Hello again. Out of all of the stuff in the media, this is the most
informative of all we have seen.
Very well said. We wish all the best for those effected and Houston as we
move through this.
When the dust clears, Enron will be remembered as a pioneer and great
W. Mark Shirley, CPA
Enron Is History, Says History
By HOLMAN W. JENKINS JR.
November 28, 2001
Back in the mid-1980s, a pipeline executive called Ken Lay was fishing
around for a name for his company, produced by a merger of Houston Natural
Gas and Omaha-based InterNorth. He consulted with consultants, politicked
with politicians, and came up with a moniker. The company would be called
Three weeks later, fed up with the wisecracks from a press that had looked
up the dictionary definition of "enteron" (n. the intestine), he changed the
company's name again. Henceforth it would be known as Enron.
A columnist less devoted to high standards of decorum might be tempted to
extend the metaphor of the company's misbegotten name. In recent weeks,
after all, we've seen Enron's stock collapse over indigestible accounting
and the emergence of dealings between the company and its senior officers
that exude an odor of genuine malfeasance. The evidence is far from clear,
but for the sake of Mr. Lay's reputation one hopes these missteps will prove
one more case of a company fooling itself rather than setting out
deliberately to defraud the markets.
Enron grew to be much more than a pipeline hauler of natural gas, becoming
the pre-eminent trader and marketer of all kinds of energy contracts and a
vocal proponent of deregulation. Now, all but overnight, it's kaput, just
waiting to find out if its fate will be bankruptcy or absorption by an
We cannot help be put in mind of another commodity wunderkind in the 1970s,
Phibro (short for Philipp Brothers). Hard to believe, but Phibro was once a
name that made grown men quiver on Wall Street. Fattened by trading profits
from the great commodity inflation of the 1970s, which some mistook for a
permanent new age of scarcity, it scooped up the Street's oldest
partnership, Salomon Brothers, tucking it into its back pocket and renaming
the combined firm Phibro-Salomon. Here was a powerhouse of unlimited
potential, investors told themselves.
Flash ahead to California's electricity meltdown earlier this year. Enron
saw its revenues quadruple partly as a result of the inflated prices being
quoted in the California market. Many foresaw a new scarcity megatrend, but
there was no true energy shortage. Posted prices on the California power
exchange may have skyrocketed, but the effective price was zero dollars and
zero cents, because the utilities had no cash to pay and politicians were
thumbing their noses at piles of IOUs.
When prices are zero, suppliers take a hike -- that's what economics
teaches. But once the state government started pumping its own cash into the
market, the phony posted prices plummeted and supplies became plentiful
again. Now California is swimming in power and nobody talks about an "energy
You can date the loss of investor confidence in Enron almost exactly to the
moment when the California fiasco began to repair itself. Fortune Magazine
put the inaugural nail in Enron's coffin in March, noting that the company's
growing dependence on trading had turned it into an oil-patch version of
Goldman Sachs. Goldman's stock sells at a price-earnings multiple of 17,
reflecting investors' well-founded distrust of trading earnings to be
reproduced reliably year after year. So why, the magazine asked, was Enron
awarded a multiple of 60-plus? Mmm...
Enron did yeoman service as a champion of deregulation. Boss Ken Lay, a
believer in technology and the power of markets, was a true visionary, to
the point of annoying people who didn't care for his air of being a man on
the right side of history. The moldering pipeline he took over would
certainly have been an also-ran if he had not thrown Enron headlong into
trading and marketing.
But deregulation doesn't confer permanent advantage on anybody. A
deregulated environment favors constant innovation and a continual upsetting
of plans and strategies.
Add the fact that, despite the California bubble, there is no reason to
believe energy prices won't continue their long-term relative decline as
technology advances more quickly than the depletion of conventional
resources. Add also the likelihood that information technology will continue
to lower the barriers to entry to Enron's trading business, which means more
competition and shrinking margins. Enron begins to look a lot like Phibro.
The great commodity-trading machine was already running down by 1981, when
it bought Salomon and Wall Street was swooning. Inflation was being quelled
by Paul Volcker. The products that Phibro traders bought and sold were
increasingly being traded transparently on electronic exchanges. "Four or
five years ago, they used to be able to take other companies to the
cleaners, because they knew where the market was and others didn't," a
trader explained. "With everyone knowing, within a few cents, where the
price of any product was, Phibro's ability to make a profit off its superior
Not only is this true of Enron, but of its would-be bottom fisher, Dynegy,
run by Mr. Lay's Houston homeboy, Chuck Watson. Dynegy's proposed takeover
of its former nemesis was hanging by a negotiation yesterday.
While Enron in recent years was selling hard assets and concentrating on
electronic market-making, Mr. Watson was doing the opposite. His big play in
the Enron deal is to get his hands on the original HNG-InterNorth pipeline,
now known as Northern Natural Gas. By having both feet planted in the real
business, he claims his firm will be able to make a profitable sideline out
of trading despite growing competition and transparency.
We'll see. Dynegy and Enron were born at the same time, and of the same
motive. Dynegy was originally created by six pipeline companies, a
Washington law firm and Morgan Stanley to take advantage of new
opportunities in deregulated natural gas. But the gnats are already
Gas producers who have claimed for years that the duo control too much of
their fate now insist they shouldn't be allowed to merge. Don't listen to
the fussbudgets. If this was a business in need of trustbusting, Enron
wouldn't have been resorting to funny accounting to make its earnings. As
Merrill Lynch's Donato Eassey has pointed out, wholesale margins have been
steadily thinning as trading becomes more transparent and competitive.
Wishful accounting has time and again proved the last refuge of companies
whose dearly held "visions" were not panning out. Enron prided itself on
being realistic and adaptive, but it failed to see that its own beliefs
about the world needed overhauling.
"It ain't what you don't know that gets you in trouble; it's what you know
for sure that ain't so." -Mark Twain
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