In an appearance before the Securities and Exchange Commission late last month, former Enron CFO Andrew Fastow is said to have invoked the Fifth Amendment when asked about his role in the company's downfall. Just days before, Fastow's lawyer reportedly told one newspaper that Fastow bears no responsibility for the company's collapse — the largest in U.S. corporate history.
But Fastow's own comments suggest that he does. In an interview with CFO in mid-1999, Fastow asserted that he had helped keep almost $1 billion in debt off Enron's balance sheet through the use of a complex and innovative arrangement. "It's not consolidated and it's nonrecourse," he told CFO.
That would seem to depend on how you define "nonrecourse." In fact, the 10-Q that Enron filed on November 19, 2001, states plainly that the debt ultimately was Enron's responsibility. According to the filing, the $915 million debt was backed by Enron's obligation to extinguish it, if necessary with cash.
That obligation, as reported in the 10-Q, would fall to Enron if the company experienced a downgrade below investment grade by any of the three major credit rating agencies. Sure enough, that downgrade took place shortly after the disclosure of the $915 million obligation, along with another $3 billion in similar off-balance-sheet liabilities. And that downgrading, in turn, prompted Enron's bankruptcy filing.
Partnerships Within Partnerships
The debt that Fastow discussed with CFO was needed for a partnership called Marlin, which helped finance the Atlantic Water Trust, Enron's unconsolidated subsidiary. The Atlantic Water Trust in turn invested in Azurix, a subsidiary that owned a majority of the water facilities of a U.K. company known as Wessex.
"What we did," Fastow told CFO, "is we set up a trust, issued Enron Corp. shares into the trust, and then the trust went to the capital markets and raised debt against the shares in the trust, using the shares in the trust as collateral."
During the 1999 interview, Fastow boasted that the Atlantic Water Trust was so effective at minimizing Enron's balance-sheet exposure that several banks that had not been involved in the transaction later "came back and marketed it to us" as their own invention.
Fastow was flattered. "We like to see our ideas get marketed back to us every once in a while," said Enron's ex-finance chief. Neither Fastow nor his lawyers were willing or able to comment for this article.
Credit analysts insist that they did not know the full extent of arrangements such as Marlin before the 10-Q filing on November 19. But earlier, in his comments to CFO, Fastow had argued that the company had supplied enough information, if only in supplemental form, to keep analysts informed. "We have disclosures about it in footnotes," he told CFO in the spring of 1999, "which help our investors and the rating agencies understand all of this."
Dancing in the Dark
In hindsight, of course, analyst understanding turned out to be woefully inadequate. Perhaps, in the case of the rating agencies, analysts felt constrained in their research by the fact that Enron, like other issuers, paid their employers for their opinions.
Analysts at agencies that rated Enron securities scoff at the suggestion of conflicting interests, pointing out that they knew about most of Enron's debt guarantees for off-balance-sheet partnerships and took them into account in their reports. Yet, at least one off-balance-sheet obligation, a $690 million note, took these analysts by complete surprise. Moody's Investors Service, for one, announced that in the future it would look harder at arrangements like those that brought down Enron.
At this point, at least one thing is clear: Footnote disclosures were not enough to help observers figure out what Enron was really doing. Indeed, CFO selected Fastow as an Excellence Award winner in 1999. And only analysts whose firms were paid by Enron seem to have had sufficient leverage to demand the additional information needed to fully clarify the nature and implications of the partnerships. "I wasn't in any position to demand certain information," says Michael Rao, an analyst for Dominion Bond Rating Service in Toronto. "And I couldn't follow it from the outside."
CFO has attempted to contact Fastow in recent weeks, but so far has not succeeded in talking to the former Enron finance chief.