Enron hit worse than Argentina
Failure of giant energy trader hurt markets harder than Latin American financial crisis
Eric Beauchesne -- Southam Newspapers
OTTAWA - The collapse of corporate energy trading giant Enron Corp. did more to undermine global markets than the financial crisis in Argentina, which led it to default on its debt and devalue its currency, the world's central banks note in a report to be released today.
The problems of a single corporation did more damage than the financial failure of a mid-sized emerging economy in part because Enron's problems, unlike Argentina's, caught the world by surprise, according to the Bank for International Settlements.
"One reason for the limited impact of developments in Argentina on financial conditions in other emerging economies was the fact that markets had already priced in a high probability of sovereign default by Argentina for several months before the actual event," says the Swiss-based international research arm of the world's central banks, including Canada's. "This stood in contrast to the case of Enron, where the extent of the company's problems was not apparent until shortly before its default."
Even now, Enron's collapse remains shrouded in mystery, it noted, not to mention suspicion.
"Three months after the failure of Enron, it remains unclear when and how the U.S. energy trading giant gained and lost from misstating its financial reports," the report said.
The most comprehensive report on the Enron collapse, according to the central bankers, comes from the company's board of directors. In a 203-page report, the board said Enron created entities that were structured to "accomplish favourable financial statement results, not to achieve bona fide economic objectives . . ."
That explanation underscores another reason Enron's collapse did so much damage -- it undermined confidence not just in the competence of corporate managers but in their honesty and that of their accountants.
"In late January and early February ... global markets gave up significant gains as concerns grew about the reliability of corporate disclosures on earnings and debt," the central bankers' report notes.
"As details emerged regarding aggressive accounting practices and flawed internal governance, that prompted broader doubts about the integrity of information supporting financial markets," it says. "Investors punished the stocks and debt of highly leveraged firms and of companies that showed relatively poor transparency in their accounting statements."
Again in contrast, other emerging economies were not punished for Argentina's apparent financial incompetence.
"Despite the crisis in Argentina, public- and private-sector issuers in the emerging economies were able to gain access to the international securities and syndicated credit markets, though the volume of flows remained limited because of the weak global economy," it says.
The report notes that investors attention this month has started to shift away from the accounting concerns raised by Enron thanks to the surprisingly strong economic reports out of the United States. and some increased optimism about the outlook for Japan.
But the concerns raised by Enron's collapse continue to haunt markets.
In the United States, Enron is the target of inquiries by more than 10 congressional committees. And its failure has generated proposals for more than 30 pieces of legislative reform, many aimed at ending conflicts of interest for corporate auditors.
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