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Gold/Mining/Energy : Precious and Base Metal Investing -- Ignore unavailable to you. Want to Upgrade?

To: Bruce Robbins who wrote (668)	11/28/2001 11:06:12 PM
From: russwinter	Read Replies (2) \| Respond to of 39344

From Enron Metals site explaining how they offer long term (hedge) "protection" for their clients. enrononline.com

To: Bruce Robbins who wrote (668)	11/29/2001 8:07:04 AM
From: russwinter	Respond to of 39344

James Dean school of finance: live fast, die young: Enron perishes. Who will follow? By: Tim Wood PRINCETON, NJ -- Enron [ENE] is dying as brightly as it lived, but this time it is a flame-out rather than a starburst. The bleeding edge gas firm turned commodity trader saw its shares crater 85 per cent on Wednesday after Standard & Poors put its credit rating through the shredder. The derating accelerated the maturity on a portion of Enron's $15.4 billion debt which immediately panicked the market and pushed the share down to less than $1 per share. That left white knight Dynegy with no option but to call off its proposed $9 billion acquisition that had valued the company at more than $10 per share. In a cameo worthy of the Three Stooges, UBS Warburg and RBC Capital issued less than timely revisions on Enron after the dam burst – changing their recommendations to "hold" from "strong buy" and from "strong buy" to "buy-speculative," respectively! What's to hold, guys? The fallout from Enron's collapse cannot be underestimated. Not only is the $15 billion in debt at risk, especially in a company with nothing more than intellectual capital which doesn't fetch much on auction, but in the frittering away of $30 billion in shareholder equity in a little more than two months (it peaked at a market value in excess of $70 billion). Add to that unfunded retirement benefits (401ks were concentrated in Enron stock), creditors by the hundred, instability in the energy market and a web of derivatives, and the real cost of the collapse could easily top a quarter of a trillion dollars, although it will never be fully accounted for. To give that some perspective, it's double the as the estimated cost of the terrorist attacks on America. The losers are primarily investors in mutual funds and pension funds who will take a hit in their portfolios. That will help to disperse the impact somewhat, but not enough. But there will intense hand-wringing among the primary debt holders, especially JP Morgan and Citigroup who were unable to put a rescue package together or delay the debt derating any further. Derivatives puzzle It is the derivatives that raise the most concern but offer the least information. The insalubrious offshore vehicles that fired chief financial office Andrew Fastow set up and used to distort Enron's performance apparently made prodigious use of derivatives. Then there were energy derivatives and who knows what else. The gearing typical of derivatives suggests that Enron still has many dominos to knock over. Or will it? There are two lines of thinking. A derivatives boffin I spoke to said risk is dispersed almost entirely in these types of transactions. Unfortunately I could not understand how an obvious loss becomes a non-loss so I cannot relate any more of the discussion than that. The second option is that the (in)famous plunge team will step in and save the day. This is quite plausible and may explain the pattern of events so far. It is quite possible that there has been a gentlemen's agreement to ring-fence the derivative losses, but allow Enron to fail. That would be a relatively neat way out of the crisis. The naughty child is spanked, but family decorum is maintained. For conspiricists, possible plunge team intervention raises an interesting dilemma. The same powers have been accused of fiddling with the gold market to such an extent that the coffers are nearly dry. How then to pay for a derivatives bail out? Another mystery, another conspiracy. Alternatively, the Federal Reserve may be feeling chastised after its unwarranted deliverance of Long Term Capital Management and is now using Enron to signal that the days of a blank check book to back up extravagant risk taking are over. It looks that way if you consider the facts. In August 1998, LCTM's capital had collapsed to $2.3 billion raising its leverage ratio to 55 times as bets on emerging market bond spreads and speculative positions in commodities came undone. That triggered margin calls which the firm could not meet because its assets were illiquid. The total estimated value of the derivatives and forwards written by LCTM were eventually totalled at $1.25 trillion ($1,250 billion or the annual budget of the US government). That gives us some appreciation of the potential leverage that Enron may have been able to generate considering its greater size although it must be discounted somewhat because it was never the financial lapdog that LCTM was to the big institutions. On that basis, we might conclude that Enron could have derivative exposure of at least $100 billion assuming that it was not nearly as aggressive or adventurous; hence the $250 billion estimate mentioned earlier. But that is still massive by any means and dwarfs the $3.65 billion that was required to bail out LCTM. If exposure of $1.25 trillion could be closed out with time and $3.65 billion, then how much easier to quell Enron's upset. So much for being too big to fail. Something has changed and it cannot be that Enron was a Texas oil business that the Wall Street smoothies disdained. Of course, there is a genuine hint of malfeasance in all this while LCTM was just guilty of recklessness and hubris. That may be the sum total of the explanation. The other possibility is too awful to contemplate – that you must rack up bolder losses to get the Fed's attention.