Challenge

Appetite for credit capacity is much greater than what is justifiable given credit quality of industry and liquidity of transactions.

General Themes

Dearth of liquidity in market (bearing in mind that EIM's purpose is to stimulate liquidity)
Poor credit quality
Highly structured nature of steel transactions (inventory management, illiquid options, etc.)
M-T-M Accounting and incentives related to achieving earnings targets
Size, tenor and rating drive credit exposure; size and tenor drive transaction value -- therefore ratings drive credit limits.
Producers are naturally long; end-users are naturally short; Enron is neither and explicitly takes credit/market risk on both sides of a transaction

Short-term Solutions

Consider expanding "risk pool" (with concentration limits) to provide more flexibility to commercial teams (Pitfall:  could be rapidly depleted to achieve short-term budget targets)
Reduce size of transactions and increase volume to achieve greater diversity and less concentration
Prioritize counter-parties to give consideration to those of greater strategic importance
Clarify/[expand?] purpose of E-DASH

Action Items

Plan more formal education for Steel Group centered around:
M-T-M Accounting
Basic Credit Analysis and drivers of credit exposure
Market Risk Analysis
Determination of Credit Lines
Calculating Credit Reserves
Link Budget Process to Credit and Market Risk capacity allocations
More clearly define view of liquidity with regard to different types of transactions/commodities
Explore risk syndication options
Compare credit evaluation results across business units to ensure conformity throughout Enron--study should take into consideration credit rating, size of company, size of transaction, tenor of transaction and collateral rights



Regards,

Chip Schneider
713-853-1789
ECN2864