Enron adds up 4 years of errors

Houston Chronicle ^ | Nov. 9, 2001, 9:17PM | TOM FOWLER

[Gladwin]

(LJM2 is a subsidiary/partnership of Enron)

In June 2000, LJM2 purchased fiber-optic cable from Enron that was installed yet unused for $30 million in cash and $70 million in an interest-bearing note, or IOU. LJM2 sold some of that fiber to other companies for $40 million, but since Enron helped market the fiber to those buyers it received an "agency fee" of $20.3 million.

In December 2000, LJM2 sold the remaining fiber for $113 million to a special entity that Enron created strictly for the purpose of that purchase. LJM2 then used some of the proceeds from the sale to pay off the $70 million Enron IOU.

As if the transaction weren't complicated enough, Enron then signed a contract with one of the investors of the entity that paid $113 million for the fiber to help cushion that investor from any potential losses.

The transactions were completely legal and earned LJM2 $2.4 million and reduced Enron's credit risk on the transaction by $9 million. The fact that the earnings rely so heavily on business between such closely related entities is disturbing, however.

[Gladwin]

I went to the Houston Chronicle site to see the history of the Enron collapse. The above paragraphs are excerpted from one of the stories there. My question is, does anyone here understand what went on in the above paragraph? I can tell it is screwy accounting, as they are selling assets to themselves for higher and higher prices, and booking the profit and not the debt. But, does it make sense at all?

[Tuco-bad]

I can tell it is screwy accounting, as they are selling assets to themselves for higher and higher prices, and booking the profit and not the debt. But, does it make sense at all?

This is penny ante stuff.

If you want to know why Enron went under; think derivatives.

[Gladwin]

Derivatives are like options? or more complex than that?

[tarpon_bill]

I think that Enron at first saw fiber like a pipeline. But it wasn't. Capacity of fiber optics is an odd duck. When you run a cable underground you put much more fiber in the hole than you will need for a long time.

Cost is in digging the hole, not the cable capacity.

Technology moves the capacity per fiber up as well.

So when you use a circuit, then it is used. When you need more capacity, you just lite up more fibers. You may only be using 5% of the cable capacity at any one time.

Not true with a pipeline. What you got is all you got. So you have a fixed pipeline 'bandwith' and you can trade energy based on fixed constraints.

Enron ran up with the oil price spike, and crashed when energy prices crashed. To save themselves they branched out to fiber. Treated it like a pipeline ... bad move.

Should have stuck with energy, at least they understood it.

The rest appears to be fraud IMHO.

tarpon

[Tuco-bad]

Derivatives are like options? or more complex than that?

Much much complex.

Derivatives could be an aggregation of options (calls & puts), futures, stock, real estate, currency etc.

Derivatives are so complex, that many a time the owner isn't quite sure as to if the investment is making or losing money.

And a significant change (e.g., price of oil, currency devaluation) could turn a big profit into a loss, or vice versa.

[deport]

Just for starters

[pointsal]

IN REAL ESTATE DEALS, I'D CALL IT A DAISEY-CHAIN. THAT'S HOW THE S&L SCANDAL GOT FUELED, IN PART. HOW MANY ACCOUNTANTS AND AUDITORS WILL GO TO JAIL OR COP A PLEA? ANSWER- NONE. THE EVIDENCE HAS BEEN SHREDDED.

[Wphile]

Deriatives and bandwidth

I agree this is what toppled Enron. Deriatives with commodities is a very tricky business and Enron had no clue about fiber-optics and bandwidth. Not to mention all that ad revenue on those stupid "why?" commercials. They made everything so complicated, no one could understand what was going on, probably including themselves.

I'm sure there is fraud involved and collusion with the auditors. White collar crime. The political aspect is much ado about nothing except all the sweetheart deals Clinton's administration arranged for Enron: India, Mozambique, etc. Wish that would come out but probably won't since it involves Democrats and not Republicans.

[Gladwin]

Gawd, that makes my head hurt. It sounds like a bad combination of door-to-door insurance policies with Vegas bookmaking.

[kitkat]

I'm about to ask an incredibly stupid question, but please tell me whether there is a law, or there isn't a law, that says it's illegal for auditors to shred the evidence. I haven't heard anything on radio, TV, or seen anything in the printed press about such a law. I suspect the reporters don't know the answer either. And this is what the voters will want to know.

[Wphile]

I can't site the law but there is a law that once records have been subpeoned (sp?), they cannot be destroyed. The laws are pretty vague about what records auditors are supposed to keep. They really only have to keep what is deemed "necessary." According to another thread, the auditors were directed, by an attorney for Arthur Anderson, to shred documents related to Enron. Not sure if this was done prior or after the issuance of the court order.

It's also on Drudge. It's a TIME magazine piece that is pretty good on the business part but the political spin is still all Bush, Bush, Bush. They come close to exonerating him and the administration but not without first throwing in lots of inuendo. The are now blaming Bush for not handling it properly thereby creating intrique. The press is so lame. I hate them. Guess they forgot the rule about getting the facts first and then you write the story.

[tillacum]

Sounds like a similar deal with the nursing homes being sold and bought by a group from Arkansas, they bought nursing homes then sold them to their own entities at an increase, then resold them at another increase to themselves, again.

[wheels]

Derivatives are not complex at all. Moreover, they have existed in various forms for thousands of years and are necessary if you want to eat. If you quit watching Network News and read a book, you would not sound so uniformed.

Here is an example of a derivative.

Farmer Larry plants 100 acres of wheat every Spring. Each Spring he also agrees to sell that wheat at a certain price on a certain date in October, to a certain person. Farmer Larry has just entered into a derivatives contract.

There is probably a good chance your Utility bill is a derivative contract every month. If you agree to pay a fixed monthly rate, like I do, regardless of your amount of usage, then you have probably entered into a derivatives contract.

[Tuco-bad]

Derivatives are not complex at all. Moreover, they have existed in various forms for thousands of years and are necessary if you want to eat. If you quit watching Network News and read a book, you would not sound so uninformed.

Yes there are derivatives and there are derivatives.

The ones you refer to are the simpliest of derivatives.

Enron was dealing in the most complex of derivatives; derivatives even Enron hardly understood.

That's why they're going belly up.

[kitkat]

Thanks for the information about the auditors shredding the Enron audit papers. It sounds as though the auditors will walk on that one.

About the Dems being so eager to "hang" this one on Bush, you are so right. I'm sick of hearing it. They DID say that if they can't dig anything up, they'll at least leave a question in the minds of the voters, and the press is cooperating with them. This morning, CNN news on my local radio gave an update on Enron and it was pretty concise and honest EXCEPT for such things as, "Bush, almost as an afterthought..."admitted that Enron had contacted the White House. Then it went on to say that Bush is trying to distance himself from the investigation. They also made much of the fact that Bush didn't "help" Enron when it was facing bankruptcy. If he had done that after accepting campaign contributions, then they'd be attacking him for selling out the White House just as his predecessor did.

[Wphile]

Yeah, the old damned it you, damned it you don't type of argument. It's so disgusting the way the press has behaved here.

Not sure how this will play out in the eyes of the public. If the final result is: They asked Bush for help, he said no, then that is what they will remember. And that's good for Bush.