Thursday, July 31, 2003

Warning: boring Enron-related material ahead. When drowsiness strikes, proceed to the next post.

Every time I comment on Robert Musil's latest Enron fantasy, as surely as night follows day, there quickly comes an enraged response, filled with even more egregious... gee, am I repeating myself?

At any rate, he's responded to my earlier remarks on the recent settlement between the SEC and Enron's bankers. Which, considering the way I pointed to him, is fair enough. But rhetorical tit-for-tat about the particulars would probably be less enlightening to anyone that actually gives a damn than a few basic facts on the transactions at issue.

First, the basics. These transactions were "disguised loans, ... understood to be disguised loans and approved as such." That's not my assessment, or the SEC's, it comes from email from a senior executive at Chase.

Second, the effects. While these transactions were effectively loans, they weren't carried on Enron's books as loans, but rather as potential liability for commodity deals. The effect of that treatment was to conceal an alarming run-up in Enron's debts. And, quoth securities law expert and Columbia prof John Coffee, that's not accident or sloppiness; the people involved acted "intentionally, knowingly, and fraudulently".

Third, as to the propriety of this accounting treatment, Musil is uncommonly fond of quoting out of an early Times report on the disguised loans that "Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board", as if that proves it was undeniably kosher. Let's put that statement in context:

Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board, the nation's accounting rule maker, said Timothy S. Lucas, director of research and technical activites at the board. But the group will soon reveal a new recommendation [i.e., rule], he said, requiring that such transactions be accounted for as loans as well. The board was reconsidering its policy last September, before Enron's collapse.

In other words, far from viewing the accounting treatment as kosher, the FASB had already marked it as suspect, and was in the process of banning it.

Lastly, on the settlement -- settling a regulatory action for chump change is generally a good deal if you can do it. But $300 million isn't chump change for anybody. Not even Chase and Citibank.

For the curious, in slightly more detail, the transactions at issue worked, crudely speaking, like this: Enron agreed to sell, say, natural gas to the bank for some amount, receiving payment immediately, but delivering the gas five years in the future. They would then agree to buy the same gas back from the bank for a greater amount, payable in five years. The net effect is that Enron has sold the gas to itself -- but it gets money from the bank now, and sends more money back in five years. In other words, it's a loan, using the gas as a kind of marker. The actual deals were complicated by the use of third-party entities in the Caribbean as sock puppets, to conceal the actual nature of the transactions even more by hiding the participants, but that doesn't change the basic nature of the scheme.

And one bit of tit for tat: Musil gleefully quotes Columbia prof John Coffee's statement that the banks got "a good deal" as if it means that they settled for chump change. But he said nothing about their actual culpability; the statement, in what little context the Times gives it, could just as easily be read to say that given the mess they were in, the banks were lucky to get off as lightly as they did. I have no explicit statement of Coffee's view of the banks' particular situation, though the remarks I've quoted above are perhaps suggestive; for one thing, he's not an entirely disinterested player, being a consultant for the defense in at least one Enron-related case. But his remarks in the Times only make sense if he thinks they still face hundreds of millions of dollars more in liability in the civil suits which are still pending...


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