Thursday, October 29, 2015

"Enron Revisited: Highlights from Bear Stearns Research"

We have quite a few posts on Enron but one of my faves is from the Enron emails. From our January 2009 post "Fun With Enron Emails":
Date: 01/09/2002 10:26 AM
To:, Randy G. Kruger Jr.@ANDERSEN WO,, 
Subject: Lunch
OK you slackers (excluding Shaw), I'll give you another chance to respond.
Lunch this week or next, let me know what's good. If meeting after work is
better for you, let me know. Certainly all of you can stop shredding
documents for 5 minutes to respond.

*******************Internet Email Confidentiality Footer*******************
Both Andrews-Kurth and Baker & McKenzie were Enron attorneys, Andersen was the accountant.
Good yucks, huh?

From the CFA Institute's Enterprising Investor blog:
A fantastic piece of financial market history resurfaced this week. 
Somebody found a 26 January 2001 research note on Enron from Bear Stearns and posted it on Wall Street Oasis (WSO). 
The Bear Stearns team initiates coverage on the stock (then trading at 79 3/4) with an “Attractive rating” noting the “unlimited potential in broadband services” as just one of many opportunities. 
So there’s no way you can’t keep reading, right? I couldn’t help myself either.First, you have to just take a second and think about what this company was to the world at the time. Today, it’s hard to remember Enron as anything but a classic example of hubris and fraud. But the market didn’t always know that. 
“Already an established leader in the natural gas industry, Enron is moving rapidly — through revolutionary communications systems and interfaces — to become the world’s preeminent energy and commodities marketer, high-density Internet distributor, and distributed energy leader. We believe that Enron should be compared to leading global companies like GE, Citigroup, Nokia, Microsoft, and Intel, and that its valuation reflects this eminence.” [All emphasis mine.] 
And take care to note the trajectory that the market saw. Frauds can seem like the hottest ticket around. Remember: People called up Bernie Madoff asking to invest with him and he turned a lot of them down. In the market’s perception, Enron was on fire: 
“$98 PRICE TARGET. Our Attractive rating and 12-month price target reflect Enron’s highly successful existing businesses, customer relationships and contractual agreements; its advanced online systems and business models; and its valuation relative to potential financial results (based on both a conservative DCF and comparables analysis).” 
Just a quick tangent here. When I was a kid, my dad taught me the meaning of the term “conservative basis” as it’s commonly used on Wall Street....MUCH MORE
One other post that stands out is November 2007's "Wall Street Learned the Lessons of Enron (Unfortunately)":

By now, Climateer Investing's loyal and long-suffering readers know of my morbid fascination with stock frauds in general, and Enron in particular. One of the earliest* looks at this perversion of capitalism and markets was:

Is Enron Overpriced?

It's in a bunch of complex businesses.
Its financial statements are nearly impenetrable.
So why is Enron trading at such a huge multiple?

By Bethany McLean
March 5, 2001
NEW YORK (FORTUNE) -- In Hollywood parlance, the "It Girl" is someone who commands the spotlight at any given moment -- you know, like Jennifer Lopez or Kate Hudson. Wall Street is a far less glitzy place, but there's still such a thing as an "It Stock." Right now, that title belongs to Enron, the Houston energy giant. While tech stocks were bombing at the box office last year, fans couldn't get enough of Enron, whose shares returned 89%. By almost every measure, the company turned in a virtuoso performance: Earnings increased 25%, and revenues more than doubled, to over $100 billion. Not surprisingly, the critics are gushing. "Enron has built unique and, in our view, extraordinary franchises in several business units in very large markets," says Goldman Sachs analyst David Fleischer....MORE
Now Bethany is back with

Uh-oh. It's Enron all over again

November 14 2007

(Fortune Magazine) -- Start with the headlines about off-balance-sheet entities known as structured investment vehicles, or SIVs (or sieves, as some wags are calling them). As Gertrude Stein never said, an off-balance-sheet vehicle is an off-balance-sheet vehicle is an off-balance-sheet vehicle.

Just as Enron's off-balance-sheet vehicles were propping up its stock price by camouflaging the company's real financial results, so SIVs were inflating the credit market by providing demand for the complex securities created out of mortgages and loans used to finance buyouts....

That was four months before JPM grabbed BSC and ten months before Lehman collapsed.