Thursday, 14 February 2008

Lesson from Enron: How the Dominos Fall

Writing as someone who witnessed the Enron saga from *ahem* very close proximity, I learned an important lesson. Well several actually, but this one is to do with how the dominos fall, and the answer is – surprisingly slowly. Enron, the pre-eminent market-maker in the global energy sector, went under in October 2001. This brought down the vast and burgeoning ‘merchant energy’ sector, and after that the project finance sector; and at the time I assumed this would happen in weeks, if not days.

Not a bit of it: the big energy merchants crashed at the rather leisurely rate of one per month, until the final bankruptcy (TXU Europe) a full year after Enron. Project finance hit its nadir the year after that.

There isn’t space here to discuss why this happens in such slow motion. The point is that what we are currently seeing on the vastly greater theatre of world finance, indeed the global economy, needn’t be anything other than protracted agony. We can expect wave upon wave of Bad News, each time emanating from some new and unexpected quarter. IMHO, we’ve only just begun.

And today’s news ? Well, B&B of course, and Mervyn King’s pronouncement, and US student loans: but also this. Fitch, the ratings agency, has analysed US corporate debt (you can register free to get the report) and finds that over half a trillion dollars of bonds are scheduled to mature over the coming year. For the one-third of this that is speculative grade, where spreads have doubled or more over the past six months, “issuers will face substantially higher borrowing costs in 2008” – a bit like home-owners facing renewal of their previously low fixed-rate mortgages. Oh, and they calculate that bond rating downgrades are happening at more than 4 times that of upgrades – it’s 6 times greater downgrades for investment-grade debt.

Yup, we’ve only just begun. Happy Valentines !



Old BE said...

As long as Darling guarantees my B&B savings then I'm alright, Jack! Oh, maybe not.

Sackerson said...

Good post. The plus point is that there is often time to take avoiding action.

Tuscan Tony said...

Gods, was the Enron wipeout in 2001!?
Will stay out of bonds for a bit I think.

Nick Drew said...

Ed - probably right second time there, I think

Sackers - thanks: yes, time to take action if you can keep your eye on the ball amidst the tumult of vested interests assuring you everything's OK

TT - welcome back: yes, 2001, I have the T-shirt (and scars)

BTW you may be the first visitor to bring scantily-clad ladies to this blog

we are pretty broadminded here

Mark Wadsworth said...

Tee hee, is all I can say. Sell-to-rent and stick your money into gilts must be the way forward.

Old BE said...

ND thanks for your comment over at mine - I do take it seriously, it's just that I don't have any control over my financial destiny so my head is firmly in the sand on this one. I can scrimp and save all I like but I bought on a high LTV at the peak of the market and Gordon has put me in for a huge chunk more so......

.....always look on the bright side of debt etc.

Nick Drew said...

... just before you draw your terminal cheque!

Jeremy Jacobs said...

why so negative Nick?