March 30, 2020
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The Decline And Fall

Enron had no choice but agree to what seems to be a shotgun marriage with a rival, Dynegy, a fourth its size.

The Decline And Fall
Lay: time to play dead? Enron, the most admired company in the US six years in a row, has been consigned to the dustbin of history and business school case studies. Once the darling of Wall Street for its aggressive no-holds-barred growth, its stock was languishing at historical lows of $7.21 last week, a steep fall of 90 per cent from its peak last October, representing a notional loss of $80 billion. In the last six weeks alone, its stock plunged by over 400 per cent.

Kenneth Lay, the politically-connected chairman who counts on the United States' First as well as Second Families (Vice-President Dick Cheney) as close friends, and the acknowledged power behind 'deregulation', has faced a nightmare over the last three weeks. Following a series of stories first published in The Wall Street Journal and The New York Times, Enron's stock went into a tailspin and it never recovered. The straw—albeit a heavy one—that broke the camel's back was a $1.01 billion charge on its pro-forma statement of earnings. Subsequently, it has emerged that most of Enron's purported earnings were bogus and accounting jugglery is the most charitable explanation. The company has formally acknowledged that its audited statements of earnings for the last three years were of no consequence!

It appears that several limited partnerships (LJM and LJM2 in particular, apparently named after Star Wars film characters), in which officers of Enron had substantive financial interests, were key elements in its concocted business numbers. Enron had till now gotten way with the business equivalent of murder. To illustrate, in the matter of appointment of key regulatory figures in the US, the California power debacle in which the conservative California governor went as far as saying that nothing would please him more to see Kenneth Lay in a prison cell with a fellow cellmate greeting him with "Hi Honey, my name is Spike," and its international operations—the debacles in India, Indonesia, Nigeria etc, etc, the failures of its very expensive forays into the broadband and water businesses—were in a sense forgivable. What was unforgivable was the ultimate crime of siphoning off shareholders' money through these limited partnerships and brazenly lying to Wall Street.

With a daily decline in its share prices ($37 to $7 in two weeks), the failure of white knights to emerge (such as Warren Buffett's Berkshire Holdings, on which Enron had pinned some hope), its bonds being only notionally above junk status (trading in two weeks from 101 to 65 cents on the dollar) and, consequently, the potential collapse of its trading business where it acts as a trusted counter party, Enron had no choice but to agree to what appears to be a shotgun marriage with a rival, Dynegy, a fourth of its size. The almost overnight surrender and the fact that the final price for Enron was as low as $8 billion represents a collapse unparalleled in recent business history.

This merger, slated to occur over the next six to nine months, subject to a series of caveats, may or may not take place as there could very well be several unpleasant surprises in store. Among these are the pending Securities and Exchange (SEC) investigation (in which the Enron counsel is a former colleague of the investigating officer!), the several dozen class-action suits filed over the last three weeks against Enron, its directors, Lay and several officers as well as its auditors Arthur Andersen, and, of course, appropriate regulatory approval.

In my opinion, the key surprise may very well be the several as-yet secret limited partnerships. If these are ever made public, the reverberations throughout the US business spectrum may be too unpleasant. In any event, the consequences of these events do not appear to have sunk in in India. Given the huge, and what appears to be a very difficult-to-service debt, of $22 billion from various forays that Enron has engaged in in the last three years (raised from $15 billion the week before), it is likely a solution crafted to the needs and limitations of all parties may be feasible given appropriate spine. Spine on India's part, that is.

The terms that were proposed by Enron for a settlement of the Dabhol issue—a payment of $1.2 billion, now brought down to $850 million—are clearly unacceptable. The missile that Enron has now aimed at India has not been comprehended either by the state apparatus or the media. It rests in an order issued by the London High Court, which, inter alia, prohibits the government of Maharashtra from even opening its mouth about Enron, even in an Indian court or tribunal. There are several, in my opinion, historically unprecedented consequences of this. This craven, abject surrender of sovereignty is a result of a consent agreement the erstwhile BJP-Shiv Sena government signed a year after the fraudulent 'renegotiations'. This is a truly unpardonable crime and should be sufficient reason to send the 'renegotiators' to jail.

In any event, given a series of interests, inter alia the interests of Sharad Pawar (who negotiated the first Enron contract) and consequently the present state government, the danger that Indian financial institutions, in particular IDBI, may simply go under for lending without any due diligence to this over-invoiced project, the Damocles sword hanging over Maharashtra in the form of the London High Court order and so on, it may be in the best interests of all parties concerned to iron out an appropriate transparent agreement that has India's and the public interest at its core, a comprehensive settlement, given the effective non-existence of Enron at this moment in history.

(Abhay Mehta, is the author of Power Play, a book on the Enron controversy.)
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