White Must Go
Thomas White, the former Enron vice chairman appointed by George W. Bush to be Secretary of the Army, should resign immediately. The case against White is self-evident. Touted as "one of the most outstanding managers in corporate America" by Enron's favorite senator, Phil Gramm, he was named Army Secretary, promising to bring "sound business practices" to the Pentagon. But White's entire business experience was at Enron, where he participated directly in the lies and mismanagement that resulted in its bankruptcy and the betrayal of investors and employees. Enron's business practices generally, and White's in particular, are the last thing that should be inflicted upon the Department of the Army.
Before being named Army Secretary, White was vice chairman of a venture called Enron Energy Services from 1998 through May 2001. He was paid $5.5 million in salary and bonuses in his last year alone and walked off with stock and options valued at about $50 million and homes in Naples, Florida, and Aspen, Colorado, worth more than $5 million apiece.
Touted as a burgeoning profit center, Enron Energy Services reported a pretax operating profit of $103 million on revenues of $4.6 billion in 2000. But EES was a fraud, hemorrhaging money while covering up its losses with accounting maneuvers. Its profit in 2000, according to Enron vice president Sherron Watkins, was created by counting ersatz financial trading gains from one of the infamous off-budget Raptor partnerships. The recently released special investigation of Enron's board of directors concluded that those transactions violated accounting rules. White and EES chairman Lou Pai made millions, but the venture they ran was so mismanaged that in February 2001 Enron executives brought in another leadership team to clean up the mess.
Enron Energy Services was set up to compete with public utilities in selling energy to large enterprises like JC Penney, the Catholic Archdiocese of Chicago and the US Army. Enron would sign long-term contracts to provide energy at a sharply reduced fixed price. It would then install energy-saving devices to lower its clients' energy needs and use its trading savvy to supply that energy at bargain prices.
From the beginning, though, Enron's follow-through was something of a joke. "They knew how to get a product out there, but they didn't know how to run a business," former EES employee Tony Dorazio told the New York Times. Glenn Dickson, an EES director laid off in December, charged that White and Pai "are definitely responsible for the fact that we sold huge contracts with little thought as to how we were going to manage the risk or deliver the service."
Perhaps Pai and White were more concerned about selling than fulfilling contracts because they were making their money on the front end, benefiting from Enron's aggressive accounting practices. When Enron signed a ten-year contract with a customer, it would project its revenues and profits over the ten years and book all of them as received in the first year of the sale. This "mark to market" accounting is a generally accepted accounting practice--but only when the revenues and costs can be reliably projected. EES had to predict future energy prices, the pace of energy deregulation in different states and the conservation savings of its customers over many years. It then paid its managers and sales personnel bonuses based on those projections. This was an irresistible invitation to what former EES employee Jeff Gray called "illusory earnings."
And illusion there was. "It became obvious that EES has been doing deals for two years and was losing money on almost all the deals they had booked," wrote former employee Margaret Ceconi in an e-mail to Enron's board in August, warning that more than $500 million in losses were being hidden in Enron's wholesale energy division. Enron used its bankruptcy to walk away from EES's losing deals and dismissed most of its 1,000 employees.
Where was White during all this? His emerging defense is that he was out of the loop. He didn't do numbers. He provided a dashing can-do military figure for the customers, a rainmaker who helped land the deals. And EES was tasked to show growth. Bidding for a fifteen-year, $1.3 billion contract with Eli Lilly, it paid Lilly $50 million up front to seal the deal. The contracts could be projected as profitable, even if they were to bleed money in the succeeding years. So long as EES kept expanding fast enough and the contracts kept rolling in, no one need know. Under White's leadership, Enron Energy Services turned into a classic Ponzi scheme.
White still maintains that EES was "a great business...there were no accounting irregularities that I was aware of." It is hard to imagine a clearer self-indictment. Either he knew that EES was a lie and is potentially guilty of fraud, or he was oblivious to the lie and thus is utterly incompetent to manage the Department of the Army with its annual budget of $91 billion.
Tyson Slocum of Public Citizen argues that White is a walking conflict of interest. He came to the Army pledging to get it out of the energy business, even as Enron was bidding to supply the military with energy. He pledged to sever all financial ties with Enron but elected privately to receive an annuity payment, part of which came from the company. Enron's bankruptcy ended this conflict, but it doesn't put an end to White's complicity in a scheme from which he pocketed millions while running his venture into the ground, betraying the trust of investors and employees alike.
Ultimately Enron is about values, about integrity and responsibility. It is a story of executives who cashed out more than $1.1 billion in stock while misleading employees and investors. Thomas White is one of those executives. Personal responsibility should apply to the powerful as well as the weak. If it means more than election-year campaign rhetoric for this Administration, then it is time for Thomas White to go.