Confusion with enron case

CFA General
#1

Hi guys i’m new here and i was just studying Enron case for my college course (Financial Statement Analysis).

While i was going through the SPE Activities of Enron. I got confused where it is stated that when enron created raptor 1 (Talon). It was partnered with LJM2 and enron made an agreement with LJM2 that Talon will not excercise any hedging activities with Enron until the capital invested by LJM2 is paid back with return which equals to 41 million. The point is Talon earned this return using put options on Enron stock. So how did it not breach the agreement? It was a transaction between Enron and Talon which previously was restricted. Can you please explain? from several literatures what i understood is : The agreement was for merchant investment hedging (i.e. enron owning other company’s investment) not for trading derivatives with Enron ( enron’s own stock)

Could you please clearify

Thanks

#2

I’m not sure I understand your question fully.

My understanding was that Enron’s SPEs, including the Raptors, Chewcos, LJMs etc. should have been consolidated with Enron as they weren’t arms length transactions, and although more stringent SPE/VIE rules came out subsequent to Enron blowing up, they clearly were considered self dealing and related party transactions that didn’t have substance and were far too thinly capitalized to hold up to a sniff test to being legitimate entities. Add to that the exorbitant $$ that these entities funneled out of Enron and into Fastow’s pockets.

#3

Maybe this document will clear your doubts

http://www.swlearning.com/accounting/brooks/enronpart1.pdf

http://www.swlearning.com/accounting/brooks/enronpart2.pdf

http://www.swlearning.com/accounting/brooks/enronpart3.pdf

http://www.swlearning.com/accounting/brooks/enronpart4.pdf

#4

I may be wrong but my understanding from your post is that the restriction prevented Enron from being a counterparty on a transaction that was to hedge risk (it is unlikely that Enron was the counterparty on trades of Enron options).