Ken Rice To Receive Architecture Award

The invitations have been sent. The flowers are ordered, the final headcount turned into the caterers. Everything is ready for the Greater Houston Preservation Alliance dinner at the River Oaks Country Club (1600 River Oaks Blvd) at 7pm on February 1, 2008. If you have your ticket ($300 per person), you can walk right in, take your seat, and get ready for an evening of great architectural preservation.

One of the historic homes up for the Good Brick award is located at 1704 Kipling St. in Winlow Place, originally built 1930.

However, the man who is up for the award will not be at the gala. Ken Rice was sentenced to 27 months in prison for securities fraud related to the Enron collapse.

Architect Donna Kacmar describes the 1704 Kipling St. renovation on her website:

The house had stood vacant for over 20 years when the new owner invested in the area. The shiplap interior wall siding was removed and milled and then used to replace the oak flooring on the first floor that had been destroyed by termites. Some of the cabinet pieces were fabricated from the old door jambs. The existing doors and door hardware was refinished. New windows, new building systems, all new finishes, and new landscaping complete the transformation of the duplex into a single family residence with four bedrooms, four bathrooms and three living spaces that respects its past and its place in the neighborhood.

And the pictures do show a pretty little duplex:

Godspeed, Ken.

If You Read Suzanne Barlyn Read This Now

I normally do not rebut every anti-Enron story to come down the pike but this story by Suzane Barlyn at The Street has gone so far across the line that I feel I must speak up.

Suzanne begins her article thus:

As a former Enron shareholder, I’m not expecting a huge windfall from a pending class-action suit against the company.

But I intend to claim every last cent of the paltry sum that may be awaiting me.

Let me be clear: I have no issue with litigant/plaintiffs accepting monies that they might have won in a just lawsuit. However, the Enron lawsuit that I believe Ms. Barlyn is speaking about is the one in which its primary litigant, Bill Larach, is readying himself for prison for securities fraud after a guilty plea. Larach is deserving of a post of his own to detail all the various dirty tricks he’s participated in, but it will have to wait.

What grinds my gears about Ms. Barlyn’s statement is the assumption (which many people share) that she’s due something even after the company collapsed. Investments are called investments and not savings accounts precisely because they could make money or they could fail, and the investor could lose money. Barlyn knows this; I refuse to believe she’s in an imbicile with no investing experience. Yet her comment reflects a strange entitled quality that exists in otherwise smart people when discussing Enron.

More than six years have passed since Enron, the former energy-trading giant, filed for bankruptcy, costing its investors as much as $60 billion in market value. The debacle is a historical milestone for American business that’s now synonymous with corporate corruption and fraud.

Agreed. But any thoughtful examination of the facts shows the Enron was not, in fact, corrupt. Because the corruption opinion was formed and entrenched so quickly, there is a lot of hard work to be done to correct those impressions. But I dislike when journalists take these facts for granted.

My husband, Ben, and I owned just a tiny fraction of the overall pot — 50 shares, once valued at about $3,000 — but we’re filling in every line of a claim form that arrived this month in a continuing class-action suit arising from Enron’s collapse.
Maybe, somewhere at the end of this tunnel, we’ll find a check totaling about $350 — a figure based on the average $6.79 per share distribution that shareholders who owned common stock are likely to receive.

What? With such a minuscule amount of money at stake, why the animus? Why the need for redress?

Last week, the U.S. Supreme Court refused to hear a $30 billion case filed by Enron shareholders against Merrill Lynch, Credit Suisse First Boston, and Barclays Bank, which, they allege, schemed with Enron by entering partnerships and transactions that helped the energy giant show revenues while it was actually incurring debt.

The Supreme Court’s refusal to hear the case means more empty pockets — and fewer deep ones — for shareholders. It’s also motivation to grab whatever we can right now.

Let me just take a wild stab in the dark here and assume that Ms. Barlyn would be full of righteous justification if the SCOTUS refused to hear a review of Roe V. Wade? Or since Ms. Barlyn has such trust in the journalists who assured her that Enron was corrupt, why is it so difficult to put trust in the Supremes who are, supposedly, impassionate moderators of these matters? Believe me, I have my own issues with the Supremes, but I rarely believe that they are attempting to screw any specific group of people with their judgements.

Sure, it would be a lot easier to toss the packet of legal papers in our recycling bin and walk away from the hassle. But that would only lower the percentage of investors who are enforcing their rights under the settlement.

A low percentage of claims, I think, sends a message that righting the wrongs committed by Enron executives, Arthur Andersen (the company’s former auditor), and a slew of financial services firms (including JP Morgan Chase and Citigroup who had a hand in peddling the securities, just doesn’t matter anymore.

Maybe they never happened in the first place. I realize its a difficult position to take, but I think if you review the facts, you begin to see a picture emerging of a company that really was not corrupt. But I’ll put that aside for a moment. What does it matter anymore, Ms. Barlyn? Why do you feel so directly victimized by Enron, Arthur Andersen, and the banks? Particularly since you owned less than one half of one half of one percent of the shares? I’m curious if she’d accept a hypothetical situation in which I’d send her a check for $350 instead of her filing a claim. I am betting no; she would say it’s not the money (obviously); it’s the principle of the thing. She wants to punish the company (which doesn’t exist anymore). She wants to ‘send a message’.

Michael Donnelly, a principal in Donnelly Steen & Co. Wealth Advisors in Marlton, N.J., says several of his clients and friends have also received the lengthy Enron class-action paperwork.

“We all have a responsibility to participate solely based on the message that a united front might indicate to other companies in the future who have a moral and ethical dilemma and hope that they make a wiser decision,” he says.

Right. Okay.

Donnelly and I share the same views about participating in most other class-action suits — they’re typically a waste of time with few meaningful benefits to the so-called “injured class” they purport to protect.

This is, I think, the only thing I’ve agreed with thus far.

[Ms. Barlyn describes class action suits against Toys R Us and Netflix but I didn't see any relevance to the discussion of Enron so cut it.]

But Enron is far different from these types of claims, which are seemingly devised by plaintiffs’ attorneys for their own benefit. The chain of fraud that soaked investors and had a catastrophic impact on thousands of jobs and employee retirement plans permeated the company’s C-level, including the office of Kenneth Lay, Enron’s now deceased former CEO.

That is a drastic statement. I would challenge Ms. Barlyn to tell me what fraud she’s talking about here, because I really don’t think she knows.

As Donnelly, the financial adviser says, “Each and every shareholder must participate, and complete the paperwork in order to try to recapture a small piece of what so-called ‘trusted business executives’ and Wall Street banks bilked them out of.”

He’s right.

Red meat words, but okay.

At worst, my family can fund about one-and-half weeks of groceries with my $350 distribution from the $7.2 billion Enron settlement fund. At best, we can buy groceries and have a small voice in the aftermath of an historical event that continues to transform corporate governance standards in America.

What voice? What are you saying by accepting the $350? I really don’t know.

The average distribution per share of common stock is likely to increase from $6.79, based on the percentage of shareholders that don’t file, according to Patrick Coughlin, the San Diego-based lawyer who represents the Regents of the University of California, lead plaintiff and an institutional investor who claims to have lost $145 million in the Enron disaster.

Lawyers stand to walk away with the most cash in the Enron aftermath — and just about every other class action suit. Coughlin’s firm has requested just less than 10% of the $7.2 billion settlement fund (which has been accruing additional interest for several years). That would be more than $700 million dollars, off the top of the fund, if the court approves.

Our approximate $350 check may pale in comparison.

But it’s still our cash and we want it back.

That’s the issue. It’s not your cash. It was an investment in a company. Did you read the prospectus? Did you read any of the 10ks or 10q forms? If you claim fraud now and believe that the company was bad, bad, bad and will ‘learn something’ if you and your fellow claimants actually take the paltry amounts, then do you likewise believe you can ‘learn something’? Or do you feel that you’re a victimized aggrieved party in need of redress, with no responsibility at all for your own investment choices?

The Power of Myths

The most excellent Tom Kirkendall at Houston’s Clear Thinkers has a great article on the power of myths. Kirkendall is as pro-Enron as I, and I adore his fuzz-free posts on the subjects. Definitely worth checking out.

The Subprime Mortgage Crisis Has Nothing In Common With Enron

One needn’t google ‘subprime mortgage and Enron’ to see examples of the comparison; they are floating through the culture like germs. The comparison reached a tipping point when former SEC chairman Arthur Leviit warned that the write-downs were just beginning and that, “as with Enron, banks failed to disclose in their balance sheets the special purpose structures which held subprime debt.”

Journalists and bloggers immediately attached themselves to the ideas that: 1.) the subprime housing crisis has something in common with Enron and 2.) Enron failed to disclose their special purpose structures in their balance sheets. Both of these are false, and as a premiere market executive, Levitt should know better. For the record, Enron’s special purpose entities were fully disclosed in their balance sheets, as well as 10K and 10Q forms. This is simply not debatable.

But because Enron is the great-grandaddy of business scandals, it is easy (and lazy) to accuse the former energy company of all manner of crimes, and to compare it to current roblems as a point of reference.

Either one believes that Enron was corrupt and it slid into bankruptcy under the weight of its own malfeasance, or you believe that market forces were at work that disadvantaged Enron. Which is it for the housing crisis? Are all mortgage companies corrupt? Or is there a market force at work here causing a sort of spiral effect? If adjustable rate mortgages adjust out of the borrower’s ability to afford, the borrow defaults on the mortgage, the mortgage company writes it off with a handsome pay-back from the federal government. Unlike the mortgage industry, Enron’s business had no backup. In the waning days of Enron, when Ken Lay called his friends in the Administration, nobody was willing to help. There was no ‘federal oil and gas marketing company’ for them to look to when things went awry.

Mortgage companies buy personal debt. Enron was a gas marketer. Two entirely different business models were at work. While Enron’s business involved hard assets, credit, trading, retail and wholesale products, the business of lending is … well, lending. Mortgage companies use consolidated capital to make loans to individuals it believes will pay the money back with interest, thereby making a profit. When that fails to happen, nothing much happens; they simply sell the bad loan back to Fannie Mae, Freddie Mac, or Ginnie Mae. The mortgage companies then recoup their losses.

Never in their wildest dreams would Ken Lay or Jeff Skilling imagine snookering the public so flagrantly.

The subprime market is risky on its face. Mortgages issued to those a company knows and in some instance actually targets should be intelligently hedged to protect itself from the good chance that the bad loans will default. That does not seem to be case. Where Enron hedged, mortgage companies only prayed.

In January 2008, the chief accountant of the Securities and Exchange Commission, Conrad Hewitt, blessed a banking-industry plan to modify thousands of troubled mortgages to address concerns over subprime mortgages. The ruling was met with relief by homeowners eager to hold on to their homes, and it was also cheered by banks who would rather collect on the debts than write off a default.

Hewitt assured auditors, regulators and the banking industry that he would not object to continued off-balance sheet treatment for securitized loans, even if the banks that supposedly sold all rights to the loans are now changing their terms.
This is the central principle at the heart of securitization. The loans have been sold to investors. By allowing a change of terms, it risks undermining both legal and accounting claim that banks no longer control them.

“The basic underlying principle…is that assets transferred to a securitization trust should be accounted for as a sale, and recorded off-balance-sheet, only when the transferor has given up control, including decision-making ability, over those assets.” If the bank still effectively controls the loan, wrote Hewitt, then it can’t use off-balance-sheet accounting.

This brings up another comparison to Enron. Specifically: the Nigerian barge deal, in which Enron sold its interest in two Nigerian barges to Merrill Lynch, and which the government contends was fraudulent. The case is still being litigated. The government contends that it was not a ‘true sale’ because Enron allegedly assured Merrill Lynch that Enron would buy back its interest in six months and that Merrill Lynch would not lose money. The fact remains that while the barges were under the control of Merrill Lynch, Merrill Lynch would be liable for the loss of the barges if, for instance, they’d sunk, caught fire, or met with pirates. Ostensibly they would also be entitled to any profit made by the barges while in its control.

Do we really have to ask: what is ownership? Apparently we do. Since banks are exerting the right to control the terms of loans they’ve already sold, they are no longer the bank’s. Trying to re-write the terms now seems too little, too late. The origin of the problem was the mortgage lender who looked at the assets to debt of potential buyers, saw the fact that the buyer could not afford the house, but approved the loan anyway.

Banks chuffing off these deliberately-made bad loans, even in the face of all the evidence demanding prudency, seems a much more deliberate act of fraud than anything Enron might have done.

Enron Comparisons Incorrect

If you read an article about the subprime mortgage crisis, you will likely find a comparison to Enron. Forget the fact that the two have nothing in common; the impulse is to compare Enron to every bad thing that comes down the pike. Today’s example is from The Street. The CEO of Sallie Mae uttered a profanity during an analyst call and voila!, they are the next Enron:

Albert Lord apologized Wednesday for using profanity on a conference call with analysts in December, as he met them anew on a call to discuss the student lending giant’s swing to a fourth-quarter loss.
…

“My closing comments were offensive,” Lord said on Wednesday, after acknowledging that he was not providing adequate answers to questions from analysts on the December call. “They were not meant to be my closing comments.”

The offensive comments were made after William Kavaler, a managing director of the French bank Societe Generale, pressed Lord repeatedly for insights about the interest in securities backed by Sallie Mae loans.

“We’re trying to figure out what your stock is going to be worth, and you’ve got to give us some guidance, you’ve got to give us some numbers,” Kavaler said.

After referring Kavaler to Sallie Mae’s investor relations contact, Lord cut the call short and said, “No questions. Let’s get the [expletive] out of here.” The episode provided Wall Street with an eerie reminder of obscene comments made to analysts by Enron’s Jeff Skilling during the energy company’s meltdown in 2001.

Let’s get something straight, right here, right now. Jeff Skilling’s comment was improper, but it must be understood in context.

Analyst, Richard Grubman, a shortseller who may or may not be one of Chanos’ goons, had asked Jeff Skilling in the past to issue the balance sheet with the cash earnings. Skilling had explained that the balance sheet is not issued with the cash earnings since the two sets of data were calculated differently and the numbers came in at different times.

Transcript from the first of the two calls in which he asked the same question:

Q4 2000, Earnings Release conference call, held January 22, 2001;

Richard Grubman: ‘I was wondering if you could tell us what assets and liabilities from price risk management activities were at year end, both current and non-current, so those four balance amounts. Thank you.’

‘I don’t have that information with me.’

Paula Reiker [?]: ‘The question had to do with price risk management and that comes out with the balance sheet, which will be disclosed in our 10K. In terms of impact on overall cash flow, we would expect, you know, for the full year 2000 that earnings would roughly equal cash flow.’

Richard Grubman: ‘I guess I don’t understand why we can’t get sort of seminal balance sheet data now.’

Mark Koenig: ‘Well – this is Mark Koening. And Rick Causey is here, our accountant. We have not finalized all of the balance sheet data and we’ll disclose that as we put that together with the associated notes that are important to accompany that. That’s the reason.’

‘OK. Thank you.’

The second call, in which the same question was asked yet again, Skilling lost his temper and called the guy an asshole. Was it the appropriate response? Maybe not. But the fact that he uttered the A word to a guy who clear was being a jackass has become some sort of proof that Things Were Not Well At The House of Enron. That premise can be debated, but what I find so interesting is that Enron was so iconic it has become a metaphor for everything.

Retrial of Merrill Lynch Execs in Enron Case Delayed

AP Via KVIA.com:

A federal judge in Houston has delayed next week’s retrial of two former Merrill Lynch executives who want the case dismissed.

Their 2004 fraud and conspiracy convictions connected to an Enron deal were overturned.

Jury selection was set for Monday in the retrial of Daniel Bayly and Robert S. Furst.

But the judge today delayed the trial after Bayly, Furst and a third executive set for retrial later filed an appeal with the 5th U.S. Circuit Court of Appeals.

The three were convicted of conspiracy and wire fraud for helping push through Enron’s sham sale of power barges off Nigeria.

The deal was struck to bolster the earnings of Enron’s energy division.

The 5th Circuit in 2006 threw out their convictions after finding fault with the government’s erroneous fraud theory known as “honest services.”

Has the AP ever heard of ‘innocent until proven guilty’?

The three were convicted of conspiracy and wire fraud for helping push through Enron’s sham sale of power barges off Nigeria.

Really? Because I thought their convictions were overturned; in fact, the article says so. You can’t have it both ways: either they are convicted or they are not convicted, and right now they are NOT convicted (hence, the new trial). And the idea of a ‘sham sale’ would necessarily rely on the conviction of people for that crime.

But nevertheless, the Task Force’s wheels have come off every Enron conviction and I really don’t see this reaching some awful (unjust) end.

Best Stock of 2008: Enron

The U.S. District court in Houston will be paying Enron investors an average of $6.79 a share out of the $7.2 billion settlements fund. While it’s a far cry from August 23, 2000 high of $90.75, it is more than even the Enron Credit Recovery Corp believed it would distribute as of the summer of 2006.

$6.79 isn’t a market screamer, but it’s more than shareholders of, say, Qwest had at close of business Friday.