Which will be the next derivatives meltdown - silver?
DAVID CALLAWAY
Enron meltdown threatens to spread
Commentary: Investor confidence has left the building
By David Callaway, CBS.MarketWatch.com
Last Update: 12:11 AM ET Dec. 13, 2001
SAN FRANCISCO (CBS.MW) - As the traveling Enron crisis opens in Washington D.C., with the predictable hand wringing and finger-pointing that accompany public hearings, an ominous development looms over Wall Street - a potential run on the energy sector.
Investors who lost their shirts on Enron don't plan on sticking around in case there is a second act to this tragic comedy, and Enron's former rivals are bearing the brunt of this sudden concern.
The fallout threatens not only the energy industry and the badly damaged concept of deregulation, but the public confidence in the U.S. financial markets themselves, and the man whose new job it is to protect that confidence - Securities and Exchange Commission Chairman Harvey Pitt.
Shares of energy companies plunged early Wednesday as investors bailed on the sector, concerned that Enron's misleading accounting could be an industry standard and that other companies could be mini Enrons just waiting to implode.
Scrambling reassurances from some of the companies and an announcement by El Paso Corp. that it will sell $2 billion in assets and simplify its books helped avert disaster, and most of the stocks recouped what had been double-digit percentage losses.
El Paso (EPG: news, chart, profile) shares actually ended higher on the day, rising 5 percent to $41.07 after trading as low as $36.39. Shares of NRG Energy (NRG: news, chart, profile) also rebounded to close higher at $13.50 after hitting a new 52-week low of $9.70.
Shares of Williams Cos. (WMB: news, chart, profile), Mirant (MIR: news, chart, profile), and Dynegy (DYN: news, chart, profile) all closed lower, while Calpine (CPN: news, chart, profile), which had fallen for two consecutive days on a New York Times report that it looked like Enron, avoided a third day of losses by bouncing off a two-year low to close at $15.91, up 2.6 percent. Shares of Enron itself fell 6 cents to 66 cents.
This is a story that's not going to go away very soon. It has almost everything to it: wealth, arrogance, manipulation, connections that run through the corridors of power right up to the White House itself. Only thing missing is sex. But let's leave Bill Clinton out of this - for now.
If this debacle is going to be prevented from becoming a full-scale national energy crisis, someone is going to have to step in and restore confidence. That someone is Pitt.
The new Securities and Exchange Commission chairman faces a case right now that will define his tenure at the nation's most important securities regulator. See full feature on Pitt.
In addition to getting to the bottom of the Enron case, and assuring investors that the rest of the energy industry is clean, Pitt has to take on the far greater problem of Depression-era accounting laws that need to be updated and accounting companies that need to be held to higher standards.
Arthur Andersen CEO Joseph Berardino testified yesterday that the accounting firm had warned its client, Enron, last month that there might be some "illegal acts" within the company because it did not disclose certain information about one of its trusts.
That warning came on Nov. 2, when Enron's shares were just above $11 each. Bet there are a lot of folks out there would have appreciated a heads-up on that one.
Berardino also acknowledged that Andersen had made a mistake in evaluating the company's books, which contributed to it having to restate earnings. It's too early to tell if this scandal has the potential to bring down Andersen. I think it's unlikely.
But it is the latest and the largest in series of accounting mishaps that clearly show companies and their auditors are going to have to be more forthcoming about their businesses if they want to win investor confidence.
Pitt's predecessor at the SEC, Arthur Levitt, focused all his energies on providing better disclosure for investors. Pitt now needs to step up and let Wall Street know he is serious about continuing this campaign. Lip service won't do it. Only active investigations and penalties with real teeth in them will.
Otherwise, it's only a matter of time before the next Enron occurs. And it looks like investors already know it.
David Callaway is executive editor of CBS.MarketWatch.com.
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