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RealMoney.com : James J. Cramer


Untying Enron's Partnerships Knot

By James J. Cramer

12/21/2001 11:12 AM EST

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Click here for the latest from James J. Cramer

Sometimes I get emotional about this stuff. I can't help it. When you have people who worked for Enron (ENE:NYSE - news - commentary - research - analysis) and lost everything, and top dogs who cashed out, I keep thinking that Scrooge is alive and well and living in Houston, or Rio, or wherever the bad guys went after they destroyed Enron.

I watched that whole hearing on C-SPAN the other day, the one where people from Enron talked about losing their nest eggs. I know that was political theater for some. I also know it was mainly Democrats asking the tough questions. And I'm aware that Democrats are making the biggest stink about what happened at that company.

Worse, some Republicans, including my CNBC partner Larry Kudlow -- a very smart and a very good man -- genuinely believe that market forces brought the company down. It's as if the destruction of Redy Kilowatt, not the revelation of $18 billion of debt in off-the-books partnerships, sunk the company.

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Just Trust Us? No Thanks

Of course, that's simply not true. Ideology in the face of homework cannot stand. Enron famously didn't directionally trade, a term of art from my business that means the company was historically market neutral.

It didn't care which way the kilowatt went. In fact, if my opponents, who argue that this is a story of a company's management that simply took the wrong side of the trade, are right, then we have still one more set of lies to deal with.

If the Republicans want to have fun with this case, they should resurrect Hillary Clinton's old commodity-trading records, the ones that showed she never made a wrong move. They're pertinent because Enron apparently never made a wrong move, either. But in Mrs. Clinton's case, someone else did: The bad trades had to get stuffed somewhere, because no one's right all the time.

One Possible Explanation

If you ask me what happened, it is this: Enron kept the good trades and off-loaded the bad trades to these partnerships. They did just enough good trades to make the Street's numbers. Enron was, in the end, a hedge fund, and any good hedge fund manager would tell you that you should only run one fund at a time. That's because the temptation to jam bad trades into one account to favor the other is just too great.

That may sound sinister, but it's the most innocent scenario I can think of why these partnerships might have been hidden. If they were kept hidden to preserve a credit rating, then I would tell you they were also kept hidden from the audit committee on the board. I say that because the audit committee was made up of people who knew the consequences of too much leverage.

Wendy Graham, for heaven's sake, was the head of the Commodity Futures Trading Commission. Many of her inquiries concerned overuse of leverage. Two other members were esteemed accountants who would know in a flash that ratings downgrades would come if anyone knew how much debt there was.

Finally, the most damning one -- and the one that I think still hasn't been talked about enough -- is the possibility that these partnerships were used to run ahead of utility companies that were buying and selling power on Enron's trading system. As Enron's system was like a Nasdaq trading system that showed both bids and offers, it is possible that corrupt executives had this partnership information about where buyers and sellers were going.

California Dreamin'

And if you want to get really Lex Luthor-like about it, corrupt execs could have cornered the market in electricity, driving it up to unbelievable levels in, say, California, and could have told other power companies to keep electricity out of the state to let prices go higher.

Did that happen? Who knows? I know that Enron would go to its grave arguing it had nothing to do with the greatest short squeeze of all time, the California energy crisis, if it weren't already in its grave.

Maybe the truth about these partnerships will come out, maybe it won't. But simply put, Enron's destruction had nothing to do with the markets' drop and everything to do with chicanery. If executives knew that things were unraveling and they were bailing, I am confident that the Justice Department will get some scalps here, maybe some big ones.

I suspect that the underlings are already willing to give up their bosses, to avoid jail time for simple fraud. The question might turn out to be, who is big enough and how high did it go?

Everyone's saying it could take years. That's wrong. I think this one's going to be easier to crack than most because there are so many people involved. You turn one, you might be able to bring the whole edifice down.

But without guilty pleas, it will be tough because the stuff that was done will be too hard for most juries to understand. No matter what happens, this story's not going away anytime soon.


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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. Check out Cramer's Personal Portfolio, and to find out what trades he'll make before he makes them, sign up for Action Alerts PLUS. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jjcletters@realmoney.com.
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Dow Jones S&P 500 NASDAQ 10-Year Note
10,501.05 1,114.11 2,212.10 35.46
Oil *
71.77
UP
29.55
UP
7.70
UP
21.79
UP
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10 Yr
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SPDR Gold
110.24
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+0.70%
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+0.17%
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