{TEXT} My mail box last week was full of messages ranging from Enron "Doesn't look good" to "Would the last person holding Enron please turn off the lights", (although, clearly, the lights have been off for a while as far as the world's biggest energy company is concerned). We are, once again, in the realm of financial scandal, corporate mismanagement, global disaster and unprecedented losses. We've had it with Long Term Capital Management for hedge funds, Marconi for telecoms and now Enron for utilities.
Of course, Enron wasn't your average utility company - it was an energy trader which, a short time ago, was raking in the money from California's energy crisis. Now it knows how the Californians felt. It was always hard to imagine the sun-drenched west coast in the grip of energy shortages; it's equally hard to imagine how a company with revenues of around $140 billion (€157 billion) for the first nine months of the year could see its shares fall from around $90 to less than 90 cents in a few weeks.
It's another story of capitalism gone wrong and a darling of the markets turning into its worst nightmare.
Enron was formed in 1985 by a merger of two energy companies and began trading natural gas in 1989. Five years later it started trading electricity. By last year almost all its revenues and 80 per cent of its profits came from wholesale energy trading.
One of the first things you learn about trading is it is, essentially, a zero sum game. For everyone who makes money there's a loser. Trading isn't exactly rocket science and it's not actually productive. Banks, for example, need to buy and sell financial products in order to deal with their customers. But they also buy and sell simply to make a profit. And if one of them profits from the deal, another one loses. It's that simple. And it's that simple when it comes to energy trading too.
Of course there are a whole heap of different strategies designed to help you limit the loss-making possibilities of deals that you do, or maximise your profit potential. Sometimes you can sit at a desk surrounded by graphs that seem to tell you, no matter what happens, you're a winner. It never works out like that.
You can have all the hedges you like in place but if you get it wrong you still end up losing money. The smart thing (at least from the trader's point of view) is that you can blind people with science and they'll take your word for it that you just can't lose. Especially if those people are supposed to know what you're talking about.
Especially, too, if they're auditors. Clearly this never happened when I was trading since I was always at pains to make everything as simple as possible for auditors. I'm kind-hearted.
As far as Enron was concerned the traders certainly seemed to blind a lot of people with science.
Some of those sophisticated trading strategies are difficult to understand and analysts have already admitted that they took the company at its word about the earnings potential of what it was doing.
What they were doing was leveraging up big time so that the company became overextended.
And although it was the darling of corporate America and although it was reeling in the investors, it was actually losing a fortune.
The impact of its downfall will be felt by many smaller companies, as well as some of the major banks and mutuals. Some estimates put losses for British banks at more than £8 billion.
The thing about being at the cutting edge of financial engineering is that - as an investor - you need to know what exactly is being engineered. But investors often don't want to know and, once the company is making money, they don't want to rock the boat. And the financiers - well, most of them don't want to admit that they don't actually understand what's just been engineered. They'll look at the computer printouts and the glossy graphs and they'll hand over the cash because that's what everyone else is doing. Especially if the company concerned is a big player in the market.
Every bank wants to be doing business with the big player in the market. And, of course, the big players become big by getting finance from everyone. At that point it's in everyone's interest to keep the show on the road and not be the one to question the emperor's suit.
According to some analysts, Enron is profitable but it's hard to be sure about that. After all, this is a company that overstated profits for the past five years by more than half a billion dollars. What exactly are the analysts analysing at this point?
Financial commentators are split between those who believe that the company was at the forefront in the fight for competition in the energy sector and forever lowered the price of that energy for the consumer (except, of course, in California).
The company was lauded for turning energy into a commodity and providing a marketplace in which to trade it.
Yeah well - lots of people and companies and foundations and heaven knows what start off with great ideas but, somehow, the more complex the structures around them the more dramatic the falls.
And the more they take the actual product out of the equation the more likely it suddenly seems that things can go horribly wrong.
Not that I want to bleat on about dotcoms but they're still the perfect example of selling absolutely nothing for a hell of a lot of money.
The Securities and Exchange Commission is now investigating Enron. Employees, as usual, have either lost their jobs or are just walking out.
But, and I know you'll be surprised at this, the directors of the company have made a lot of money. It's an ill wind that doesn't turn a few turbines after all.
