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Week 4 - January 28th - 2002 |
David
Seaton's Energy Links® Commentary
Enron, Enron, Enron! Last week I compared it to the film, "Gremlins". This
week I'll compare it to "Titanic" and by next week I'll probably be comparing
it to "Schindler's List" or even "Argentina" - not the film, the country.
It's bad, real bad and getting worse or as a rapper would say, "badder"
every day. Trust is fundamental in every aspect of life. When you cross
the street with a green light you trust that the coming cars are
seeing a red light. You trust that they know what that means because
they had to take an official test to get a license and you trust
that they have a license and you trust that, anyway, they are going to
be at least human enough not to run you over and kill you dead. That's
a lot of trust when you come to think of it... That's why mothers tell
their children to always look both ways before crossing the street. However
for many years, many people - and their mother's too - have been investing
their earnings and savings in a lot of companies because they trust
the system. What happens if they stop trusting? Maybe an auditor,
on leave from Arthur Andersen, wrote the film "Sixth Sense" and all these
companies investors see walking around staring at them are really dead,
but just don't know it yet. It was fun in movie theatres, but in real life...
maybe not so funny. David
Seaton
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| Enron,
no taxes (Cohen - Washington Post)
I recently had dinner with a very rich man -- a multimillionaire for sure, maybe a billionaire. He described one of his recent deals, how he had taken a small company, added all sorts of doodads to it, done this and done that (pardon the technical terminology) -- and sold it for an astounding amount of money. He then confided his business philosophy: Pay no taxes. As it happens, that's precisely my own business philosophy. Only I have been unable to implement it. All the years I've been in business, which is to say working for a living, I have paid federal, state and local taxes -- and I resent, loathe and even hate anyone who manages not to. I am talking Enron here. It paid no federal corporate income taxes in four of the past five years. It managed that while reporting profits that turned its stock from a stodgy performer to a Wall Street high-flyer, enabling its executives and board members to sell more than $1 billion in stock in that period. Most of that time, Enron paid nothing to Uncle Sam. How did it manage to do this? Let me count the ways. Enron set up almost 900 subsidiaries in tax havens. I am referring to the Cayman Islands, the Turks and Caicos, Mauritius and Bermuda, places with nice beaches and banks that ask no questions. Using those secret partnerships we now know about, the company buried its profits under the palm trees, like the pirates of old. At the same time, Enron was able to deduct the cost of stock options. So the many millions that Enron's executives and board members received in options were deducted for tax purposes. In the year 2000, for instance, a tax bill of $112 million turned into a refund of $278 million. Enron billed itself as the quintessential American company. It adapted to the new era and the New Economy. It traded in a virtual intangible, energy -- by taking electricity from there and selling it here. But it was quintessentially American in another way: It talked rugged individualism, but when things got tough, the tough didn't get going. They put out their hand. Click here to read more Contents |
| What
Did Ken Lay Know on Aug. 20? (Business Week)
On Aug. 20, 2001, Kenneth L. Lay was absolutely upbeat about Enron's prospects. Although Jeffrey K. Skilling had abruptly resigned as Enron's president and CEO less than a week before, Lay insisted that the company's slate was clean. "There are absolutely no problems that had anything to do with Jeff's departure," Lay, who had just reassumed the CEO job, told BusinessWeek Dallas Correspondent Stephanie Anderson Forest that day. "There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues.... There is no other shoe to fall." Two months later, Enron's finances began to unravel. By December, the company was in bankruptcy, and on Jan. 23, Lay resigned under pressure from Enron's creditors. But what federal investigators want to know is: Did Lay know more than he was admitting on Aug. 20 -- and were his statements to BusinessWeek Online an act of securities fraud? Investigators in Congress and at the Securities & Exchange Commission have uncovered a chronology they believe suggests Lay should have known of Enron's massive accounting problems before that interview. Enron Vice-President Sherron S. Watkins' now-famous memo to Lay -- asking, "Has Enron become a risky place to work?" and pointing out that "Enron has been very aggressive in its accounting" -- was written and dropped off for Lay to review on Aug. 15, according to congressional investigators and Watkins' lawyer. By Aug. 20, Lay had scheduled a meeting with Watkins to discuss her concerns, according to her lawyer, Philip Hilder of Houston. Documents obtained by congressional investigators back up that date. If Lay knew of the problems and had good reason to view them as substantial, any public statements denying those problems could be deemed false and misleading corporate disclosures. That would be a potential civil or even criminal violation of federal securities laws. "If it appears in BusinessWeek or on its Web site, he's as vulnerable for that as if he put it out in a company news release," says a former top SEC lawyer Click here to read more Contents |
| Man
on the Hot Seat (US News and World Report)
To an uncanny degree, Andy Fastow mirrors the growth of Enron Corp. As the Houston-based energy giant rocketed to fame as a supernova of the "new economy," Fastow, its chief financial wizard, soared upward with it, crafting the complex partnership deals that in a short 10 years turned a sleepy pipeline outfit into the seventh-largest corporation in America. Now, with Enron in flames, having erased$67 billion in the largest bankruptcy in history, Fastow, a onetime Master of the Universe, is the most wanted man in corporate finance, the target of untold lawsuits and unchecked rage. Like the junk bond and savings and loan debacles before it, the Enron collapse is fast becoming a signature scandal. Its impact is felt in thousands of layoffs, the implosion of retirement savings, and possible criminal charges for massive accounting and securities fraud. Last week's developments alone were the stuff of corporate fiction: An Enron executive warned Chairman Kenneth Lay months ago of her worries about the partnerships Enron used to keep hundreds of millions of dollars in debt off its books. Enron's auditing firm, Arthur Andersen, fired its lead auditor when it was learned that Andersen destroyed documents after an investigation had begun. Then Enron fired Andersen. The head of the Securities and Exchange Commission, until recently stroking the accounting industry, proposed a new oversight body. Business leaders speculated openly about whether Andersen would survive. Click here to read more Contents |
| Spreading
It Around (Krugman- New York Times)
(...)Why is Enron a problem for conservatives? Even if the Bush administration turns out to be squeaky clean, which we'll never know unless it starts to be more forthcoming, the scandal threatens perceptions that the right has spent decades creating. After all that effort to discredit concerns about the gap between haves and have-nots as obsolete "class warfare," along comes a real-life story that reads like a leftist morality play: wealthy executives make off with millions while ordinary workers lose their jobs and their life savings. After all that effort to convince people that the private sector can police itself, the most admired company in America turns out to have been a giant Ponzi scheme - and the most respected accounting firm turns out to have been an accomplice. You might think that the shock of the Enron scandal - and it is shocking, even to us hardened cynics - would make some conservatives reconsider their beliefs. Click here to read more Contents |
| Electricity
Goes to Market (MIT - Technology Review)
Economists aren’t generally known for consensus of opinion, but there’s one point on which almost all of them agree: regulated markets are less efficient and end up costing consumers more than unregulated markets. It is this conviction that has driven the deregulation of the electric utility industry over the past decade. In a free electricity marketplace, the theory goes, the forces of supply and demand would drive the industry to become more efficient and reliable. Electricity prices would drop, supplies would increase and companies would make rational investment decisions based on expected returns. Because one unit of power is indistinguishable from any other, electricity would ultimately become a commodity, bought and sold on the basis of price with no concern over whether it was produced a few kilometers away or halfway across the country. Time has shown, however, that the road to commoditization will not be without its bumps. As the California energy crisis of 2000 has demonstrated, partial deregulation-in this case, letting wholesale electricity prices float while keeping the retail price capped-can make matters worse. And as long as public opposition to new generating plants remains high, the supply of electric power will have difficulty keeping up with demand, no matter how enlightened the deregulatory policies. But as those who study the electric industry point out, there’s an even more fundamental obstacle to realizing the promise of deregulation: the technology itself. Nearly everything in the current power system-from the generating plants and the transmission grid that distributes electricity throughout the country to the devices that run on that power and the meters that keep track of power usage-is designed for use in a centralized system of regulated, monopolistic utilities that produce power at a few locations and ship it out to local customers at a fixed price. While the regulatory policies have begun to change, the technology, for the most part, has not kept up. Click here to read more Contents |
| Hot
air about German gas (Editorial - Financial Times)
Germany's cartel office was right this week to block on competition grounds the bid by Eon, the energy group, for effective control of Ruhrgas, the country's dominant natural gas distributor. However, the federal government appears tempted to overrule its famously independent watchdog. It should think again. Approving the deal would be a bad mistake, for the European Union as well as for Germany. Eon and its supporters in Berlin say the deal would create a strong national champion better able to compete internationally. Exactly the same excuse is used by France to resist liberalisation of its do mestic energy market and justify the controversial EU acquisition spree by Electricite de France, its state-owned power monopoly. The argument is nonsense. Restricting domestic competition does not produce competitive companies: it blunts commercial enterprise, breeds inefficiency and misallocates resources. Furthermore, closing national markets by entrenching dominant suppliers in a sector as vital as energy severely retards EU economic integration. If Germany follows that route, its own economy will be the first casualty. It has already failed to reap the benefits of steps to liberalise gas supply. Prices remain high and new entrants have made little impact because incumbents have locked local suppliers into long-term contracts and used a variety of ruses to keep competitors at bay. Click here to read more Contents |
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