Lay Blames Fastow for Enron Problems

Lay said Fastow responded by trying to negotiate a severance package of about $5 million.

"I think at that point in time, I said, 'Hell no, Andy!' and walked out," Lay thundered.

By then, Lay testified, "the market was reeling" and Enron stock was in freefall. By November, he felt the only two ways to save Enron were through a recapitalization of the company by its banks or a merger with cross-town rival Dynegy Inc.

Lay testified that he believed he worked out the details of the merger with the head of Dynegy, had signed the documents and was heading back to Houston from the meetings in New York when he got the call from Dynegy that the board disliked the merger.

"The next Sunday," Lay said, "we filed for bankruptcy."

Earlier Tuesday, Lay said he never told Skilling about an employee's memo that warned that the company "could implode in a wave of accounting scandals."

The memo, by Enron insider Sherron Watkins and delivered to Lay in August 2001, just after Skilling left the company, has proven to be a linchpin of the government's case against Lay and Skilling.

Watkins detailed what she saw as accounting problems at the LJM partnerships.

In his testimony last week, Skilling said Lay had never mentioned the Watkins memo to him, even though Skilling was prominently mentioned in it. Lay's testimony Tuesday corroborates Skilling's.

During Skilling's testimony, government prosecutors seemed incredulous that Lay never mentioned the memo to Skilling, especially in that Lay and Skilling met hours before Lay met with Watkins to discuss the memo.

Lay is being questioned by defense lawyer George "Mac" Secrest, which will be followed by government cross-examination, probably later in the week. Lay's lead lawyer, Michael Ramsey, is recuperating from coronary surgery and Lay has at times appeared uncomfortable in Secrest's hands.