SAN FRANCISCO --
I knew Long Term Capital Management. And Enron (ENE) is no Long Term Capital Management.
That mantra, along with upbeat comments from firms such as
, plus a far-better-than-expected report on durable goods orders helped reinstate the market's upward trend Thursday. The
Dow Jones Industrial Average
rose 1.2%, the
gained 1% and the
"While Enron is a disaster, it's a very focused disaster," said Anthony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray in Minneapolis.
Unlike Long Term Capital Management, the hedge fund whose steep losses threatened to destabilize the capital markets to a degree that the
brokered a bailout in late 1998, Enron "is not fundamental to the overall macro system," Cecin said. "It's not a market problem -- it's an Enron problem."
Long Term Capital had about $1.2 trillion in notional derivative contracts at its peak and borrowing lines leveraged up to $200 billion, according to Jerry Henwick, a derivatives analyst at J.P. Morgan Chase. "I'd be very surprised if Enron compares anywhere close."
Henwick didn't have specifics on the Enron situation, but initial indications confirm his suspicions. The energy trading firm's derivative liabilities to third parties approached $19 billion at the end of September,
reported, citing figures from
Still, Enron's widely expected and seemingly unavoidable bankruptcy would be the largest in history, likely resulting in sizable losses at some of Wall Street's biggest institutions.
J.P. Morgan Chase
each have about $900 million of exposure to Enron, according to brokerage firm estimates.
Lehman Brothers said about two-thirds of Citigroup's exposure is secured, and estimated the firm would take a "maximum after-tax hit" of 10 cents a share in a worst-case scenario. J.P. Morgan has $500 million in unsecured and $400 million in secured loans, said Lehman, projecting a worst-case hit of 15 cents a share.
Among other large banks, Credit Suisse First Boston put
Bank of America
exposure at $500 million,
at $300 million and
at $50 million.
Major brokerage firms such as
are not believed to have significant exposure to Enron, CSFB reported.
But CSFB conceded that "details on bank exposures to Enron are not completely transparent" and its estimates do not reflect other obligations, including counterparty risk, which could be "significant."
The issue of exposure to Enron is so significant that Lehman Brothers felt obliged to issue a list of large-cap banks it believes have little or no exposure to the fallen energy-trading giant, including
Fifth Third Bancorp
But the bottom line is financial stocks fared well Thursday after Wednesday's bashing. Citigroup and J.P. Morgan rose more than 1% each, while Bank of America gained 3.1% and the Philadelphia Stock Exchange/KBW Bank Index rose 1.2%. The American Stock Exchange Broker/Dealer Index climbed 1.7%.
Concerns remain about smaller, regional banks, as well as other energy firms' exposure to Enron, particularly,
($100 million, according to
(less than $100 million),
($75 million) and
($50 million to $60 million). But the prevailing attitude among traders seems to be that the Enron fallout, while extensive, is containable.
James Bianco, president of Bianco Research in Barrington, Ill., suggested the Enron blowup was mitigated by loan syndications, which spread the risk among multiple lenders. "Everyone shares equally in the misery of Enron, but no one shares mightily," he said.
Long Term Capital and Enron shared the sin of
hubris, but Bianco noted the energy-trading firm was apparently not buried by a market bet, as was the case with the infamous hedge fund.
"Long Term Capital was a market story because they bet the wrong way" -- mainly on spreads between U.S. government bonds and emerging markets' debt -- and "the legions who mimicked them
also bet the wrong way," he continued. "Enron is not the tip of the iceberg-type thing."
With the caveat that there may be more "skeletons" in Enron's closet, Bianco suggested Enron is less like Long Term Capital in terms of its broader market implications and more like Drexel Burnham, which once dominated the junk bond market as Enron dominated energy marketing.
As with California's Orange County in 1994, which was forced to declare bankruptcy after its treasurer made an ill-fated venture into derivatives trading, the Enron debacle has Wall Street's bears crying wolf once again. There's been talk this week that the Enron situation shows again the precarious state of the U.S. financial markets and thus will cause foreigners to sell the dollar and Treasury bonds, not to mention stocks.
But early indications suggest otherwise: Both Treasuries and the dollar rallied in concert with stocks Thursday.
"The reality is we're back in a bull market and the market is going to act differently than it has in the last 18 months," Cecin said.
The trader repeated a
previously stated optimism and is betting "big money" that the market won't retest the September lows. Regarding others' bearish views, Cecin said that after 18 months of being drubbed, "it takes a long time for people to adjust their psyche."
Maybe so, but with the Enron case the adjustment process didn't appear to have taken very long at all.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.