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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: JBTFD who wrote (1087)	4/4/2002 8:32:50 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 2794

fwiw I strongly agree that the use of special purpose vehicles caused the situation to get as bad as it did. They used those vehicles to hide the enormous debt and lack of revenues. If this information had been public knowledge the market would have provided feedback, via declining stock price and credit downgrades, that would have forced them to curtail their broadband and other new ventures long before they had gotten large enough to destroy the company. I did not say derivatives had nothing to do with Enron. I said they did not cause the loses. Derivatives have become a convenient bogeyman that people who haven't a clue what they are talking about, such as Congress, love to blame for all manner of ills. My point is that the only fair criticism of derivatives as an instrument is when structures create hidden an poorly understood risks that cause unexpected losses. There are plenty of examples of that. Enron IS NOT one of those. There were no hidden or unexpected risks that were associated with derivative structures that caused losses. And that includes the partnership you mention. Everything Enron did with those special purpose vehicles, and SPVs fwiw are not in an of themselves derivatives, could have been accomplished with straight debt. In point of fact the derivative structures that I have seen that were in those partnerships were derivatives in name only. They were debt structured as derivatives for accounting reasons. But they had no price risk and were just means to generate upfront cash for future repayment i.e. debt. They functioned in all economic aspects as debt. Enron was sunk entirely by massive debt that they had concealed with derivatives and partnerships. But the losses were no caused because they were using dangerous derivatives.