The interesting Hettinga-message below evokes bank-runs, but (unlike the media) I doubt I'd have ever called Mr. Lay any sort of crusader for free markets. IMNSHO, "political bigwig" was a more accurate description, but of course, I often (accurately) describe things in ways the "mainstream" media won't. I liked seeing http://www.satirewire.com/news/0111/enron.shtml though I can't classify satireware as very "mainstream." :^) JMR
Subject: A Big Fall Evoking Nasty Old Memories of a Run on a Bank From: "R. A. Hettinga" <[EMAIL PROTECTED]> Date: Thu, 29 Nov 2001 09:11:06 -0500 http://www.nytimes.com/2001/11/29/business/29PLAC.html?todaysheadlines=&pagewanted=print November 29, 2001 A Big Fall Evoking Nasty Old Memories of a Run on a Bank By FLOYD NORRIS The final collapse of Enron (news/quote) amounted to something that few living Americans have ever seen: a bank run like those in the days before deposit insurance. Enron appeared to become a wildly successful company by creating a new, largely unregulated financial business, that of energy trading. That business ran on credit, and required suppliers and users of energy to sign contracts that called on Enron to meet obligations months or years later. Enron became something like a bank, which takes depositors' money and promises to pay it back later. But unlike banks in the current era, this institution had no federal deposit insurance to reassure customers when rumors began to spread that it was in trouble. That proved to be its Achilles' heel. Enron's collapse is a reminder for big players in unregulated markets that their financial health must be beyond doubt. Before the advent of deposit insurance, bankers knew what was needed to head off a bank run. It was cash, so much cash that it would be clear that panic was unwarranted. Nearly a century ago, J. P. Morgan took the lead as he and fellow banking tycoons put up the millions needed to keep the Trust Company of America open. Thus was halted the Panic of 1907. As it happened, corporate descendants of two major institutions involved in that rescue - J. P. Morgan Chase (news/quote) and Citigroup (news/quote) - were major players in the Enron debacle. But they did not try the strategy this time. Instead, Enron kept arranging an additional billion or two in loans, clearly struggling to find the money. Morgan and Citigroup allowed the word to spread that they were ready to put in more money on their own, but the amounts were relatively small, and somehow the money was never invested. When Dynegy (news/quote) agreed to buy Enron, it put up $1.5 billion in cash only after it was assured that it would get control of the company's crown jewel, the Northern Natural Gas pipeline system, or its money back, if the deal collapsed. The final straw came on Tuesday, when negotiations on a revised Dynegy takeover deal came down to efforts to find $250 million or $500 million of Enron assets that could serve as collateral for a new Dynegy cash advance. The message to companies that traded with Enron was clear: even its rescuer is demanding collateral, and is having trouble finding it. Given that, Enron's financial business could not continue. Public haggling over the terms of the rescue assured that no rescue was possible, something that would have been obvious to the original J. P. Morgan but that seemed to escape his corporate heirs. As Walter Bagehot, the British financial journalist and historian, wrote in 1873, "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone." The markets Enron helped to create will endure, but probably without Enron. It will be interesting to see whether participants in them continue to resist regulation as much as they have in the past. Unregulated markets, especially when they are relatively new, can be very profitable for those with superior market knowledge, as Enron seemed to have. But when prices are visible to all, the value of that knowledge plummets. Regulation could bring more openness, but it could also bring structures, like clearing systems, that reassure traders they need not worry about the credit of those with whom they trade. If the markets continue to be unregulated, Enron's collapse makes it more likely that the big players in those markets will be companies that are already regulated enough to assure customers that they are secure - companies like major banks and brokerage houses. That would be bad news for Dynegy, which was Enron's major competitor before it tried to become its acquirer. The crisis at Enron may have exposed a "flaw in the business model" of energy trading companies, said John Diaz, a managing director at Moody's (news/quote), in an interview yesterday. "Companies in this industry need to think carefully about their liquidity management," he said. "We're going to be looking very hard at this." The litigation over Enron seems likely to be prolonged and expensive, but it may boil down to Senator Howard H. Baker Jr.'s famous Watergate-era question about President Richard M. Nixon: What did he know and when did he know it? That question will be asked about Arthur Andersen, Enron's auditor, and about its corporate officials, past and present. But it will be asked most particularly about the banks and investment banks that served Enron and its affiliated off-balance- sheet entities in recent years. Enron's disclosures last week showed it needed to pay far more in debts over the next year than most people had understood to be the case. But the newly discovered loans did not materialize out of thin air. The money was lent by banks and bond buyers to the off-balance-sheet entities. Those who were stuck with losses on the known Enron debt may claim the financiers who syndicated the loans should have told them of all the other debt. Among those who do not come out of this looking very good are the bond rating agencies. Just six weeks ago, after Enron put out an earnings release showing strong pro-forma profits, as it defined them, two of the agencies, Fitch and Standard & Poor's, reaffirmed Enron's rating of triple-B plus. Moody's, the agency that was the most skeptical about Enron, put the rating under review and hinted it would, at worst, cut it one notch. None of the rating agencies seemed overly concerned about a detail disclosed by Enron at the time: a $1.2 billion reduction in shareholder equity related to what it later said were accounting mistakes involving a partnership run by Enron's chief financial officer. But that disclosure set off a cascade of questions that Enron could not answer in a reassuring way. It ran through billions as companies demanded more protection to keep trading with it. Enron could have been saved, if an institution that was trusted - whether that was Chevron (news/quote) Texaco (news/quote), which put up the $1.5 billion cash that Dynegy invested, or J. P. Morgan Chase or Citigroup - had made it clear that it was willing to stand behind Enron. A credible backer would have ended the run. But no one was willing to do that, and their hesitance as they learned more only accelerated the run. Whether they were wise to avoid that exposure may become clear as it emerges how much creditors will eventually get. Finally, the rating agencies yesterday downgraded Enron to relatively low levels of junk. They knew that was likely to force Enron into bankruptcy in the near future, but they also knew that no one was willing to rescue a company that the agencies had viewed as solid only weeks before. Yesterday, as Dynegy walked away from the merger, it said that it was no longer willing to trade with Enron - unless Enron put up "sufficient credit support." It knew that support was nowhere to be found. Copyright 2001 The New York Times Company | Privacy Information -- ----------------- R. A. Hettinga <mailto: [EMAIL PROTECTED]> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED] http://www.e-gold.com/stats.html lets you observe the e-gold system's activity now!
