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Pratap Ravindran

Enron allowed different customers to sit in on the same trade. Thus, they had to go through Enron even when trading with each other. The result? An awesome market share.

MUMBAI, May 2

THERE's cherry-picking and then there's cherry-picking.

Ask UBS Warburg Energy, the North American power and natural gas trading business of the Swiss-owned, wanna-be global bank, UBS Warburg, which bagged EnronOnline at an auction on February 11 in a no-cash deal - just one-third of future profits (if any) to Enron's creditors.

The purchase of the B2B marketplace which lay at the very core of Enron's now distressed business was the follow-up to a deal struck by Enron and UBS Warburg, the investment banking group of UBS, AG, on January 15.

The deal was received with scepticism as nobody, at that point of time, was very convinced that Enron had, in fact, been a good energy trader.

While analysts conceded that energy trading accounted for the bulk of Enron's $100 billion revenue in 2000 and that the business was, indeed, a profitable one, they were quick to point out that the profits were extremely volatile and that the company had smoothed out its profit stream by suppressing trading spikes and dips through swap deals which allowed it to shift payments forward or backward, depending on when it wanted to recognise income.

Further, an examination of Enron's numbers revealed that its energy trading earnings were based on mark-to-market accounting. That is, its energy traders booked all projected profits from the supply contracts in the quarter in which they were made - even if the contracts spanned several years, sometimes as many as 24 years!

Mark-to-market accounting, in combination with such exotic contracts, essentially meant that Enron could - and did - inflate profits by factoring in off-the-wall price forecasts.

And then again, analysts were not entirely convinced that a stodgy bank could rein in Enron's wild traders who were comfortable with the company's high-risk, anything-goes culture and accustomed to earnings in excess of $ one million a year. One media report put Enron's willingness to take a risk in a trade at a stunning $66 million - as against $12.2 million at Dynegy and $16 million at Duke Energy.

Given UBS Warburg's risk management practices, the analysts were pretty certain that a culture clash would occur - media reports abounded of traders "exploring all their options" even after signing contracts with UBS that prevented them from leaving Enron for an undisclosed period.

Mr Michael Hutchins, global co-head of credit fixed income at UBS Warburg, had no such doubts. In fact, he issued a statement: "We're confident in the people that we've hired... "

However, analysts are now beginning to confess that UBS Warburg may have seen something in Enron that they did not.

They are now paying attention to what Mr John Costas, the Chief Executive of UBS Warburg, who knows his way around electronic markets, having helped in the automation of trading in Government securities over ten years ago, has to say about the whole deal.

According to Mr Costas, Wall Street never got around to figuring out how clever Enron had been in its trading.

Citing one example of Enron's trading savvy, he points out that Enron allowed different customers to sit in on the same trade.

Thus, they had to go through Enron even when trading with each other. The result? An awesome market share. And then again, Enron, by sitting in on various deals, culled critical information which allowed it to do some deals on its own.

This practice, incidentally, is entirely legal in the US energy trading markets.

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