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CNN Saturday Morning News
Interview With Bill Hogan
Aired February 23, 2002 - 07:40 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.
MILES O'BRIEN, CNN ANCHOR: While we have been telling you the story time and again that Enron discouraged its employees from converting their Enron stock into variable annuities or for that matter anything else. And an article in the online edition of "Mother Jones" magazine expands on all of that, saying that before Enron's collapse, Chairman Ken Lay and his wife socked away millions in the so-called variable annuities.
Now, stay with me on this. We will explain what the implications of these annuities are, as we bring in Bill Hogan, the D.C. bureau chief from "Mother Jones" magazine, who broke this story -- good to have you with us, Bill.
BILL HOGAN, "MOTHER JONES" MAGAZINE: Thanks for having me.
O'BRIEN: All right. We've got to do a quick financial 101. Variable annuities, what's the implications of anyone converting into these annuities? How does that protect someone?
HOGAN: Well, you don't just have to convert. Either of us, say, could go out and buy one, but the significant feature really is that in six states, including Texas, investments in variable annuities, like say an insurance policy, are protected from creditors under almost any circumstances. So there is basically in this case an initial investment that's set aside for a period, in this case seven years, at which point it is annuitized and monthly payments to the buyers or the beneficiaries begin.
O'BRIEN: All right. So these annuities are protected generally from lawsuits, from creditors, bankruptcy, all that sort of thing you can literally shield as much assets as you can put into that annuity.
HOGAN: Absent in Texas the element of fraud, they are virtually lawsuit proof, and that's why many people buy them. And as I say, there are six states in the country, including Texas, that provide what's called full protection for these variable annuities.
O'BRIEN: All right. Now, that we have sort of gotten that all out then, tell us what you learned about Ken Lay and his purchase of these annuities.
HOGAN: Well, what I learned in the central thrust of the story is that in early 2000, Mr. Lay and his wife invested around 4 million to buy two annuities that would provide them at maturity, which again is seven years down the line or 2007, with an annual income, should they both be living, of around $900,000, or an annual income stream I should say.
And what's really significant to me, I think, is that earlier this year, Mrs. Lay was on national television, as you know, saying that they were having liquidity problems and looking at bankruptcy. And this very salient feature of their financial background went unmentioned.
O'BRIEN: To say the least, talking about liquidity issues, staving off personal bankruptcy, and here there is this annuity, which has been invested with some $4 million. And the payout on that begins when?
HOGAN: In February of 2007.
O'BRIEN: OK.
HOGAN: And I think I'm doing this from memory now, in an amount of about $43,000 a month for Kenneth Lay, and a smaller amount, I think it's $32,000 a month for Linda Lay.
O'BRIEN: Your memory is perfect. I am looking at your article here, and that's exactly what it is. That's a tremendous amount of money. And the question, I guess, that a lot of people who haven't been following this very closely, let's compare the timelines. When this transaction occurred, what was going on in the public, and what were Enron employees being told about the fate of their stock in their company?
HOGAN: Well, this was long before, and by long, I mean more than a year before there was really any trouble on the Enron horizon. So I am not, in doing the article -- and I would like to make this clear, I am not a mind reader. I don't want to impute any motives to the investment, other than to say many people make it for this very reason, as I had mentioned earlier.
In the following year, in spring of 2001, some sales people for variable annuities were apparently approaching Enron employees and asking them to convert 401(k) assets to variable annuity in a kind of rollover from one tax-deferred instrument to another. And in an Enron newsletter, they were warned against these salesmen, and really I think a fair reading of that says they were basically told that Enron stock was a good investment, and that other employees were making money by buying more Enron shares. So I just found an element...
O'BRIEN: All right. So I know you don't want to be a mind reader, but there is an above board motive for this? It's just difficult to see what it might be perhaps?
HOGAN: Well, no. I mean, many people buy variable annuities, and as I say, the rules in each state are different. The sale feature in Texas and these five other states is the creditor protection feature. And one would even -- virtually any high profile corporate executive, the financial advisers I talked to said, they would be recommending this type of investment. So... O'BRIEN: But employees of Enron were steered away from them.
HOGAN: Steered away from it, and I think that's kind of a hypocrisy factor that's interesting to me, because in retrospect, the -- and isn't hindsight wonderful -- but in retrospect, the investment advice that they got from Enron was absolutely dead wrong.
O'BRIEN: All right.
HOGAN: They would have been much better off putting their money into variable annuities.
O'BRIEN: Hypocrisy is the word. Thank you very much, Bill Hogan with "Mother Jones" magazine -- we appreciate you joining us this morning and sharing with us your story.
As a matter of fact, if you would like to see the story in its entirety, it was published initially at MotherJones.com, and you can find it at that location. The article lays out pretty much what we just said in some greater detail on these variable annuities and why Ken Lay and his wife might -- well, he doesn't get into motives. But you can figure out the motives yourself or draw your own conclusions.
Bill Hogan with "Mother Jones" -- thanks very much.
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