FW: Economist Article ,
 -----Original Message-----
From: 	Gray, Barbara N.  
Sent:	Monday, November 05, 2001 6:27 PM
To:	Koehler, Anne C.; Shackleton, Sara
Subject:	FW: Economist Article


one of worst I've seen too...especially the last paragraph...
 -----Original Message-----
From: 	Sole III, Carlos  
Sent:	Monday, November 05, 2001 6:15 PM
To:	Gray, Barbara N.
Subject:	FW: Economist Article

So far the worst article, I've seen yet.


Taken from this week's edition:
 
A financial black hole 
Houston, we have a problem
Nov 1st 2001 | HOUSTON, LONDON AND NEW YORK 
From The Economist print  edition

The troubles of Enron, a Texan  powerhouse in the energy markets, could result in a new financial  crisis

JUST last year, visitors  to Enron's glittering headquarters in Houston were greeted by a giant banner  that proclaimed the firm, "The world's leading energy company". That annoyed  Enron's smaller energy-trading rivals, many of which have offices only a stone's  throw away in Houston's Energy Alley, but not as much as what came next-a new  banner, declaring Enron "The world's leading company". In recent weeks, as the  company has been engulfed by a financial crisis, that banner has quietly been  removed. 
The heady mix of  audacity, ambition and arrogance revealed by the banners is as good a guide as  any to Enron's remarkable rise and fall. Forged in the 1980s by the merger of  two troubled gas-pipeline firms, Enron drove the development of the  sophisticated spot-and-derivatives markets in energy that it has come to  dominate. Indeed, such is the scale of its operations, and its dealings with  many of the world's financial institutions, that some observers see parallels  with Long-Term Capital Management (LTCM), the hedge fund  that failed in 1998-and not just because seemingly brilliant financial  alchemists have been humbled. Were Enron to go bust-unlikely, but in the current  nervous climate, not impossible-might a crisis ensue?

Troubles in California's  politically crazed power market, an ill-advised foray into telecoms bandwidth  trading and concerns about management badly dented Enron's share price earlier  this year, prompting the departure of Jeffrey Skilling, the firm's newish chief  executive, in August. Kenneth Lay, an avid free-marketeer, friend of George Bush  and visionary chairman of the firm, was obliged to resume hands-on control.  
This has not slowed  Enron's decline. Day by day, it seems to be sinking deeper into a financial  quagmire that is largely of its own creation. Not least thanks to its lack of  transparency, the firm's credibility with the markets has eroded to the point  that talk of a possible takeover or even bankruptcy is widespread.
Enron's reputation for  financial wizardry has been turned from an asset to a liability since its  third-quarter results came out in mid-October, showing a $1 billion write-off on  water distribution, broadband trading and other investments. Worse, disclosed  only in passing by Mr Lay in a conference call with analysts, the firm suffered  a $1.2 billion reduction in capital, stemming from a hedging deal with a related  private-equity fund called LJM. The charge was due to  Enron's forced sale of 55m of its own shares when the partnership was unwound  this summer. Almost nobody outside Enron had been aware of the terms of the deal  with LJM, a "structured finance vehicle". 
Enron's failure to offer  details about the risks from other related partnerships have led many to fear  the worst about its huge balance sheet. Its shares plunged by 19% on October  30th alone (see chart), before recovering a bit the next day.

Andrew Fastow, who was  replaced as chief financial officer on October 24th, was a general partner in  LJM . Jeffrey McMahon, his successor, has much to do to  restore confidence. Questions abound. Were the trusts run at arm's length? What  did Mr Fastow earn from the partnership? Ominously, the Securities and Exchange  Commission (SEC) has now launched a formal  inquiry.
Moody's, a rating  agency, last week cut its rating on the company's debt to barely above "junk"  level. Further downgrades might unleash claims from other off-balance-sheet  partnerships. Those known about, such as Atlantic Water and Marlin Water, do not  seem big enough to bankrupt Enron, but speculation is rife about what other  obligations might lurk secretly in other structured vehicles.
A lower credit rating  could destroy Enron's core franchise as the leading energy middleman, by scaring  away customers and freezing the wholesale energy markets. That might have nasty  consequences in other markets. Enron acknowledges that it is a large participant  in the derivatives market, holding a portfolio with a notional value of $21  billion. Rightly or wrongly, many traders believe that figure vastly understates  Enron's presence. If the firms on the other side of Enron's trades start to fear  that payment is not coming, they might curb their other trading, producing a  knock-on effect. Where this could end up is a subject of much  conjecture.
Utilities that trade  energy could be hit. So could the commodity and derivative operations of large  commercial and investment banks. The ties are notably tight between Enron and  J.P. Morgan Chase, according to Ventana Capital, a research firm. Not only does  J.P. Morgan provide innumerable separate credit arrangements for Enron; it also  has the largest derivative operation of any bank, as well as a large business  trading commodities. There is "no doubt" that Enron is on the other side of many  J.P. Morgan trades, says Ventana.
Were Enron to fail,  Ventana thinks "it has the potential to cause a major financial crisis", worse,  in some ways, than what occurred after LTCM . That merely  froze the debt markets temporarily, whereas Enron deals in the building-blocks  of the American economy. Imagine gridlock in the markets for gas, timber, coal,  metals, fertiliser, bandwidth or indeed any of the products Enron deals  in.
As yet, this all seems  unlikely. Many big traders were happy to deal with Enron this week, although at  shorter maturities and with less complex structures than in the past. Trading on  EnronOnline was reportedly strong. Jim Donnell of Duke Energy, a big energy trader,  described "a huge dichotomy" between the collapse in confidence in Enron in the  equity and credit markets and the "business as usual" attitude taken by big  commodity trading firms when considering Enron as a counterparty.
Yet as questions about  Enron's credit-standing spread this week, it began to have difficulty making  markets in some instruments. Few firms would accept Enron's name as guarantor of  a credit derivative. In its core energy markets some big trading counterparties  refused the Enron name. On the InterContinental Exchange (ICE), two houses reportedly specified that they would not take  Enron's credit. 
The biggest credit  exposure appeared to be with banks, whose $3 billion of back-up lines to Enron  were drawn down last week. J.P. Morgan arranged an additional $1 billion  emergency credit-line this week. This back-up, it is widely assumed, is needed  mainly to meet margin calls triggered by the ratings downgrade.

Too big to fail?
Is Enron too big and too  important to be allowed to fail? Philip Verleger, an energy economist, thinks  that Enron is so central to energy markets that it could not easily be replaced.  Enron's rivals mostly disagree, unsurprisingly.
But even Enron's worst  enemies do not (yet) expect the firm to die from its current crisis. Most  traders seem keen that it should live. "Nobody likes to see a wholesale trader  disappear," says one. They admire Enron's armies of traders and their ability to  do deals. EnronOnline is one of the Internet's few success stories, assuming its  huge trading volumes do indeed generate big profits, as the firm  claims.
Enron's, and the  financial system's, problems could worsen if doubts grow about its ability to  meet its obligations. On the surface it is rich in assets, if not cash. But its  lack of transparency leaves uncomfortable room for doubt. In June 2000, The  Economist challenged Mr Lay to reply to accusations of arrogance,  high-handedness and a propensity to push the limits of the law. His response was  revealing. To show that such charges were baseless, he pointed to another firm  unfairly maligned by critics: Drexel Burnham Lambert, an investment bank that  rose from obscurity to market prominence in the junk-bond boom of the 1980s.  Drexel was accused of arrogance, he groused, but it was only being "very  innovative and very aggressive". Drexel was not bailed out: Michael Milken, its  star, ended up in jail, and Drexel collapsed in a heap of bad debts and  ignominy.
mary.cook@enron.com