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Enron Executives Testify Before Senate Commerce Committee

Aired February 26, 2002 - 10:25   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: Now, we go right to Capitol Hill. Jeffrey Skilling, former Enron executive testifying before the Senate Commerce committee. Let's listen in.

(JOINED IN PROGRESS)

SEN. BILL NELSON (D), FLORIDA: ...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 the 22nd. In that three week period, just extraordinarily defying logic so I'll follow up wiht that at the appropriate time. Thank you Mr. Chairman.

SEN. BYRON DORGAN (D-ND), ACTING CHAIR, SEN. COMMERCE CMTE.: Senator Nelson, thank you.

Mr. Skilling, why don't you proceed, and would you introduce you counsel as well?

JEFFREY SKILLING, FORMER ENRON CEO: Yes, Mr. Chairman, this is my counsel, Mr. Bruce Hyler (ph), represents Olgle, Olmelveny and Myer. And it -- should I go ahead and give my...

DORGAN: Why don't you proceed, and your entire statement will be made a permanent part of the record...

SKILLING: Right.

DORGAN: ...as is the case with the other two witnesses.

SKILLING: Mr. Chairman, distinguished Senators, my name is Jeff Skilling. I worked at Enron for 10 years, spending 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 on -- 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."

But 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 Miss Watkins also disagrees with Andersen. If the focus of this hearing is 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 at -- while I was at end -- Enron. Second, I never duped Ken Lay. I heard Miss 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. Mince, 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 labelled everything from hucksters to criminals, with a complete disregard for the facts and evidence assembled.

These untruths shatter lives and they have -- 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 an 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 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 -- and are likely to be wrong -- unfortunately, neither common decency nor common sense will carry the day in this politicized process.

I am nonetheless the 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 dialogue today, and I hope that's the case.

Mr. Chairman, unlike so many others so much less fortunate than me, I'm 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.

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've indicated previously. The truth is 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 be done about 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 -- quote -- "appalling" -- unquote. And 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. And that is, of course, at odds with what the board of directors of the corporation itself found following your departure.

But 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'll have plenty of time. Miss 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?

SHERRON WATKINS, ENRON VICE PRESIDENT: It was approximately a half an hour.

DORGAN: Half an hour.

Did you sense a from that meeting Mr. Lay knew what you were talking about? Did he get it?

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.

DORGAN: You indicated in your memorandum, "You are nervous that we will implode in a wave of accounting scandals" -- quote, unquote -- "the business world" -- quote -- "will consider the past successes as nothing but an elaborate accounting hoax" -- unquote. And then you when you testified before the House, you said that the transactions that you were concern 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 Skilling, Mr. McMahon, Mr. Lay, and others? When you say "common knowledge," can you describe that for us?

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.

DORGAN: When you say "upper management," do you believe that would include Mr. Skilling?

WATKINS: Yes, I do.

DORGAN: And yet Mr. Skilling testifies that he really didn't know much about this at all. I'm going to go through a list of board meetings and so on at some later time. 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 accounting hoax and scandals and so on. And you say "common knowledge." Do you believe that includes Mr. Lay? Obviously, it includes Mr. Lay after you addressed it with respect to the memorandum. Did it before that point?

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? And my point to him is yes, there is something wrong when an entity owes us $700 million -- we've booked on the income statement, we have a receivable from that entity -- and they're going to pay us back by cashing in our own stock.

DORGAN: Mr. Skilling, where you aware of that structure? We're talking now about the structure. Were you aware of that structure?

SKILLING: Yes. I was in the board meeting that Miss 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.

DORGAN: Is it your contention that structure was appropriate in as much as Miss Watkins and others and those of us in Congress now see that what was backstopping that partnership was Enron's stock? Is it your contention that you knew of it and it was appropriate?

SKILLING: I relied on our accountants, who, in fact, I believe it very clear -- I've seen the minutes of that board meeting, and it's very clear that Mr. Rick Causey, who is 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.

DORGAN: So you are saying Arthur Andersen informed the top executives at the corporation this was an appropriate structure. You knew about it, therefore, believed it was OK because your accountant said it was so.

SKILLING: The structure was presented to the board of directors. Mr. Causey said the accountants had looked at it and signed off on it, and the board approved that structure.

DORGAN: I'm going to go into a different direction, and then I'll come back, and we'll have several rounds of questions.

Could you move the microphone just a bit closer.

SKILLING: Yes, sir.

DORGAN: I want to talk about some things I think you've said you didn't know about. You say you did know about that structure. Disclosures about Mr. Fastow are interesting and also, I think, lead to the word "appalling" in the Powers' report. Mr. Fastow has an equity position in partnerships, makes $30 million in commissions, invests $25,000 dollars and 60 days later takes out $4.5 million. It seems to me that's kind of a corrupt system. And 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?

SKILLING: All of 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 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 was approved based on a fairness opinion that had been received from accounting, that they said this was a reasonable transaction for Enron corporation. So I and the other board members believe that was adequate protection for our shareholders and approved it.

DORGAN: Are your surprised what you have since learned about Mr. Fastow's compensation?

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 -- some -- newspapers have published, of that order of magnitude, yes, I was surprised.

DORGAN: Let me ask a brief question of Mr. McMahon, and then I'm going to come back a second round and ask a series of questions of Mr. Skilling and Miss 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 know about the records that were destroyed?

JEFFREY MCMAHON, PRES. & CEO, ENRON: Currently, I don't believe we know what records are destroyed. As I understand it, we have cooperated fully with the FBI, who has come in and does some work in the building, interviewed a lot of our employees, who are on the floors where this shredding may have occurred.

We have -- 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 made aware of it, so the shedders were secured and removed from the building.

And prior to that, the legal group, as soon as the investigations began, sent out many e-mails to all employees requesting them to retain and protect documents.

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.

MCMAHON: Yes, it was. In March of 2000, I had a conversation with Mr. Skilling.

DORGAN: And what was the response to that conversation? Can you describe the conversation generally and tell us what the response was?

MCMAHON: Generally, at the time -- let me step back and kind of give you perspective of the organization. I was at that point in time treasure of Enron Corp, and I was reporting to the then-chief financial officer Mr. Fastow. And there were two groups reporting to Mr. Fastow at the time. My group was one, and Mr. Copper's group was responsible for structured financing, in that fell the LJM partnerships of 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 meeting with Mr. Fastow and many meeting with other members of senior management, I felt I needed to talk to Mr. Skilling about those conflicts as -- and how I saw that they should be fixed.

DORGAN: And so you took your concern to Mr. Skilling. What happened as a result of that?

MCMAHON: We had about a 30-minute meeting, as I recall. And Mr. Skilling listening intently to my concerns. And at the end of meeting, he indicated to me he would remedy the situation and fix the problems.

DORGAN: And did you lose your job as corporate treasure shortly thereafter.

MCMAHON: About two or three weeks later, I was offered a job internally to move to a different group.

DORGAN: Do you think it was a result of your meeting with Mr. Skilling?

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 the meeting with Mr. Fastow, who was then my boss, who indicated to me had spoken to Mr. Skilling about our conversation, and he was concerned whether we could work together again. So when that opportunity did arise, I did ultimately take it.

DORGAN: But, I mean, You're trying to put an awfully good face on this. It appears to me that you went to Mr. Skilling, said there are real problems here, and the result is you were transferred? You disagree with that?

MCMAHON: I think that's correct statement of the facts. I certainly don't have knowledge that Mr. -- that was direct result of that meeting.

DORGAN: Mr. Skilling, do you recall the meeting, when Mr. McMahon came to you and said there are serious problems here?

SKILLING: Mr. Chairman, I remember the meeting with Mr. McMahon, yes.

DORGAN: Do you remember the meeting the same way Mr. McMahon describes it? 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 in no way in a derisory way to Mr. McMahon. He was raising an issue. He was concerned about compensation because of the structural conflict that issue 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 procedures that were in place, he would need my support to ensure that he was not damaged by this conflict, and 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 call a "performance review committee." And there was typically 24 people on the performance review committee. And I said if Mr. Fastow is concerned, they will 23 people in that room that are cheering you on, and I said it will not impact, and I support you in your compensation.

DORGAN: Well, Mr. Skilling, it seems to me what Mr. McMahon is saying about that day is at odds with what you say when you said, I left that company, I had no idea anything going on that was a problem. And it appears to me Mr. McMahon said he came to talk to you about these problems, and you're taking us off into a compensation issue. I understand that. But we need to get to the bottom of it. I will come back around with a whole series of questions, but it seems to me this is at odds with what Mr. McMahon says the meeting was about. And if Mr. McMahon did in fact represent these problems to you, I would like very much for you to tell the Congress, I was aware of them and did nothing. I mean, if that's the case, let's hear that.

SKILLING: Mr. Chairman, I absolutely disagree with that. I think...

DORGAN: You disagree with Mr. McMahon's statement.

SKILLING: No, I disagree with your statement.

You said I heard 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 testimony in the House, where Mr. McMahon mentioned Joe Sutton visited him after that, I think I kind of vaguely recollect saying to Joe, go in there and make sure this is taken care of. I actually vaguely remember also going to Mr. Fastow and putting him on notice that there was an issue here, and asked him to do what he needed to do to ensure that was not a problem for Jeff.

DORGAN: I will inquire further about that. Senator McCain.

SEN. JOHN MCCAIN (R), ARIZONA: I want to thank the witnesses for being here.

Miss Watkins, you've 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 you're view that Mr. Skilling wasn't aware of the accounting improprieties of the partnerships that led to the collapse of Enron?

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 meeting 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.

And 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 unrelated outside third party.

MCCAIN: Mr. Skilling, I would be glad to give you an opportunity to respond to that statement of Miss Watkins.

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 that was presented to the board of directors as to how that transaction operated. I believed that based on the representation 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 Miss Watkins talks about restructuring or the fact that, you know, what I knew or didn't know, my only recollection of the restructuring of the Raptors is that I was told there were restructuring the Raptors. I asked if the accountant signed off and if it looked OK, and I was told it was, and went along with it.

MCCAIN: Was it your responsibility, do you know?

SKILLING: Sorry.

MCCAIN: Was it your responsibility to know?

SKILLING: As I said, senator, I am not an accountant. These are highly, highly -- I think if you 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 Arthur Andersen's technical group in Chicago, because it wasn't so technical. And they signed off and said they thought this was an appropriate accounting treatment.

MCCAIN: I would like to move to the issue of broadband. You're familiar with Mr. Scott Bolton. He was a manager of government relations?

SKILLING: I'm sorry, I don't recall him.

MCCAIN: Well, on March 9th, Blockbuster and Enron officially called off their movie-on-demand partnership. Do you recall that?

SKILLING: I don't recall the exact date, but I do recall the Blockbuster transaction unraveling.

MCCAIN: And you remember that the stock price dropped after that?

SKILLING: I would have to go back an look, but that's probably right, yes.

MCCAIN: At the board meeting on March 16th following the March 9th calling off the partnership with Blockbuster, you noted that analysts and portfolio managers in Boston had questioned you on the decline in telecommunications market and how it would effect Enron's broadband business. You told the board, you said -- quote -- "The development of the business would be slower than originally expect." Do you recall that?

SKILLING: No, I don't recall that.

MCCAIN: You don't 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 -- quote -- "faced a quote complete meltdown" -- unquote, Bolton recalled. There was no demand for high-speed Internet services and prices were plummeting. Do you recall that?

SKILLING: What was the date on that, sir?

MCCAIN: Sometime in March of 2001.

SKILLING: March of 2001. Yes I recall a trip to Portland.

MCCAIN: Do you recall saying that the business faced a -- broadband business faced a complete breakdown -- unquote?

SKILLING: I think the actual term that I used was that the broadband industry, the high-speed data interchange industry was facing meltdown at that time. We believed that might have been a positive development for Enron, because as prices dropped, we believed there would be more capacity available to create a traded market in bandwidth, and so we believed very strongly that -- in fact, our entire strategy, and people have talked about our strategy in broadband. Our strategy was predicated on a bandwidth glut. It was predicated on a bandwidth glut. We were a low or modest asset investment strategy, assuming we could create a market and tradable market for broadband.

So as this market price started to decline, late in the first quarter of 2001, quite frankly, 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 would be beneficial to the trading and merchant side of the business. The content side of the business, which is what you are reacting to or asking about, as it relates to the Blockbuster business. The reason the Blockbuster arrangement terminated is that Blockbuster was not able to get some of the content that we thought they would be able to provide us, and we believed we could get the 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.

MCCAIN: And In New Orleans, at the end of the month, you said publicly that the broadband operation was going full speed -- quote -- "pedal to the medal."

SKILLING: Yes, sir, and we believe center strongly that the traded market, the market of creating a commodity market for bandwidth was progressing well. It was progressing much...

MCCAIN: Was that an accurate assessment?

SKILLING: That 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.

MCCAIN: Had your good feelings been substantiated by subsequent events, as far as broadband is concerned?

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 counterparts in the marketplace. It got the point that you could not sign a long-term deal for bandwidth, because there were no credit-worthy counterparts. 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.

As a matter of fact, I believe Ms. Watkins, the reason that she moved from the telecommunications business to Mr. Baxter's area is that we were desperately to move our people out of the broadband business once we realized there was a serious credit problem there that we really just couldn't contain.

MCCAIN: I see that my time has expired, but I understand that there's a drop in the market, you told the board the business would be slower than originally expected, and then you went to Portland and said that there would be complete meltdown, but in New Orleans, you said the broadband operation was going full speed.

SKILLING: Mr. Senator.

MCCAIN: I find those statements contradictory. SKILLING: They're not contradictory.

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 -- quote -- "pedal to the metal."

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 the representations that we made to analysts, that our strategy in the broadband business was predicated on a glut on bandwidth capacity. You can talk to anybody in the industry. We're the first people to talk about, that there was a meltdown. Prices were collapsing in that March timeframe, March of 2001. That, we believed, was exactly what we had predicted, exactly what we had projected, and we thought that would lead to the growth of the market.

We built the natural gas wholesale business at a time when gas prices plunging. We built the electric business 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 business because turning out the way we expected.

Now subsequently, it went from meltdown to -- I don't know that anybody has seen in the history of business -- I mean, I'm kind of a history business buff. I'm not sure there has ever been an industry in history that has experienced the change of fortunes that occurred to the long-distance fiberoptic 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 pest we could out of that business into other growing Enron businesses.

MCCAIN: My time has expired. I thank you Mr. Chairman. Thank the witness.

SEN. PETER FITGERALD (R), ILLINOIS: Thank you, Mr. Chairman.

Mr. Chairman, I have a an advance copy of a article that's going to be published in "Vanity Fair" magazine in their April 2002 edition. It's by Marie Brenner, and I'm wondering if I could introduce this into the record. I'd like to examine the witnesses about this.

DORGAN: Without objection.

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's my understanding that at that time, you were employed with the firm of Arthur Andersen, is that correct?

MCMAHON: I'm not sure what time period you were talk about in the '80s, but I was employed with Arthur Andersen from I believe 1982 to 1988, or '89, somewhere around there.

FITZGERALD: And were you, while you were at Arthur Andersen, were you involved into an investigation into some misappropriated funds at a company called Enron Oil?

MCMAHON: Yes, I was.

FITZGERALD: According to Marie Brenner's article in "Vanity Fair" -- and Marie Brenner is a Columbia University adjunct professor. It's reported in the article that the issue with the company in 1987 involved the misappropriation of monies 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 complete agreement. The auditors adamantly told Mr. Ken Lay that the two rogue traders should be fired. Is that your recollection, Mr. McMahon?

MCMAHON: My recollection of that -- 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 in controls and the concerns we have.

I don't recall whether the report suggested that the senior management should be terminated, but I believe they were terminated the day that problems were discovered, that's my recollection.

HARRIS: If you are just joining us, we want to advise you that what you are watching is CNN's live coverage of the Enron hearings this morning on Capitol Hill. This is before the Senate Commerce Committee. We've been listening this morning to three witnesses from Enron: Sherron Watkins, the whistle blower in the case, Jeffrey McMahon, who is the man you saw moments ago, the president and COO of Enron, and Jeffrey Skilling, the man who has been finding himself on the hot seat, because of the contradictions between his testimony and those of the other two witnesses.

Let's listen in.

FITZGERALD: ... the two rogue executives made, and if they were fired what he could lose.

My conclusion was that this guy is guy who puts earnings before scruples, rather than reacting to dishonesty right in front of him. But you, Mr. McMahon, don't have any recollection of the both the Enron internal auditors and Arthur Andersen auditors recommending that the rogue traders be fired.

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 (ph), New York that year. And the two top executives that were accused of this were not...

FITZGERALD: There wasn't any period of time that they were kept on the payroll after it had become clear that there had been a misappropriation of funds?

MCMAHON: Obviously, I don't know how long they're kept on the payroll. They certainly were not operating out of that office, once the auditors got there.

FITZGERALD: So you didn't draw any conclusions about Mr. Lay from that incident?

MCMAHON: No, I think our view as the firm at the fine was that this was in fact...

(AUDIO GAP)

HARRIS: We apologize for that apparent technical difficulty. There, for some reason, we appear to have lost the audio portion, and then the video portion of that feed we were getting from the Senate Commerce Committee hearings, and apparently, everyone has lost the feed. If you were joining us, this feed is in conjunction with some of the other networks who were covering this hearing as well. And apparently, there's a problem there on the Hill. So once we get that straightened out, we will go back and rejoin those hearings.

We actually have it fixed. Let's rejoin now.

SKILLING: Yes, that's correct.

FITZGERALD: Were you, on the other hand, leaving aside where the accounting was appropriate, were you aware that the structure of the transaction entailed a degree of risk for Enron?

SKILLING: No, sir. I -- what was presented to the board, and the general concept, as I understood 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.

FITZGERALD: What your understanding how the Raptors were capitalized?

SKILLING: There was third-party equity from the outside.

FITZGERALD: Entirely with third-party equity, is your understanding?

SKILLING: No. No. It was my understanding that there was some Enron equity involved.

FITZGERALD: What was the Enron equity?

SKILLING: I don't know.

FITZGERALD: You didn't know?

SKILLING: No.

FITZGERALD: Did Enron put its own stock into the Raptors?

SKILLING: I believe if you go back to the board minutes where it was approved, that would have laid out in detail what the specific...

FITZGERALD: You were aware Enron had issued its own stock to the Raptors, were you not?

SKILLING: You can not issue stock to the Raptor without having approval from the board of directors is my understanding.

FITZGERALD: So you were aware of that?

SKILLING: If it's in the minutes, then...

FITZGERALD: You were aware Enron issued its own stock, and they issued a lot of stock, didn't they, to the Raptors?

SKILLING: I don't know, sir.

FITZGERALD: Did you ever look into it?

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.

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?

SKILLING: I think if they come to me and said that and probably, my first question would have been, is this OK? Are the accountants OK with it? If they said yes, I would have said OK.

FITZGERALD: You didn't see issuing stock as risky to capitalize the Raptors with even unlimited amount of Enron stock?

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.

FITZGERALD: As long as the accounting was OK, you weren't concerned about risk. Risk is something different than the accounting.

SKILLING: No, sir. Senator, I think you can ask anyone, and you can ask everyone sitting at this table, if there was anybody that was concerned about protecting the company against economic risks, it was me. I absolutely was concerned about protecting the company from risks.

FITZGERALD: But you saw nothing risky in issuing even an unlimited amount of Enron stock?

SKILLING: I was told the transaction was an appropriate, Senator.

FITZGERALD: I'm not asking whether it's appropriate. I'm asking whether...

UNIDENTIFIED MALE: Senator, I'm sorry. I apologize for interrupting, but I don't think he testified that he did or didn't see a problem with the issuance of an unlimited amount of stock. He is trying to give you the 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 bit of stock or however much stock was going to be issued, as long as he has recollection of it.

FITZGERALD: I just want -- you -- nail down in your mind -- was it -- not whether it was appropriate from an accounting standpoint, but was it risky at all to issue Enron-owned stock to the Raptors?

SKILLING: Again, it was my understanding that the purpose and the function of the Raptors was to provide hedges for highly-volatile technology investments we have made, so I believed we were reducing the risks to the company, absolutely.

FITZGERALD: Even though it was backed by Enron's own stock.

SKILLING: It was third-party equity involved as well, senator.

FITZGERALD: But that was a small percentage, wasn't it?

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, but 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.

DORGAN: Senator Wyden.

SEN. RON WYDEN (D), OREGON: Thank you, Mr. Chairman.

Mr. Skilling, in your opening statement I went through this barrage of warnings that you seem to have gotten from high-level insiders at Enron. And I'd 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 interests questions in the partnerships that Mr. McMahon talked about?

SKILLING: Mr. Senator, you said that I'd received a bunch of warnings. I don't recall any of them being the ones you mentioned, quite frankly.

WYDEN: For all those people who said that you they were warning you. Miss Watkins, I went...

SKILLING: Miss Watkins did not talk to me, Senator.

WYDEN: Miss Watkins said -- and I quote here -- Miss Watkins said, that Clifford Baxter told her that he met with you repeatedly to express his concern about the partners. SKILLING: In my House testimony, I have been very clear on my recollection with 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 appropriateness or inappropriateness of the transaction.

WYDEN: Talk about the conversation with Mr. Fastow about whether conflicts of interest and partnerships were mentioned after Mr. McMahon came to you and raised those questions specifically?

SKILLING: We've discussed the conflicts of interests embedded in LJM at virtually every board meeting of the company, and most of those were subsequent to that meeting, and that was in March of 2000. That was very early in the process. They were very few transactions in the LJM structure and so we had lots of discussions and they are documented in the board of directors minutes.

WYDEN: Well, I'm concerned first because Mr. McMahon says that puts a lot of confidence in somebody who seems to be at the heart of the conflict questions. And 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?

SKILLING: Senator, we -- you look at the minutes of the October 1999 board meeting and finance committee meetings, we dealt explicitly with the issue of conflict of interests 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 the conflict of interest might impact compensation to people in his position, and I assured Mr. McMahon that it would not impact his compensation, and I think subsequent to that, as I mentioned -- and I have, again, only general recollection of this. I believe I did talk to Mr. Sutton, who is vice chairman of the company, and asked him to look into the concerns that -- any other concern Jeff had related to that, and I talked to Mr. Fastow and put him on notice that there had been a complaint and then I expected him to deal with that.

SKILLING: had related to that. And I talked to Mr. Fastow and put him on notice that there had been a complaint, and then I expected him to deal with it.

WYDEN: Mr. McMahon, my understanding is your concern went to conflicts of interest at the partnerships, and not just conflicts of interest involving this compensation issue. Could you clarify that?

MCMAHON: The meeting I had with Jeff was -- again, as he indicated -- that the board had approved the conflict of interest existing. My issue was really the process internally on how that conflict was managed. It 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 very large impact on their compensation, on the promotion capabilities, etcetera, etcetera, etcetera.

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. My issue was process driven more so than anything else, senator.

WYDEN: Do you want to respond to that, Mr. Skilling, because seems to me that when Mr. McMahon brings you a fundamental issue about conflict, you go to the person who has the biggest conflict.

SKILLING: I -- I concur with what Jeff just said. He came to me with a process issue, raised some issues about compensation. I believe that I had resolved that by telling Jeff I would totally support him -- 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 that I spoke to Mr. Sutton, who is vice chairman of the company, and asked him to get with Jeff and see if we could deal with that.

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 believe we addressed the problem.

WYDEN: In the meetings of the October 6 board finance committee discussion, Mr. Fastow discussed how to mitigate potential conflicts and -- quote -- "Mssrs. Buy, Causey, and Skilling approved all transactions between the company and the LJM funds." Did you approve all the transactions?

SKILLING: No, sir.

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've said that you didn't believe your signature was required. Is that correct?

SKILLING: You've asked a couple of questions there. One question was did Mr. Mintz say -- frankly I don't believe that is Mr. Mintz's testimony, so I would like you to give it to me.

WYDEN: That was his testimony.

SKILLING: Can you give to me again? Do you have a specific reference, sir?

WYDEN: He tried you to get you to sign approval sheets for the LJM deals and reminded you that your signature was required. Correct? SKILLING: Do you want to -- can we bring forward and pass out to the members of the committee Mr. Mintz's specific memo and 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 would like to send it to you.

WYDEN: Let's do this. Let's do this, Mr. Skilling. Even if you didn't believe your approval was required...

SKILLING: My approval, Mr. Senator, was not required in the October 1999 board minutes. There is very, very clear description of what the approval process is, and my name the not on it. Subsequent to that, and I think you will see in Mr. -- can we -- would you look at this, rather than -- I mean...

WYDEN: Sure.

SKILLING: This is an LJM approval process sheet. This is to Mssrs. Bye 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." This is from Jordan Mintz. The thing says -- here's what it says -- they have an overview, and it says, "In order to address these three critical and overlapping concerns" -- concerns basically related to conflicts of interest -- "the board has previously approved the following procedures and controls." This is head of global finance legal. "Number one, Enron and LJM are not obligated to one another to transact. Number two, Enron's chief accounting and risk officers are to review and approve the terms of all transactions Enron or an affiliate with LJM. Number three, the board's audit and compliance committee shall annually review all transactions completed that year and make any recommendations they deem appropriate. And number four, 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 LJM subsequent or supplemental approval sheet that was come up with, and there are 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 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. 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 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?

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've got -- yes, we did know. I just told you.

WYDEN: I will tell you, having read from the minutes specifically, it says, "Mssrs. Buy, Causey, and Skilling are to approval all transactions."

SKILLING: Back up. Back up. That is the October 2000 board meeting, is it not?

WYDEN: It's right there in the minutes.

SKILLING: Mr. Fastow's representation of the process that was in place -- and this is -- I believe it's a finance committee meeting, is it not?

WYDEN: Right.

SKILLING: Who is making that statement?

WYDEN: I just gave it to you.

SKILLING: No, who made the statement?

WYDEN: According to the minutes, Mr. Fastow.

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 clarity -- in clear, specific terms -- what that process was. And if you go back to October 1999 minutes of 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.

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, and we'll have another round.

SKILLING: Mr. Senator -- may I respond to that? Mr. Senator, we had two organizational units that were charged with reviewing these LJM transaction and the conflicts generated. One was out internal accounting group. We had 600 lawyers in that internal accounting group. Our risk-control group, under Rick Bye, 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.

DORGAN: Sen. Cleland.

MAX CLELAND (D), GEORGIA: 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.

SKILLING: Thank you.

CLELAND: Just -- I'm just trying to understand all this. And 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 in my state that were hurt by actions taken at Enron and by the Enron implosion, on behalf of my schoolteachers, 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?

SKILLING: 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. 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 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're 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 Dealer's Association.

All of those contracts have something called a material adverse change clause in them. What has 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 has happened now is that the banks can pull their money out of a company that has threatened, and if somebody walks into claiming and accounting -- and accounting fraud is tantamount, in the business world, to walking into a crowded theater and screaming fire: Everybody runs to for the exits.

And there are these triggers in all of these financial contracts, in all of these loans, that mean that a modest problem that can be dealt with -- these are not big numbers in the grand scheme of Enron corporation -- if we had -- this is my hypothesis: I wasn't there, but I think if the company had some time and 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 nature -- 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 didn't want to have a run on the bank is because if there is a run on the bank, the bank started pulling money out of the real economy. 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.

It's the old story about the bear, the two guys talking about the bear. And the one guys say if a bear comes, just run like hell. The 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. If 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 contracts 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.

CLELAND: But aren't we talking a little bit more about George Bailey, Jimmy Stewart, and "It's a Wonderful Life"? We talked a little bit 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?

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's clearly something that should be looked at.

CLELAND: Miss Watkins, you've seen this from the inside. You had guts enough to write a memo. You've described Enron leadership, the leadership culture there, as arrogant and intimidating. But you had enough courage to fight through that. What is your understanding of what went wrong at Enron?

WATKINS: The accounting questions -- on October 16, when we had what was virtually an unexplainable income statement write down, as well as a $1.2 billion reduction of shareholder's equity -- those were related to the Raptor transactions, to LJM2. It was not a typical write down where you've paid too much for an asset, and it's not worth what you paid for, so you write it down.

It was 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 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.

If, as 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 a hint at financial statement manipulation, he would have better planned for the ensuing crisis that hit the company.

We, I believe, went into the 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 trenches of debt become immediately due, and that was the end.

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, 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 or arrogance, covert operations, off the books, this whole sense of not leadership, but bossism, do you think that got Enron in trouble?

WATKINS: Yes, I do, because I think it lead good people astray in the fact that they did not question structures that they were not comfortable. I think Sen. Fitzgerald has mentioned in this "Vanity Fair" article -- I understand there's some quotes in that about Mr. Skilling's intimidating practices, and they're worth reading.

CLELAND: Thank you, Mr. Chairman.

DORGAN: Sen. Burns.

BURNS: Thank you, Mr. Chairman.

I have just two questions. Miss Watkins, can you give me what and when your -- that triggered your concerns that the company was going down the wrong road and your concerns were heightened that the company could implode if it stayed on the same path? Could you give a time frame in there? What triggered your curiosity. What happened at that point? And then -- what and when?

WATKINS: 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 ECHI (ph) and the new power company that were hedged with Raptor. The hedged prices were not what the business units said Enron could achieve. They explained the structure to me, explained that the structures were backstopped by Enron stock. Enron 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.

It concerned me greatly you can never use your stock to affect your income statement. I believe that -- before I went to Mr. Lay, I actually also went to Rex Rogers (ph), who is an associate general counsel for Enron Corp. under Jim Derrick. I told him -- I think this might also be in some of the notes that...

BURNS: That conversation -- before you had the conversation with Mr. Skilling?

WATKINS: I did not have a conversation with Mr. Skilling. I had a conversation with Mr. Lay, on the 22nd.

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 to talk to Mr. Skilling and tell him to stop this. He put this in motion, and he needs to find a way of fixing it. When he suddenly and shockingly resigned, August 14, I felt compelled that I had, 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 sometime in '02 and '03.

BURNS: Was that the only conversation you had outside your office was with that counsel?

WATKINS: I also met with Mr. McMahon for an hour and a half on August 21st. 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 interest to take that offer.

It's notable that Mr. McMahon's replacement was Mr. Ben Glison (ph), effectively letting the foxes into the hen house. Mr. Glison, as we all now know, was an investor into the LJM partnerships.

BURNS: My question now, and it 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 my, as I made the point in my statement, that 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 they could survive. What do you point to base your conclusion?

MCMAHON: The conclusion that -- or the facts that I point to you to base that conclusion are several. We -- first off, let me state, the -- 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 it maximize recovery for our creditors an other stakeholders, and both Steve Cooper, who is the CEO, and myself, believe that it is a combination of selling certain assets, as well as reorganizing around other assets, because we think, potentially, that there is a higher value creation or preservation in that scheme.

What to reorganize around is still being debated right now internally, but it is likely to be our pipelines and power stations that we have.

BURNS: This may be an inappropriate, but what are some of those assets?

MCMAHON: What's left level with Enron, outside of wholesale, or outside the merchant business, are interstate gas pipelines. There is a utility in Portland, Oregon, and there are several utility-type assets in South America, and Europe.

BURNS: Has Enron completely separated itself from the broadband services?

MCMAHON: It's certainly in liquidation. We may still have some assets there left, but they are on the market to be liquidated.

BURNS: Thank you, Mr. Chairman.

DORGAN: Senator Boxer.

SEN. BARBARA BOXER (D), CALIFORNIA: Mr. Skilling, Senator Cleland gave you a chance to get a softball. 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 in the depression. That's when we decided it was important, our predecessors, to federally insure banks.

And 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 have learned in years of getting batted around in politics, is that when somebody tells you, this is very complex, you 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 gain or avoid a loss on its income statement. Is that true? Were you aware of that?

SKILLING: I'm not an accountant.

BOXER: I didn't ask you that. Is her statement true?

SKILLING: I think I would have to be an accountant to know if it's true. I don't know.

BOXER: Wait a minutes, you'd have to be an accountant to know that a company could never use its own stock generate a gain or avoid a loss in an income statement. What was your education, Mr. Skilling? I know I read it was pretty good.

SKILLING: I have a master's in business administration.

BOXER: A master's in business administration, and yet you didn't know this simple fact, is that correct? You were saying you are ignorant of that fact, that Ms. Watkins have told us -- it's not complicated. Even those of us up here understand this very clearly.

SKILLING: OK. Well, just a second, senator...

BOXER: A company can never use its own stock to generate a gain or avoid a loss, and you're saying, in getting your master's, and where did you go to school?

SKILLING: Harvard Business School.

BOXER: In Harvard Business School, you did not know this, is that correct?

SKILLING: I did not know that there is an absolute prohibition on it, because, again, I'm not an accountant, but I know of at least one case where that's not true, at least one case. I would also suggest that you go through Mr. Duncan's notes that he gave to Vincent Elkins, where he described the accounting rational. I think you will. He has a rationale, and if you want an example of a case where equity...

BOXER: That's OK.

SKILLING: Senator, may I answer the question?

BOXER: Yes, I just have a limited amount of time.

SKILLING: I have an answer. There are cases where you can use equity to impact your income statement. And the most egregious or the one that is used by every corporation in the world is executive stock options. And as a matter of fact, I think Thasby (ph) tried to change that, and you introduced legislation in 1994 to keep that exemption. And 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 add set of logic that was consistent with his view that this was an entirely appropriate transaction.

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 because, why, and tell him this? What was your issue?

WATKINS: I did believe it would be a job-terminating move.

BOXER: Say that again.

WATKINS: I believed it would be a fruitless effort and I believe that now, even more than I did in late July and early August.

BOXER: Why do you that Mr. Skilling would have fired you?

WATKINS: I look at his actions rather than listen to his words. I mean, I have learned on August 21st, that Mr. McMahon went to Mr. Skilling with some very serious concerns. I have 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 Glison in charge of sort of guarding the hen house, and that was letting two foxes in the hen house.

BOXER: So you feared because of what had come before, that had you gone Mr. Skilling with this very simple statement that you made, which by the way, do you stand by that, despite what...

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.

BOXER: Mr. Skilling, you didn't have written testimony, but I took some notes, and your opening statement was extremely compassionate to the employees, and I want it 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?

Ninety-nine.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: I will be honest with you (UNINTELLIGIBLE) employees eligible for employee referral program, and I don't know why they can't be. I don't know that was ever determined. So I would say yes, they are, absolutely.

Column b.

(END VIDEO CLIP)

BOXER: Listen to this.

(BEGIN VIDEO CLIP) UNIDENTIFIED FEMALE: Should we invest all of our 401(k) in Enron stock. Absolutely.

(END VIDEO CLIP)

BOXER: OK, so that at the end of '99, 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 lead the employees to think they should keep buying stock?

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 I worked for the company, I was a strong believer in Enron Corporation. You can take the videotape to mean what you want it to mean. I was a supporter of Enron Corporation.

BOXER: Yes, but much had you unloaded by that point?

SKILLING: The term unloaded I think is a little bit of a pejorative.

BOXER: I will say it in a more direct way. How many shares had you sold up to that point, and what was your money that you had 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. And you had a chance to be honest with them and you shook your head, yes. What is it in your recollection that you had already sold?

SKILLING: Obviously, I feel terrible about what happened to the employees. I think if you -- if we wanted to do dueling videos also, there's a videotape of an employee meeting two months later where I go and pretty excruciating detail what some of the issues are that the company is dealing with. I think I was open to the employees, and I think as long as I was at the company I was discharging my duty.

BOXER: Let me put it in the record. In '99, the same year the tape was recorded, and you can look at it over and over again...

SKILLING: I thought you said 200.

BOXER: This was in '99, the end of '99.

SKILLING: You are saying this is December of 1999.

BOXER: Yes. I'll put it in the record, because my time is up. The insiders record show you had sold more than 513,000 shares of Enron for $22 million at a time he you were nodding in agreement for those people to put everything in their 401(k) into the company. I just want to get that on the record.

DORGAN: Senator Breaux. SKILLING: Excuse me, I would like to see the basis of that number. You are saying in the year 1999, I sold 500,000 shares of Enron stock.

BOXER: Yes, he we have the records. We will send them over to you during the next press...

SKILLING: Yes, well send you records, too, because I believe that that number is an incorrect assessment.

BOXER: OK, we will show you the records.

DORGAN: Senator Breaux.

Senator McCain.

MCCAIN: Could I ask you something, isn't it true that in the year 2000, you received $5.6 million in bonus and in 1999, $3 million in bonus, in 1998, $2.25 million in bonuses.

SKILLING: I don't recall.

MCCAIN: You don't recall what you received in bonus.

SKILLING: No, sir.

MCCAIN: $5.6 million.

SKILLING: I don't recall, I'm sorry.

DORGAN: Senator Breaux.

SEN. JOHN BREAUX (D), LOUISIANA: Well, I would have remembered mine.

(LAUGHTER)

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?

SKILLING: In recent history, or you want me to go back in time? I think there have been a lot of times when there were in panics that led to cascading problems in the economy, and I think you see some of the signs of that starting to happen here as well.

BREAUX: But I mean by any measurement, isn't this -- it seems to me, one of the biggest and largest business failures to it has effected that I can certainly remember. I'm not a business history buff, but it seems to me...

SKILLING: I just don't know, senator.

BREAUX: I think it'S the biggest mess we have had in business failures in a long time because of the extent of the failures and the number of people and a number of states that have been effected by it, the fact that it is 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 would like it ask you, I mean Monday morning quarterbacking is generally not a good thing to participate in. But in this case, I think it perhaps it could be helpful. I mean, you made a number of statements, Mr. Skilling, about, I don't remember, relied on advice of attorneys, relied on 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 than what you did during your period in those various positions?

SKILLING: I said before. I have gone back and tried to think what I would have done differently given the facts at the time. And quite frankly, there is nothing I can come up with that I would think I would do different given the facts I had at the time. Obviously there have been a whole lot more facts subsequent to this.

BREAUX: Can't you look back and say, look, I would have instituted a system to make sure that as chief operating officer that I was given the fact. You know, it is one thing to say, I didn't get the information I should have. But as chief operating officer, isn't your responsibility or CEO or president, to set up a mechanism to insure that in fact you did get the information. It is not enough, I think, to say that they didn't tell me. I mean, why didn't have you a system that assured as chief operating officer that you were informed?

SKILLING: I believed we had a good control system in place. In fact, I think if you compare the number of people that are involved in our control system, the reporting structure for that control system, I think you will 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.

In retrospect, what I wish, in retrospect, I wish I never heard of LJM. But at the time, with the facts we had, the information we had, it looked like something in the interest of our shareholders.

BREAUX: You mentioned that Enron's failure was due it 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, number one, by I think we are talking about selling $66 million worth of stock over the period when you were running the company, while you were talking about the stock being undervalued, yet here as the chief operating officer, you are selling a huge amounts of stock, while you were telling the general public and employees that the stock is really undervalue.

I mean, were you not contributing to the so-called run on the bank at Enron by your actions, and selling your own stock and abruptly resigning?

SKILLING: We have 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 have 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's October 23rd. 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.

BREAUX: Ms. Watkins, thank you for being with us.

You mentioned then in, I guess the memorandum, the seven-page memorandum you 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, with all of the offshore investments, the special-performance entities, I mean, 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 or suggesting account scandals that the structures themselves were illegal the way they were set up? I mean, what were you saying when you were talking about accounting scandals? I think Mr. Skilling would say that Arthur Andersen said all of these things were appropriate, and proper and legal. What were you talking about when you talked about accounting scandals?

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 assets, that we add 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, is 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 counterparts were not completely certain of our financial health.

The problem is, is that a customer doesn't know whether they are going to owe us money or we are 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.

BREAUX: Did you think that structures, in particular the Raptor structure, was, on its face, allowed by the law or improperly set out, or were you concerned about the risk it put Enron at by participating in it?

WATKINS: My opinion was that it was -- it could not be appropriate. I did vet my concerns with Mr. James Hecker (ph), a former colleague of mine at Arthur Andersen. I spoke to him for approximately 48 minutes on August 20th. I hadn't been in accounting in about 10 years. 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.

BREAUX: That's what you conveyed to Mr. Lay?

WATKINS: Yes, and I also participated in a three-hour interview with Vincent and Elkins on September 10th. Their interview notes from that were part of the documents released by the House. I have reviewed those notes. And in my opinion, Vincent and Elkins understood my concern about the crisis facing the company.

BREAUX: The final point I have is that, I mean, it seems to me, before all of this, you had some of the finest advisers in the world. Arthur Andersen's reputation prior to this certainly was that, Vincent Elkins' law firm has the same kind of reputation. I can't figure out how with those advisers not telling folks at Enron that, hey, you can't do this, I mean, you are paying them a lot of money to give you the best advice possible, and either they were not giving you the best advice, or they were totally wrong, or they were so much a part of Enron's culture that they were part of the problem, too. I'm not sure which it is.

Thank you.

DORGAN: Senator Carnahan.

SEN. JEAN CARNAHAN (D), MISSOURI: Thank you, Mr. Chairman.

Mr. Skilling, Ms. Watkins just testified that you always looked to the market for guidance. If so, why didn't the fact that the markets had dropped by 50 percent on Enron stock, why did you not see that as a problem? And how could you think that Enron under those circumstances was perfectly healthy when you left the company?

SKILLING: Well, Senator, I was clearly aware of the drop in the stock price, but there are things other than the drop in the stock price that make a difference. The reason the stock priced drops, there were basically three reasons. The first one was that the collapse in optical fiber stocks 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 have 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 reregulate 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. By the time I left in August, we had significantly reduced the capital budget. We redeployed a lot of people oust business. We reduced the burn rate. We felt we could wait it out, 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 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. And 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.

CARNAHAN: But how could you say the company was in good financial condition when you left under those circumstances?

SKILLING: I felt that the having made the changes we made in broadband...

DARYN KAGAN, CNN ANCHOR: You can call this a Skilling Grilling. That's what we have been listening to most of the morning here on CNN. Former Enron CEO Jeffrey Skilling sitting before the Senate Commerce Committee, answering some very tough questions from senators sitting on this panel. Also on this panel, current Enron vice president Sherron Watkins, and the current president Jeffrey McMahon, giving some very conflicting and different answers to what Mr. Skilling has to say.

The testimony will go on on Capitol Hill. You are going to hear more of it right here on CNN.

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