we had a company that a buyer would be--would 
find attractive, you know, whether they wanted to buy a Cayman 
company or a U.S. company. So a lot of that was just--we did 
hire the best and the brightest, and it was strategically 
planning how we bought assets.
    Senator Nelson. Okay. There may be some semantics here, but 
I'm particularly thinking about partnerships that were created 
whereby they would be publicly traded on a stock exchange. 
You're familiar with those kind of partnerships?
    Ms. Watkins. No, sir, I'm not. That Enron held? No, not 
that were publicly traded.
    Senator Nelson. Well, let me ask you about in a partnership 
that was publicly traded, was there an opportunity whereby 
Enron would allow partners to buy additional interest in that 
partnership as a way of supporting the partnership's ability to 
distribute the minimum quarterly dividends to its investors or 
limited partners?
    Ms. Watkins. I think you might be referring to some of the 
master limited partnerships that Enron had, I think, in the 
liquid pipeline area and possibly EOTTs, but I do not have any 
firsthand knowledge of the way those partnerships worked.
    Senator Nelson. Mr. Skilling, do you?
    Mr. Skilling. I'm really not familiar with the mechanics on 
the master limited partnerships.
    Senator Nelson. You're not familiar with whether or not the 
partnerships would allow limited partners or others to buy in 
instead of buying publicly-traded shares of those limited 
partnerships?
    Mr. Skilling. Senator, I just do not know what that means. 
Can you say it again?
    Senator Nelson. All right.
    Mr. McMahon.
    Mr. McMahon. And I'm afraid I'm going to have to be a 
little bewildered, as well. The publicly traded partnerships 
that I'm aware of that Enron somehow associated with are EOTT, 
which is the master limited partnership, and Northern Border 
Pipeline. There may be others, but I do not--none come to mind. 
In the EOTT partnership, if I think I understand your question, 
there is some sort of obligation in which Enron as the general 
partner has an obligation to EOTT limited partners for dividend 
distributions. I'm not precisely sure how all that works or how 
that obligation manifests itself.
    Senator Nelson. So I'm really seeking information here. In 
a publicly traded partnership then that Enron could allow 
private parties to buy into that partnership instead of through 
purchasing on the public traded stock market. And if so, it was 
a way to support the partnership's ability to distribute the 
minimum quarterly dividends in that partnership?
    Mr. McMahon. I'm not familiar with the first point, which 
if I'm understanding your question, that somehow off-exchange 
purchases and sales can happen. I'm not familiar with that 
capability. But on EOTT in particular, there is some sort of 
credit support that Enron gave EOTT which would assist it, as I 
understand it, to make its quarterly distribution from time to 
time.
    The reason I know this is it occurred post bankruptcy when 
EOTT tried to ask Enron to make good on that promise, and 
obviously post bankruptcy we were not able to. I'm afraid that 
is really all I know about that.
    Senator Nelson. Well, as we get on into this in further 
discussions, I'm given to believe that there were certain 
partnerships set up that could meet their cash requirements by 
issuing additional limited partner interest with the 
partnership. And that Enron would contribute to that 
partnership in exchange for additional partnership interest to 
support the partnership's distribution of the minimum quarterly 
distribution. And if that is the case, and that is what I'm 
asking, there is absolutely no risk to someone investing in 
that partnership, because then Enron will come in and support 
it so that the partnership distribution is there, the minimum 
quarterly distribution is there.
    So none of the three of you, save for your general 
knowledge, are aware of this particular mechanism?
    Ms. Watkins. No, sir, I am not.
    Senator Nelson. Okay. Let me ask you this, Mr. Skilling. 
Earlier we had talked about--well, let me ask you. Enron Energy 
Services--that was a partnership. And was it consolidated on 
Enron's books?
    Mr. Skilling. Yes, sir.
    Senator Nelson. Okay. Now earlier I had asked you if you 
had any information about any information or communication 
being transmitted from Enron, its officers, its directors, 
encouraging pension funds to acquire Enron stock, and you had 
indicted that no, you did not have any information of that.
    Mr. Skilling. Well, I--no. I thought the question you were 
asking was, you know, sometimes when the stock was dropping. I 
think you were saying that they were buying stock in October or 
something, was there any communication. I was gone, so I would 
not know.
    There would--in the normal course of business we had an 
investor relations group. And I would imagine, you know, over 
the last decade I'm sure that they probably have talked with 
most of the large pension funds in the country and talked to 
them about Enron as a potential investment candidate. But I, 
after I left on October 14, I would have no information about 
that. August--I'm sorry, August 14 of 2001. I would have no 
information.
    Senator Nelson. All right. But before that you would have 
some knowledge of those pension funds investing in Enron stock?
    Mr. Skilling. Well, not really. I mean there--we used to 
get a printout, I do not know, once a quarter or once a half, 
that just showed who the largest shareholders were in the 
company. I do not--it would be the list of like the top 25 
holders. And then I would typically see that, but to be in the 
top 25 you had to own a lot of stock. I mean the top 25 holders 
of Enron stock would--I forget what the threshold is, but it 
was probably 10 million shares, 5 or 10 million shares.
    Senator Nelson. Do you have any recollection back in 1998 
that you talked to the Ontario Teachers' Pension Fund of 
getting them to invest in EES?
    Mr. Skilling. I'm sorry, say again.
    Senator Nelson. The Ontario Teachers' Pension Plan.
    Mr. Skilling. Yes, sir.
    Senator Nelson. Getting them to invest.
    Mr. Skilling. In--but I did not hear----
    Senator Nelson. In EES, Enron Energy Services.
    Mr. Skilling. But what was the date, sir?
    Senator Nelson. 1998.
    Mr. Skilling. I do not remember the specific meeting, but 
the Ontario Teachers' Pension Fund became--bought a portion of 
Enron Energy Services. And I believe CalPERS bought a portion 
of Enron Energy Services in late 19--would have said it was 
1997, but was it 1998?
    Senator Nelson. January of 1998.
    Mr. Skilling. January of 1998, okay. All I can say is that 
I do not recall specifics, specifically talking to them, but 
they were our partner in EES. We sold, I think, 7 percent of 
the company, and I think Ontario Teachers took, this is my 
recollection, like 3 percent. I think CalPERS took 4 percent of 
the business.
    Senator Nelson. And what was your role in getting the 
Ontario Teachers' Pension Plan to invest?
    Mr. Skilling. I do not recall specifically. I would imagine 
that for an investment like that they would have sent their 
representatives to Houston and asked what the business strategy 
was of the business. And I do not know if I gave that 
presentation or if somebody else did, but we would typically 
give a presentation on what the markets were that we were going 
after and how we were going after those markets, and that sort 
of thing.
    Senator Nelson. Okay.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman.
    Mr. McMahon, I am a lawyer, but I'm not a bankruptcy 
lawyer. But after my last line of questioning a bankruptcy 
lawyer did call my office and suggested that there are ways 
that a company in bankruptcy can help severed employees. And 
that is by either hiring former employees back for a temporary 
period or listing some of the severance costs as administrative 
expenses.
    My question to you is would you talk to your bankruptcy 
lawyers to see if you can do anything for the severed employees 
who have lost so much? This would not affect their pensions, 
but many of them would feel so much better if they at least had 
their contractual severance obligations met. Would you make 
that commitment today?
    Mr. McMahon. Absolutely, Senator. You have my personal 
commitment. This is a very high priority for existing 
management of the company to deal with this. And I'm not an 
attorney, but I'm becoming a bankruptcy expert unfortunately, 
and a lot of these things we have pursued.
    The administrative claim as an issue for pre-petition 
severed employees, as I understand that, that is a matter of 
getting that paperwork done. Post-petition employees it is a 
little, as I understand, it is a little bit tougher matter 
because of the termination of the severance plan. But we are 
actively researching everything we can do for these employees 
and we're going to be working with the Creditors' Committee on 
this, as well.
    Senator Hutchison. I appreciate thus far your commitment to 
do that. I think it is important. You have a certain amount of 
assets left, and I would like to see a more favored treatment 
of people who have been left in the lurch.
    Second, if this bankruptcy lawyer is correct and people can 
be temporarily rehired and then made to be administrative 
expenses later, I would at least like to see the employee's 
status the same as attorney's fees, for instance. And I think 
that would be some small amount of help that might be given in 
these circumstances.
    I would like also to ask you, Mr. McMahon, if the nature of 
the business that is left of Enron, in that are there any other 
off balance sheet partnerships and is that an ongoing concern 
that we should address?
    Mr. McMahon. What is left of Enron we are having 
internally, in connection also with our external counsel, 
Skadden, Arps & Weil, Gotshal, exhaustive investigation of all 
the corporate structures that the company has. Most of these 
partnerships or finance structures have creditors. So, as part 
of the bankruptcy, we are determining who they are, how it was 
structured, et cetera. And it is my understanding that we are 
fairly far along in that process, and to date have not 
discovered anything that would cause us concern, a lot of these 
other partnerships, but that is a process that is still under 
investigation right now.
    Senator Hutchison. Okay. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Hutchison, thank you.
    Mr. Skilling, on January 22, 2001, the Enron Board of 
Directors awarded you an additional 125,000 shares of stock 
roughly, at no cost to you. Is that accurate?
    Mr. Skilling. Shares of stock or stock options?
    Senator Dorgan. Stock options, I'm sorry. Options for 
shares of stock.
    Mr. Skilling. I do not remember the exact number.
    Senator Dorgan. The 125,562 shares, or options rather for 
Enron stock, why would a Board do that in a January meeting?
    Mr. Skilling. Well, January was typically our compensation 
meeting. What we would do is calculate how the business had 
done for the prior year, and then based on that we would 
determine what our overall bonus pool was and allocate that to 
our employees. So that occurred simultaneous with management.
    Senator Dorgan. Now, when you were testifying before the 
House of Representatives, you were asked if you dumped stock 
because you knew there was some financial trouble in the 
company. And, I just pointed out that you sold $66 million 
worth of stock in a period of time. You said, ``No. In fact, 
when I left Enron holding almost the same number of shares that 
I held at the beginning of 2001.'' But, you did not tell the 
House of Representatives that, in fact, during that period you 
received 125,000 shares, options for shares of Enron. Is that 
true?
    Mr. Skilling. The shares count that I gave is shares, not 
options. So those options----
    Senator Dorgan. Yeah, but you were busy selling. You sold 
500,000 shares for $15 million a month after you left Enron; 
you, from January 3 to June 13, sold 10,000 shares every 
Wednesday for a total of 240,000 shares. The point you were 
making to the House was, ``Look, I did not dump anything. In 
fact, I ended up with about the same amount as I started 
with.''
    But, in fact, when you take a look at what was sold, you 
converted options to shares and sold them. It appears to me you 
did not tell the whole truth to the House when you answered 
that question.
    Mr. Skilling. Well, this is--I think that gets to Senator 
Boxer's question. I do not know how you want it presented. I 
mean the statistics are there; you have to file them with the 
SEC. You guys can get them and present them however you want.
    Mr. Hiler. I would also just--I would like to point out for 
the record, I believe that was in my client's opening 
statement. And what he was showing, I believe, was that he did 
hold shares----
    Mr. Skilling. At the end.
    Mr. Hiler [continuing]. Significant shares at the end, at 
the period when he left the company, and he had significant 
shares at the beginning of the period.
    Mr. Skilling. I'll give you an example, Senator.
    Senator Boxer said that I sold 500,000 shares. There was a 
little confusion there because there was a stock split that 
occurred in 1999. So her number was calculated different, you 
might have to adjust for that. But I started the year 1999 with 
262,000 shares that I owned. I ended the year 1999 with 906,000 
shares. So I actually had an increase of over 600,000 shares 
during that time period. Yes, some shares were sold during the 
period, but in terms of share ownership, the share ownership 
increased. So I do not, you know, you can present it a number 
of different ways. I do not know--I mean I've presented it 
every way I can and you guys have the statistics and you can--
--
    Senator Dorgan. Well, and I think I represented what we 
have, and it suggested something different than you're now 
saying, but let me ask about another report. I do not have any 
basis for knowing about this, I just ask you to respond to it. 
There was a report in the Dow Jones news wires that you and Ken 
Lay stage-managed a fake trading room to impress analysts, 
jokingly referring to it as ``The Sting.'' You wanted the room 
to look like a Wall Street trading floor, so you got the best 
equipment, tore down offices. You would tell the analysts 
``This is how we structure a deal.''
    ``And we painted phones black to make it look like a slick 
operation. We held a rehearsal with Skilling and Lay the day 
before, and Skilling said he wanted to play the Paul Newman 
character in the movie `The Sting' when the analysts came 
through. But they said it really was more of an elaborate 
charade because there was not much going on there.''
    How accurate is this?
    Mr. Skilling. Any suggestion that the trading floor in EES 
that was developed was not for specific business purposes and 
did not significantly advance the conduct of the business is 
preposterous. It is absolutely preposterous.
    Senator Dorgan. Did you try to deceive analysts when they 
came to that floor?
    Mr. Skilling. Absolutely not.
    Senator Dorgan. Did you paint phones black and invite other 
people to come sit at those desks----
    Mr. Skilling. I do not know how you paint phones black. 
We--I mean we have standard telephones in the company. I'd 
imagine they're the same phones that we have everywhere else. 
If someone painted a phone black, I certainly did not know 
about it. Was the trading floor a legitimate effort to put 
together a better risk management and better business process? 
Absolutely.
    Senator Dorgan. I understand that, but I was asking about a 
circumstance they alleged you created in order for analysts to 
be able to see something that did not actually exist in 
operation, but I think you've answered that.
    Let me ask you something on a chart that I had used 
previously. This chart shows subsidiaries of major 
corporations. And it may be hard for you to see, but I'll 
describe what it is. It talks about the rank in Fortune 500, 
the first 10 companies, 10 largest companies, and over on the 
far right it says ``Subsidiaries and Offshore Tax Havens, 
Enron, 872.''
    The next largest company is General Motors. They had 14 
subsidiaries and offshore tax havens; Enron, 872.
    The reason I ask the question is, you know, some people 
think that this was a culture in which you stretched the rules, 
bent the rules, then broke the rules; and that part and parcel 
of all of this is to be as aggressive as is possible to do a 
lot of things, including avoiding paying taxes. How is it that 
the company would have 872 subsidiaries and offshore tax 
havens? Any response to that?
    Mr. Skilling. Senator, I do not know. If you look at the 
total subsidiaries the company had, I'm guessing 3,000 
subsidiaries.
    Senator Dorgan. You had 2,832, far more than any other. The 
biggest company, General Motors, had 316. But of interest to me 
is how many of them were in tax havens, Cayman Islands and so 
forth. I do not think I've ever seen anything quite like this, 
and it reinforced for me, at least, that there was a culture 
here of----
    Mr. Skilling. Yeah, but--I'm sorry, I cannot see----
    Senator Dorgan [continuing]. A lot of unusual----
    Mr. Skilling [continuing]. The chart from here. My eyes are 
not as good as they used to be. Do you have any----
    Senator Dorgan. Let me ask someone to come down there and 
show it to you.
    Mr. Skilling. Do you have any banks on the list? Do you 
have General Electric on the list?
    Senator Dorgan. Those are the 10 largest corporations in 
the country.
    Mr. Skilling. Then why is not General Electric on the list?
    Senator Dorgan. Well----
    Mr. Skilling. Is this--okay. Let me see them, yeah.
    Senator Dorgan. Yeah. You'll see the list.
    Mr. Skilling. Okay.
    Senator Dorgan. General Electric is on the list and they 
had 24 subsidiaries. But I'd like you to----
    Mr. Skilling. Now wait. Now, you know, I hate to be 
skeptical, but----
    Senator Dorgan. Well, in this room it is a common thing 
these days.
    Mr. Skilling. Yeah.
    Senator Dorgan. Especially today.
    Mr. Skilling. Certainly is. General Electric, GE Capital 
Corporation had multiple investments with us in subsidiaries. I 
would imagine they had more investment subsidiaries in 
partnership with Enron than 24. I mean what is this chart? Is 
this General Electric Corporation, or have you picked up all of 
the subsidiaries? How can you do business--General Electric 
does business in several hundred countries around the world. 
They would have to have a separate incorporated business in 
each----
    Senator Dorgan. Yeah. Well, Mr. Skilling, this----
    Mr. Skilling [continuing]. One of those countries.
    Senator Dorgan [continuing]. Is a report off their 10-Ks. 
But I, you know, we can have another hearing on General 
Electric.
    Mr. Skilling. Well, I mean just think about it logically.
    Senator Dorgan. I'm very interested in Enron at this point.
    Mr. Skilling. Just think about it.
    Senator Dorgan. So if you could describe for me as the CEO 
of Enron, former CEO of Enron, your subsidiaries, and 
especially those subsidiaries in tax havens.
    Mr. Skilling. I guess all I can say is I would imagine that 
if you got the accurate numbers there, I would imagine you 
would not see as much difference between Enron and other 
companies. I do not know what the specific purpose of each 
offshore subsidiary was, but I know, for example, in every 
single country where we operated we had to have a separate 
subsidiary. We had to have a separate subsidiary for every 
single project we entered into. And there is no way that 
General Electric operates in fewer than 24 countries. I mean it 
just--it does not make any sense.
    Senator Dorgan. Well, we'll have further dialog about that. 
I'll submit some questions to you.
    Mr. McMahon, I just have two other questions, then we'll 
finish.
    Mr. McMahon, I know that the company offered bonuses to get 
people to stay just prior to bankruptcy. And that also is 
controversial, especially because so many people lost so much 
money. I believe you were given a $1.5 million dollar retention 
bonus; is that correct?
    Mr. McMahon. That is correct.
    Senator Dorgan. And was that common? How many people in 
Enron just prior to bankruptcy got bonuses to convince them to 
stay? And was a million-and-a-half necessary to convince you to 
stay at Enron?
    Mr. McMahon. Let me answer your first question first. I 
believe the number of retention bonuses ranged into the 
hundreds of employees. I'm not precisely sure of the exact 
number. And at the time, the Board authorized this; I was not 
part of this decision. But frankly, it probably was not 
necessary for me to receive that amount to stay.
    Senator Dorgan. Ms. Watkins, did you receive a bonus to 
stay?
    Ms. Watkins. No, I did not.
    Senator Dorgan. You understand why some people down at the 
bottom would be furious with all this? I mean, there is a lot 
of money flying around if you look at the history of this 
company in recent years, a lot of money moving around quickly.
    Mr. Skilling has said nothing about Mr. Fastow today 
really, but if I were Mr. Skilling, I think knowing what I 
know--and I've read a substantial amount about what happened 
here, I would think that Mr. Fastow deceived people inside the 
corporation, or they knew what he was doing and acquiesced to 
it, but one of the two. But yet, I do not hear anybody talking 
about who did something inside the corporation that was 
inappropriate, except the Board of Directors.
    The Board of Directors issues a best-case report that is 
scathing about what happened inside this company. And now, you 
know, I'm going to mention the bonuses. I'm sorry to do that, 
Mr. McMahon. I know that no one has raised any questions about 
your role. You say you went to see Mr. Skilling to complain 
about the circumstances in a very similar way that Ms. Watkins 
complained and Mr. Skilling turns that discussion into a 
discussion about compensation whenever we raise this issue. I 
assume it was more than compensation, it was what you said it 
was.
    But Mr. Skilling says Ms. Watkins is wrong, Mr. McMahon is 
wrong, the Powers Report is wrong, the market is wrong. You 
know, Mr. Skilling, I have great difficulty believing your 
testimony. I wish I could believe your testimony, but somebody 
was not home at the Enron Corporation.
    Mr. Skilling. Is that a question?
    Senator Dorgan. Well, no, it was a statement. I regret 
having to make the statement, but you're sure welcome to 
respond to it if you like. I can put it in the form of a 
question if you'd prefer.
    Mr. Skilling. I think if you're suggesting that--well, let 
me start off. I do not think that my description of the meeting 
is radically different than Jeff's.
    Senator Dorgan. It is.
    Mr. Skilling. Everybody has a meeting. It is not. I have 
said that Jeff raised the issue of conflicts of interest. I did 
not say it was strictly a compensation issue, he raised an 
issue of conflicts. We had a process in place that was approved 
by the Board and he was raising some other issues. My 
recollection--and, you know, Jeff probably has a better 
recollection because he probably thought about it more than I 
did in retrospect. But my recollection is that compensation was 
a key part of that discussion. And I believe that I followed up 
and I believe that I--I hope that I put his mind at ease that 
he should do what he believed was ethically correct, because I 
believe in that. I have heard----
    Senator Dorgan. See, you've done it again, Mr. Skilling.
    Senator Dorgan. You just created a transition into a new 
subject.
    Mr. Skilling. I have heard Ms. Watkins' comments, and I 
cannot for the life of me see what basis she would have for 
suggesting that I would know some of that. I mean, how would 
she know that? And I do not see that it is at all inconsistent 
that there would be some things I do not know if some people 
purposely kept me from knowing some things, which I guess goes 
to the beginning of your comment. I do not see why that is so 
hard to understand.
    Senator Dorgan. Well, I would say this. I'm not a 
stockholder and I'm not an employee, but if I were and somebody 
at the top was getting $66 million selling shares of stock, I'd 
surely want them know everything that is going on inside that 
company. Especially when key people, including Vice Presidents, 
say what was happening was common knowledge, and especially 
when after the Board of Directors issues a report that says 
what was going on inside that corporation was, ``appalling.'' I 
think there is an expectation that people in that position 
would have known.
    Mr. Skilling. You now say that you did not know. I regret 
very much that testimony, because I think it is at odds with 
what Mr. McMahon said, despite the fact that you pivot that 
every time you talk about it. It is at odds with Ms. Watkins, 
it is at odds with the market assessment of that company, and 
it is at odds with the Powers Report.
    Mr. Fitzgerald.
    Senator Fitzgerald. Thank you, Mr. Chairman.
    Ms. Watkins, I have not had a chance to ask you any 
questions today. As I'm sure you know, I have great admiration 
for your role in bringing to the attention of superiors what 
you thought were grievous errors in the way Enron was 
accounting for earnings and hiding losses. And I think the 
whole country has a great deal of admiration for you, because 
it took a lot of courage to stand up and speak out when you 
did.
    And everything that I've heard you say, both before this 
Committee and the House, has made perfect sense to me. The only 
thing I'm troubled with is the notion that Mr. Ken Lay was 
somehow duped. And I want to ask you a few questions and go 
back over why it is that you think that Mr. Lay was duped. You 
gave him your letter shortly after Mr. Skilling left the firm. 
He left the firm on August 14, 2001. What day did you give him 
your letter?
    Ms. Watkins. I gave him the anonymous letter on August 15, 
2001, and then the full set of memos when we met on August 22, 
2001.
    Senator Fitzgerald. And you had the meeting for a half hour 
on August 22?
    Ms. Watkins. Yes.
    Senator Fitzgerald. And at that time, you recommended to 
him--and in your memo you clearly recommended to him that they 
should conduct an investigation; that the investigation should 
be handled by a law firm different than Vinson & Elkins because 
they were clearly conflicted. They were at the center of 
setting up all these partnerships. Is that correct?
    Ms. Watkins. Yes.
    Senator Fitzgerald. And did you also not recommend to Mr. 
Lay that they review the propriety of the accounting for all 
the transactions?
    Ms. Watkins. Yes. At the heart of my concern was an 
accounting concern.
    Senator Fitzgerald. It was an accounting concern. Now when 
Mr. Lay ordered the investigation though, is not it correct 
that he told Vinson & Elkins to do the investigation? He hired 
them to do the investigation and that he specifically told them 
not to review the accounting issues that you raised.
    Ms. Watkins. Well, I learned with the release of documents 
that the House did a couple weeks ago that Vinson & Elkins' 
investigation had been limited and they had been told to not 
second-guess the accounting treatment. They did not indicate 
that they had any limits in their review when they met with me 
in September.
    They also met with me October 16, 2001, in the afternoon. 
We had released earnings that morning. We had written off $1.2 
billion in shareholders' equity. They told me that--they did 
not show me their report, but they said that the conclusion had 
been that the accounting, when done, was proper. So they made 
accounting conclusions to me. It seems at odds with the fact 
that they say that they were not second-guessing the 
accounting. It all appears to be somewhat of a whitewashed 
report to me.
    The reason I think Mr. Lay did not get it was he gets this 
report from V&E October 15th saying ``It's all okay, the optics 
are bad.'' And he just decided ``Let's unwind it. Let's write 
it off, let's get it behind us.'' If he truly understood the 
magnitude of manipulating your financial statements I think, 
you know, if it were me, I'd do a lot more contingency plans. I 
would know that that would upset the market, what would be our 
backup on equity and debt finance, what were we going to tell 
our investors, what were we going to tell our customers.
    We were radio silent for roughly two weeks and we hid 
behind the SEC inquiry. When investors would call and say 
``What's this about the unwind? What's this about Raptor?'' The 
response was always, ``Well, the SEC is investigating, so we're 
not going to be able to answer questions about Raptor.'' My 
understanding is the SEC phoned us and said ``Do not hide 
behind us. If your investors have questions,'' you know, 
``answer them.'' We had no ready answer to explain that write-
off, which makes me think he did not get it.
    Senator Fitzgerald. But, Ms. Watkins, is not it true that 
Mr. Lay specifically instructed Vinson & Elkins, ``Do not 
follow Ms. Watkins' recommendation and review the accounting 
propriety. Do not review the accounting.'' On page 176 of the 
Powers Report it says that ``The result of the Vinson & Elkins 
review was largely predetermined by the scope and nature of the 
investigation and the process employed.''
    Isn't it possible that Mr. Lay was contributing to burying 
your concerns by putting in the restriction that they not 
review the propriety of the accounting?
    Ms. Watkins. That restriction should not have been there, 
in my opinion, and it concerns me that it was.
    Senator Fitzgerald. It concerns you that it was? I mean it 
is like you have raised accounting issues; and it would be like 
somebody having some trouble with their car and taking it to 
the dealer and say ``Please fix the car, but do not look under 
the hood.'' It is a real problem.
    And certainly if he had been duped prior to your meeting 
with him on August 22, do not you think you de-duped him in 
that meeting?
    Ms. Watkins. I would think so. I mentioned in my opening 
statement that I had been extremely disappointed by the 
company's reaction and response to my concerns. And I was 
incredibly frustrated, because I do think Mr. Lay missed a 
small window of opportunity to salvage the company by ignoring 
the obvious, as indicated in the Powers Report.
    Senator Fitzgerald. And Mr. Lay is a bright man, is he not? 
Do you have an opinion on that? Do you think he is a bright 
man? Maybe you do not.
    Ms. Watkins. Not after this fall.
    Senator Fitzgerald. Did you hear Mr. Skilling's discussion 
about his description of the budget process at Enron? Is it 
your understanding that Mr. Lay and Mr. Skilling would meet 
with the various units to discuss their budgets?
    Ms. Watkins. Yes. There was an annual budget process that 
occurred in the--typically in the fall of each year for the 
following year.
    Senator Fitzgerald. Was it your impression that units felt 
some pressure to meet their budgets and contribute to Enron's 
overall earnings as they had been expected at the beginning of 
the year?
    Ms. Watkins. Yes. In fact, you know, Mr. Skilling referred 
to two alternatives by which we accounted for our equity, 
merchant equity investments, that we could hedge them with a 
local relation hedge, or we could choose to hedge them with 
Raptor. Well, we also had a third alternative, which was to 
take normal prudence reserves. In many of those investments, 
Avici, I think, Enron invested maybe as little as $5 to $10 
million. The company went public, it--the value rose up into 
the $170-$180 million range. We took all of that into earnings 
at Enron Broadband when we had hold restrictions. The prudent 
thing to do was to put a prudency reserve and maybe just take 
30 or 40 percent of that gain.
    Senator Fitzgerald. Did Mr. Lay and Mr. Skilling ever tell 
units to be prudent in their earnings and not to push the 
envelope?
    Ms. Watkins. I think the business units were under pressure 
to meet their earnings targets. So if that was a mechanism by 
which they could meet it, they would choose to write up their 
equity investments to the maximum amount. And then we were 
forced to turn to something like a Raptor vehicle to lock in 
that value, and that Raptor vehicle was not a real, true 
economic transfer of risk.
    Senator Fitzgerald. Mr. Chairman, I know my time is 
expired, but I wonder what the--I certainly have many more 
questions and I do not want to hold up the other Senators. Do 
we want to do another round, or----
    Senator Dorgan. Why do not we proceed to Senator Boxer.
    Senator Fitzgerald. Okay. Thank you.
    We'll come back. Thank you.
    Senator Boxer. Thank you. Mr. Chairman, we all know that we 
are not prosecutors here; we're not a court. Yet, we know that 
it is illegal to sell shares based on insider information. It 
is not for us to decide whether that happened. However, I want 
to get back to this just to give my own opinion, as it ought to 
be examined.
    You know, you can talk about number of shares from night to 
morning. I used to be a stockbroker. We know if there is a 
three-for-one split, you start out with a share, you wind up 
with three. You can sell two and still have the one and say ``I 
still have as many shares.''
    I think the important thing is what the Chairman said. Mr. 
Skilling, you and others sold multi-million--almost a billion 
dollars worth of insider stock. The fact of the matter is that 
you sold $20 million worth before you told those employees 
sitting in that room who looked up to you in more ways than 
one, to put their money into Enron.
    They looked up to you, they looked up to Ms. Olson. And it 
was like a pep rally--you had already sold. You should have 
told them that. And you should have, if you felt any fiduciary 
responsibility when they asked, said, you know, ``Look into 
diversifying.'' You mentioned that today in an offhand fashion, 
but that is not what we heard.
    I want to get to the California case. During the 
electricity crisis on Front Line in June 2001, they asked you 
``What do you,'' you know, ``the generators seem to be making 
so much money.'' And, you said, ``We're the good guys. We're on 
the side of the angels.'' That was in June, 2001. In that same 
month, you made your now-famous joke referring to the Titanic, 
when the Titanic went down, the lights were on.
    Today, you give this very good excuse for this horrible 
statement here to the California Attorney General with whom you 
were so upset. You could have taken him on in a dignified way. 
I think it is a little kindergarten for a person in your 
position to say ``Well, I'm going to tell a joke against all 
the people in California because your Attorney General told a 
bad joke about Kenneth Lay.'' I'm sorry, I do not buy it. This 
is----
    Mr. Skilling. You think the Attorney General's comment was 
a joke?
    Senator Boxer. I did not agree with his statement that he 
made.
    Mr. Skilling. Thank you.
    Senator Boxer. That is not the point, and it is not the 
point to change the subject. You took on the State of 
California when you, in talking to the press, described the 
company's condition, which was going down. You said that Enron 
faced terrible problems because California's electricity crisis 
had been solved. That is a direct quote from The San Diego 
Union Tribune.
    And in the SEC filing in November 2001, at the height of 
the money coming into your corporation to keep it alive while 
insiders were selling like mad, the SEC filing from Enron's 
words, ``The power and gas intermediation business both 
benefited from price volatility in 2001.'' So we see what 
California meant to you. California was keeping----
    Mr. Skilling. Can I respond to that? Those are not 
inconsistent comments.
    Senator Boxer. I will let you respond, of course, as soon 
as I finish what I'm saying.
    Mr. Skilling. Keep the----
    Senator Boxer. I will stop and let you say as many things 
as my----
    Mr. Skilling. Thank you.
    Senator Boxer [continuing]. Chairman thinks is appropriate.
    The fact of the matter is, Mr. Skilling, you told our state 
in 1994, California would save billions of dollars by 
deregulation. You even put a number on it, Mr. Skilling, $8.9 
billion per year. But, that did not happen. Let us see what 
happened. Okay? Let us see what happened.
    We went from 1999, $7.4 billion total to keep our lights on 
and keep our seniors cool in the summer and warm in the winter, 
and our agriculture business going, and Silicon Valley going. 
If it were a country, California would be the fifth largest 
country in the world. Manipulation of a company and an industry 
is just wrong, because it hurts the whole country. Electricity 
costs went up $27.1 billion in one year. By the way, demand up 
4 percent. Demand up 4 percent.
    However, you said we were going to save over $8 billion a 
year. Well, the overcharges are way more than that, and the 
long-term contracts were a ripoff also. So it is many more 
billions that we lost, this transfer of wealth from the people 
of my state to the robber barons of the 21st century. That is 
what I think. So the bottom line is we paid a huge amount, and 
the electricity cost was not related to demand.
    Now I want to go to FERC for a minute, because FERC was the 
only thing between you and total deregulation. What did you do? 
You wined and dined a lot of people at FERC, did you not? We 
have here the list of the best recollections of FERC people, 
decision-makers.
    On December 7, 2000, you treated these folks or had lunch 
with these folks and with this Daniel Larcamp, Director of 
Markets, Tariffs and Rates at FERC, along with seven other FERC 
employees. He says ``Several other Enron employees 
participating in showing Enron's trading room.'' So was that in 
Texas that that occurred?
    Mr. Skilling. I have no idea, Senator.
    Senator Boxer. Well, he said he had lunch--you were present 
at the lunch in Enron's trading room. Would that be in Texas if 
this gentleman is correct, his calendar is correct?
    Mr. Skilling. Well, we have a number of different trading 
floors, but I just do not recall that. We had a lot of people 
from government that would come through, because this was all 
new and people were trying to understand it. So I would not be 
at all surprised----
    Senator Boxer. Do you remember your lunch with Thomas 
Herlihy on December 7, 2000, Executive Director and Chief 
Financial Officer of FERC?
    Mr. Skilling. Who? There is a----
    Senator Boxer. H-E-R-L-I-H-Y. Do you remember anything like 
that?
    Mr. Skilling. No, I'm sorry, I do not.
    Senator Boxer. Do you know this Daniel Larcamp? Do you 
remember who he is?
    Mr. Skilling. No.
    Senator Boxer. Had lunch with him. Okay. Well, Mr. 
Chairman, I will submit some more questions for the record 
regarding this series of meetings that Mr. Skilling does not 
remember.
    Mr. Skilling. Have you gone through----
    Senator Boxer. Do you remember any other meetings with FERC 
employees or decision-makers at all during the time when 
Californians were asking FERC to intervene? Do you remember any 
other meetings?
    Mr. Skilling. While California's----
    Senator Boxer. Yeah.
    Mr. Skilling. No, I had----
    Senator Boxer. The last six months you were----
    Mr. Skilling. I had meetings with FERC commissioners, but I 
do not remember in the last six months that I was with the 
company that I met with FERC commissioners.
    Senator Boxer. Okay. I have one last question and then I am 
done. You will be very happy to know that.
    Mr. Skilling. You have not asked any questions yet.
    Senator Boxer. Well, I will. I said I'm done with my part.
    Mr. Skilling. Oh, Okay.
    Senator Boxer. I'm making some statements. I just asked you 
a question. You just answered that you did not recall.
    Now I want to talk to you about overbooking lines. These 
are two traders, T-R-A-D-E-R-S. Here is what they say: ``What 
we did was overbook the transmission line we had the rights on 
and said to California utilities, `If you want to use the line, 
pay us.' By the time they agreed to meet our price, rolling 
blackouts had already hit California and the price for 
electricity went through the roof.''
    Another one said: ``We would overbook the lines, which 
would cause congestion. The price of power would go up on the 
other end and--where the power was being delivered to.''
    Do you have any knowledge that this was happening?
    Mr. Skilling. What is the----
    Senator Boxer. By Enron traders.
    Mr. Skilling [continuing]. Reference to?
    Senator Boxer. It is about the transmission lines in 
California being overbooked by Enron.
    Mr. Skilling. Is this the result of the ISO [independent 
operating system] loading testimony that was held in, I 
believe--I think it was the spring of----
    Senator Boxer. Well, let me explain. I'll explain what it 
is, because it is in an article here. The trader said: ``Enron 
held the transmission rights on path 26, a key transmission 
line connecting Northern California to Central California, and 
also connecting to path 15, a major bottleneck grid pathway in 
Northern California owned by PG&E, which no one broke as a 
result of all of this.''
    So my question is are you aware that the traders were, in 
fact, overbooking the line and congesting these transmission 
lines? Were you aware of that at all?
    Mr. Skilling. The only thing that I'm aware of, Senator, is 
there was a difference of opinion on the rules of the 
independent system operator. It was just set up. Well, you know 
better than I do when the independent system operator came into 
effect. But there was a question as to how you could schedule 
and nominate power onto the system. And it turns out the way it 
works, it is like, you know, in the New York Mercantile 
Exchange. In the New York Mercantile Exchange, in a typical day 
probably 200 to 300 BCF of gas is traded. The settlement 
location for that is Henry Hubb.
    You can only move 300 million cubic feet, so you're trading 
something on the order of 700 times the amount of volume that 
can physically be moved through a delivery point. So there 
would be many cases where you would schedule, nominate 
capacity, in anticipation of an offsetting nomination that was 
going to be coming later. That is absolutely standard industry 
practice. And the ISO looked into one specific case. They said 
that their--it is my recollection of what they said, is the 
rules were not quite clear.
    Senator Boxer. Okay.
    Mr. Skilling. And they ended up, I think we resolved it, 
said that we would change the rules.
    Senator Boxer. Well, Mr. Chairman, I just want to say that, 
again, it is changing the subject. We have traders here from 
Enron who are saying they did something wrong, but you do not 
see anything wrong. And if I could just close and leave.
    There was a whole advertising campaign against Governor 
Gray Davis. The ads were sponsored by an organization called 
American Taxpayers' Alliance. The Governor Gray Davis Committee 
has had to file a suit because the people behind these ads will 
not come forward. Do you know anything about those ads that 
blamed the Governor for the grayouts it was called?
    Mr. Skilling. No, I do not, Senator.
    Senator Boxer: You do not know anything and you never 
talked to anyone who contributed to that fund and----
    Mr. Skilling. I----
    Senator Boxer. We're going to find out eventually.
    Mr. Skilling. I do not know.
    Senator Boxer. But you do not know that Enron contributed 
or any of your traders, like----
    Mr. Skilling. I do not know.
    Senator Boxer. Dynegy or--you never--you did not know about 
this ad campaign?
    Mr. Skilling. I knew there were all sorts of ad campaigns 
going on in California.
    Senator Boxer. Did you know about that one?
    Mr. Skilling. What is it called again?
    Senator Boxer. It was called out ``Grayouts from Gray 
Davis.'' They began June 18, 2001, before you left.
    Mr. Skilling. I do not recall, Senator.
    Senator Boxer. Okay. Thank you very much.
    Senator Dorgan. Senator Nelson.
    Senator Nelson. Senator Boxer, do you need some more time?
    Senator Boxer. No.
    Senator Nelson. You're certainly welcome to mine.
    Senator Boxer. I think I did what I had to do.
    Senator Nelson. Mr. McMahon, let me pick up where we left 
off. You were describing the master limited partnerships, and 
you specifically mentioned EOTT. Are you aware of any other 
master limited partnership?
    Mr. McMahon. The only other one I'm--that I'm aware of is 
Northern Border Pipeline. And I'm not 100 percent certain that 
that actually is a master limited partnership.
    Senator Nelson. Well, in your opinion, can you explain to 
the Committee a description of how a master limited partnership 
is structured?
    Mr. McMahon. I really cannot with any degree of accuracy. 
I'm just vaguely familiar with EOTT as it came across my area 
of responsibility over the last month or so when EOTT's 
management asked Enron to perform under a credit support 
agreement.
    Senator Nelson. Mr. Skilling, can you provide to the 
Committee a description of how a master limited partnership is 
structured?
    Mr. Skilling. I'm sorry, Senator, I cannot. I think it's a 
tax structure and they're pretty complicated. I do not know.
    Senator Nelson. Okay.
    Ms. Watkins, we were trying to get the specific label on 
this when we were talking earlier. Do you have any information 
you can share with the Committee?
    Ms. Watkins. No, I do not. I'm not familiar with how master 
limited partnerships work.
    Senator Nelson. Okay. Let me ask Mr. Skilling. We were 
talking earlier about CalPERS and Ontario and how in 1997 and 
early 1998 there was a successful involvement of getting 
CalPERS and Ontario Teachers' Pension Plan to invest in EES. We 
had talked about that. Now, at the same time, you had a 
financial stake in EES, did you not?
    Mr. Skilling. I do not know. I did not have a--well, I had 
a--we had something that was called phantom equity, which was--
you could--when we started new businesses back in the early 
1990s we tended to give a piece of the business to the 
executives. We started EES, I believe in 1994, and I was given 
a piece of phantom equity in that. We converted that to--we did 
away with the plan and converted everybody onto standard Enron 
stock and options, and I do not recall the specific date of 
that conversion.
    Senator Nelson. Well, what begs the question is--and we're 
looking at this from a standpoint of legislation--is it a 
conflict of interest for an officer of a company that has an 
interest in an entity of that company to go out and to get 
others to purchase into that company in which the officer has 
an interest?
    Mr. Skilling. Well, you know, it was standard and is 
standard industry practice. For example, in the development 
business, when you're developing a power plant, typically you 
give the developers a percentage of the power plant. And then 
they're out finding additional investors because you typically 
only want to keep a small sliver. So that would be a standard 
industry practice, Senator.
    Senator Nelson. Do you think that needs to be changed?
    Mr. Skilling. I, quite frankly, have not really thought 
about it. I'll think about it and--I do not think it is a 
problem. I do not know, I'd have to think about it.
    Senator Nelson. Well, you know, we live in a different 
world then, because I can guarantee you if any of the Members 
of this Committee were trying to get people to buy into 
something that they had an interest in there would be people 
questioning the conflict of interest. I think that is something 
we're going to have to look into, Mr. Chairman, from the 
standpoint of the protection of consumers.
    Mr. Skilling. No, but I think if the issue is one of 
disclosure, I mean my experience has been--and when we would 
bring in outside private equity to participate with us, 
typically they would insist that management have some sort of 
an equity interest in the company. They would insist on that, 
so that they had some sort of an incentive. That was the last 
plan, to my recollection, where we had that.
    And, in fact, we had looked at a number of other businesses 
where--in fact, Mr. McMahon was involved in a business where we 
were trying to bring in some outside equity and the outside 
equity parties demanded that management have a percentage of 
the business. And I ended up personally terminating the 
discussions or telling them we're not going to do the deal, 
because I said, ``We will not put our employees in a position 
where they're not working for Enron Corporation.''
    So, I think typically it is the private equity partners 
that like it. I think from Enron's standpoint, it is a good way 
to incent people. So I think it is probably a little different, 
but I'll think about it and----
    Senator Nelson. Did you have any other financial interest 
in any other entity in the company?
    Mr. Skilling. When I started with Enron in 1990, I was 
given a partial--or one of these phantom percentages in the 
wholesale market, when we started that wholesale market. And 
then I converted that. In fact, I believe the conversion of 
that plan was at my insistence also into just standard Enron 
stock and options, I believe in 1994 or 1995, something like 
that.
    Senator Nelson. Would you provide a list to the Committee 
of the entities in Enron that you had a financial interest in?
    Mr. Skilling. It is just those two.
    Senator Nelson. So state those two then again please for me 
for the record.
    Mr. Skilling. It is what we called Enron Gas Services, 
which later became Enron Capital & Trade; the name changed. And 
the other one was Enron Energy Services. They were both kind of 
standard phantom plans.
    Senator Nelson. Would those entities include private 
partnerships as well?
    Mr. Skilling. Those were--well, Enron North America, our 
merchant business, was 100 percent owned by Enron Corporation. 
We never sold an interest in that business to anyone. Enron 
Energy Services we sold 7 percent to CalPERS and Ontario 
Teachers. Then we ended up buying that back, I believe a year 
later, at what turned out to be, I think, a very good 
investment for CalPERS and for Ontario Teachers. I think--I 
mean the business was great for them. It was a good investment 
on their part.
    Senator Nelson. I'm sure it was.
    Mr. Skilling. ``We'' meaning Enron bought them out.
    Senator Nelson. I'm sure it was, but my question was were 
you involved in any of those private partnerships? Did that 
include your investments in those two entities? Did that 
include any private partnerships was the question.
    Mr. Skilling. I do not--Senator, I do not think so. I do 
not know. Enron North America, or Enron Gas Services was a 100 
percent-owned subsidiary. And Enron Energy Services was 100 
percent-owned, except for that piece that was sold to CalPERS 
and Ontario. And we bought it back, I think after--do you 
remember if it was a year? It was a relatively short period of 
time.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Dorgan. It is my intention to recognize Senator 
Fitzgerald for 10 minutes. I will follow that by 5 minutes, and 
we will then adjourn the hearing. You have been with us for 5 
hours and have been very patient.
    Senator Fitzgerald.
    Senator Fitzgerald. Thank you.
    Mr. Skilling, I wanted to return to the transaction with 
the Braveheart Partnership again. That was a situation in which 
Enron had a video business, a broadband video business. It 
entered some kind of an agreement with Blockbuster. Blockbuster 
was going to provide video content, movies, and Enron was going 
to beam the movies to people's homes via their broadband video 
network. And that business was a fairly new business. My 
understanding is it just existed, at its height maybe had 1,000 
customers. Is that your recollection?
    Mr. Skilling. I do not know what the final number was. We 
were in a beta test in Portland, Oregon; Salt Lake City; New 
York City; and one other city, I forget which. But, at that 
point it was a beta test.
    Senator Fitzgerald. And that was the point in time in which 
Enron sold that business?
    Mr. Skilling. Sold a portion of the business.
    Senator Fitzgerald. Just a portion of the business?
    Mr. Skilling. Yes.
    Senator Fitzgerald. What portion of the business did you 
sell?
    Mr. Skilling. I think it was--I cannot tell you exactly, 
but I think it was the first 10 years of--it was a share in the 
first 10 years of cash-flow in the business, something like 
that.
    Senator Fitzgerald. Okay. And you were not sure who it was 
sold to? You did not know who it was sold to. You said that 
before.
    Mr. Skilling. No. No, I knew the name of it was Project 
Braveheart, was internally what the project name was. I do not 
know who the counterparty, the specific counterparty was in the 
transaction.
    Senator Fitzgerald. Now my understanding based on newspaper 
accounts--and I do not have the original documents--is that the 
Braveheart partnership was created to receive, I guess that 10 
years of earnings or revenues on that Blockbuster video 
business. And that partnership went out and found an investor 
in Wood Grundy, the investment banking arm of the Canadian 
Imperial Bank of Commerce.
    And my understanding is that Canadian Imperial Bank of 
Commerce, Wood Grundy, was going to take the earnings of that 
business, maybe it was for the next 10 years, in return for 
supplying the partnership with $115 million. My understanding 
is also that Enron promised to guarantee that Wood Grundy would 
get back the $115 million that it put into the deal. If for 
some reason the video business did not pan out, Enron would 
insure that the bank in Canada would get its money back. Is 
that your recollection?
    Mr. Skilling. I do not know the specifics of the 
transaction, Senator. I mean, I would have known that there was 
a sale. I mean, you know, you'll pick up--it is a big company, 
but I knew that we were in the process of selling a portion of 
what we called our content services business, which is what 
you're describing. And I believe we ended up selling. I do not 
know the specific nature of the transaction, the specific terms 
and conditions, or the pricing of it.
    Senator Fitzgerald. We discussed earlier that Braveheart 
paid $110 million to Enron, which Enron booked into earnings 
over two quarters, $54 million in the fourth quarter of 2000 
and $54 million in the first quarter of 2001. Do you recall 
that?
    Mr. Skilling. I've read the newspaper account, so, yes.
    Senator Fitzgerald. But you do not recall when you were at 
Enron booking $54 million in earnings from that during your 
first quarter as CEO of the company?
    Mr. Skilling. Yeah. If you'd asked me, I would not have 
remember the number, but I have subsequently read in the papers 
what the number is.
    Senator Fitzgerald. Now that business that you sold 10 
years worth of the revenues from, was that worth $110 million? 
It did not really have any paying clients, did it, at that 
point? Did it have any paying clients?
    Mr. Skilling. I--we were in beta test, so I do not know 
offhand. Was it worth that much money? Yeah. I mean if you look 
at the enthusiasm that there was for broadband applications at 
that time. We had the only working online, effective video on 
demand platform in the country. And video on demand was a very 
exciting concept.
    It is a very exciting concept where it is like a simulated 
VCR, where you can buy a movie from Blockbuster or from a 
studio, you can stop it, you can fast forward it, you can 
return it, rewind it, but you do not have to return it to the 
store. I mean, all you do is you just call it up on your 
screen. We had a whole list of movies. You could pick which 
movie you wanted. When you picked that movie, it stayed in a 
server close to your home for 3 days, and at the end of the 3 
days, it would be taken back. So it was very, in my opinion, 
and I think most people in the industry, this very powerful----
    Senator Fitzgerald. So you thought it was reasonable to 
take into earnings $110 million based on the sale of 10 years 
worth of revenues?
    Mr. Skilling. Yeah. Selling a piece of that business right 
then, I think I--my guess is----
    Senator Fitzgerald. Thought that was reasonable, yes or no?
    Mr. Hiler. Excuse me. Let me just make sure you answer the 
question. I think he is already answered that he did not know 
the figure that was----
    Mr. Skilling. Right, the specific----
    Mr. Hiler [continuing]. Taken in earnings. He answered you.
    Mr. Skilling. Was--I do not know the specifics of the 
transaction. Was there a tremendous hunger on the part of 
investors for access to investment vehicles in video----
    Senator Fitzgerald. Okay.
    Mr. Skilling [continuing]. Absolutely.
    Senator Fitzgerald. Were you aware that Enron Corporation 
had made some kind of a promise to pay the Canadian bank back 
if that business did not earn back the bank's investment?
    Mr. Skilling. No, I did not know that.
    Senator Fitzgerald. You were not aware of that. So somehow 
the corporation gave some kind of a guarantee, something akin 
to a guarantee, and you as a CEO were not aware of that. 
Somebody could guarantee a $115 million debt without the CEO 
knowing?
    Mr. Skilling. Yeah. I would imagine that the approval 
authority for a credit guarantee would be lower than for a 
cancellation. I just do not know. I do not recall, Senator.
    Senator Fitzgerald. It was a pretty good way to create 
earnings though, is it not, if you can effectively have a 
partnership borrow money. Enron can guarantee it so that the 
partnership can borrow all the money it would like, and then 
pay it to you and you'd just report that borrowed money as 
income. Does that make sense to you, Mr. Skilling?
    Mr. Skilling. You would have to talk to the accountants 
about that. I mean I, if the accountant said, you know, and I'm 
sure----
    Senator Fitzgerald. This is not an accounting issue. This 
is a valuation issue. I'm not questioning the accounting. I 
think the accounting may have been 100 percent according to----
    Mr. Skilling. Right. If you're saying was it worth 
something, asolutely.
    Senator Fitzgerald. This is a valuation issue, not an 
accounting issue. I want to----
    Mr. Skilling. The valuation of the partnership interest, I 
mean at this time, this--people were so enthusiastic about 
this.
    Senator Fitzgerald. Well, how did Enron get $110 million? 
Why not $50 million? Not what--why not $500 million? How did 
they pick the $110 million value?
    Mr. Skilling. I do not know, but I would guess that they 
were looking--my guess would be they were looking at comparable 
technology companies at that stage of development to see what 
they were selling for.
    Senator Fitzgerald. As CEO, did you want any procedures in 
place to insure that Enron got fair value for assets that it 
sold?
    Mr. Skilling. We had lots of procedures in place. We had a 
group that was called a risk assessment and control group that 
would have done absolute strip-down of that transaction to see 
if we were getting fair value for it. That would be standard 
operating practice inside the company.
    Senator Fitzgerald. Now it turns out in that case you got 
more than fair value; is that not right? Because ultimately, 
that business fell apart completely and wound up being 
worthless; is that not correct? And that was before you 
departed the company.
    Mr. Skilling. Well, in retrospect, I think it turns out 
that we all, not just me, but I think several million people 
significantly overestimated the opportunities available in the 
broadband business and the electronic delivery business.
    What the problem was, I mean the problem turned out to be 
the last mile. We could not get enough direct access over the 
last mile. We had enough backbone to provide the video on 
demand. We had plenty of backbone and capacity and fiber to get 
the movies out to the extremities of the network, but we could 
not get through the last mile.
    Senator Fitzgerald. Mr. Skilling, it is not just that video 
business that you sold to partnerships. You sold lots of other 
Enron assets to partnerships and were paid lots of money for 
it, and in many of the cases it appears that Enron--or the 
partnerships had borrowed the money to pay Enron for those 
assets and that Enron had either guaranteed the borrowings or 
provided some kind of credit support for it.
    Mr. Skilling. Was providing some portion----
    Senator Fitzgerald. So that it looks to me----
    Mr. Skilling. You do not have to go through specific 
transactions. I'll give you an example, Senator. If you sell 
your house, a lot of people when they sell their house provide 
seller finance. And it is still a sale, I mean, once you've 
sold and you're taking a credit risk on the counterparty that 
has purchased that house. That can be entirely appropriate in 
many, many circumstances. To the extent that we were providing 
financing, we had a finance company.
    Senator Fitzgerald. Did you consider these seller 
financing?
    Mr. Skilling. To the extent that I--we'd have to look at 
the very specific transaction and what the structure of it was, 
but if someone had said to me that someone was buying something 
from us and we were financing a portion of that purchase, I 
would have said, ``That's no different than General Electric 
financing washing machines.'' It is a natural----
    Senator Fitzgerald. And was the seller financing all 
disclosed in your filings with the Securities Exchange 
Commission?
    Mr. Skilling. The balance sheet would show every time we 
had an accounts receivable. Yes, sir.
    Senator Fitzgerald. That you had, in fact, financed the 
purchaser's purchase. That is all disclosed?
    Mr. Skilling. Senator, we did, in a typical year, I would 
imagine we did 30,000 or 40,000--maybe more than that, maybe 
50,000--transactions. Did we separately disclose every single 
transaction? You could not do it. I mean, you'd be sending the 
investors a phone directory, you know, something of that size 
that had the information in it.
    Senator Fitzgerald. Is this typical seller financing though 
when it is not really an independent third party, when it is 
really a partnership that you own 97 percent of? Are not you 
really just doing seller financing almost to yourself?
    Mr. Skilling. Senator, you're--you have to ask the 
accountants what the logic is that they used. But when they 
came to us, they believed that our----
    Senator Fitzgerald. It is not an accounting issue.
    Mr. Skilling. Why is that not an accounting issue?
    Senator Fitzgerald. That is not the issue I'm raising. I'm 
just saying----
    Mr. Skilling. Okay, then I'm missing something. Try it 
again.
    Senator Fitzgerald. I mean you're selling assets to 
something that you own 97 percent of.
    Mr. Skilling. Right.
    Senator Fitzgerald. And you're booking revenues based on 
those sales.
    Mr. Skilling. Right. So they----
    Senator Fitzgerald. Even though you are liable contingently 
for the indebtedness incurred by the partnership.
    Mr. Skilling. Well, I'll give you an example of where that 
would be entirely appropriate. Let us say that I had a mortgage 
pool; I had a pool of mortgages. And I put them into a pool and 
I put 3 percent sliver of equity in and I sold it. Now, once 
you've done that, you have transferred risk, 3 percent risk. 
Turns out mortgages are real safe. You know, the default rates 
are pretty low. And so the accountants look at that once that 
risk transfer has occurred. They look at that and they say has 
the risk transferred? If the risk transfers, you have to 
account for it as a sale transaction.
    So I would have to look at each of the individual 
transactions. I cannot. I'm not an accountant, so I would not 
be able to look at it. But was it appropriate to book revenue? 
Ask Arthur Andersen. If it was inappropriate, we would not have 
done it. If it was inappropriate, if there was any time that 
there was anything that I was aware of that was inappropriate, 
we would not have done it.
    Senator Fitzgerald. Now were you aware that the company 
built up $20 billion in off balance sheet indebtedness in this 
manner? And that is why you had to file bankruptcy, is it not, 
because those debts were coming due and you could not pay them?
    Mr. Skilling. I refer you again to the 10-K on page 72. It 
actually--it lists it out in detail.
    Senator Fitzgerald. So you were totally aware of it, of all 
the off balance sheet indebtedness?
    Mr. Skilling. And so was everyone else. So were the rating 
agencies, so was everyone else. There was no attempt to hide--
--
    Senator Fitzgerald. It never occurred to you that this was 
too much debt to be--you were not concerned about how much debt 
you were incurring?
    Mr. Skilling. We went to the rating agencies and we would 
show them what our balance sheet was. We would show them those 
same disclosures. They would go through and they'd look at it. 
And they looked at it and they said we were BBB plus. Now is 
that a reasonable number? I think so. We had a great business. 
We were a major, major player in a very fast growing business 
in energy wholesaling. That business was highly, highly 
profitable. We would have made--if this catastrophe had not 
occurred, I believe strongly that we would have made $220-
$225--$2.20-$2.25 per share of real live earnings in the year 
2002. Put any kind of multiple against that. Put a 20 multiple, 
put a 10 multiple against that. The stock price at a minimum 
should have been in the $20 to $30 range.
    Senator Fitzgerald. Enron just experienced a liquidity 
problem last fall?
    Mr. Skilling. We had a run on the bank based on a loss of 
confidence that was related to all of this.
    Senator Fitzgerald. But when they went into the bankruptcy 
it turns out that people are not going to get 100 percent back 
on the dollar, are they, creditors are not?
    Mr. Skilling. Any time you go into bankruptcy, all 
accounting, all balance sheet transactions assume an ongoing 
business. Once you put a company through bankruptcy, I 
guarantee you you are going to get a haircut on every asset 
that you have.
    Senator Fitzgerald. Mr. McMahon, what percent on the dollar 
do you think that creditors of Enron are going to get in the 
bankruptcy? Are they going to get over 50 percent on the 
dollar?
    Mr. McMahon. Senator, I'm afraid it is way too early to 
even make that analysis yet, but it is certainly less than 100 
cents on the dollar. We've recently disclosed that we believe 
the recovery on the equity to be----
    Senator Fitzgerald. Unattached.
    Mr. McMahon. Basically zero, right. No----
    Senator Fitzgerald. On the equity, well, certainly the 
equity's wiped out, but what about on the debts?
    Mr. McMahon. Right. Well, that is my point. Since the 
equity's not going to get anything----
    Senator Fitzgerald. Think it will be more than 50 cents on 
the dollar?
    Mr. McMahon. It is just too early to tell.
    Senator Fitzgerald. Mr. Skilling, I dispute the notion that 
if it is a solvent bank, if it were liquidated that it could 
not pay off all its depositors. A solvent bank would liquidate 
its government bonds. If its loans were what they said they 
were and it was a solvent bank, they would liquidate and sell 
the loans, and they would have capital and surplus left over 
and everybody would get paid off. You only have a problem and 
cannot pay off creditors if, in fact, your liabilities exceed 
your assets. And my understanding from what I've read is 
Enron's going to be paying somewhere like 35 cents on the 
dollar back to its creditors.
    Mr. Skilling. Senator, you may be a great Senator, but when 
it comes to understanding what happens in bankruptcy, I would 
suggest that if you put General Motors into bankruptcy 
tomorrow, they are not going to be able to sell their machine 
tools for 100 cents on the dollar. That is just not what 
happens. When we used to have runs on the banks in the late 
1880s, as soon as that run began it was, ``Katie, bar the 
door,'' because then the lenders, the people that had borrowed 
the money decided they did not have to pay it back; they were 
taking liquidity away from the corporation.
    It is almost impossible--that is why it is so important 
that the company got a couple of months. If the company had a 
couple of months of breathing space, I think things would have 
turned out okay. The company was solvent. The financial 
statements suggested the company was solvent. It was illiquid, 
not insolvent.
    Senator Fitzgerald. Mr. Skilling, one of the first bank 
boards my father was on in the 1950s, in those days they used 
to liquidate banks, and it was because the owners just wanted 
to get their investment back. And they simply liquidated the 
bank and they paid off everybody and paid their shareholders a 
return. I submit to you that if a company is fully solvent, it 
can pay all its debts back and pay back its retained earnings 
against capital and surplus. I agree that----
    Mr. Skilling. In 3 days? If--in 3 days, if your creditors 
are saying I want the money right now, you cannot do that.
    Senator Fitzgerald. Obviously you cannot do it right away, 
but over a period of time you can. And Enron got a timeout from 
the bankruptcy and it is only going to pay back 35 cents on the 
dollar.
    Mr. Skilling. Enron has now got----
    Senator Fitzgerald. It has way more liabilities than 
assets.
    Mr. Skilling. Enron has got lawsuits from any of a number 
of claims. Once this thing happens, once you cross that corner, 
it is very hard to turn around and go back the other direction. 
I mean that is just the----
    Senator Fitzgerald. All right.
    Mr. Skilling. That is the way it is always been.
    Senator Fitzgerald. If I could go to Mr. McMahon, I'm going 
to wrap up. I want to let all of you out. And my good Chairman, 
Senator Dorgan, who has been very indulgent, I appreciate it.
    Mr. McMahon, Ms. Watkins was in the company in the CFO's 
office for what, six weeks, Ms. Watkins, before you figured out 
that it was all a house of cards?
    Ms. Watkins. Probably four to six weeks.
    Senator Fitzgerald. Mr. McMahon, you were at Enron for many 
years. You were treasurer from 1998 to March of 2000. Did you 
not figure out it was a house of cards in all that time?
    Mr. McMahon. No. Frankly, the first time I saw Enron having 
financial problems was when I took over as CFO in the middle of 
the crisis. And it was very clear at that point in time that 
there was, in fact, an inability for the company to access 
capital in the capital markets, in the bank markets. That was 
my first clue that there was a major financial crisis at this 
company.
    Senator Fitzgerald. So this all just went right over your 
head all those years that you were there as treasurer?
    Mr. McMahon. Even as Treasurer, I thought we had strong 
businesses, and was not until I saw it in late October that--it 
was not long before that that our CFO had told quite a lot of 
management that the balance sheet was in extremely good shape.
    Senator Fitzgerald. And finally, wrapping up the first 
question I asked you. I have some more details about that 
report the auditors gave in April 1987 to the Enron Board. They 
recommended to the Enron Board in April 1987 that the two rogue 
executives who had misappropriated money in New York, that they 
be terminated immediately, and they were kept on at least three 
or four months after that. And during that time, a control 
officer from Enron was supposed to go out and watch them, and 
somehow he was delayed several months in going out to watch 
them. And then during these three to four months that these 
rogue traders remained at Enron Oil, they ran up $1 billion in 
bad trades.
    And then Rudy Giuliani, who was U.S. Attorney at the time, 
started a prosecution investigation in the fall of 1987. The 
two eventually pled guilty to over $100 million in bad trades 
and fraud. One served time in jail and the other was put on 
probation. And I said in that Vanity Fair article that I 
introduced into the record earlier, that Mr. Lay was the one 
who resisted terminating these employees, even though it was 
the unanimous recommendation of the team of internal auditors 
and external auditors. And my understanding is you were on the 
term of external auditors at Arthur Andersen at that time; is 
that correct?
    Mr. McMahon. Yeah. In 1987, I was a--I think a junior 
manager at Arthur Andersen.
    Senator Fitzgerald. But you were--did go to New York?
    Mr. McMahon. Yes.
    Senator Fitzgerald. Do you remember the recommendation to 
the Enron Board?
    Mr. McMahon. I do not recall. I mean, I know there was an 
internal control recommendation made, but I, you know, that was 
prepared by the partner and the senior manager on the job.
    Senator Fitzgerald. So you were not involved in that----
    Mr. McMahon. Well, I was involved in the detailed audit 
work at the offices in New York.
    Senator Fitzgerald. And you never heard anything about: 
Boy, they were awful slow to terminate those two execs who 
apparently just took money and put it in their own account that 
was Enron money?
    Mr. McMahon. I do not recall. I mean, it is 15 years ago.
    Senator Fitzgerald. Okay, okay.
    Thank you very much, Mr. Chairman and all the panelists.
    Thank you for being here. Thank you.
    Senator Dorgan. Let me just finally ask Mr. McMahon. Have 
you read the Powers Report?
    Mr. McMahon. Yes, I have.
    Senator Dorgan. Do you agree with it?
    Mr. McMahon. I do not think I know enough of the details or 
agree with one or the other. It raises some very, very serious 
concerns which we are investigating currently. We've made some 
very significant personnel changes as a result of it.
    Senator Dorgan. Have you fired people as a result of it?
    Mr. McMahon. Yes, we have.
    Senator Dorgan. How many?
    Mr. McMahon. Well, the Chief Accounting Officer and Chief 
Risk Officer have been discharged. The General Counsel has 
resigned, and we've made some internal moves within the 
accounting department to give it new leadership, as well as our 
auditors have been discharged.
    Senator Dorgan. You fired employees because there was 
something wrong, something going on wrong that the Board of 
Directors' report steered you to. Is that the basis of the 
dismissals?
    Mr. McMahon. Yeah. I believe those--the Chief Risk Officer 
and Chief Accounting Officer were discharged for cause pursuant 
to a Board request.
    Senator Dorgan. Is that at odds with what Mr. Skilling is 
telling us today, that really things were fine?
    Mr. McMahon. I mean I--obviously the Powers Report brought 
to light some things that I do not--well, certainly the Powers 
Report brought things to light that needed some changing.
    Senator Dorgan. Were they the things that you were 
attempting to bring to Mr. Skilling's attention many, many 
months before that?
    Mr. McMahon. Well, the Powers Report clearly talks about 
the conflicts of interest that I was concerned about, but I 
think it obviously goes on to specific transactions which I was 
not aware of at the time I brought that up to Mr. Skilling.
    Senator Dorgan. And do you believe Mr. Skilling was unaware 
of all of this?
    Mr. McMahon. I really do not know.
    Senator Dorgan. But you believe you made Mr. Skilling aware 
of some of it?
    Mr. McMahon. Oh, clearly as far as the structure of the 
conflict internally. You know, I recall very clearly our 
conversation. It was a very big event in my life at that point 
in time. So my meeting with Mr. Skilling was, after several 
meetings with my boss and then the Policy Committee above my 
boss and going to Mr. Skilling, I have a vivid recollection of 
that.
    Senator Dorgan. That recollection is different than Mr. 
Skilling's recollection. Mr. Skilling testified in the House 
that you came to see him about compensation, and he had no 
recollection of discussion beyond the issue of compensation; is 
that correct?
    Mr. McMahon. That is the understanding--that, to me, is Mr. 
Skilling's testimony. And I did mention compensation as a 
symptom in that meeting, but I obviously had wider concerns 
than compensation.
    Senator Dorgan. Let me ask Ms. Watkins, if I might. The 
import of your testimony before the U.S. House was to suggest, 
I think, at least as it was interpreted by the media, was that 
Mr. Lay was sort of the unwitting, innocent victim here, ran 
the company but did not really know very much. Was that your 
intention when you testified? Is that a fair assessment of Mr. 
Lay's role in the corporation?
    Ms. Watkins. I'm drawing that conclusion based on my eight 
years at Enron, where I worked with a very hands-on Rich Kinder 
as COO and a very hands-on Jeff Skilling as COO. I never had 
very much interaction with Mr. Lay. This fall, when I did have 
interaction and when I conveyed my concerns, I was extremely 
disappointed by his inability to grasp the dire situation the 
company was in. His actions of writing this off with just no 
contingency plans reaffirms my opinion that he did not get it.
    Senator Dorgan. Did not want to get it or did not get it? I 
mean you actually served it to him.
    Ms. Watkins. Well, could be a little bit of both, could be 
a little bit of both.
    Senator Dorgan. But you actually served it up on a platter, 
did you not, to say ``Here is the situation as I see it. And by 
the way, do not ask Vinson & Elkins to look into it.'' And what 
he did is he asked that particular law firm to look into it, 
and then restricted the law firm's view with respect to the 
accounting pieces. I'm just trying to understand what you're 
saying about Mr. Lay's role. Mr. Lay came here and did not 
testify.
    Ms. Watkins. I'm just giving you my opinion based off my 
interactions with the people that I worked with at Enron. And 
this was such a grave issue, and to see it written off and 
unwound, and we did not even have an explanation ready for 
investors. October 23, at an all employee meeting to address 
the write-down, Mr. Lay likened this crisis to poor investment 
decisions we had made, to the Peruvians nationalizing our oil 
company in the 1980s. It is completely different.
    Senator Dorgan. We are trying to get the names of the 
investors in all of the partnerships and having an almost 
impossible time getting them.
    Mr. McMahon, you're the President and COO of the company at 
this point. I assume those records exist somewhere. I have 
talked to the interim CEO, his attorney has called us back; I 
received some piece of information that was indecipherable to 
me a couple days ago. But this Committee intends to search for 
the names of all of the investors in all of the partnerships, 
and I'm wondering if you, as a President of the corporation, 
will be helping us in achieving that goal.
    Mr. McMahon. We'll--Senator, we'll obviously cooperate, as 
we have been, fully. But please keep in mind these partnerships 
were not sponsored by Enron, they are outside. So those 
documents would not typically reside in the Enron offices, 
although as I understand our internal investigation sought--
searched for those. So we'll continue to cooperate.
    I do understand there is one particular one on LJM2; the 
limited partners have filed a lawsuit in the State of Delaware. 
And so, I think part of their lawsuit, those who've filed 
motions against the general partner, I think that is a matter 
of public record on the court's website.
    Senator Dorgan. But let me ask you, if an accountant comes 
to you today as President of the company and says, ``All right. 
Here is a partnership, an off-the-books SPE partnership, and 
Enron owns 97 percent of it, I want to see the records. I want 
to verify that the other 3 percent is non-Enron. Show me the 
records.'' What are you going to show the partner, nothing? 
You're going to have to have the records, are not you?
    Mr. McMahon. Sure. I think on these partnerships you're 
talking about today, the LJM, et cetera, the--I do not know 
what due diligence was done by the accounting group at the 
time. Clearly going forward, whether we ever do another SPE 
again is another question, but clearly, due diligence efforts 
for Enron going forward would be much more stringent.
    Senator Dorgan. Well, I must tell you that reading the 
Board of Directors' report, it appears to me that due diligence 
is a term that is totally unknown inside that corporation. The 
construction of some of these partnerships according to the 
Board of Directors report itself, paid no attention to due 
diligence.
    But let me make a final point.
    Mr. Skilling, at the start of today you were credited for 
testifying. I will similarly give you credit for coming. I must 
say that it was disappointing to me that Mr. Lay would not 
testify. He has every right not to testify.
    I appreciate your testifying, Mr. Skilling, but I must tell 
you that as I listened to your testimony, there are times when 
that Harvard MBA shows through very well. You are articulate, 
incisive in your analysis of complex financial transactions, 
and then, when pressed on the Board of Directors investigative 
report you seem to me to lapse into utter confusion about 
accounting. And somehow, it just does not fit.
    I do not know that we've gotten much closer to the truth 
today. We have to keep digging, it seems to me. This is a 
miserable way to spend a Tuesday, as a matter of fact, but then 
it is a small price to pay compared to the loss of people that 
have lost their life savings and lost their jobs and lost their 
investments. So, we have to continue this process.
    It is not pleasant for you to come and sit at a table for 
five-and-a-half hours. The Committee appreciates the fact that 
you are here today, and we will be conducting about four 
additional hearings dealing with other aspects of this. You 
have been very patient for five-and-a-half hours and the 
Committee appreciates your attendance.
    This hearing is adjourned.
    [Whereupon, at 5:37 p.m. the hearing adjourned.]