the CAMP ENRON Report

... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.

For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.

For brief orientation, see this
Welcome to CP

... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Sunday, February 24, 2002

--- Not With a Ten Foot Poll, I Wouldn't ---

It's dangerous to believe any polling results, much less do arithmetic with them, but hey, danger is our biznes.

Per USA Today (as of 2/11), 2% think Enron "did not do anything seriously wrong". 52% say Enron management did no worse than other business exec's. By my math, half the public thinks all exec's are crooks.

Good news for Ken Lay! At 5/41, Fox rates favorable/unfavorable numbers a smidge better than Johnny Walker Lindh's 4/45 ... but well within the margin of error.

Consistent with other results, 67% of Business Week's CFO Forum attendees say they've been pressured to misrepresent corporate results. 12% say they caved.

Karlyn Bowman compares several polls and finds minimal erosion in support for Social Security investment in equities.
Gallup, CNN and USA Today's question ... usually finds slightly more than 60 percent of respondents favoring a proposal "that would allow people to put a portion of their Social Security payroll taxes into ... stocks and bonds." This January, 63 percent were in favor

Adding it all up, John Q Public thinks corporate capitalism is a species of organized crime ... and he wants his share of the take.

--- How Al Gore Nearly Saved Enron ---

Al Gore Nearly Saved Enron. And Global Crossing. And a cumulative $2T in deadweight destruction of real (not speculative) capital.

At the dawn of the 1990's, Al Gore, Jr. was making noises about an Information Superhighway. (He may not have coined the phrase, but he most firmly impressed it in the national dialogue.) Gore's vision was a blend of ARPANET, the Apollo Project, and the Interstate Highway system that Al Gore, Sr. took the initiative in creating back in the 1950's. The feds would create the backbone, set standards and enforce terms of service. Commercial players and co-ops would build out the onramps, local loops and customer amenities.

Funny thing happened on the way to the Future. Gore lost to Clinton in the race for the 1992 nomination. Clinton picked Gore as VP, and picked up on Gore's information highway concept, but ...
In October 1992 ... a fundraising dinner party for Bill Clinton, Al Gore and 135 Silicon Valley and biotech executives ... raised $400,000. A top priority in Silicon Valley was ... the so-called "information superhighway." ... Gore envisioned ... government leading the charge. ... leading executives wanted a network built by private companies like their own. ... by the end of 1993 the Vice-President ... declared : "Unlike the intestates, the information superhighway will be built, paid for, and funded principally by the private sector." Remarkably, within two days of Gore's remarks, telecommunications companies ... contributed $120,000 to the Democratic Party. [PBS Frontline]
Gore probably had it right the first time, for at least two important reasons. First, the autonomous self-tuning properties of commodity market economics DO NOT APPLY to networks. The invisible hand has no idea how to build or maintain minimal spanning trees or any of their higher order n-connected analogs. Indeed most of the literature on network economics is restricted to the case of a single network operator.

Second, a backbone transport authority would have had leverage to induce cooperation and choice at local levels, along with an exchange-based funding stream to support nonthreatening cross-vendor amenities.

Instead we had a classic case of competitive overprovisioning, a race for first-mover advantage, de facto standardization wars, compatibility linkage contests (amid nonstop lobbying oneupsmanship). At the end of the day, $2T in real capital was effectively flushed down a rathole -- invested in capacity that will be obsolete long before it is used. This in turn brought financial devastation for firms big and small, new and old, good and bad, innovators and consolidators ... and for vendors who sold them supplies and services ... and for widows and orphans invested in "safe" utilities.

One of the companies trampled in the rush to the exits was Enron (by way of its bandwidth trading operations). Another was Global Crossing. A lot of other firms inthat sector went down the tubes without cooking the books, and don't kid yourself -- there are other companies cooking the books out there (not all of which would achieve negative net worth if exposed).

[authored 2002-02-24, originally posted on The Fray]

Saturday, February 23, 2002

--- Enron-link Restatement at U. Va. ---

From today's WP:
before its fall from grace, Enron was on its way to becoming a business school staple -- as a success story ... Bodily and Professor Robert F. Bruner, colleagues at the University of Virginia's Darden Graduate School of Business Administration, decided two years ago that Enron would make a fascinating case study ..."about strategy, about innovation, about leadership," ... already on the syllabus at several business schools for this semester.
The coursework module has been salvaged, with revised emphasis.

--- A Tale of Endarkened Self-Interest ---

Camp Enron Players' little theater under the stars presents new episodes of the Tragedies of Enron, playing nightly. Our staging is unconventional ... from the wings off stage right, a chorus intones "All Clear! Nothing to see here, Citizens! Go on about your business! Beware the Liberal Medea! Beware the Venal Pols! Quick, don't do anything! No deeper meanings, no larger lessons here! Shit happens, get over it! Don't look behind that door! Why stay for the Second Act? Stop the show!"

Our right-wing chorus is too vast to permit individual credit to all concerned, but let's highlight a few voices.
Safire (NYT): "let us not get caught up in a frenzy ... The nature of the market ... is to correct itself ... this is happening now, all around us ... Posturing politicians do not make markets. ... People by their confidence make markets, and people learn painful lessons."

Jenkins (WSJ): "If humiliation, jail and disgorgement aren't enough to deter future Fastows, more New Deal regulations of the sort that failed to prevent Enron aren't going to help. ... Harrumphing in Washington won't stop the occasional Enron from falling off the edge. We'll be lucky, though, if the hullabaloo ... sillier and shriller by the day, doesn't ... result in something truly unwise."

Abelson (Barrons): "Committee members ... acquitted themselves extremely well of any suspicion of entertaining even a rudimentary acquaintance with business and finance. ... unintended consequences of reform are always noxious"

Bartley (WSJ): "despite all the arm-waving, it might be a good idea to let the law take its course before throwing the free-market baby out with the Enron bathwater ... corrections for much of this are already under way ... No board is ever again likely to be so cavalier"

Krauthammer (WP): "members of Congress falling over each other ... the market has already acted with a terrible swift sword. ... when irrationalities are finally exposed, markets swiftly self-correct. ... politicians, for all their huffing and puffing, will be just following the market"

Reynolds ( "compare the honesty of the federal government's accounting procedures with Enron's ... Congress as an institution doesn't have the necessary moral standing ... Enron's failure is a success ... liberal bias ... they've already managed to make Enron boring ... most people won't be paying much attention"
On CNN's Moneyline, the panel takes mere seconds to reach a unanimous verdict: Enron is forgotten by year-end.

To sum up:
(1) The story is overblown. Reporters and reformers are corrupt, partisan, grandstanding buffoons.
(2) Laws don't deter crime. "Reform" makes things worse.
(3) If anything is wrong, The Market will fix it ... or already has.

One problem with this assessment is that the original crime scene is still warm. New police tape goes up daily. Bodies, smoking guns, bags labeled "loot" turn up every few hours. Lean on any bookcase and a secret passage opens, and behind that a freshly mortared stone wall. Evidence lockers are bulging, the lead sheet overfloweth, prominent citizens scuttle furtively in the shadows. A bit early to close the book on Enron with a notation of "death by misadventure". If the right answer is "do nothing", there's still time ... isn't there?

For another thing -- and this is revealing -- most of the choral litany is false on its face.

Whoever loves markets well enough to get intimate with their history and theory knows this: markets do not self-correct for imperfect information. Just the opposite -- by the magic of the market, frauds multiply, diseconomic defenses spring up, output is reduced, resources are misallocated. Total cost -- often exceeding the extent of the crime -- falls disproportionately on the innocent. This has been known informally for millennia; analytic treatment has progressed markedly in recent decades, culminating in the 2001 Nobel in Economics.

How about the "school of hard knocks"? Absorbing one caper's painful lesson, do we avoid the next? Not if history is any guide. Sure the market reacts ... after a drug-related killing, for instance, dealers take their business around the corner until vigilance returns to normal. Like other gatekeepers, corporate boards have been cavalier before and will be again. See this abridged history.

How about deterrence? Lay whatever penalty you want on the "Risk" branch of the decision tree -- it won't deter many rogue CFO's so long as the "Reward" branch transforms millionaires into billionaires. Here, as in the case of the rogue trader who burns through a billion dollars of other people's money trying to pull even, post hoc justice has little traction. Cumbersome as it is, there is no substitute for prevention via proactive institutional oversight.

One thing is true of markets throughout history -- their members wise up, stand up, unite and demand regulation. It's part of that forgotten tradition of Enlightened Self-Interest. The Buttonwood Nation has reams of rules. Behind each rule lies a lesson learned in true-life tales from the dark side of rational self-interest.

Now, how about those grandstanding reformers? In the hearings I watched, Republicans -- notably Rep. Greenwood (PA) and Sen. Fitzgerald (IL) -- were marquee players, and Democrats took few cheap shots. By my mark -- throwing out high and low scores -- career politicians grasped the subject matter better than the parade of private-sector attorneys, accountants and financiers ... and these were come-as-you-are standing committees, not the inevitable select committees. The press stumbles now and then, but financial newshounds are winning their stars with incisive spadework and enviably clear presentation.

Yes, political axes are ground, and the unfortunate coincidence of ENE's proximity to GWB has opposing camps on hair trigger alert. Of course there's grandstanding, false positives and collateral damage. But our Vast Right-Wing Chorus is staking out its defensive perimeter on untenable ground, seemingly distant from core holdings. Why deny the undeniable and pretend the impretensible? Is it simply the fruit of naive analysis?

In my book, it's corrupt. Not intentionally corrupt, perhaps, but intellectually corrupt, culpable and liable ... just as a CEO is liable for fraud perpetrated under his willfully ignorant nose.

At stake is a perpetual rearguard action against TR's Progressive Era, FDR's New Deal, and the concomitant axis of evils -- taxation, regulation, litigation. By some lights the present danger is not overreaching regulation, not unwise regulation, but any demonstration of any benefit from any regulation. This faction gags on facts now because it has grown fat on lazy generalities at odds with the facts. They've dragged a self-satisfying distortion of market economics so far out on a limb of unreality, there's no place to go.

What ever you do next, don't look down! Admit the O-rings crumble when immersed in icewater, and a whole reliability engineering regime goes back to the drawing board. Concede one point of oversight that might have damped Enron's ballistic trajectory, and a whole cultural movement comes in for the equivalent of ... what? A bottom-up credit review? A crisis of confidence? A run on the bank? Insolvency? Scandal? Shareholder lawsuits?

As Homer (Simpson) exclaimed, "I see the light ... it burns!!!"

The Chorus of Endarkened Self-Interest is pitching a losing proposition, missing the point, and missing the opportunity of a lifetime. Houston, we have a major malfunction ... we're bringing the System in for Level Three diagnostics, and maybe a comprehensive overhaul. The resulting configuration need not be a mission-creep elaboration of the old order. False-choice trenchlines left from Cold War days will be graded over. We'll mark out new playing fields and make up new rules. There's abundant scope for conservative principles and market-oriented solutions in this creative problem-solving swapmeet. All y'all bring your best ideas to the table ... face facts, cut deals, try to build one with the fewest moving parts ... just make the damned thing work!

Or would you rather leave your seats on the Rules Committee to Michael Moore and Ralph Nader?

[authored 2002-02-23, originally posted on The Fray]

Monday, February 18, 2002

--- Watkins Skates, Sharks Gather, Vultures Circle ---

In a triumph of Artistic Impression triumphs over Technical Merit, a congressional panel melts as Sherron Watkins skates over ethical thin ice. Watkins' performance sets the stage for Ken Lay's vaunted "out-of-the-triple-toe-loop" defense of his crown.

FLASHBACK to Camp Enron Report of 2002-01-18:

The big fish could still slip the net on the premise that everything they did was stupid but technically legal, or done on misinformation, or on somebody else's authority, or done "virtually" in places where it wasn't even illegal. Or "auditor ate my homework" defense, or some premature proceeding leaves them with Ollie North immunity. Or they pull a Marc Rich ... or find Jesus, plead out for a slap on the wrist and retire to the Cayman Islands to write their memoirs.
Also recall our suggestion of the Enron Valdez defense: "I wasn't even on deck".

In Iran-Contra, you may recall, nobody was in the loop, from Reagan the delivery boys ... at least on the record. Little fish were just following ultra-secret orders. Big fish never even heard of the operation. Middle fish could not recall "at this point in time". Whatever links the prosecution could cobble together were ultimately blown to smithereens in a barrage of presidential pardons.

Watkins may be stranded in ethical no-man's land ... not in on the original Enron caper, but implicated in the getaway as an accessory after the fact. At any rate, the hunger for telegenic testimony, the dearth of competing witnesses, and her own survival instancts should guarantee sympathetic treatment.

Once thought to be destroyed, recap notes from interviews in Enron's internal investigation suggest big differences between what Lay knew and what Lay said as he exercised PR damage control over Skilling's abrupt departure. See WSJ on MSNBC

Meanwhile, Texas archivist are gradually releasing documents (the "KennyBoy Papers"?) revealing Bush and Lay as penpals. GWB carrying water for ENE in Pennsylvania, Uzbekistan, and Texas ... not necessarily a bad thing for the guv to do for a home-state biz. Enron staff carried water for Bush on political errands, too ... that could be a shade more problematic. Scope of contacts and buddy-buddy tone demolish GWB's "KennyBoy who?" disclaimers. As far as we know Bush has little or nothing to hide ... why work so hard to hide it? "Guilty knowledge"? The Smoking Gun has more originals than you ever want to see.

FLASHBACK to this Short Takes of 2002-01-11, breaking ground for Camp Enron, where I suggested:

For future reference, remember this phrase ... "a Culture of Minimal Disclosure". ... Conventional wisdom says it's just more Hatfields and McCoys. I predict it becomes a major historical turning point.
Most incriminating statement to date!
Not Skilling. Not Watkins. Andersen CEO Joseph Berardino, before the House Financial Services Subcommittee (2002-02-05), fields a softball question re legit uses of off-balance-sheet financing and Special Purpose Vehicles, and answers -- "because a company wants to show a better financial position, perhaps attract a lower cost of capital ... very common". There really are legitimate accounting, business and economic reasons for SPV's ... but apparently none came readily to mind when Mr. B was caught in the glare of the headlights, er, spotlights. An indictment of the system ... if you're looking for Mr. Big, the Culture is the real killer.

(Speaking of SPV's, scuttlebutt around Camp Enron says DOD is field testing a ruggedized all-terrain amphibious version of the Enron SPV for high-risk operations. On background, one source notes "If we only had these babies back in the day, we'd still own Havana, the Philippines, and the Panama Canal.")

"Feeding Frenzy" -- the expression properly pertains to sharks, who can get so excited over blood in the water that they'll bite on anything (including each other). The metaphor extends less than rigorously to pack journalism. But it applies with a vengeance to bankruptcy proceedings, where creditors and other litigious scavengers are at once teammates (trying to maximize nutritional value extracted from the whole carcass) and competitors (elbowing each other for position in the pecking order).

The Great John Nash ("A Beautiful Mind") won a Nobel for formalizing the game-theoretic foundations of such cooperative conflicts. Nash thought he'd found a system of elegant rational solutions ... further examination it revealed a perverse infinite regress of games within games.

FF#1: The ENE creditors committee is dominated by megabanks, who have conflicted motives based on overlapping relationships (including the prospect they'll end up on the defense side of the table with Enron in related cases). A scuffle is brewing between the megabanks, ordinary creditors, Enron affiliates inside the bankruptcy envelope, Enron affiliates outside the bankruptcy envelope, and arms-length transactional counterparties. Bones of contention include disposal of valuable properties, and interim management of the ENE Empire's integrated cash management system (see earlier item on NEPCO).

Barnet Skelton, a Houston attorney who was arguing for the motion to wall off Enron N.A. from the corporate cash-management system, said the creditors committee was not the "watchdog" for all creditors it claimed to be. Rather, he said, it is a "lapdog" for Enron's biggest creditors, Citicorp USA and JPMorgan Chase Bank, who have substantial holdings in Enron Corp. (Houston Chronicle)
FF#2: In a mass consolidation of shareholder lawsuits, the University of California is designated lead plaintiff. Based on coherence and experience, Cal edged out bids by an NYC/Florida coalition, and a four-state combo (OH, WA, GA, AL). Potential for mixed motives here, too, since California is going after Enron for billions in energy market manipulation refunds.

FF#3: One subset of Enron employees and retirees aren't getting paid on the deferred compensation plan they bought into and worked for in years past. Another subset cleaned up on up-front salary and bonuses shortly before ENE filed bankruptcy. Money in the bank? Yes. In the clear? Not necessarily. The first group may have a case against the second group, since payments made in contemplation of bankruptcy may be unwound as "preferences".

FF#4: Enron's tax history goes under the scanning electron microscope. Did ENE net $381M in tax rebates over five years (as claimed by Citizens for Tax Justice)? Did ENE pay $112M net taxes (mostly AMT) last year alone, as they claim? Or did ENE pay relatively modest amounts in net taxes, as ENE financial statements suggest? Enron agrees to waive privacy and turn over tax records for thousands of subsidiaries and partnerships back to 1985. By my reckoning we're looking at millions of pages of tax returns in umpteen national jurisdictions with no central clearing house, and no direct way to backtrack the offsets and reconcile competing claims of fact, equity and priority. (See previous item re PGE.) When the facts are sorted out, competing governments will chase money that's no longer in ENE's vault. Where is it, and how far will they chase it? Looks to me like at least a twenty-year case ... the kind that stimulates development of novel litigation technology and artificial intelligence ... maybe even a lively futures market in Enron tax liability swaps.

FF#5: Finally and hilariously, Enron is as Enron does. Some enterprising post-Enron jackal tried to file a (forged) deed in Galveston County, transferring title to $15M in (genuine) properties owned by Ken and Linda Lay -- three houses in (appropriately) Pirate's Cove -- to the "Enron 401(k) Employee Trust".

Is Ken Lay really broke? We really don't know. Disclosures of previously unreported stock sales (under a reporting exception where the buyer is the corporation) undermine the "poor KennyBoy" storyline ... but suppose Lay was cockeyed optimist enough to plow the proceeds into frothy tech stocks on margin? Leverage works both ways. The sob story could be essentially true if Lay continued investing borrowed dollars, on borrowed time, into a collapsing bubble.

Access of Evil?
UCC presses FCC to vacate and reopen a $7,500 wrist-slap settlement of Enron's 49 wireless licensing violations. (United Church of Christ is active in digital divide and other public media access issues, through their Office of Communication.)

And "In public policy, it matters less who has the best arguments and more who gets heard -- and by whom." (Ralph Reed memo to Enron)

And just outside the Enron envelope, "Not that he owes me a vote, but he owes me a phone call." (Trial lawyer/lobbyist Dickie Scruggs in re Sen. John Edwards, D-NC).

Remember Rudy G's venture with Ernst & Young to provide crisis management consulting to distressed businesses and agencies? WSJ reports Giuliani Partners declines invitation to help a distressed Enron. OK, then, how about Global Crossing?

Coming soon -- how Al Gore nearly saved Enron AND Global Crossing!

Sunday, February 17, 2002

--- PUHCA Sightings: "Not an EWG, Joey, but a FUCO" ---

Almost undetected under the target-rich radar buzz of campaign finance debate and hearings on corporate governance, Congress strives mightily to centrifuge the bouncing baby of market-oriented electric reregulation out of Camp Enron's murky, septic bathwater. Per this pre-game report:
"Whether we like it or not, the old regulatory compact has been broken" and it is too late to turn back, a utility official said. Enron's disappearance, however, "has left a hole," the executive acknowledged. "There is no drumbeat right now on a lot of the issues that Enron was involved with."
What is (or was) the old regulatory compact? Read on.

"Not an EWG, Joey, but a FUCO" As Andersen CEO Joseph Berardino bones up for another congressional grilling, selected senior partners ("how you doin" "how you doin" "how you doin") tutor him in the arcane mysteries of the PUHCA.

What's a "PUHCA"? If you answered "an invisible white rabbit who stands at least six feet tall, can stop time, knows absolutely *everything* and spends his evenings going from bar to bar", your mojo's on par with Andersen's auditory hallucinations. You must be thinking of Elwood P Dowd's friend "Harvey" Or maybe you're thinking of Harvey Pitt, SEC Chairman and faithful invisible friend to the AICPA? Wrong again.

PUHCA is the Public Utility Holding Company Act of 1935, as amended, a.k.a. the Act -- one of those anachronistic Depression Era regulatory schemes, enacted back when "... financial pyramid schemes ... sometimes 10 layers thick ... made industry regulation ... impossible. After the collapse of several large holding companies ... [SEC alleged] stock watering and capital inflation, manipulation of subsidiaries, and improper accounting practices. ... Strict limitations on intrasystem transactions and political activities were also imposed."
(From this DOE profile)

What an awful time that must have been ... and what lucky dogs we are, living here in the Future and all.

Pursuant to the Act, SEC classifies utility holding companies as exempt or non-exempt. For a non-exempt PUHC, routine business transactions -- issuance of debt or equity, asset acquisition, dealings with affiliated companies -- require SEC approval in advance. For Enron and other presumably less-dangerous exempt little PUHC's, life is much easier.

OK, now what's a "FUCO"? That's "Foreign Utility COmpany", per the Act. [The array of Enron-invented FUCO's in exotic locales might lead one to suggest a more insolent interpretation.] FYI, BTW, EWG's are "Exempt Wholesale Generators".

And a "PUHCA Pretzel"? Long before GWB's impromptu self-Heimlich, "... we called certain cases ... 'PUHCA pretzels,' because they required us to twist and turn the Act to conform to the needs of the industry. ... [today] the appellation 'pretzel' could be used to cover most matters we handle."
(Barbash, SEC, 1997)

The affected subgenus of capitalism has raised pretzel-twisting to the status of high art, and PUHCA is under fire by regulatees and regulators alike. It certainly is out of step with the "dance of supply and demand" as the kids dance it these days.

So what's PUHCA got to do with the price of bananas in Camp Enron? Maybe nothing, maybe everything. (Speaking of bananas ... a moment of silence, please, for recently-bankrupt Chiquita Brands, formerly United Fruit ... once Master of Nations, the power behind many a throne and/or junta under its own "old regulatory compact".)

Independent study questions:
(1) Did Enron avoid classification as a non-exempt holding company by misrepresenting its relationships with FUCO's and other "separate" entities ?
(2) Did Andersen improperly twist, and did the SEC inadvisably swallow, a batch of poisoned PUHCA Pretzels?
(3) Would proactive transparency under PUHCA have kept Enron on the straight and narrow?
(4) Or conversely, did shell games motivated by outdated regulation help create the habitat for later games of financial hide-and-seek?

By one popular analysis, Enron morphed itself into an unregulated investment bank, and calamity ensued. Believe it or not, there's a move afoot to widen the event horizon of this regulatory black hole.

From WSJ on MSNBC:
A bill before the House to deregulate the electrical-power industry would ... repeal a utility holding-company law administered by the Securities and Exchange Commission. ... investment companies wouldn’t be subject to regulations governing capital structure, self-dealing among affiliates and board independence - all hot-button issues raised by Enron’s collapse. Enron received SEC exemptions from the Investment Company Act and PUHCA during the 1990s.

Reuters Europe details Enron's preference for illiquid trading positions:
... pressure to value outstanding trades at the most optimistic level possible was particularly strong in the run-up to Enron's reporting periods. ... some traders opted to pursue more illiquid trades simply because they were especially difficult to value ... because there is no central, independent pricing mechanism ... companies can be subjective ... Enron's trading was in markets with low levels of transparency, where they were the biggest trader. "They were trading quite unusual commodities and for quite unusual periods ... in terms of determining the market price, in a lot of instances the company was the market"

Speaking of transparency, Senators Feinstein (D-CA), Cantwell (D-WA) and Wyden (D-OR) have introduced legislationto place energy derivatives trading under the open-book aegis of the CFTC.

Look forward to high-voltage creative tension, as one side tries to strip regulation down to the bare walls, and the other side tries to push ten pounds of slithery things back into the original five-pound regulatory box.

In related developments, Texas Attorney General (and GOP Senate candidate) John Cornyn is taking heat for a (Sept. 2001) decision, enabling Enron to provide services under Texas electric deregulation without disclosing the same financial information provided by other applicants.

And Cornyn is throwing heat, taking a shot at potential opponent Kent Bentsen (D), charging that Bentsen's July 2000 vote (against an amendment that would have restored CFTC authority over energy derivatives) was an outright quid pro quo. Bentsen says he preferred to address the issue in context of deliberations on comprehensive electricity dereg/rereg (see Feinstein Bill above). As suggested here from Day One, Enron connections may take some wind out of Bentsen's sails ... but is Cornyn out of his mind? Cornyn's Enron pot dwarfs Bentsen's Enron kettle ... and if Bentsen is vulnerable, why not save the attack for the general election?

With Shays-Meehan-McCain-Feingold on front burner, watch this space for more Enron-linked notes on political operations, things that make no sense, and campaign finance reform.
[orig. 2002-01-25, posted on Fray 2002-02-17]

Wednesday, February 13, 2002

--- Campaign Enron Finance Report ---

FLASHBACK: 2002-01-10 This writer predicted "McCain-Feingold by St Val's Day ... In the wake of Enron".

We're not quite there, and action in the Senate is no slam dunk. But close.

Shays-Meehan campaign finance reform wins in the House, pre-conferenced with McCain-Feingold in the Senate. When it came to Armageddon, at least 40 Republicans lined up on the side opposite Speaker Denny Hastert; at least 30 lined up opposite Hastert and the NRA combined. Thanks, Enron!

I'm a First Amendment zealot. In my opinion, Shays-Meehan encroaches on freedom of speech. I further believe it will be pecked to death by a well-plotted campaign of precision-guided litigation, or circumvented by the natural power of money to find one or another channel of expression. Even if it stands against these forces, I do not believe it will turn the tide of negative, vacuous and disinformative ads. All these things considered, I strongly support the legislation and urge its passage. Our system of government of, by and for the people is in more serious jeopardy than most commentators realize, and extreme measures are called for.

In the spirit of these developments, a few campaign finance hits off the old Enron/Azurix waterpipe ...

There is a recurring noise in the blogosphere about Enron getting nothing for the big bucks they spent on political operations. The "Paid For But Not Bought" thesis has been shot down over and over, but still it gets up and walks. We'll run the drill ourselves in a later dispatch, if necessary, but I expect the noise will die down as investigation and exposure proceeds.

Enron was a major player in multiple political arenas. At the federal level it mostly played defense -- creating "regulatory black holes" and other blind spots. At state level -- where most utility regulation is developed and applied -- it went on offense, exploiting these lacunae to write the rules for games it had designed to be rigged. Abroad, a wider range of strategies had one thing in common -- Enron was good at talking important people into things that made no sense.

Enron provides evidence against every good faith "good citizenship" argument for corporate money in politics.

Argument #1: Corporations spend money to elect like-minded public officials. Rebuttal: In 702 state-level races, 98% of Enron's money went to winning candidates. You don't win 98 out of 100 races by trying to get the right people elected. If your aim was to tip electoral outcomes, most of your money would go to competitive races, and the occasion promising upstart. (

Argument #2: Corporations spend money to assure a lively public debate. At 98% they're not spending money on both sides of one race (though the partisan split was 45% to 55%), and they're spending most of it in walk-over's where there's no active debate or attentive audience.

Argument #3: Contribution is a form of speech, as in "raising issues in the public square". Rebuttal: Enron would be horrified -- heads might even roll -- if its name or pet concerns became topics of attention in these races. The big open secret is that money buys privileged access, and the resulting communications occur as far from the public square as possible. A smaller, dirtier open secret is that "issue" money is used most effectively in sponsoring attack ads against uncooperative candidates, featuring issues completely unrelated to the sponsor's interests.

The money game is another instance of our reciprocal patronage theme -- pols squeeze economic interests for contributions, economic interests squeeze pols for favors, and they end up producing results that are mutually self-serving but systemically irrational. This exchange is rarely as clumsy as an obvious quid pro quo, as in Enron's $25K contribution to Texas Gov. Perry's coffers the day after Perry appointed an Enron exec to head the Texas PUC. Or Enron's $100K ante into Democratic coffers as soon as Clinton put in the good word on the energy deal in India.

They -- politicians and donors -- don't do it because they like doing it. They do it for the same reason CEO's squeeze CFO's to stretch the truth in financial reports ... because if they don't do it, somebody else will, and somebody will beat them to the head of the pack. Funding is an arms race, and there's no reward for unilateral disarmament.

Enron's political operations are bigger than they look in the rearview mirror, certainly bigger than the reported FEC total of $133,800 for Bush2000. Let's look at some particulars.

First, peer professionals in the beltway "government relations" game admired Enron as among the most effective and efficient at getting its way. Some big spenders ramp up their efforts in response to a single urgent development, spending lavishly and clumsily. (Microsoft, going from non-player to Top 10 in a single cycle, might be a case in point). Enron took political operations seriously. It used sophisticated quantitative models to help it pick the right fights. It got more for the dollar ... so its political impact was bigger than the raw dollar budget would suggest.

Second, Enron used every imaginable alley and back street and shortcut ... every form of spending outside the FEC totals. Convention sponsorship (Philly $250K), parties at conventions ($???), inaugural balls (yup, Enron had big balls ... at least $350K worth). The Florida Recount Fund. Laura's pet charity ($400K). The corporate aircraft loophole ($60K in reimbursed fare equivalent, saving the campaign maybe $300K out-of-pocket). Friendly swaps with beholden charity-ball dance partners ("I'm thinking about chipping in ... by the way I've given all the law allows over here ... say, you'd like to help remove the restraints on human potential, wouldn't you? Great!") and business partners (Andersen's importance -- Houston office excepted -- is overstated, but Vinson & Elkins included at least three $100K Bush "Pioneer" arm-twisters). Grants to policy/advocacy think tanks for campaign-friendly "research" pieces. "Fact-finding" trips for elected officials and staff. "Friendly" hunting trips. Alleged parking campaign staff off-budget, on corporate staff positions or consulting engagements.

At the level of state and local utility districts, where Enron's bread is really buttered, reporting is less consistent and less transparent, rules are often looser and more easily skirted.

Third, we know Enron under-reported its formal lobbying expenditures at federal level. "A dozen premier lobbying firms with Washington offices were hired by Enron and reported spending more than $1.6 million for the first six months of last year. Enron reported it spent about half that -- $825,000." (Houston Chronicle) [UPDATE: Make that at least $2.5M]
And we know Enron was extremely active in lobbying at state level ($3-5M in Texas alone, over several years).

Finally, consider those thousands of sub-subsidiaries and off-balance-sheet, off-shore Special Purpose Vehicles. Who's been cruising around in those vehicles, and where have they been parking, and with whom? Some of the named names made instant millions on token investments required to satisfy the 3% rule. These structures are excellent vehicles for unearned, undocumented transfer of wealth. Who were the unnamed names, and where did these slush-fund pipelines discharge their effluent?
[originally authored 2002-02-13, posted in The Fray 02-17]

Monday, February 11, 2002

--- Mom to Skilling: Get a Clue! ---

Skilling's Mom doesn't buy his story
"When you are the CEO and you are on the board of directors, you are supposed to know what’s going on with the rest of the company,” Betty Skilling, 77, told NEWSWEEK in an interview before the hearing. “You can’t get off the hook with me there ... He’s going to have to beat this the best way he can.”
Worth magazine publishes an annual list of the "50 Best CEOs".

In their scheme, "Best" has a lot to do with "the vision thing". I've been thumbing through these ranks of visionary corporate leaders (Jeff Skilling, #2 in 2001 ... Ken Lay, #36 in 2000), and finding a lot of visionary losers. At least they never bit on GX.

One sign of the times (today's NY Times) -- "flamboyant leader", i.e., Worth CEO W. Randall Jones, "struggles to keep his publication alive".

I recall this little gem from games-maven/poet/philosopher Danny Kleinman:

"Concept precedes,
Temperament conquers Technique.
Vision laughs at Counting"
Well, yeah. But good vision tells ya when to start counting.

Former Enron CEO Jeff Skilling's congressional testimony last week drew mixed reviews. Some thought he played his overeager interrogators like a Stradivarius. Others thought he put himself in direct jeopardy of a perjury conviction. By my scorecard, he:
(1) lost points in the court of public opinion,
(2) failed to win even grudging adversarial respect from prosecutors,
(3) failed to gain bargaining power as the "indispensable witness" against other defendants,
(4) failed to reach the threshold level of telegenic sizzle we demand of our career celebrity villains, and
(5) screwed himself royally in the probitive legal department.

But perjury? Prosecutors won't have to fall back on anything as lame as the last-resort, sour-grapes reprisal tactic of a perjury indictment.

Skilling opened by telling us he was "devastated" and "apologetic". He closed by telling us he wouldn't change a thing. To FORTUNE magazine's Andy Serwer, Skilling has a "Nixon problem" -- either he was in it up to his eyeballs, or he was a total nincompoop ... and nobody thinks he was a nincompoop.

I think it's worse, and more transparent, on an angle I have not seen picked up anywhere else.

Skilling asserts the company was in "strong financial position" when he left in mid-August. Not only was he uninvolved, he had no knowledge of any financial sleight of hand, or corrupt conflict of interest, or sham transaction, or circumvented financial control, or make-believe SPV with make-believe revenues, or fraudulent statement to investors. He was in the dark ... in one instance, quite literally. So far so good for Skilling -- assuming this claim stands up against the inevitable drip, drip, drip of documentary evidence and testimony.

Skilling then asserts the company was brought down by outsiders -- the predations of creditors, and lawyers, and a liquidity crisis -- a "run on the bank". OK, plausibly consistent. He might reasonably have believed that on 2001-12-02, assuming he was in the dark when he left on 2002-08-14.

Skilling further asserts the company is still viable, but misunderstood. Uh-oh. Who left that in the script? That's a problem, because now he is aware of several chapters of the financial cookbook, and those disclosures don't change his opinion of ENE's financial condition. This makes no sense. Will he claim the affected transactions weren't material? That won't fly. Will he claim they were legitimate? That won't fly either, and it would obviate his reason to claim ignorance in the first place.

Maybe I'm missing a subtle turn of strategy ... is this performance the preface to an insanity plea?

Call it the "Enron Valdez Defense" -- "I wasn't on the bridge ... wasn't even on deck ... I was in my cabin ... must have dozed off ... heard shouting ... woke up with such a headache ... they should have known better than to hire a guy like me ... but the ship never ran around ... people are just saying that to make us look bad".

I figure Skilling is going down hard unless ... unless ... no ... no reason to go there. The bill of particulars on Skilling is yet to be written, but doors are closing behind him ... week by week he'll find himself with more rope and less wiggle room ... and the prosecution has all the time in the world.

Sunday, February 10, 2002

--- Camp Enron Mission Statement ---

The coroner investigating the Global Crossing incident has called in special agents from the X-Files team. Elsewhere, financial bloodhounds are sniffing at some extremely odd terms in a series of Citigroup credit-linked notes. The plot thickens -- and broadens ecumenically -- in ways that affirm this writer's view of the matter. This is not just the Enron melodrama, it's a metastasizing meta-scandal, a takedown of the prevailing meta-context ... a revelation of latent defects so crippling and openly exploitable as to subject The System to the possibility of product recall. The geniuses of ENE and GX have demonstrated a devastating hack attack on corporate governance. Was this a simple case of buffer overrun, one we can cover with a patch? Or is there a gaping set-theoretic hole in the platform security model, rendering the entire architecture untenable? In either case, how far from shore should we sail in our theoretically-leaky boats?

I'll stick out my reputational neck. In history's rearview mirror, Enron may loom larger than 9/11. The contest depends on things yet to be. In 21st century history, will "terrorism" and the "war on terrorism" play out as coherent themes? Or as anecdotal clutter? As major or minor motifs? Will they be eclipsed by related conflicts, and seen later as mere links in a chain-reaction? Or will unrelated issues eclipsed them entirely? Same questions for "Enron". Which will more strongly influence the emerging global meta-context? There's a reasonable case to be made for WTC, a clear sentimental favorite ... but my money's on Enron.

Camp Enron coverage will include ample servings of highlights and sidelights ... politics (including PPD), and courtroom drama, and soap opera, and farce, and even sport. But keep in mind that Enron itself is merely the chimerical sideshow poster child for a three-ring circus of misplaced devotion.

In the main I'll attend to the larger and deeper implications (which are emphatically large and exceedingly deep). Our topic in a nutshell: How will republican democracy and market-based capitalism escape being eaten alive by their own demon spawn?

And so the Plot Thickens ...
Global Crossing's collapse seemed at first an unrelated matter, coincidental except as convenient to die-hard ballot-boxers looking for a Democratic tat to match the Republican tit of Enron. Deeper inspection reveals a unifying theme, one that will draw a great many other matters into its orbit. Let's lay out the "coincidental" case first ... later we'll demolish it under the weight of analysis.
ENE hyped a neoteric smoke-and-mirrors business model; GX was constructed as a real business for real customers.
ENE was a counterproductive business; GX was a productive business that (along with its peers) built too much useful capacity.
ENE collapsed when trading partners realized its balance sheet was bogus; GX collapsed when real revenues didn't cover fixed charges.
ENE accounting was fictive; GX accounting (also audited by Andersen) was aggressive.
ENE used off-book sham transactions with foreign shell partnerships; GX presented its results on its own books.
ENE tried to hide bad results with ever wilder fabrications; GX owned up and bailed out.
ENE tweaked politicians to avoid regulation; GX tweaked politicians to establish regulation.
ENE politicked more aggressively than anyone else in its sector; GX politicked on par with its telecom peers.
ENE was overwhelmingly partisan; GX was evenhanded. GOP ex-Pres Bush41 got in on the same ground floor as DNC Chair-to-be McAuliffe. GX's chief promoter was a neocon/futurist Reaganaut. ("If you don't like capitalism," said Mr. McAuliffe in defense of his windfall, "move to Cuba or China." ... but if you DO like capitalism, move to the Caymans or Bermuda?)
[Note on terms of reference: In bankruptcy, Enron ("ENE") trades OTC as "ENRNQ". Global Crossing "GX" now trades as "GBLXQ".]

Now, how did GX make money on paper ... without actually making money?

Suppose Will Vehrs borrows $10, buys a collectible Warren Buffett bobblehead doll, and sells it to Tony Adragna for $1000. Will's financial statement shows revenue = $1000, cost of goods sold = $10, debt = $10, cash-on-hand = $1000, and net profit = $1000.

Now suppose Tony sells it back to Will, again for $1000. Tony got out of the game even. Will has revenue = $1000, COGS = $10, debt = $10, cash-on-hand = $0, and assets = $1000. Will's profit, by GAAP, is still $1000. (The doll is effectively marked up as a $1000 asset on Will's books, whether valued at cost or "market".)

Next suppose Tony buys a Warren Buffett doll, Will buys a Paul O'Neill, and I buy a Robert Rubin, at $10 each. We can make similar trades pairwise (as GX did with Qwest, only with fiber-optic capacity instead of bobbleheads), or in three-way swaps, or we can invite more friends to play in our rotisserie "Geniuses of Capitalism" fantasy league. In the token economy, "on paper", we all get rich. In the real, utilitarian economy, we're idiots ... but no specific transaction or bookkeeping entry violates any specific rule of accounting. The scheme as a whole may have violated first principles of accounting, and economics, and even law (depending on how Will raised that first $10) ... but those are separate questions.

We could have played the same game, but left the bobbleheads in the box, on the shelf, or even in the warehouse ... trading "bobblehead swap" contracts for whatever beneficial interest might attach to owning a bobblehead. The bobbleheads don't even have to exist, as long as our speculative enthusiasm does exist.

ENE played a very different game. The players were captive entities, dressed up to look like arms-length counterparties. ENE explicitly created structures that made ENE revenues dependent on the price of ENE stock. And they explicitly structured the closing dates on derivatives contracts to keep the upside of a given transaction on one financial statement, time period and/or taxing jurisdiction, while slip-sliding the offsetting downside result into a different statement, period or jurisdiction. Even done right -- and ENE didn't always dot all the i's -- this violates rules, principles and laws.

The two schemes have one thing in common, something that blows away the "coincidence" thesis and raises legitimate concerns in seemingly unrelated quarters.

Both schemes depend on reciprocal patronage. I buy your stuff, you buy my stuff. This isn't necessarily evil. There's nothing wrong with ATT buying IBM computers and IBM buying ATT telecom. Direct or indirect reciprocal patronage is the essence of market economics. But it is a context that bears close scrutiny.

ENE's version was obvious corrupt practice. The GX/Qwest round-trip swap falls somewhere in the darker end of the grey scale. In better camouflage -- in three-way swaps or staggered round-trips -- it might have ranked well up in the light-grey range and escaped notice entirely, even in bankruptcy.

These "light grey" corruptions are subtle. They work when a whole community shares the same unfounded enthusiasm. The imputed value will never be brought to ground so long as it is honored by all, and so long as there's never an occasion to spend the "proceeds". Call this illusion the Categrorical Derivative ... vice that's as good as virtue, as long as everybody acts alike. [Kant believe I wrote that!] For obvious reasons there are strong social pressures against spoiling the game, against pointing out that the Emperor has no clothes.

What other systemic shadings depend on the mutual backscratch of reciprocal patronage?

Think about market bubbles (endemic even in simulated markets where, in theory, they ought not exist). Think about bull markets in general.

Think about the IPO game, and how little of the "take" ends up capitalizing the enterprise a public offering is ostensibly meant to finance. Think about the derivatives game (then read Frank Partnoy's FIASCO, and think some more). Think about the whole publicly-held equity game, in which most successful firms span the arc from launch to collapse without actually disbursing anything to shareholders (who value their shares according to the firm's theoretical capacity to disburse dividends).

Think about the Japanese economy, where everybody is too big -- and too interrelated, and too deep in the hole -- to count their losses and fail.

Think of the "managing class", the echelons of desk-jockeys who squeeze disparate compensation out of their firms' equity investors, customers and thier fellow employees -- because they and their peers write all the world's staffing and compensation plans.

Think of Citigroup, who issued near a billion dollars in ENE credit-linked notes ... securities that behave almost exactly like ENE corporate bonds except for one thing -- they pay less interest! In other words, securities nobody in their right mind would ever buy under any circumstances, no matter what condition Enron was in ... unless there was a hidden agenda. As NYT's Daniel Altman astutely recognizes, the real mystery isn't "did Citigroup take advantage of inside information on ENE partnerships?", it's "who the hell bought these notes?" (was it Enron, or an ENE partnership?) and "why?" (was this deal part of some extended quid pro quo pro quo pro quo ... ?).

Tuesday, February 05, 2002

--- Camp Enron Salutes Camp O.J. ---

Michael M. Thomas, a Yankee Optimist and Texas Oil Patch kindred spirit of GWB ( "I Understand Bush Men" ), shares priceless observations on the The Roots of Enron [current in New York Observer; perm archive link will differ]. MTM recalls long-past encounters with Vinson & Elkins ("more concerned with 'Yea!' than 'Nay!'"), traces the whole financial bloodbath to O.J. Simpson -- by way of W.J. Clinton -- and wraps up with a cite from J.R. "Rudyard" Kipling:
... They denied that Wishes were Horses; they denied that a Pig had Wings.
So we worshipped the Gods of the Market who promised these beautiful things. ...
Vinson & Elkins have deep pockets, but are they too well-connected to take the fall? ( )

Bracewell & Patterson, also a Houston legal powerhouse, cites conflict of interest and severs ties with Enron. B&P is home to (non)lobbyist RNC Chairman Marc Racicot and Texas GOP A.G. candidate Greg Abbott, among others

Prosecutor's wetdream, continued. The suspects themselves are zealously preparing white papers laying out each others' misconduct in painstaking detail. With defendants like these, who needs on-budget staff?

Who are the "partners" in hundreds or thousands of Enron-related entities? Don't ask Enron , but Joshua Micah Marshall has more (more acute questions, that is).

Ken Lay cancels scheduled appearances before Congress ... and at World Economic Forum's "Davos on the Hudson", where "Among those who want to know more about Enron are business leaders from developing nations. They have been urged for years to ... emulate Western capitalist practices." ( )

In the Senate, Fritz Hollings (D-SC) goes over the top, railing about "cash and carry" influence peddling. In response, Gordon Smith (R-OR) spins out, insisting it's a business scandal, and ... it happened on Clinton's watch. A careless gift to Smith's opponent in this fall's competitive re-election bid, in a state stacked with Enron victims.

Democrats want to play Enron up as a political scandal. Republicans want to confine it to a business scandal. Self-inflicted damage continues. Political scandals undermine the "party of government". Business scandals -- if they loom large enough to make any popular impression at all -- undermine the "party of business".

FLASHBACK, 2000-12-14: Fortune magazine floated three names for Treasury Secretary under Bush43: Ken Lay, Philip Purcell of Morgan Stanley, Hank Greenberg of AIG (recently pummeled for Enron-like accounting).

[That's Morgan Stanley, the derivatives and structured financing wizards, not J P Morgan, the structured financing and derivatives wizards. The two Morgans are related by parentage going back to the last great paradigm-shaker in corporate governance -- the 1920's boom, securities manipulation, the 1930's bust, and the Glass-Steagall Act of 1933. The Act restricted banks to the banking business, and has been eviscerated by recent "anything goes" deregulation. The world breathes in, the world breathes out, in the never-ending cycle of rascality and reform. ]

The Houston Astros, "perceived in the public and cast in the national media as an affiliate (and even an ally) of Enron", are in court trying to get out from under the Enron nameplate ... while Enron stays current with scheduled payments (!) in a possible bid to negotiate sale of "Enron Field" naming rights on their own terms. How about "Global Crossing Field"? "Tyco Stadium"?

Also in the game of registered marks, CNBC's "America Now" (Kudlow and Cramer) unveiled a logo for their own excellent scandal coverage ... including the big cockeyed 'E' fallen over on its back. Now it's gone. Issues?

Dave Barry Does Enron (Q. What does ''leveraging'' mean? A. Lying.)

Speaking of things which I am not making up ... Austin left/populist muckraker Jim Hightower found this ill-timed puff in Texas Society of CPA's Today's CPA, December 2001 issue (composed in October): "Enron's accounting function has been an integral part of its success and vision."

2002-02-08 ADDENDUM: More "Camp O.J." connections:
(1) O.J. "Dream Team" attorney Johnnie Cochran is on the scene, this time for the plaintiffs. (Will we find Alan Dershowitz scouting out sympathetic test cases for his "torture is OK under certain circumstances" thesis ?)

(2) If taken down and sued to smithereens in civil actions, Enron executives may retire to lifestyles of the rich and notorious -- a la Mr. Simpson.

(2a) Key executives enjoy multimillion-dollar external private pension and insurance contracts, untouchable in civil litigation. WSJ -- by subscription -- has a good piece in yesterday's 2/7 edition.

(2b) Texas, like Florida, provides extremely generous "homestead exemptions" in personal bankruptcy. Houston sees a minor boom in high-end residential construction as "Exron's" frantically hammer multimillion-dollar additions onto their multimillion-dollar estates.

Monday, February 04, 2002

--- Did Enron Exist? ---

There's an unsettling buzz going around Camp lately. Who among us has seen the Enron? Is this expedition yet another Yeti chase, a search for the fabled Lost City of Gold or mythical Atlantis, an elaborate snipe hunt? How do we know it ever existed? Evidence is anecdotal, indirect, circumstantial, but still ... the whole landscape is marked with footprints and relics that beg other explanation, and thick with what everyone swears is Enron scat.

"Everybody knows" the towers of Enron once peeked out through breaks in the clouds, looking down on our present malarial digs. Puzzling, though, that nobody ever found the passage to the bedrock foundations on which these grand towers are supposed to have stood. Locals nevertheless staked their futures to the word "Enron", and trade was often conducted in tokens of this pie-in-the-sky faith -- Pieces of Enron, a.k.a. "shares".

A year ago just one share fetched $80 in trade in local markets, and all shares together amounted to $60B. When a $60B edifice falls down, shouldn't it make a sound? A splash, a crunch, a thunderclap? For perspective, the World Trade Center towers were in the $10B ballpark, and their collapse made a "splash" on the order of $100B.

But Enron's collapse made no such splash. Except for the natives holding now-worthless Pieces of Enron, life went on. The sun came up in the morning, the waterwheels turned, grain grew in the fields, tongues wagged in the square, and the markets were unruffled.

Enough allegory. There's a serious economic enigma here. ENE began as a financial story, and the most perplexing angle was the non-story: "the markets were unruffled". With DOJ's criminal inquiry it became a general circulation story, one of crime, politics, suicide, celebrity liars, celebrity lawyers, Jesse Jackson. We must assume Geraldo Rivera is just around the corner, and so are disclosures of sexual hijinks. But nobody sees $60B of real economic loss ... no discernible reduction in real goods, real services, real capital ... maybe just the opposite!

Arms-length auction markets once valued Enron equity at 0.3% of US tangible assets, over and above 0.2% in on-book and off-book IOU's, mostly in non-market placements with the "smart money". Beyond that, ENE's "handle" in outstanding contingent contracts ran to something like 20% of a year's US GDP. Enron went away, and nobody missed it except shareholders and debtholders. What happened? In the strictest economic sense, did Enron ever exist?

Enron invented itself as a maker of markets in a wide range of securitized commodities and derivatives ... a purveyor of optionality, liquidity, information, trust ... a conqueror of time, distance, uncertainty. This brings us to a paradox in rational market theory regarding value-added valuation of market-makers.

Yes, speculative buyers -- those who buy things not because they want them, but because they expect somebody else will want them -- perform a useful function. So do intermediaries who repackage slices of risk and reward inherent in speculative assets. So do pure market-makers, who maintain continuous auctions in goods where actual quanta of original supply or end-use demand may arrive intermittently.

Yes, they render valuable service, and no, they won't do it unless there's money in it. But no, again, their quantifiable value of this work can't be much above zero ... if the market is strictly efficient, then zero; if marginally inefficient, even the barest margins should bring market makers out of the woodwork.

Were energy markets so inefficient to begin with that Enron's participation lubricated the wheels of commerce to the tune of $60B value-added? Or were equity markets so inefficient they placed a $60B price tag on something with zero economic value? Either conclusion is unpalatable to adherents of the "market is always right" doctrine ... and likewise to heathens like myself who view markets as remarkably practical self-optimizing devices.

One possibility is that economic loss is real, but diffuse, and recognition of loss is cascading in a slow chain reaction through subsidiaries, business partners, and downstream victims. The full extent of the damage may take time to show up. One problem with this thesis is that most visible damage is evident in the token economy, not the real economy.

A few shards of Enron rubble have turned up in my backyard. Let's start with NEPCO, Enron's chief appendage in the global power plant construction game, "a 64-year-old Bothell company that employs 3,700 people ... Enron bought NEPCO in 1997. It recently listed annual sales of $1.5 billion. Enron ... did not mention NEPCO in its annual reports for the past three years."
[ The Seattle Times: Enron's ruin drags down Bothell firm ]

Technically, we're talking about NEPCO Services International, Inc. (a fully owned subsidiary of National Energy Production Corporation (a fully owned subsidiary of HOUSTON PIPE LINE COMPANY (a fully owned subsidiary of ENRON CORP))). Similar is Thai Nepco, Ltd. (which is only 99.94% owned by N.E.P.Corp.). Related entities include NEPCO UK Ltd. (a fully owned subsidiary of Enron Europe Construction Ltd. (a fully owned subsidiary of EEL Company Ltd. (a fully owned subsidiary of ENRON CORP))). This genealogy as of Enron's 2000 10-K, more detailed and more consistent in format than the 2001 report, in which some parentages have apparently changed.

NEPCO does real work, and falls outside Enron bankruptcy proceedings, but Enron stripped NEPCO's cash accounts before filing bankruptcy.

"NEPCO ... subsequently bounced checks to suppliers ... lawsuit from a German bank that says the company had "no bank accounts or economic existence independent from Enron" ... Enron "swept" the company's cash into its centralized cash-management system ... those funds are now frozen in court. ... In some instances ... NEPCO has had to go back to the client and say, 'Can you give us that money again?' ...".
Next there's the City of Seattle. "City Light" sold Enron about $900K of surplus hydroelectric power in November, and is standing patiently in line with the other creditors. The City also lost an unrealized $2M on in-the-money forward power contracts to Enron. Adding insult to injury, the City also has unresolved claims of perhaps $100M resulting from Enron's alleged market manipulations in last spring's "California" power crisis. The technical and legal basis for these claims looks stronger all the time, even as collection prospects grow correspondingly dim.

The Seattle case raises what will be a recurring theme of unsymmetric effect. Enron acted in the market not as a broker (arranging trades between principals), but as a principal in each trade. It bought contracts from and sold (mostly offsetting) contracts into the same markets. Counterparties whose outstanding contracts are in-the-money will have trouble collecting from Enron. Those who are out-of-the-money are still on the hook, facing ravenous Enron creditors. In some cases these debtors and creditors are one in the same entity, in others they're neighboring entities, or business partners, or outright competitors, and some of them were dealing with Enron, others with subsidiaries, others with "Separate Business Entities".

Then there's PGE ("Portand General Electric"), an Oregon utility Enron assimilated a few years back. PGE calculated its share of income taxes due, about $90M annually, remitted that amount to Enron HQ, and included those taxes as allowable cost basis under regulatory ratemaking authority. But Enron apparently paid no taxes over the same period, garnering over $300M in refunds through its shell games with shell corporations.
[ Enron pockets PGE's tax payments ]

Also in my backyard, Microsoft will slip a nationwide DSL initiative by several months, backfilling for (major regional partner) Enron.

Similar stories will pop up like mushrooms in the business pages of every local paper big enough to have a business page. In Mr. Lay's neighborhood, these items from the Houston Business Journal:

EOTT Energy dampened by Enron's wake

Enron power contracts still in limbo as more twists emerge

In the widely-reported big leagues, Morgan Stanley [CORRECTION: s/b J P Morgan Chase] (itself a one-time Evil Empire of derivatives chicanery) will take a hit on the order of $2.6B.

Beyond the existential enigma, there are darker portents. Market sleuths have been backtracking where Enron's tracks disappeared from the herd. Some of the evidence suggests the affected markets are functioning more efficiently now than they did when back when Enron was "helping".

Energy markets in particular are delivering more product at lower prices. Contrary to the Cheney Energy Plan (by which we need a new power plant ever five days for the next twenty years) we seem to have too many plants under construction, and many projects are going into mothballs.

Quantitative forensics may take years. In the end, other explanations may emerge ... or insiders may spill the beans. For now, proofreading between the lines, Enron may have had negative net economic value.

Paraphrasing a renowned Senate Select Committee Majority Counsel, now in charge of DOJ's Criminal Division, "What about THAT, Mr. Lay, what about THAT?".