BY
JOE BOB BRIGGS
UPI
January 18, 2002
|
Joe Bob Explains Enron
Let's Ask Arthur Abdul Anderson |
Here's how Enron works. It's really quite simple. Ismail is a
successful mule trader in Peshawar. Every year Ismail delivers 30 mules
to the Kabul Mule Market and gets $40 per mule.
This year, however, the Khyber Pass is full of warlord militias, so
Ismail is not sure he can drive his mules to market without losing a
mule here and there. Also, the demand for mules in Kabul seems to be
dropping. Maybe he'll only be able to sell 20 mules, or, God forbid, 15,
and then be forced to feed and water the rest of them on a money-losing
trek back home.
In other words, it's a scary market and Ismail is worried about
feeding his family.
What Ismail needs is to limit his risk with an Enron derivatives
package. First he pays $2 per mule for a Khyber Pass Derivative, so that
any mule killed or stolen by warlords will be reimbursed at the rate of
$20 per mule--half the going market rate, but still better than taking a
total loss.
Next he buys Enron Mule Futures. For $28 per contract, he guarantees
delivery of a mule in three months time. He takes 15 of these, figuring
that a guaranteed $28 mule sale is better than showing up in Kabul and
discovering that the mule buyers have been killed by stray bombs.
Meanwhile, at the Enron Mule Trading Desk in Houston, eagle- eyed
yuppies are studying the worldwide mule markets and starting to have
their doubts about those $28 delivery contracts. Mule use is dropping
all over Afghanistan, even as the mule count is dwindling. Better resell
eight of those 15 contracts to a European commodities broker for $24
each, then make up that $32 loss somewhere else while cutting the
company's exposure in half. But how to hedge the risk on the other
seven?
Aha! A blip on the computer screen. A temporary mule shortage in
southern Iran! With a current mule price of $42 in Tehran, Enron could
offer a Linked Mule Swap Double Derivative tied to the gap between the
price of mules delivered in Kabul on a given date and the price in
Tehran on the same date. Sure, you would rather have the quick-and-clean
Iran sale, instead of the sale in Kabul that requires trucking the mules
to a foreign market. But even if you add in $4 per mule for transport
through militia-held territory and averaged the markets together, you
can still clear eight bucks just on the gap alone.
Enron's average price-per-future-mule is now $32.57 when you include
the $4-per-mule loss on the mule futures dumped in Europe. But based on
the amazing $12 Kabul/Tehran trading gap, they can easily put together a
"delivery in either market" contract that will allow them to ask $36 per
mule on their Mule Online internet trading system. The first mule future
sells instantly for $36 and the price bobs up to $36.50, two mules go
for $36.75, and then there's a big jump for the last three mules to
$37.90. Enron has now offloaded all their price-based mule futures
liability for a profit of $31.70.
But this doesn't mean they're out of the mule market in Central Asia.
It's still two months until Ismail delivers his 30 mules, and Enron is
on the hook for his Khyber Pass derivative insurance policy. Things are
not looking good in that part of the world, either. The chances of a
mule being picked off as a road- passage tax are pretty high, and the
loss of the whole herd would be a $600 liability. Quickly the financial
boys go to work and part of that liability is resold to a consortium of
Singapore banks, Australian mutual funds, and Saudi Arabian arms
merchant Adnan Kashoggi, thereby reducing Enron's percentage to 25 per
cent, or $150 in potential liability against a $15 premium (remember the
$2 per mule paid by Ismail), and Enron also takes a brokerage fee of $20
from the three other partners, thereby reducing its real liability to
just $120.
But that's still too much of a spread, so Enron continues to hedge.
Fortunately the company has such a diversified trading floor that Enron
mule-market experts can walk over to the traders in the warlord-militia
derivatives department. Sure enough, there are at least four tribes near
the Khyber Pass who are increasingly concerned about profit margins.
There simply aren't enough people to rob. Things have gotten so bad, in
fact, that the warlords are hedging against the oncoming winter by
taking futures positions in stolen chickens, stolen humanitarian aid
trucks, and western hostages. There's not a mule market yet, because the
warlords have successfully converted many of the recalcitrant villagers
into pack animals. But Enron knows how to MAKE markets.
Quickly the numbers-crunchers go to work, and they soon determine
that the average number of stolen mules per 100-man militia is 1.4 per
year. That represents anywhere from $28 to $56 in lost mule-thievery
income if the Khyber Pass is closed or inhospitable to traders from
Pakistan. Amortizing that amount over 12 months, the warlords have an
exposure of anywhere from $2.33 to $4.67 per month in lost pillage.
Hence Enron announces the new Highway Robbery Derivative, in which each
tribe is guaranteed the value of two stolen mules in each 12-month
period in return for paying a premium of $4 per month.
Enron's hedge is now complete, and it's a beautiful thing to behold.
The chances of Ismail losing a mule to a raiding party are approximately
one in 30, or 3.33 per cent. Since he's paying $60 for his derivative
contract, the expected loss of 3.33 per cent of his herd would result in
a payment of only $20--a more than comfortable spread. Meanwhile, if the
mule is stolen by a warlord holding a Highway Robbery Derivative, then
the payment to the other side would only be $28 against premiums of $48.
If Ismail simply passes through the Khyber Pass without incident and
sells all his mules at the standard price, Enron pockets $60 from Ismail
and $48 each from four warlords, in addition to the previous profit of
$31.70 from that heady Internet mule-futures trading day and the $20 in
packaging commissions. If each warlord steals his standard 1.4 mules per
year, then Enron still owes six-tenths of one mule to the warlord, or
about $22.20 based on a $37 sale price.
Total expected profit, based on 5.6 stolen mules, one of which is
stolen from Ismail: $143.20.
Total profit from all Ismail-related mule transactions: $194.90.
See, it's simple when you know how it works. Ask Arthur Andersen.