HOUSTON (CNNMoney.com) - Former Enron financial chief Andrew Fastow testified Tuesday that executives Kenneth Lay and Jeffrey Skilling knew about controversial partnerships used to artificially prop up Enron's performance.

Fastow testified that early in 2001 Skilling had praised his "creative finance mind" for coming up with the "LJM" partnerships and other schemes that helped hide millions of dollars in losses in 2000. He also said that the company's board of directors, including Lay and Skilling, approved the formation of the partnerships.

Andrew Fastow

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According to internal documents shown by the government, Skilling estimated that the company's true book value for its international operations was $5.1 billion, a far cry from the $10.1 billion that was being touted. "It would have been devastating information to release to the public," Fastow said.

Fastow said after the success of the first partnership, LJM1, in propping up Enron's earnings, he approached Skilling and suggested the formation of a second, larger partnership.

Fastow testified that Skilling replied, "Get me as much of that juice as you can." Fastow explained that Skilling was referring to the way the LJM partnerships helped increase Enron's earnings.

Fastow pleaded guilty to two counts of wire and securities fraud in 2004 and now faces 10 years in prison in return for his expected testimony against his former bosses.

His wife, Lea, was also convicted in an earlier trial for fraud. Fastow said he involved his wife in the tax conspiracy and in his first show of emotion in an otherwise controlled testimony, Fastow's voice started breaking and he wiped his eyes as he said he misled his wife.

"She pled guilty to filing an incorrect tax return," he said, adding that she was unaware of any conspiracy.

As for his own plea agreement, Fastow said "I pled guilty because I am guilty and I thought that it would be in the best interest of my family."

The second partnership, LJM2, was subsequently formed, Fastow said, but Enron only vaguely alluded to the partnerships in footnotes on SEC filings in order to avoid attracting too much attention.

When it came time for Enron to consider using its LJM3 partnership, Fastow said Skilling was apprehensive. Fastow testified that Skilling told him, "I love LJM. I want to do all the deals that I can with LJM. I just don't want the footnotes."

Fastow said those footnotes were garnering more attention from analysts and the media and he believed that Skilling was concerned.

By the middle of 2001, it became apparent that the shady dealings had started to catch up to the company. Fastow said he told Skilling in June of 2001 that Enron was facing a "$5 billion to $7 billion problem" and suggested that the company find a merger partner with a stronger balance sheet. Fastow said Skilling dismissed the idea and complained, "Andy, I've hit a brick wall, I just don't know what to do."

Before the company hit its downward spiral, Fastow said he originally thought the formation of the LJM partnerships were "a win-win" for both Enron and himself because the company was meeting its earnings targets, which benefited shareholders and also helped him earn millions.

"I thought I was being a hero for Enron," he said. "I stepped in to the rescue as LJM" by buying assets such as its troubled Brazilian power plant and Nigerian barges that the company was unable to find another buyer for in time to meet earnings targets.

He said he entered a number of mutually beneficial side agreements that pushed the transactions forward. These side agreements were documented in the so-called Global Galactic documents -- a handwritten list of side deals and guarantees that were initialed by Fastow and former chief accounting officer Richard Causey and were presented to the jury over objections from the defense.

Fastow said he was assured by Causey that he would check with Skilling regarding the list and was told that Skilling would abide by the terms of the varied deals.

The defense team contends that the Global Galactic documents -- which aren't available in original form because Fastow destroyed the original handwritten list -- may not be authentic. And if they are, Skilling's initials weren't present on the documents -- a point the defense is sure to raise upon cross examination.

But the presence of guarantees, especially if the prosecution can prove that Skilling did in fact assure Fastow that he would not incur any losses, could be damning for Skilling. Such guarantees would make Enron's accounting treatment of the transactions fraudulent, because it would mean that LJM's investment wasn't truly "at risk" third-party capital.

The prosecution is expected to wrap up its direct examination Wednesday morning.Then defense attorneys for Lay and Skilling are expected to conduct an aggressive cross-examination, attempting to prove that Fastow's illegal conduct was the only wrongdoing within the company -- and was done without the knowledge of Lay or Skilling.

Combined, the defendants face more than three dozen fraud and conspiracy charges accusing them of lying to investors about the company's financial state while they enriched themselves by selling millions of dollars in stock.

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(An earlier version of this story omitted the mention of international operations in Fastow's testimony about book value)

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