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But Enron absolutely knew the price it could get for the gas: it had already sold it. And because of that knowledge, it was able to lend far more money than a bank typically would.
But being fully hedged also means you’re making no profit on any price move in oil; all the profit comes from the deal you’ve cut with the customer.
On his way out the door, Kinder took one other thing, the most important of all. He cut a deal to buy Enron’s interest in something called Enron Liquids Pipeline for about $40 million in cash.
Though long gone from the company, John Wing still held millions in Enron stock. When he learned that Kinder was leaving, he sold most of his shares.
The Enron trading desk, Skilling added, always had a matched book—meaning that every short position precisely offset every long position—and made its trading money merely on the commissions, not on speculative risk. Right up until the end, Skilling and his lieutenants stuck to that line, long after it had become demonstrably false.
even if 97 percent of the capital consisted of debt raised by the company selling the assets, the company didn’t have to include that debt on its balance sheet.
“It was a purported sale, but it looked and smelled like a financing,”
In its internal calculations of Enron’s total debt, Citigroup included the prepays. But when it came to selling the risk to investors, it used Enron’s financial statements—which were supposed to comply with GAAP accounting—and lumped prepays in with trading liabilities. Thus, while Citigroup didn’t want to assess its own risk without seeing the full picture, it was perfectly willing to sell investors a more pleasing image. GAAP accounting, noted Citigroup internally, was the “least conservative analysis.”
by the end, Enron owed some $38 billion, of which only $13 billion was on its balance sheet—the
Every bit as much as the accountants at Arthur Andersen, the banks and investment banks were Enron’s enablers.
lending, though the most fundamental of banking activities, had devolved into a low-profit, low-margin enterprise, while investment banking, with its outsized fees, was one of the most profitable endeavors known to man.
By the late 1990s, Enron had become one of the largest payers of investment banking fees in the world.
A hedge, it’s important to remember, is a little like taking out insurance. For a small amount of money, you’re buying a derivative contract that commits the seller of the contract to pay you a preset price for the asset. If the price of the asset falls, the counterparty has to pay off your contract—and he takes the financial hit that you’ve
avoided. If it doesn’t fall, the counterparty keeps the money you’ve paid for the contract, and that’s his profit. Conventional hedges work only for highly liquid assets, like large-cap stocks or corporate bonds, where derivatives traders can make money by writing lots of such “insurance.”
a series of extraordinary accounting maneuvers, all approved by Arthur Andersen,
It was a massive obfuscation, calculated to hide the awkward fact that the now-terminated Raptors had hidden Enron losses.
Even more astonishing, the release didn’t even mention the separate $1.2 billion cut in shareholders’ equity—which wouldn’t show up on the accompanying financial statements since Enron never released its updated balance sheet until well after the quarterly-earnings statements.
