Ken Lay's Optimism Was Outpaced by Reality

In fact, the trading profit at Valhalla was so significant, it could not have been achieved without massively violating the company's trading guidelines. But as chief executive, Lay repeatedly ignored such warnings until an audit revealed that some of the profits were based on falsified transactions designed to fatten traders' bonuses. Instead of firing the traders and informing shareholders, however, Lay persuaded directors to keep things quiet, at least until the company could unwind some of its potentially devastating trading positions. Only six months later did the company came clean, blaming "rogue traders" for a reported $140 million pretax loss that wiped out about half of Enron's profit for the year.

Years later, it would be with the same unshakable confidence that Lay would embark on his civic activities, as he sought to persuade city residents, and the rest of the world, that the cultural and aesthetic wasteland that was downtown Houston could be transformed into a vibrant urban center.

In pressing his campaign for electric power deregulation, Lay lavished millions of dollars on state and federal politicians of both parties, framing the issue as one of free-market efficiency against the entrenched interests of monopoly utilities and their regulators. The experiment finally collapsed with the 2001 power crisis in California, with allegations that Enron and other companies had manipulated the wholesale price of power. Lay immediately, and indignantly, denied the charges, but apparently never bothered to check them out. State investigators soon uncovered the trading tickets and tape recordings that proved beyond doubt that market manipulation was a major factor in the California crisis.

For a corporate executive, of course, it would be unseemly to boast about political connections and influence, even when you're on a first-name basis with the president of the United States or you give his parents a lift to the inauguration in the company jet. But Lay was more than disingenuous in denying his influence over federal energy policy during the early years of the Bush administration. In fact, his post-election memos to the new White House became the centerpiece of the Cheney energy plan. And Lay was able to handpick two members of the Federal Energy Regulatory Commission, where continued support and expansion of electricity deregulation was crucial to Enron's growth strategy.

Even when it came to dealing with Jeff Skilling's sudden resignation as Enron's chief executive, in August 2001, Lay apparently saw it as his duty to calm investors rather than rattle them with the truth. Although he expressed shock and disappointment at the news of Skilling's resignation, he'd known about it for weeks. And contrary to Lay's statements that he'd done everything he could to get the sometimes brash and dismissive Skilling to change his mind, Skilling reportedly told friends that he would have been willing to stay for several months, if only he'd been asked.

I suppose it is possible that a man who thinks as broadly about things as Ken Lay, and who spent as much time dealing with civic and public policy matters, might have left it to others to check over those funny-sounding off-balance-sheet transactions that he approved at the urging of then-Chief Financial Officer Andy Fastow. But when the Wall Street Journal starts running stories about such deals and trading counter-parties and credit-rating agencies start inquiring about them, the handbook for chief executives and chairmen of the board is pretty clear about what to do:

You cancel your appointments, summon your top outside and internal auditors and begin grilling everyone who knows anything about those deals, one by one, until you finally shake the truth out of them.

What you don't do -- unless you're Ken Lay and you're miffed that anyone would dare to question your integrity -- is get on a conference call with industry analysts and declare that you "and the board of directors continue to have the highest faith and confidence in Andy and believe he is doing an outstanding job as CFO." The next day, Fastow was gone.

Were those instances of willful deception? Or are they examples of the self-deception that becomes ingrained after years of obfuscation and half-truths, part of the corporate leadership game? Because of an untimely death in Aspen, we'll never know for sure.

Steven Pearlstein can be reached atpearlsteins@washpost.com