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Enron Mail |
Russell:
I think I should give you a little background on small ventures. Bill Perkins and I have a strong personal and professional relationship. He is an extremely creative individual. Whalley actually commented on him today as someone "who thinks outside the box". Bill actually sat in a bar four years and said the next tradeable market would be bandwidth. He has been successful in the gas business when he has had someone to filter his ideas. As such he provides an informal consulting role to Enron. He throws out ideas and, every once in a while, he comes up with a great one. He pointed out an anomalous pricing occurence in the options market, a market I normally don't follow closely, that I translated into a multimillion dollar trade for Enron. In return, I have agreed to have Enron intermediate his trades within reason. I want to emphasize that continuing this relationship should be considered a high priority. I am willing to accept some of the credit risk exposure as a cost of doing business. Bill understands his role as an independent in the market and performs the right risk/reward trades for someone with finite capital. I place very high confidence in Bill not conducting high risk trades. Having said that, we certainly need to monitor his credit exposure and continue to require LC's. Just understand that he is at a different level of sophistication that any other non-investment grade counterparty. I understand there was some concern in regards to the Transco Z6 spread option he traded. He was absolutely right about the valuation and we, on the trading desk, knew it as well. There are a couple isolated products that Enron does not do a good job of valuing because of systems limtations. This was one product. Our spread options are booked in Excel using option pricing models created by the research group. The problem with these models is that they are strictly theoretical and don't take into account gas fundamental price limitations. For instance, it is less probable, though not impossible, for a transport spread from a production area to a market area to go within variable cost than the models predict. Thus it is necessary to apply a correlation skew curve on top of the overlying correlation used. Obviously, we have this function in our pricing models. I was not aware this methodology had not been transferred to the valuation models. This has since been changed. Fortunately these incidents tend to be extremely rare as very few non-investment grade companies trade these types of products. Finally, on Friday Bill wanted to do a trade that reduced his exposure to Enron. I gave Mike Maggi the go ahead to do the trade without consulting credit. I do not believe that I acted out of line in approving this trade considering the circumstances. If you believe differently, please advise. Thanks, John
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