It looks as though Enron will set a record as the biggest bankruptcy in U.S. history. Regardless of the final details, it is pretty clear that anyone who had stock in the company can write off most of their investment. So can some people who never bought Enron stock.
And that quirky truth illustrates how “institutional innovation” in finance markets can change the rules of the game and tip accepted wisdom on its head in a short time.
A Minnesota reader bought 100 shares in an Oregon electric utility nearly 20 years ago. For almost a century, utilities were a safe, low-risk alternative for stock investors. With government-sanctioned monopolies and state-regulated pricing that virtually guaranteed modest but steady profits, utility stocks were nearly as safe as buying bonds. That is what the reader sought—safety for capital and moderate, but nearly risk-free, dividends.
A few years ago, however, Enron purchased this reader’s little regional utility. He received Enron shares to replace his original utility shares. Enron was off on its wild steeplechase to become the world’s largest energy firm. Now, in a few short months, it has imploded.
And our Minnesota investor, who sought safety, is left holding Enron shares that are worth essentially nothing.
The irony is that Enron sold the Oregon utility again as part of its frantic search for cash to build another story or two in the house of cards it was constructing. That utility apparently continues to generate modest, but regular, profits for its new owners.
What can one say? The old lesson of “caveat emptor” certainly applies. When you buy a share of stock you either have to follow the affairs of your company closely or risk losing your investment. On the other hand, this Minnesota investor acted as prudent people did for decades. If you wanted to take on risk, you invested in riskier, more volatile stocks.
If you were risk-averse, you bought well-rated utilities. If you did, there was no need to pore through the business pages every day to ensure that your staid, mousy little gas or electric was behaving itself. Our reader is a sadder but wiser investor.
Anyone else who owns shares should heed his experience. In this age of mergers, acquisitions and de-acquisitions, a stockowner must behave like the parent of a teenager. Every evening when the news comes on you must ask yourself, “Where are my stocks right now and what sort of company are they keeping?”
The national media have emphasized how Enron employees who held company stock in their 401(k) are out of luck. If you have a 401(k) and it contains stock in your employer, take heed and diversify.
There are at least two other lessons for Minnesotans in the whole Enron debacle. First, The St. Paul Companies may have to pay out more than $80 million, after tax, in surety bonds posted to guarantee deliveries to Enron customers and to cover claims against Enron directors and officers.
Given the swarms of trial lawyers reportedly backed up trying to land at the Houston airport, that second category is probably a sure bet.
This local insurer essentially learned the same lesson that anyone who ever co-signed a promissory note or posted a bail bond for a ne’er-do-well in-law. Be very careful about guaranteeing someone else’s actions.
The St. Paul is well capitalized and well managed. Taking occasional big hits is what the insurance business is all about. But you can also bet that The St. Paul and other commercial insurers who post such surety bonds, or directors’ and officers’ liability policies, are looking at their risk assessment procedures to minimize such hits in the future.
Finally, some people from my corner of Minnesota, the windswept Buffalo Ridge, wonder how the Enron bankruptcy will affect its large Enron wind energy project headquartered in Lake Benton.
I don’t know any details, but my guess is that this initiative won’t be affected in any substantial way.
This is the sort of operation that is easy to sell to some new owner as a package.
This is part of why the legal remedy of bankruptcy exists. Bankruptcy allows productive assets to be conveyed to solvent new owners with minimum disruption to society as a whole when the original owners hit financial reefs.
Few people who own shares in a bankrupt firm or are its creditors see the silver lining in a bankruptcy filing. But for society as a whole, it is important that windmills keep turning and gas keeps flowing, regardless of the inanities committed by executives in Houston or elsewhere.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.