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, April 28, 2002

--- Camp Enron Court Report ---

This week, like every other week, the chorus of Endarkened Self-Interest declares "the Enron Story is Dead". Maybe they're right, after all. Not much happened this week except ...

Opposing advocates faced off in a pre-trial hearing, where Houston US District Judge Melinda Harmon heard Andersen's request to postpone the criminal trial for obstruction of justice. "Denied." (Chron)

Trial opens May 6 ... same day as the Baptist Foundation fraud case in Arizona. Andersen initially mounted a high-profile national PR campaign proclaiming their innocence, and crowed about sticking it to DOJ by asserting their speedy trial rights. Now they want more time. "Denied."

Given an extra six weeks, they might conceivably settle civil claims, which would relieve obstacles to a deferred prosecution bargain with DOJ ... they might keep more clients on board ... they might sustain noncompete provisions long enough to sell off chunks of the firm ... they might even see a turnaround in current sentiment on the jury pool (1/3 say "string 'em up" now). In a few extra weeks ... "I may die, or the King may die, or the horse may die ... or the horse may talk". By my read, the Court is not amused.

Hopes fade but efforts continue to revive settlement talks over Andersen's share of liability in a brace of Enron-related civil actions. At stake is not how much Andersen should pay (all they can), but who should get what (creditors vs shareholders) and what precedent this might set re proportional responsibility of other secondary/tertiary defendants. (Enron's got no money, Andersen's got no money ... "So, who's got my money?")

WSJ published juicy details from a Grand Jury declaration, inadvertently released. Andersen employees in Portland, Oregon apparently challenged and then disregarded orders to destroy documents. Andersen attorney Nancy Temple may face perjury charges related to her congressional testimony. (At the time, informed observers mocked Temple's performance as the work of a bad lawyer acting on bad advice from bad lawyers.) DOJ is pursuing wider criminal securities fraud and perjury raps implicating both Enron and Andersen.

[Certain pundits were surprised Andersen could face criminal indictments above and beyond obstruction of justice. Certain pundits suggested there was nothing to DOJ's case but trumped-up technicalities. Certain pundits have not a clue.]

The current federal case -- obstruction of justice -- is really a freak accident, a head-on collision on the way to Andersen's funeral. It embarrasses Andersen, distracts DOJ, complicates life for the civil plaintiffs, and drains potential recoverable assets. It's a "chef special" appetizer ... not the main course.

Meanwhile in federal bankruptcy court, Judge Gonzalez appointed a panel to review Enron's legal fees -- mounting to the tune of perhaps $20m a month.

Earlier, Gonzalez granted a motion to remove pension funds from Enron control. Labor Department's Eugene Scalia alleges Enron contrived "to deceive the government by entering an agreement that it had no intention of honoring." Enron responds "Um, yeah ... so?".

The Connecticut waste disposal fiasco (public money channeled into bad loans, disguised as steam power swaps) may be headed for the Grand Jury, with locally intense political implications "Two of the officials who lost their jobs in the CRRA controversy were [Governor] Rowland's former co-chiefs of staff" ( Hartford Courant )

California renegotiated roughly $15B of its $43B in forward energy contracts -- shortening some, repricing others -- to obtain concessions worth $3.5B. This is roughly half of the premium above current market rates, suggesting California's claims (that the contracts were signed under the duress of manipulated energy markets) had substantial chance of success in protracted legal proceedings. It'll be interesting to see what happens to the other $28B in contracts outstanding, and what effect this has on similar claims by other western states.

As part of the agreement, California waives its rights to pursue further claims on these particular contracts. FERC is reluctant to grant any such claims. Among other things, this would imply that FERC -- in its eagerness to boost deregulation -- fell down (or rolled over) on the job, let the bandits run amok, and let applicable statutes of limitation expire on billions in otherwise valid claims.

On the flip side of this coin, Sierra Nevada (Nevada Public Power) failed to obtain similar relief and suffered credit rating downgrades, possibly triggering a death spiral. In my neck of the woods, Seattle City Light went thousands in debt -- per customer. Among major regional utilities (all suffered to some extent), City Light placed the clearest nonspeculative bets on a rational market and a responsible FERC ... and lost the most. Now the second-guessers are having a field day.

Day after day, NY A.G. Eliot Spitzer drew intense flak from the Geniuses of Capitalism and Defenders of Free Enterprise (you know who you are) over his move to nail the big boys for security analyst conflict-of-interest (starting with Merrill Lynch). But by the end of the week
a number of other state A.G.'s rallied to enlist in Spitzer's Army.

Chair Harvey Pitt announced the SEC would join Spitzer in a formal inquiry. It's unusual for SEC to comment on ongoing investigations, but events threatened to run away without the commission (which is supposed to lead parades like these). [Merrill was a major client of Pitt's, back in the day ... but who wasn't? WSJ reports SEC enforcement staff were eager to get into the matter, but Pitt had assigned it to another division. ]

Merrill Lynch CEO David Komansky issued an unusual public apology ... but stopped well short of any blanket admission of systemic misconduct. Much like the Vatican, Komansky blamed the bad apples, not the system, and promised more diligent enforcement of existing strictures.
This puts the securities industry in a bind similar to Andersen ... any negotiated admission of wrongdoing hoists an invitation to private individual and class-action litigation, and routine technical investigations may lead to evidence of additional conduct too serious to keep out of criminal cour ... but stonewalling just ticks off the regulators and criminal justice system. Sleepless nights ahead for four high-profile securities analysts who testified "no flies on our shit" in early congressional hearings.

We learn this week that Merrill had enlisted gun-for-hire Rudy Giuliani on their side of the argument. Bad move for Rudy, getting caught on the wrong side and the losing side of his first high-visibility engagement. Spitzer, for his part, lets it be known he is looking for structural reforms, not takedowns (though a $100M slap on the wrist for Merrill might reinforce the object lesson) ... and he is definitely looking at firms other than Merrill (batting next, Salomon Smith Barney, whose Jack Grubman helped pump up the telecom bubble?).

All this sniffing around has turned up the heat on additional sniffing around. NASD has noticed several firms, inviting them to show why they should not be charged in illegal IPO schemes (including soliciting buyers to engage in kickbacks and "laddering" -- bidding up first-day open market prices -- as a condition of participating in the offerings). Front and center on the griddle are FleetBoston's Robertson Stevens unit, and JP Morgan Chase's Hambrecht & Quist. CSFB got off earlier with a $100M penalty and no criminal prosecution ... how many times will the authorites "send a message" before they "go for blood"?

Florida Gov. Jeb Bush decided to initiate settlement negotiations before filing suit against Alliance Capital Management over some $300M in Enron-related claims. Florida pension fund's outside lawyers think they will bring suit eventually.

John Hancock and subsidiaries are suing over $215 in nonpublicly traded securities issued or secured by Enron and affiliates.

Adding to the paper pile, investors filed suit against Enron (and Enron executives, subsidiaries, Andersen, nine banks or security firms, and two law firms) over manipulative accounting for development expenses on overseas projects. Allegedly, out-of-pocket costs in excess of $100M were neither expensed as incurred nor written off when projects were discontinued.

Farther from the tilted-E, things are heating up (federal grand jury and probable board-chartered independent inquiry) at ULLICO, a union-controlled financial enterprise where insiders gained on inside trades as ULLICO stock gyrated in tune with that of Global Crossing.

Dynegy affirms SEC inquiries into "Project Alpha" -- a complex piece of financial engineering using gas trades to manipulate reported earnings, cash low and tax liability -- and agrees to reclassify certain reported results. Moody's has Dynegy on credit review ... another possible death spiral. The Alpha scheme itself may be legal, but it sure ain't right. (As Kinsley observes, "the real scandal is what's legal" ... but the rest of that story belongs under our "accounting scandal" heading, not "day in court".) Look for Citigroup to be drawn into the inquiry for its role in engineering and enabling the scheme.

Williams Cos. continues to suffer the lingering effects of Enronitis in both energy and bandwidth trading. An earlier spin-off (Williams Communications, now in Ch. 11) looks like it may not quite achieve escape velocity, and could bring a rack of liability bombs crashing back onto the mother ship's balance sheet. Various Williams stakeholders -- backed up by mallet-holders, pitchfork-holders, and torch-holders -- are lining up for "constructive dialogue".

That about covers the Law and Justice segment of this week's Camp Enron Report. We'll be back later with a recap of developments on the reform front, and a tracking report on accounting meta-scandals and Enronitis in the financial markets. By all means, tune in next week for an update on the "Enron Story is Dead" story!

Monday, April 22, 2002

--- McCullough: "the Titanic has hit a second iceberg" ---

The Chron reports
Enron may have overstated the value of its assets and financial contracts last year by as much as $24 billion, the company told federal regulators Monday. ...

"... this appears to show it was a lot worse than we expected," said Robert McCullough a Portland, Ore.-based consultant who has studied Enron. "From here, it looks like the Titanic has hit a second iceberg."
The distress-sale context of Enron's real business unit divestitures would explain part of the discrepancy. Also, some derivative complexes were terribly illiquid, or were carried on the books at highly subjective valuations ... "mark to market" where no market ever existed. Additional losses may be tip-off's to as yet undisclosed "accounting irregularities".

I was toying with an explanation of FERC, Enron, Andersen, AICPA, SEC, JPM, etc., as the "seven-layer salad of scandals" (more on that later) ... but now Enron alone looks like an all-you-can-eat buffet.

Again, my surmise is there's no Enron worth salvaging, and no going business asset that wouldn't be worth more under a different nameplate. Don't reorganize. Get busy and liquidate.

--- Duncan Rats Out Andersen Damage Control Scheme ---

This is HUGE -- if the story pans out -- and it covers our earlier blind speculation that DOJ Grand Inquisitor Michael Chertoff has an evidentiary ace up his sleeve.

NYT's Kurt Eichenwald reports (available in the Chron with minimal clicks) that (per confessed shredder David Duncan) senior Andersen management commissioned damage control strategy in response to multiple red flags on the Enron account, and that document destruction plans were activated as part of this larger scheme. "Red flags" would include Sherron Watkins' notorious "implode in a wave of accounting scandals" memo (which you may recall was written to facilitate damage control, not to blow the whistle).
Supported by Duncan's testimony, prosecutors will argue that the destruction last October by Andersen of thousands of documents and e-mail messages related to Enron was not the spontaneous decision of a few employees but the culmination of months of discussions about how to get the files on the firm's troubled client ready for review by outside investigators.
Either that, or somebody's yanking Eichenwald's chain, or Duncan is a lying scumbag and DOJ is the patsy. But Eichenwald is no fool, and Duncan/DOJ wouldn't pursue this line this far without corroborating documentation or witnesses.

What about THAT, Mr. Dobbs, what about THAT?

Speculation (CNBC): Is Volcker ready to throw in the towel on his Andersen salvage mission? [UPDATE from WSJ on MSNBC]

Thursday, April 18, 2002

--- Andersen/DOJ Settlement Talks Break Down ---

Camp regulars will not be surprised, though many other sources have reported the plea bargain as a done deal at various times through the past ten days.

Andersen pulled out ... "See you in court" ... they could be bluffing, but more likely they are paralyzed, with no good options. Bunny in the headlights, may as well roll the dice

The proposed settlement could have unraveled on any of several sticking points. WSJ on MSNBC offers this conundrum, which will be familiar to "feeding frenzy" followers:
proportionate liability could cost the plaintiffs — and save the banks — a bundle. If a jury, for example, found that the plaintiffs in the case suffered $10 billion in damages, and that Andersen was 20% at fault, the other defendants in that case could reduce the judgment to $8 billion.

If the banks agreed to give up that right, then the amount of the reduction would equal only the amount that Andersen actually paid — $300 million under the tentative agreement.
This is part of the broader food chain and conflict of interest problem: major Enron creditors are also suspect as major Enron enablers and/or co-conspirators.

From here, it's unclear how any course of remedial action will achieve either justice or business as usual. It's like we were having a good old '90s house party, and then somebody went and upchucked on the pool table, and then a fight broke out, then somebody fell and cracked his head, and somebody drove their SUV into the pool, and then things got nastier, and then somebody piped up "My house? I thought this was your house?". Things will just never be the same.

Tuesday, April 16, 2002

--- Judge Approves Retention Bonus Program ---

From the Chron:
Gonzalez approved $40 million in retention payments for 1,285 employees, up to $90 million in bonuses for employees who helped the company sell assets and manage contracts to their conclusion, and $7 million in severance for about 842 employees.
Good money after bad? The reorganization counts on using the dwindling employee pool to milk outstanding forward contracts. How is that going to net anything over and above adverse claims that haven't come home to roost yet? How much of this intended "success" rests on (immensely unjust) asymmetric treatment of offsetting contracts? It's a bad business.

--- Voices of Endarkened Self-Interest Grow Restive ---

The blogmeister himself, InstaPundit Glenn Reynolds, claims the Enron scandal is dead:
BOB KUTTNER says that the Enron scandal isn't living up to his hopes. He's right, of course, that it's died.
Sorry, Glenn, are you sure you're not thinking of Nietzsche? Or maybe Mark Twain? The Enron scandal is livelier than I can keep up with, and it's unfolding very much on schedule.

Now if by "scandal" you mean "impeachment", no, it's not much of a scandal. If it means "setting the meta-context for a generation of penitent institutional change", count me in. No hedging here -- it's bigger than 9/11. No, it doesn't show in the polls. It probably never will, unless somebody tries to defend the indefensible a little too zealously. It is still doing it's zeitgeistly deeds.

Or if you mean InstaScandal, what's the precedent? Watergate took years to mature. Whitewater proper took 24 years to end with a whimper. Big white-collar cases, big organized crime cases can take forever. We're 3-5 months (by most counts) into the Enron Era.

As the big cases go, Enron's bigger than most. It's a fact-heavy case, with multi-pronged, multi-layered evildoing ... maybe 100 distinct schemes of fraud altogether, with small fish lining up around the block to get off the hook by turning state's evidence. If you recall, I'm looking for 2-3 years before the first round of the big cases come to court, 2012 or so before the tectonic effects on global politics and economics are in full swing. This little paper-shredding business is a tangent, a distraction, a premature ejaculation.

Glenn also highlights this piece by Robert "Man Without Qualities" Musil:
despite all that investigating and the supposedly “obvious” and “egregious” frauds not one individual at Enron or Andersen has even been indicted or agreed to plead guilty to accounting, securities or bank fraud. . . . Further, the terms of Mr. Duncan’s plea bargain hardly suggest that ... “obvious” and “egregious” fraud – or, for that matter, any fraud.
Again, the expectations are off-center. Long ago I raised the prospect of last resort, "sour grapes" obstruction charges in failed prosecutions ... but that applies when obstruction is charged after all the other doors have been tried. No such occurrence here.

--- Short Takes from a Long Week ---

The Baxter suicide note was finally made public ... a nonevent. No insight, no grand pathos, no sinister innuendo, no originality, just "I can't go on", etc. As Enron and related drama unfolds, I expect there will be others who can't go on.

Texas Tuesday - so it was written, so it was done. Dallas Mayor Ron Kirk wins the 4/9 Texas Senate Primary run-off (suggested here in early January as an Enron side-effect), giving Dem's their best shot at Phil Gramm's old seat.

BIG news on Andersen is this piece of old news:
In Andersen's [1996 $10.5M] criminal settlement of the [1990 bankruptcy] Colonial case, the firm was not required to admit wrongdoing but had to submit to a 60-day performance review. Federal prosecutors devoted most of their energies to pursuing Colonial's principals.

Andersen was accused of helping Colonial construct what amounted to a giant Ponzi scheme ... Andersen officials were involved in "the purposeful destruction of documents,"
Is there a pattern here? How does it play in DOJ's current deliberations?

The Andersen/DOJ deferred prosecution deal would normally preclude new criminal charges on old business ... what are the boundaries on this provision? I still expect Andersen to face criminal charges unrelated to document destruction, including some unrelated to Enron except by schematic similarity. DOJ may be satisfied with the mortally-wounded Andersen as a cooperating witness in bigger pursuits, but I see billions in partners' equity walking out the door. What if it turns out that Andersen was really MR. BIG?

NYT's Kurt Eichenwald has his ear to the ground on an investigation of inside-insider trading, a scheme codenamed "Greyhawk". On the verge of a stock-hyping announcement, Enron exec's apparently conspired to route share price gains through partnerships and back onto ENE's bottom line. Booking gains on a corporation's own stock is normally illegal; trading on inside info is normally illegal ... is the combination illegal? Buying stock on insider info is illegal; waiving an existing hedge achieves the same result ... but is that illegal? The law doesn't seem to have been drafted with these novel gambits in mind.

Enron's new CEO Cooper, the restructuring specialist, estimates debt 25% higher than disclosed in December bankruptcy filings. Could go higher. See the Chron. I still can't figure out why they're trying to save this piece of shiroadkill.

The week in court
-- NY Bankruptcy Judge Gonzalez orders an add'l independent examiner to protect creditors' interests against creditors who are also Enron SPE business partners.
-- First appointed bankruptcy examiner Harrison Goldin says "freeze the cash transfers" between Enron and subsidiaries. (See previous items on NEPCO, etc.)
-- Houston shareholder suit Judge Harmon discloses her children's trust fund holdings in tangentially-implicated companies (banks, brokers, etc.). Big dollars but no objection from the parties. (May prove to be a regrettable decision as the web of implication expands.)
-- Enron's suit against Dynergy (for bailing out of the proposed merger) is moved to Houston.

Old fights continue
-- Retention contention: SEC and others object to Enron's new $140B key-employee bonus budget, demand details.
-- Enron directors and Enron-happy investment managers are dropping from plum positions elsewhere.
-- They're still struggling in India to resolved divergent interests and get the Dabhol power plant out of mothballs ... or at least sold off and out of bankruptcy.

Old buzz continues
-- Andersen inches toward settlement with DOJ ... any day now ... maybe tomorrow? It ain't easy for either side.
-- They say Andersen will settle Enron's claims against it for ~$300M ... that's less than 1/2 cent on the dollar of market cap lost in the big fall.
-- Congressional bloodhound Henry Waxman is sniffing around JP Morgan Chase. He's not the only one.
-- Army Sec'y White is still being pecked to death by low-grade ethics allegations... the latest involving FBI investigation of possible insider trading.

Reforms not yet in gear
-- House passed pension package weakens employee protections ... expect stalemate this year.
-- Audit reform remains elusive ... in fact, any feasible solution to the audit conflict problem remains elusive.
-- Financial standards reform isn't even in the starting blocks. Key players know there's a crack in the world, but they don't realize how deep it goes.
-- Option reform talk is hot and heavy, but it's more complicated than it looks. Current practice is clearly wrong, none of the leading reforms goes far enough.
-- NY A.G. Eliot Spitzer may have Wall Street firms over a barrel, now they're bargaining over structural reforms of security analyst operations ... but what to do? Most people won't pay for analysis, it gets gratis'd in with customer relationships or subsidized by some other line of business ... which is exactly where the conflicts of interest come into play. Handcuffs won't solve this problem.

Old business
-- Trading records indicate Enron dehedged and bet big on the energy price spike, with what looks like perfect timing. Western A.G.'s and PUC's allege gouging and self-dealing to kite prices. Looks plain as day on the charts, but a difficult technical case to bring home. Look for confessions from mid-level players under DOJ pressure, months or years down the line.

Wednesday, April 10, 2002

--- Merrill Lynch Smoking E-mail Update ---

This NY A.G.'s press release has links to an affidavit (pdf) including the smoking gun e-mails mentioned earlier. Here's one instance, as front paged by
Public recommendation: "Short-term accumulate and long-term accumulate"

Analyst Henry Blodget's private comments: "Piece of shit"
More where that came from, and a longer list of firms on A.G. Spitzer's radar.

--- Paydirt! Enron Helped Other Firms Cook Books ---

David Barboza reports in today's NYT: Enron offered a combination of swaps and advisory services to help corporations create better results on paper ... the Enron way! This is BIG. Enron actually made its trademark financial chicanery a line of business per se ... and the paper trails will lead investigators to a number of very interesting arrangements.

One (rejected) pitch illustration titled "Reverse Pre-Pay (Earnings Capture)" reads in part "Pre-paid deal reduces average earnings recognized in GAAP ... By restructuring the deal, AT&T can recognize the full $5/year in earnings". That's $5 as in "all figures in millions", BTW.

Done up right, these deals would juice both parties' numbers without creating anything of value. Enron pitched and sold deals to be done with Enron, using their many securitized commodities (just ask Connecticut's trash-hauling authority) ... but once the new kid learned the new hustle, he could use it anywhere.

I'd guess first-generation Enronitis makes up a large share of current SEC inquiries. How contagious was it? How many cases of second- and third-generation Enronitis? And who were the facilitators and enablers?

Tuesday, April 09, 2002

--- Big Suits, Deep Pockets ... Hmmm ---

Hey, RICO ... is the Zoot Suit making a comeback?

As suggested here all along, Enron shareholders are looking for defendants whose $1B checks will cash. They're finding big ones, a "who's who" of major financial institutions -- J.P. Morgan Chase, Citigroup, CSFB, CIBC, Merrill Lynch, BofA, Barclays, Deutsche Bank, Lehman Bros -- plus two high-profile law firms -- Houston's Vinson & Elkins, Chicago's Kirkland & Ellis -- for their roles in fabricatin' and manipulatin' off-sheet entities to camouflage Enron's deteriorating condition.

Hard cases to make, but I suspect at least some of them are meritorious and may take big bites out of more landmark institutions than Andersen (by settlement, or at trial, or in the court of public opinion). The political aftermath will take decades ... but some these battles will only take years, and will help clarify the larger issues.

On another track, employees are reported going after some of the same sources with RICO suits.

On yet another docket, NY AG Eliot Spitzer thinks he has Merrill Lynch dead to rights on securities fraud -- analysts plugging worthless stocks to keep the investment banking fees rolling in on the other side of the house. Got some "smoking gun" e-mails that sound damning enough ... how bright is the line between office humor and criminal conspiracy?

One predicted result: massive surge in routine automated destruction of corporate e-mail archives. (Routine destruction isn't obstruction, now is it?)

--- Duncan Pleads to Obstruction Charge ---

David Duncan, lead dog on Andersen's Enron audit team, pleads "guilty" to federal charges of obstruction of justice, admitting he caused documents to be destroyed -- both personally and through intermediaries -- with intent to keep them out of the hands of investigators.

Sentencing is deferred; Duncan serves as a cooperating witness; DOJ goes after bigger fish.

Implications for Andersen? Consensus says it's a major setback, but ... their original strategy was to scapegoat and discard Duncan. That tack may be fair and just, and it still just might work IF the evidence fails to support a case that Andersen as an enterprise caused documents to be destroyed with similar intent.

I'll stick with my original analysis -- one or both sides know something they're not telling, or both sides are playing a stupid game of brinksmanship.

Oh, by the way, Lou Dobbs is still sounding off, this time on the WSJ editorial page, filling 20 column-inches without owning up to the facts. He asks rhetorically
Will this indictment policy be extended to other accounting firms, two of which worked on the Enron partnerships that led to its demise?
Lou, that depends on what the "indictment policy" is. Is it to blindly indict anyone who worked in the Enron empire? Or is it to indict anyone who destroyed evidence with the intent of obstructing a legitimate investigation? If either of the other firms put the shredder into high gear as soon as the Enron shorts hit the fan, they should worry.

Saturday, April 06, 2002

--- Feeding Frenzy Updates ---

Bankruptcy Court will appoint an independent examiner for Enron ... now that's a job Volcker could sink his teeth into. Enron creditors don't trust the creditors committee to act in their interest. They don't trust each other ... nor should they. Their interests are not neatly aligned, and the committee is dominated by financial giants that helped conceive the hare-brained schemes that brought it down.

Andersen has reached an agreement in principle to deal some of their US tax practice to Deloitte Touche. (Significant west coast remnants are reported taking refuge at KPMG.) Agreement in principle doesn't mean a done deal. Risk-averse buyer's diligence could make the agreement a dead letter. Creditor litigation could block the deal. Or new legal proceedings against the tax practice -- possibly unrelated to Enron -- could render the spoils unpalatable to any scavenger whatsoever.

My take again -- the Final Four would be unwise to board and salvage Andersen's sinking ship. Better to loiter on station and fish individual survivors out of the lifeboats.

--- AICPA House in Disorder ---

In the "something must be done" arena, AICPA's solution to "business as usual" seems to be "business as usual".

Time for some creative destruction here. They've got an appearance problem of their own. CEO Barry Melacon turned $100K into $5M in dealings with the nonprofit group's commercial CPA2Biz subsidiary, monopoly marketeer of AICPA publications. From 2002-03-30 NYT, "it is virtually impossible to practice accounting without buying some items from CPA2Biz."

--- Qwest for Lifelines ---

When you start testing for Enronitis, you discover Enronitis. Expect a few false positives, but some real serious cases will turn up.

Qwest is an emerging biggie. Dirty dark fiber swaps with both ENE and GX, astronomic goodwill writedowns, SEC inquiry, a neoteric business model that didn't pan out, a fast-money management that treated the legacy landline business with utter contempt, and a community of dependent widow-and-orphan shareholders left in the lurch while the dividend falls from $2.14 to $0.05, employee base hates 'em, customer base hates 'em, regulators hate 'em. Speaking of landlines ... Qwest has been operating under consent agreements in multiple states for years now, as a result of forgetting to provide basic services ... while a philosophically libertarian FCC aids and abets their stranglehold on local markets. [My main alternative is AT&T Broadband, with which I prefer to do as little business as possible for so long as we both shall live.]

Enron's would-be merger partner Dynergy is getting a hard look ... headlines to follow. Ditto Williams Communications and its energy-patch parent Williams. Adelphia. WorldCom. Ooops, almost forgot Global Crossing. A slew of firms outside the energy and telecom arenas are being scanned for toxic concentration of option exposure, growth-by-acquistion goodwill and earnings without visible means of support. No top-echelon takedowns yet, but 49 new SEC inquiries in progress and a long list of big names that do not check out as per-share value-accretive if you hold them up to the light, even assuming their financial statements are squeaky-clean on the technical level.

--- Connecticut Agency Trashed ---

The Enron scandal hits home with political and financial impact at Connecticut's quasi-public trash agency (CRRA), which landfilled $195M by extending Enron a loan disguised as a set of non-delivery (offsetting) steam energy contracts. [see 2002-03-05 Flatland Meets String Theory] From today's NYT, this sardonic note:
... the agency's board is convening a special session, one topic of which is widely believed to be Mr. Wright's severance package.

--- Rocky Road for Nevada Power ---

John Dizard at Financial Times scathes Nevada Power for getting itself bankrupted (probably) by buying power it couldn't afford in last year's western states energy hold-up. "Acting imprudently on a huge scale means you lose."

On the other hand, what constitutes prudent behavior for a buffalo in the middle of a stampede?

Many western states utilities are in varying degrees of financial distress, depending on the strategies they adopted in the face of a de-rationalized market. It's easy to pick winners and criticize losers as if they knew then what we know now. {I can make a bundle in any market if you let me wait to what goes up, then buy at last year's prices.] Enterprises that assumed market rationality and/or FERC administrative fidelity fared worst ... many of these firms (or their managements) will not survive.

Thursday, April 04, 2002

--- Homestead Exemptions in the News Again ---

As we noted on 2002-02-08 (under the Camp O.J. Connection), there are certain states where you can go bankrupt and still keep your multi-million-dollar estate. (You do have a multi-million-dollar estate, don't you?) Texas and Florida lead the exempt-ers. In Texas "many of the state's founding fathers were debtors fleeing creditors in other states", and Governor GWB strongly defended the standard.

Philip Shenon has a piece in today's NYT covering the run-up to smack-down over the homestead exemption ... a nice spread of Enron names with palatial properties in exempt states ... pictures and all. Lay and White are featured; both are liquidating properties in other states.

Before Enron hit the skids, the Senate tried to cap homestead exemptions in a larger bankruptcy reform package. The House did not concur, and the cap seemed likely to die a quiet death in conference.

With Enron in the news, the Senate seems likely to go for the cap again, and the House likely to dissent again. This time the collision may be larger and louder, with Ken Lay as poster child.

If the bill passes, don't assume the firewworks are over ... Justice Scalia likes to have the last word on this kind of fed/state clash of initiatives.

--- Feeding Frenzy, Continued ---

Houston Chronicle has several pieces on fighting over the pieces

Enron backs out of retirement plan pact:
In February, the company signed an agreement ... to hire State Street and replace a committee of Enron executives -- some the target of government investigations -- that still oversees the plans. "At the outset, it was our goal to avoid any negative publicity" said Brian Rosen, an Enron bankruptcy lawyer. ... Rosen said Enron did not believe it should be "taxed" with the firm's fees.

The creditors committee agreed. ... "There's no justification to give such a gift to the retirement plans"
Retention bonuses still a bone of contention:
Enron's biggest creditors may have signed off on its request for a third round of retention bonuses, but others promise to fight it.

Creditors who want to cut their losses and liquidate ... claim that Enron has not shown it intends to file a reorganization plan ... New Chief Executive Stephen Cooper has said a reorganization will be built around pipeline and power generation units, but he has asked Gonzalez for another eight months to file a plan.
Political opponents press Texas A.G. (and Senate candidate) John Cornyn to recover unemployment funds
Although a U.S. Action news release called for a "possible suit against Enron for the funds lost by the Texas unemployment insurance fund due to layoffs," local AFL-CIO secretary treasurer Richard Shaw acknowledged that the best the fund could hope for was to be certified as a creditor and plead its case
Real business suffers from fake business's collapse
EOTT Energy Partners' units dropped 33 percent Wednesday after it said it won't make its first-quarter cash distribution because its cash flow has been hurt by Enron's bankruptcy ... its general partner is an Enron unit. ... markets and transports crude oil ... owns and operates an MTBE plant and has liquefied natural gas storage and pipelines. ... missed a Monday filing date for a 10-K report because it has been without an auditor since Feb. 5, when Arthur Andersen quit. The accounting firm didn't like an internal Enron report that blamed it partially for Enron's collapse.
EOTT is one of many "asset-heavy", i.e., goddamn real, remnants of the Enron empire ... not in bankruptcy but stuck in the muck just the same.

Interim CEO finally approved, questions remain
A U.S. bankruptcy judge approved the hiring of Stephen Cooper as Enron's chief executive offcer today ... JPMorgan and Citibank each participated in some of Enron's questionable partnerships, and having them lead investigations into the company's downfall was not in everyone's best interests [said a lawyer for Florida shareholders]
Several points of Cooper's contract had provoked controversy, including suspected conflicts of interest, contractual terms that avoided officer's liability, and doubts regarding the whole strategy of reorganization versus liquidation.

Editorial comment: It may be possible to reorg the Enron mountain into a viable business molehill, but what's the point? I suspect it's a vanity performance for Cooper, much like Volcker's vision of reorg'ing Andersen into a tiny model audit practice.

Enron goes deep looking for deep pockets
Four months after Enron filed a $10 billion lawsuit against Dynegy for backing out of a merger, the two are set to battle Friday over whether the case should be transferred to a Houston federal court. ... Going after Dynegy, regardless of the possibility of success, makes sense for Enron, Rapoport said. "They're looking for deep pockets"

--- Andersen, DOJ Explore Alternatives to Brinksmanship ---

WSJ on MSNBC (and others) report explorations of a less explosion conclusion to DOJ's criminal indictment of Andersen as a firm for obstruction of justice.

Speculation centers on a "Clinton Plea", where Andersen would akcnowledge the essential elements of wrongdoing without crossing the line into a technical confession of criminality, accepting the public disgrace and taking its punishment in the court of public opinion.

Camp Enron has noted the apparent rashness of Chertoff's indictment (unless he's holding cards we don't know about), and questioned the consequential value of even a successful prosecution. At the same time, we've been harshly critical of Andersen's specious defenses and untouchable attitude. [here, in part here, and especially here] And we've blistered one talking head whose one-sided on-air advocacy actively muddied the waters. [here, here and here]

What's on the table seems to be this: Andersen gets a second chance to pass the "attitude test". This may or may not work out, for a number of reasons, but Chertoff can afford to back off, and Andersen has nothing to lose by crying "Uncle".

Incidentally, this looks like a win for Volcker's damage control ("get the bad news out early") over the legal department ("anything you say can be used against you").

In any case, look for the following sequels:
  1. Andersen will die anyway, and

  2. Andersen -- as a firm -- will eventually face a devastating series of sweeping foundational criminal charges.
Our friend Mr. Dobbs, BTW, was raked over lukewarm coals yesterday in both the NYT and WSJ, but both pulled their punches. Articles focused on evident bias and possible conflicts of interest (speaking fees, Andersen's exclusive sponsorship of his defunct "Business Unusual" series), but ignored his repeated categorical falsehoods.

Dobbs, for his part, interviewed a pro-Andersen stooge again on yesterday's show ... an Andersen client who chose to retain them as auditors. Like the saying goes, "Man bites dog, that IS news".

Tuesday, April 02, 2002

--- DOJ Friendless ... on some networks, anyway ---

CNN's MoneyLine featured Lou Dobbs tossing softballs to yet another pro-Andersen voice... this time it's former SEC chairman David Ruder, asserting that DOJ has no proper interest in the matter, should withdraw the indictment, should play hands off Andersen and leave it entirely in SEC's capable hands.

But the SEC got rolled last time it tried to address the roots of the Enron/Andersen problem. And face it, GWB attained the nomination and thus the Presidency by out-fundraising everybody, he out-fundraised everybody by attacking different targets for different audiences, and his most reliable target for top-rank funders was the SEC and all that awful red tape. [Honorable mention to EPA.] And something like that will happen every other election cycle, more or less.

Over on CNBC's Capital Report it's a different story. Former SEC commissioner Laura Unger was asked whether DOJ should back off. She expressed sympathy for the families affected, but says throw the book at Andersen, send a message, instill a sense of responsibility -- and fear -- to forestall future disasters. I don't think you'll see her on air with Dobbs anytime soon ... if you do, I don't think she'll get many words in edgewise.

Caught in the middle is the anti-SEC faction's dream-Chairman Harvey Pitt, who used to represent Andersen (and all other Big's). Ruder sees no problem here. At least Pitt knows he has an appearance problem ... he formally recused himself (while informally letting everybody know he favors softer treatment for Andersen). Pitt doesn't know how big a problem he has ... and kid glove treatment won't do Andersen any good any way.

--- Andersen Global Merger Talks Fail ---

AP reports collapse of Andersen's attempt to fold non-US operations into KPMG, following defection of its European flagship practice in Spain.
Andersen Espana is the group's first Western European unit to go its own way in trying to secure a long-term future ... Spain is the sixth of Andersen's 83 non-U.S. affiliates to try to forge a separate path to survival. Andersen's partner groups in Hong Kong and China have said they plan to merge with PricewaterhouseCoopers, while Andersen units in Russia, Australia and New Zealand are arranging to merge with Ernst & Young.
Numerous other moves are in the works, and everybody wins ... except Andersen ... and Enron creditors.

--- Fortune, Fools, and Revenues ---

I was waiting for Fortune magazine to shout "April Fools!!!" after listing Enron #5 on yesterday's list of the 500 largest US industrial corporations ... but no joke. Going by ENE's reported $139B in revenues thru September 30, 2001, they moved up two slots from last year. Never mind the revenues are inflated ... Enron basically books the entire amount of each energy trade as revenue, rather than booking the net premium as most brokerage business models would do. (Enron's practice is common with other energy traders.) Never mind a lot of that $139 will be restated away later.

By more conventional accounting, Enron would have been #273 on last year's list. Don't know how they'd rank this year. Don't care much, neither.

--- Reuters Reports Dabhol Receiver Appointed ---

In re Enron hobbled and mothballed assets, see this Reuters report on the disposition of Dabhol's $3B generating plant ... a partnership of Enron, GE, Bechtel, and a pack of Indian financiers, utilities, customers and agencies who wish they'd never heard of Enron.
The process was delayed when the three foreign stakeholders demanded at least $550 million for their 85 percent stake, and asserted the money should be paid directly to them ...

Now, with the company's operations folding up in India and Enron refusing to sign a cooperation agreement to enable the sale, the process had "indeed become very complex," the official at the lender said.

In all 26 financial institutions lent money for the project, including foreign banks and multilateral agencies.

--- Feeding Frenzy Turns to Slim Pickin's ---

As Enron fell into bankruptcy, many stated assets turned out to be imaginary, while securitized liabilities crept out of the SPE woodwork and crawled back onto the balance sheet. That leaves billions outstanding in ordinary claims (IOU's and trade payables), unpaid compensation to employees (and some retirees), shareholder claims (for securities fraud, etc.), potential fines, as well as ongoing expenses on continuing operations.

These may be dwarfed by a wildcard -- legal treatment of forward derivatives contracts where Enron owes somebody money, versus offsetting contracts where another party (often the same party) owes Enron money. Standard bankruptcy treatment would void the inconvenient "Enron gives" contracts, and enforce the convenient "Enron receives" contracts. But in the world of hedged derivatives trading, standard treatment is a blueprint for impermissibly viceful schemes of "bankruptcy for fun and profit".

Behind these ordinary claims, there's another giant wildcard. Enron may end up on the hook for tens of billions of dollars in civil or criminal or even RICO penalties and restitution for energy market manipulations preceding the bankruptcy.

Enron had a considerable portfolio of genuine assets .. the remnant of its shift to "asset light" strategery. Some units have been sold off. Others -- notably power generation facilities in several nations -- could be liquidated favorably except that they're tied up in conflicting claims, with interested parties trying to outguess each other on all the other imponderables. Some of these assets are hobbled or even mothballed pending resolution of claims and assurances of contract fulfillments.

Enron disbursed nearly $800M in "performance based" executive compensation in the run-up to collapse. (DOJ has the spreadsheets. So does the NYT.)

In the "chump change" department, bankruptcy court gave Enron the green light to spend up to $130M in key employee retention bonuses. (That comes out of the same pot of money as ordinary employee severance payments. Good luck to all you non-key employees!)

Farther down the food chain, folks who owed Enron money have an annoying habit of turning up insolvent. Last year, Enron thought they had a $3B deal to sell PGE to Sierra Pacific (Nevada Public Power), but Nevada -- drained by Enron's "California" energy holdup -- couldn't pay the piper. Enron let Sierra escape a $1B commitment for less than $10M. Maybe the purchase commitment was wrongfully induced in last year's energy panic, but Enron creditors could've used the extra billion. Like a poorly-adapted parasite, Enron had a way of sucking all the life out of its hosts.

All this has Enron creditors looking down the line to other culpable "deep pockets" such as ... Andersen? But Andersen is on the ropes.

Andersen audited the nonprofit Baptist Foundation of Arizona, which turned out to be a good old-fashioned Ponzi scheme, leaving some 13,000 investors holding the bag to the tune of $570M. Andersen settled adverse claims on this account for $217M. Last week it announced it is unable to make payment as required by the terms of settlement.

Why not? Andersen planned to pay the claim through its insurance carrier, Bermuda-based Professional Services Insurance Co.... which appears to be insolvent.

Why insolvent? Among other reasons, Andersen seems to be in arrears to the tune of $100M in premiums. Andersen had already tapped its insurors for $75M (liabilities) plus $7M (fines) for Waste Management, $100M for Sunbeam, and other debacles, possibly not yet including those smoldering in Australia, Indonesia and Singapore.

I don't think it's clear whether PSI disallowed the claim, or Andersen exceeded its cumulative coverage, or PSI is under water for other reasons, or PSI and Andersen (which is part owner of PSI!) had a falling out, or whether PSI was ever properly capitalized to write this business in the first place. But Arizona's A.G. is pissed, and so are a bunch of judges and lawyers and plaintiffs, and probably another circle of people the first bunch promised to pay out of the Andersen settlement.

It probably doesn't help that Andersen currently has no clear lines of authority, nobody who can sit down and negotiate (or renegotiate) for the firm. "White Knight" Paul Volcker and the firm's lawyers can't even agree on whether to admit improper conduct in the "water over the dam" department. Adding insult to injury, Andersen's document destruction policy -- the policy that has them in deep double dutch with DOJ -- was authored by one of the partners on the Waste Management account ... one of the partners Andersen failed to punish, in the Houston office they failed to clean out after last year's major slap on the wrist.

Small comfort to creditors that Andersen partner earnings distributions will be scaled back about 1/3 ... but that won't stop the bleeding, or the desertions.

Overseas affiliates are bailing faster than USian's. From Russia, re attempts to strike a deal with Deloitte & Touche: "The interests of the US dominated, and they tried to drag out a solution before concluding a deal would be impossible if the US was involved ... Valuable time was lost." (

If that weren't enough, Andersen is implicated in a half billion dollars worth of "dark fiber" swaps between Enron and Qwest in Q3 2001, as both firms struggled to look profitable on paper. My guess: swims like a duck, quacks like a duck, gets indicted like a duck.

Andersen has been trying to negotiate a settlement of indirect claims through Enron. Andersen's best offer was reported in the $750M ballpark, but that included a big chunk of insurance money, plus maybe as much as $500M out of pocket. Andersen doesn't appear to have means to make good on either.

$500M out of pocket sounds big, but that's only about $100K per partner, or $6K per worldwide employee ... a painful nick, but hardly a cut to the bone out of an average partner's half-million-dollar annual income. In the end, the partners wouldn't dig very deep to save the firm, or -- more likely -- didn't strongly believe it could be saved in any event ... with or without DOJ's criminal indictments.

Enron claimants are reluctant to go easy on Andersen, even as it sinks into oblivion, because failure to pursue these claims aggressively might prejudice their case against the next echelon of deep pockets -- the megabanks and financial service industry. And then things get interesting.

JP Morgan Chase, for instance, has reserved a couple billion dollars for Enron-related contingencies. JPM holds roughly $1T in assets, against roughly $1T in liabilities. The difference between those two big rough numbers is about $40B ... JPM's book value. In the ordinary course of business, that's a big number. But $40B is a short stack next to $60B of evaporated ENE market cap, and up to $100B (counting treble damages) of western power market claims, and some very large unknown number resulting from out-of-the-money derivatives contracts. If the wildcards fall the wrong way, the Enron effect (plus Global Crossing, and Qwest, and whatever else) could be materially adverse, to say the least.