What comes to mind when the share price of a monster commodities trader falls off the edge? Enron, that's what.
For readers too young to remember, Enron rose from being a near-bankrupt US gas pipeline company in the mid 1980's to becoming the pre-eminent market-maker in energy and a host of other commodities in less than 15 years, at the same time as forcing through market liberalisation in gas and power across most of the western world (with every man's hand turned against them, which makes the achievement all the more remarkable), going on to revolutionise the markets for coal and paper+pulp, and developing Enron Online, the biggest B2B platform the world has known. And there have been 14 years since it went under!
But under it went, and the reason was the oldest in the book: under-capitalisation, with profits way, way ahead of cash-flow. (Yes, many of the more lurid Enron stories were true; and yes, they had laid waste to the Californian electricity "market"; and yes, the CFO had his fingers in the till - but none of these alters that basic, simple underying fact: under-capitalisation.)
I know *ahem* a lot about Enron and nothing in the same detail about Glencore. But I recognize an over-extended trading shop when I see one. Enron's demise caused a lot of dominos to fall (in strikingly slow-motion, as I recounted here), including carnage in the banking sector; and there must be a decent chance the same will happen now. Anglo American is being mentioned in same breath as Glencore and one strongly suspects that a few more Swiss-based firms will be under pressure.
Could a Glencore melt-down (which hasn't happened yet) be as bad as Enron's back in 2001? Glencore per se is a lot less commercially significant than was Enron that time. However, the global financial situation is a lot less robust now. In 2001, the great restructuring houses were fresh from their exploits in the Asian crisis of 1997-8, and were certainly up for fixing the energy sector's woes without too many widows and orphans feeling the pinch (beyond the families directly impacted in the failing energy merchants - why are American employees allowed, nay encouraged, to invest their pensions in the shares of their employer?!) Even British Energy, a very awkward casualty in the protracted aftermath, was put back on its feet without there ever being much risk insolvency would cause its reactors to pop from neglect.
Falling dominos this time around may hit the ground with a thump, and find no medics on hand to resuscitate them.