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
NOTE to READERS:
(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.
the COGENT PROVOCATEUR:
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
OTHER GOOD STUFF:
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.
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."
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.
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:
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?".