Thursday, November 22, 2007

Enron's smartest guys, crooks, victims and other saps

A book about Enron called The Smartest Guys in the Room has got me trying to figure out who they were, and who were the crooks, victims and other saps in the Enron debacle.

Shareholder and debt holder losses in Enron were tens of billions of dollars and overwhelm other numbers mentioned here. One measure of shareholder loss could be Enron’s highest share price multiplied by the number of shares outstanding, but that would be much greater than the actual aggregate amount that Enron received from all the shares of stock it issued, and it would include gains that shareholders obtained from stock that was bought at one price from Enron and that ran up to the ultimate highest price. Because the total amount of shareholder and bondholder losses by any measure dwarfs other numbers, let’s just put it in the $50 billion to $75 billion range.

Andy Fastow was manifestly a lead Enron crook. He masterminded the hundreds of transactions that were set up between Enron and artificial second parties that underlay the massive accounting fraud, and Fastow engaged in criminal self-dealing by having financial interests in those second parties. The Smartest Guys in the Room indicates that Fastow’s take from his Enron involvement was in the $60 million to $100 million dollar range. Fastow had two underlings who were also crooked and similarly profited. The crookedness of Ken Lay and Jeffrey Skilling is yet to be determined. Their take from Enron was mainly from their compensation and stock options received from Enron. A Forbes March 22, 2002 article states that the aggregate compensation for the top five Enron executives (which included Lay and Skilling) for the years 1996 through 2000 was more than $500 million (based on valuing stock options at the time of their exercise).

The auditors Arthur Andersen were complicit in the fraud. Arthur Andersen’s fees from Enron for the year 2000 were $52 million, and Arthur Andersen’s total fees from Enron may be estimated accordingly, maybe $500 million.

Recoveries of Enron stockholders and bond holders from Enron executives and from Arthur Andersen would seem likely not to exceed $2 billion in total.

Many, many investment bankers were complicit in and aided and abetted Enron’s fraudulent schemes. CNN Money, January 12, 2002 online, says, “In underwriting fees alone, the Wall Street firms earned $214 million and several million more in lending, derivatives trading, and consulting fees from Enron, the Wall Street Journal reported.” This article focuses on J.P. Morgan and further said, “J.P Morgan Chase exemplifies the complicated relationships between Wall Street firms and Enron. J.P Morgan said by underwriting bonds and providing loans to Enron, it was left with a $2.6 billion exposure once the company collapsed.” In other words, J.P. Morgan would seem to have more than a $2 billion net loss from its involvement with Enron.

Recently J.P. Morgan settled all its Enron litigation for $2.2 billion, shortly after Citigroup settled for $2 billion.

Enron was an extremely lucrative and important customer for investment banking firms in Enron’s heyday of 1990 to 2001. The hundreds and thousands of employees of these firms who worked long and hard on Enron transactions and who were complicit in Enron’s fraud did so in order to receive significant amounts of compensation as a result of doing that work, not to mention compensation received by senior management associated with fees that their investment banking firms received from Enron.

In 2002, J.P. Morgan had total net revenue of about $27 billion, that included about $2.8 billion of underwriting fees. Its total compensation expense for 2002, that included the compensation of the above employees and senior management, was about $10.5 billion, and its net income for shareholders was about $1.5 billion for 2002. Total stockholders’ equity at the end of 2002 was about $45 billion.

How then did the stockholders of J.P. Morgan fare from the business J.P. Morgan did with Enron. If the above figure of $214 million of Enron underwriting fees for all Wall Street firms (seeming for all years) is correct, J.P. Morgan’s share might have been in the $100 million range, and some portion of that went to pay the compensation to J.P. Morgan employees and senior management for their Enron related work. On top of that, J.P. Morgan shareholders seem to have a taken a very sizable hit from the $2.6 billion debt exposure referred to above, meaning, after that, the J.P. Morgan shareholders suffered a significant loss from J.P. Morgan’s business with Enron. Then, further on top of that, the $2.2 billion settlement that J.P. Morgan just agreed to will come out of the hide of J.P. Morgan shareholders.

In terms of saps and victims in the Enron debacle, J.P. Morgan’s shareholders seem to qualify. The way it looks to me is that the J.P. Morgan senior management and the investment banker employees, with custody of some $45 billion of J.P. Morgan shareholder equity, went whole hog exploiting the same (including taking on Enron debt) in order to play at the Enron game to obtain underwriting fees and other revenues for J.P. Morgan that justified large amounts of compensation and bonuses for themselves. When the longer term risks materialized (in the form of the Enron debt exposure that J.P. Morgan took on for itself in large part in order to get underwriting business, and the large settlement J.P. Morgan has agreed to pay for the complicity of senior management and its employees in the Enron fraud), the J.P Morgan shareholders were left holding the bag.

In short, I would say, count J.P. Morgan shareholders, along with Enron shareholders and bondholders, as saps and victims in the Enron debacle, possibly to the tune of as much as $4 billion.

Andy Fastow is going to jail and will probably lose his entire take from the Enron fraud. Ken Lay and Jeff Skilling may also go to jail and are also likely to lose much of their takes from Enron. Arthur Andersen has been destroyed by Enron. When all the dust settles, you can’t exactly label any of foregoing as really smart guys, and maybe just as dumb crooks, in the Enron story. Senior management at J.P. Morgan, and the employees there who did Enron work probably cleared $50 million or so in compensation from Enron, and they may have stuck the J.P. Morgan shareholders with upwards of a $4 billion loss, and will keep on their merry way. That’s doing pretty good, and probably puts them in the smart guy category. These guys, however, took some risk in participating in the Enron fraud the way they did, a couple of them may actually go to jail, and given the modest $50 million they may have cleared for what they did, they cannot be put in the smartest guys category.

No, smartest guys in the room award has to go to the plaintiffs’ lawyers. The plaintiffs’ lawyers’ are the enablers of the bad guys at J.P. Morgan who were complicit in the fraud, made off with some of the loot, and stuck the J.P. Morgan shareholders with the Enron bad debt and further stuck the J.P. Morgan shareholders with the $2.2 billion settlement liability for the shenanigans of J.P. Morgan’s senior management and other employees who did the Enron work.

How much of the $2.2 billion extracted from the hapless J.P. Morgan shareholders will the plaintiffs’ lawyers get? $200 million, $300 million? $500 million? Their ideas about transparency for them may keep that hidden. Whatever the fee is that they get for engineering a $2 billion transfer from one bunch of victims and saps to another set of victims and saps, I think you will agree the plaintiffs’ lawyers clearly belong in the smartest guys category.

Besides the amount of the take of the plaintiffs’ lawyers for socking it to the J.P. Morgan shareholder saps, do you know what especially puts the plaintiffs’ lawyers in the smartest guys category?

The answer is: They did it all legally. No risk for them of going to jail; no risk for them of being accused of aiding and abetting fraud. Hell, they weren’t in the room when the shenanigans were going on, just lurking outside, knowing they could count on tricks and shenanigans somewhere, and ready to swoop when saps came in their sights.

Mind blowing fabulous, isn’t it? Absolutely smartest guys, in or out of the room.

And, oh yeh, the Enron and the J.P. Morgan shareholders is not a one time shot for the plaintiffs’ lawyers. There’s also Enron and the Citigroup shareholder saps, WorldCom and who knows what investment banking firm shareholder saps, and HealthSouth and who knows what investment banking firm shareholder saps.

Absolutely smartest guys, biggest take, all legal.

The other guys, Fastow, Lay, Skilling, Arthur Andersen, kind of stupid; and J.P. Morgan senior management and employees, only pikers.

Just blows your mind.

No comments: