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Enron Mail |
I agree with your reasoning. Mark
Christian Yoder 01/04/2001 03:37 PM To: William S Bradford/HOU/ECT@ECT, Tracy Ngo/PDX/ECT@ECT cc: Mark E Haedicke/HOU/ECT@ECT, Earline Kendall/HOU/ECT@ECT, Mark Holsworth/Corp/Enron@ENRON Subject: The Ongoing CalPX Indemnity Agreement Issue The CalPx has written us a letter saying that if we do not sign their proposed indemnity agreement by January 12, we will have to post collateral (letter of credit) for the full extent of our exposure to them (approx $25million). Implicit in this demand is the threat that if we do not post the collateral, they will not allow us to do any business with them. All things considered, I recommend that we consider posting the collateral and that we do not sign the indemnity agreement. This recommendation assumes that we want to continue to do some residual business with the CalPX. Obviously, if our traders don't care about doing any business with them, we should just call their bluff and quit trading with them, but I don't think we would really want to do this. The reason why I do not think we should sign the indemnity agreement is because it exposes us (Enron Corp.) to the very real PX credit meltdown risk. Under the PX's Surety Bond with AIG, if creditors of the CalPX, say, the big three California Utilities for example, teetering as they are on the brink of insolvency, were to default to the PX, then AIG must keep the CalPX whole. If AIG pays any money to the PX, it will immediately turn to its indemnity agreements with all the non-defaulting participants (including ours) and try to recover from them. Although the indemnity agreements purport to limit AIG's ability to recover from us to our own specific default with the PX, I do not think we should rely on the wording of the agreement to guarantee that we would not be washed into some kind of broader claim by AIG in a meltdown situation. The wording is too ambiguous. If I were outside counsel, I would not write us a legal opinion saying that if we signed the indemnity agreement we would not have any exposure in a meltdown. Therefore, given the solvency crisis with the big three utilities, I think we should assume there will be a major payment default and I think, if we must continue to do business with the PX, we should do it on the basis of posting collateral for our exposure. Such collateral would be clearly tied to our own default and we should be able to control our own default risk with them. I have asked Tracy to set up a conference call to go over this reasoning. ----cgy
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