Tuesday, January 13, 2009
I was watching 60 minutes the other evening which aired an episode about the rise and fall of oil prices and why they managed to go up and down in the erratic way that they did. Derivatives, the dirty word of our time came up again and again as the explanation for the apparent disconnect between energy prices and the supply and demand of energy.
The demand and supply for energy derivatives drove the price for energy up and down NOT the demand and supply for energy itself.
What was even more interesting and something I had forgotten about was that Enron was the “inventor” of these energy derivatives and had lobbied for the deregulation of the energy markets. This prompted me to revisit the Enron Story that I had read years ago and which is popularly referred to as “The smartest guys in the room”.
And this is where I noticed the parallel between the current financial crisis and the collapse of Enron. The familiar statement “fool me once shame on you, fool me twice shame on me” applies perfectly here.
What struck me most was the sharp contrast between the action taken against the Enron chief executives and those taken against the executives of the current perpetrators even though many of the events show an uncanny parallel. Not to speak about the negligence of our current pompous congressional pontificators who were all there at that time indignantly questioning the Enron executives but never recognized the identical symptoms that caused the current malaise.
Yet to state that what the banking executives did to cause the demise of an entire nation was not far different from what the Enron executives did is an understatement.
Enron misled their stock holders about the company’s performance, so did the banks. They wiped out their shareholders equity and their employees 401k’s, so did the banks.
Enron used special purpose vehicles to hide losses, so did the banks. For example the Merrill Lynch transaction referred to as the “Lone Star Transaction” where Merrill sold a CDO at inflated prices to a special purpose vehicle which they financed with a loan from themselves. Most CDO’s were issued through special purpose vehicles taking the debt of the books of the banks. Most derivatives (CDO’s) on the banks books were artificially inflated, so were Enron’s
Enron’s Auditors Arthur Andersen and the Lawyers signed off on many of these Enron transactions, so did the auditors of the Banks. Worse, the rating agencies which the investment community relies on for valuing and rating debt were hand in glove with the banks and issued “flawed” ratings.
Enron artificially inflated energy prices through manipulation of the energy markets, so did the commodity exchanges and Warburg. How else can one explain a swing in energy prices of over 300% within three months?
The Enron executives “raped” the company thru bonuses and stock options, so did the banks. The banks with their collective reckless behavior put the lively hood of the entire planet at risk, Enron did not.
There is something really fishy in all this. What the Enron Executives did was considered to be criminal and they were sent to prison for extended periods of time. Why not the banking folks who have endangered an entire global economy with their unethical and reckless behavior?
It appears to me that there is a secret brotherhood that is protecting the “Wall Street” financial community. All the exact same things that Enron pioneered were replicated and imitated by Wall Street without impunity. The Special purpose vehicles pioneered by Enron’s CFO Andrew Fastow were subsequently used to issue CDO’s to take debt of the banks books and or distort valuations of existing assets, just like Enron did. It was a crime then, why not now?
Observing a Wall Street firm like Warburg taking over Enron trading, Enron’s most successful and profitable entity, within days of the Enron bankruptcy at a rock bottom price, reinforces the notion that there was a conspiracy in Wall Street to bring down a bunch of arrogant Texans that were beginning to threaten Wall Street’s monopoly. Especially considering that no one on Wall Street (Warburg) was prosecuted for not honoring Energy futures trade contracts with Enron Trading. Defaulting on these contracts is illegal in the futures markets and accelerated Enron’s insolvency and subsequent bankruptcy.
Why are there no congressional hearings on the scale of Enron for all those “crooked” bank executives that artificially inflated the world’s standard of living and threatened it with a bogus energy crisis? Are the people who are supposed to protect us from all these criminals afraid that we will see them for what they are? A criminally negligent bunch of pedantic pontificators.
There must be some mysterious invisible hand protecting Wall Street that we do not understand.
Given the uncanny parallel of events then and now, either the Executives of Wall Street should be prosecuted, punished and jailed, or the jail sentences of Skilling, Fastow et al should be greatly reduced. What was criminal then should be criminal now.