Further Fallout From Enron

It took more than 2,000 pages to describe it, but Atlanta attorney Neal Batson has confirmed in loving detail what most people already knew: Almost all of the income generated by Enron during its dizzying heights was fictitious.

I, for one, wouldn't be less shocked if someone told me Twinkies are actually made from a petroleum byproduct rather than flour, sugar, and... whatever else is in a Twinkie.

Batson, who was appointed as special examiner by the court handling the company's Chapter 11 proceedings, found that while Enron reported earnings of $936.7 million in its 2000 SEC filings, they were little more than $42 million after filtering out the phantom transactions and financial engineering. Moreover, with support from investment banks, Enron used structured finance transactions to improperly move almost $12 billion in debt off its balance sheet, enabling the company to report a debt load of $10 billion rather than a more accurate $22 billion.

But what's a billion or two dollars? Or 10? These financial shenanigans helped the company maintain a higher credit rating, giving it access to capital at a cheaper rate. Enron used this cheaper leverage to acquire more assets and trading contracts. Except for the fact that the company's traders weren't very good at generating profits, it seemed like a pretty good plan. Oh, except for the fraud part.

Batson's report did not lay blame on Wall Street investment banks, accountants, or law firms for their role in packaging and repackaging Enron's blue sky. But he's not yet done. Baston is scheduled to file another report later this year, and has subpoenaed several investment bankers at CSFB(NYSE: CSR). J.P. Morgan(NYSE: JPM) and Citigroup(NYSE: C) can also expect questions they don't want to answer. Apparently 2,100 pages wasn't enough space.

We can look at such a report as a statement of the obvious, but this has real-world implications. The bankruptcy court is working to determine how Enron's assets should be allocated among creditors, some of which are the same banks and firms that helped the company flout the law in the first place. Of perhaps greater impact is the potentially crippling $20 billion class-action suit Enron shareholders have filed against the bankers and other participants in Enron's fraud.

As Mr. Batson's work comes to light, banks could be looking at a double whammy: reduced status among Enron's creditors and increased exposure to a big-dollar lawsuit.

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