Headline, March22, 2014

"' O" BANKERS > 


ONE NatWest employee who worked there at the time   -we'll call him Chris-  saw Greenwich NatWest as a group of financial nerds tinkering with equations few people understood:

"At any one time on Wall Street or in the City there are a series of thorny issues and a series of brainy people coming up with answers," Chris explains.

"The issue in the late Nineties was that the rating agencies were looking at companies' balance sheets and feeling uncomfortable with high levels debt. So the guys at the Greenwich NatWest came up with an applied use for :

A Special Purpose Vehicle   -essentially a company that owned some of your assets and some of your debts, which effectively, and legally, moved your debt off the balance sheet into a footnote in the accounts.

Lots of people were working on this problem, but the lab guys at Greenwich NatWest were almost avant-garde in their approach around  '96/97'. We were going around flogging this stuff to anyone who would buy.

We started to tout it around various markets, but most of the companies didn't want it   -they really didn't understand it to be honest. Then we met  Enron and they were so hungry to get it done, they loved us," Chris says.

ENRON was looking for a way to hide a huge pile of debt to keep its stock price sky high. The NatWest Three were looking for a hugely profitable client. It was love at first sight.

Enron's chief financial officer Andrew Fastow, CEO Jeff Skilling and Chairman Ken Lay shared a certain pride, attitude and aggression. They lived the Houston Cliché   -work hard and play hard.

The two groups were drawn together like Hamilton's children to the Pied Piper. The Brits and the Yanks would play golf together and head out for expensive dinners.

Enron embraced the Special Purpose Vehicle, bundling up debts into oddly named, but legitimate, Caymen Island companies such as Raptor, Rawhide and Osprey:

And the vision of Greenwich NatWest's eggheads   -pushed, refined and sold hard by the Three   -was responsible for designing, forming and awakening a previously dormant market.

It was Andy Fastow who devised Enron's overall financial strategy and was ultimately responsible for the company using SPVs   -as well as beginning the fraud that followed. Prosecutors in Houston later uncovered an email Bermingham sent on 1 December, 1999:

Where he celebrated the fact that his team had   "extracted most of the value out of the deal"  after  "Fastow put his grubby little fingers in the till", he concluded  :

"For emphasis, what we have executed was not Enron's idea, or Fastow's idea..............it was OUR idea."

As Bermingham email shows, it was the ideas generated by the NatWest team that helped the energy company create deals around SPVs that meant the company actually overstated the earnings by $1bn from the third quarter of 2001.

In August 2000, the company was valued at an all time high of $68bn.

In hindsight,  the dodgy deal was probably the stupidest thing that NatWest Three could have done. They didn't need to get involved in anything illegal.

The kind of legal deals they had been creating were just about to become the hula hoop of the finance world:

And they could have been richer than  Croesus  if they'd  just stayed at the bank. By the end of  2001, the value of  SPVs as a way of borrowing money overtook the value of actual loans.
Everything spiralled from there.

Bermingham and co may not have invented the investment vehicles that caused the current banking crisis   -in the way that Elvis,  The Beatles, and the Rolling Stones  didn't actually invent  rock n' roll   -they did however, take the concept and refashion it into a product that was to revolutionise the financial world  

-Eventually with disastrous consequences.

"Would the markets have used the SPVs if there had never been an Enron?" says financial PR Graeme Kelsey,   "Almost certainly. Most banks would have stumbled across them. But there's no way they would have been so big or so significant.

Enron showed how much money you could make from them, and it demanded  those banks that it dealt with shape their debt departments to handle that kind of business. Enron was so huge and offering so much money that all the big guys went for it," says Kelsey.

"Enron was the pit canary, but its death went unheeded," says Fortune reporter Bethany McLean,  co-author of The Smartest Guys In The Room, the best selling book about the Enron affair. 

"Just as Enron had off-balance-sheet vehicles that allowed it to book earnings and hide debt,  Citigroup   and other financial institutions structured investment to do the same. The main difference is :

Wall Street   -although it was complicit in the Enron mess   -managed to walk away relatively  unscathed. This time it hasn't :

"Wall Street has brought itself down."
The honour of this educating post continues. Don't miss the next swoon!

With respectful dedication to All the Bankers in the world. See Ya all on !WOW! -the World Students Society Computers-Internet-Wireless:


Good Night & God Bless!

SAM Daily Times - the Voice of the Voiceless


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