Enron Leaves Void In Commodity Trades
The New York Times, 12/31/01
Manager's Journal: Dare to Keep Your Stock Price Low
The Wall Street Journal, 12/31/01
Missed Signals: Stock Gurus Write Off Most Big Write-Offs, But They Shouldn't --- `Special' or `Unusual' Charges Often Hold Vital Clues To Companies' Prospects --- At Home's Future Foretold
The Wall Street Journal, 12/31/01
Enron Debacle Will Test Leadership of SEC's New Chief --- Harvey Pitt's Handling of Energy-Trading Firm's Collapse to Be Watched Closely
The Wall Street Journal, 12/31/01
How to Spot Signs of Companies' Distress
The Wall Street Journal, 12/31/01
Investors Forecast Unreal 401(k) Gains Savings: Study finds near-term expectations subdued, but long-term projections of returns overly optimistic.
Los Angeles Times, 12/31/01
Executives' Bonuses Stir Anger as Polaroid Sinks
Los Angeles Times, 12/31/01
Fewer Power Plants Slated; Worries Rise Energy: Electricity producers' spending cuts lead to a slowdown in construction, which may mean tight supplies as the U.S. recovers from recession.
Los Angeles Times, 12/31/01
Commentary UC Fund Managers Were Asleep at the Enron Wheel
Los Angeles Times, 12/31/01
Amer Elec Power Buys Indian Mesa Wind Project Facilities
Dow Jones News Service, 12/31/01

IN THE MONEY: CSFB Resigns From Enron Creditors Committee
Dow Jones News Service, 12/31/01
California Utility Regulator Lynch Comments on the Power Crisis
Bloomberg, 12/31/01

Enron, Providian, Others Win the `Stocky' Awards: David Wilson
Bloomberg, 12/31/01




Business/Financial Desk; Section C
TECHNOLOGY: BROADBAND
Enron Leaves Void In Commodity Trades
By SIMON ROMERO

12/31/2001
The New York Times
Page 3, Column 4
c. 2001 New York Times Company

After the collapse of Enron, people wondered who would pick up the slack in the commodity trading of broadband communications capacity. The answer: nobody. 
Aside from a handful of bit players that specialize in brokering tailor-made deals, the bandwidth market collapsed before it was even able to attain the liquidity necessary to thrive.
The disappearance of bandwidth trading altogether is now being discussed, to the dismay of Enron-inspired operations at big companies like El Paso, Williams and Dynegy that bet heavily on the market's potential. Yet such a development should be no small surprise, given bandwidth trading's early handicaps. 
After the feverish expansion of fiber optic networks in the late 1990's, an overwhelming glut of capacity on these systems sent bandwidth prices plunging. Faced with cheap contracts and slower-than-expected growth in Internet usage, telecommunications companies found little need to participate in a secondary market for capacity because they were almost drowning in it. 
The collapse of the dot-coms and speculation that trades among big bandwidth-trading players were often little more than fancy financial maneuvering engineered to suggest growing volumes did little to help. Even before Enron's fall, the austere market claimed its victims, with players like Asia Capacity Exchange and GTX.com falling by the wayside, Ovum, a consulting firm, noted in a recent report. 
A recovery in bandwidth prices appears a distant dream. Moreover, it was never easy for rough-and-tumble energy traders to convince large telecommunications concerns why they should agree to make a commodity of their core offering. 
The fanciful business of trading bandwidth was more a symptom than a cause of the fin de siecle telecommunications debacle. SIMON ROMERO

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	


Manager's Journal: Dare to Keep Your Stock Price Low
By Joseph Fuller and Michael C. Jensen

12/31/2001
The Wall Street Journal
A8
(Copyright (c) 2001, Dow Jones & Company, Inc.)

Egged on by a buoyant economy and the pace of value creation set by the market's best performers, over the past two decades securities analysts challenged the companies they covered to reach for unprecedented earnings growth. Too often managers collaborated in this fiction, either because they had unrealistic expectations for their companies or, worse yet, because they used analysts' expectations to set internal corporate goals. When the fiction finally became obvious the results were massive adjustments in growth projections and equity valuations, and in some cases bankruptcy and liquidation. 
Enron is perhaps the most dramatic example. Wisely taking advantage of a rapidly deregulating market and capitalizing on its deep knowledge of the industry, Enron had seized a powerful, but probably once-in-a-lifetime, opportunity to remake itself as a market maker in natural gas and energy.
Wall Street responded to this and other genuine innovations with a series of positive reports and ever-higher valuations, eventually labeling Enron one of the best companies in the economy and comparing it to Microsoft and General Electric. However, the aggressive targets that Wall Street set for Enron's shares made the company a captive of its own success. 
Enron's peak valuation of $68 billion in August 2001 required the company to grow its free cash flow at 91% annually for the next six years, and then to grow at the average rate for the economy. One analyst blithely predicted that Enron would come to dominate the wholesale energy market for electricity, natural gas, coal, energy derivatives, bandwidth and energy services on three continents. 
Enron, to its own detriment, decided to take up the challenge. In seeking to meet expectations it expanded into markets in which it had no specific assets, expertise or experience, like broadband and even weather hedging -- and when this failed to deliver enough growth, it manipulated the information it gave to Wall Street. 
The story of Nortel is similar. In 1997 Nortel CEO John Roth launched a strategy to transform the company from one dependent on voice switching into one focused on data networking. Nortel acquired 19 companies between 1997 and early 2001. As its stock price soared, reaching a total capital value of $277 billion in July 2000, it came under pressure to do deals to satisfy the analysts' growth expectations. The more it did, the more it was expected to do. Ultimately, it paid over $32 billion -- using its own overvalued stock as currency -- for these companies, most of which eventually had to be sold off. Its stock has fallen by more than 99% from its peak. Some question whether the company will survive. 
It didn't have to be this way for either company. A few CEOs have wisely and bravely decided to put an end to the expectations game by simply saying no to what has euphemistically been termed earnings "guidance." In a recent filing to the Securities and Exchange Commission, Barry Diller, chairman of USA Networks, balked at the sophisticated art form known as managing expectations, comparing it to a Kabuki dance and saying publicly what many others have said privately: The process has little to do with running a business and the numbers can become distractingly and dangerously detached from fundamentals. 
Indeed, an overvalued stock can be as damaging to the long-run health of a company as an undervalued stock. The words of Warren Buffett in his 1988 letter to shareholders are instructive on this point: "We do not want to maximize the price at which Berkshire shares trade. . . . We wish for them to trade in a narrow range centered at intrinsic business value." 
But in order for a stock to trade close to its intrinsic value managers must work to make their organizations far more transparent to investors. Mr. Diller has chosen to provide for analysts actual business budgets broken down by business segments. While it is still too early to tell how that will work, at the very least companies should state their strategies clearly, identify associated value drivers, and report auditable metrics on both. That must include addressing the "unexplained" part of their firm's share price -- that part not directly linked to observable cash flows -- through a coherent description of the growth opportunities they foresee. They must tell the markets frankly when they see their stock price as overvalued. 
Stock prices are not simply abstract numbers. The price that Wall Street puts on a company's securities increasingly affects the nature of the strategies that firm adopts and, hence, its prospects for success. Stock prices also drive a company's cost of capital, its borrowing ability, and its ability to make acquisitions. A valuation that becomes unhinged from the underlying realities of the business can rob investors of savings, cost people far more innocent than senior management their jobs, and undermine the viability of suppliers and communities. 
In the long run, conforming to market pressures for impossible growth leads to shortened careers, humiliation and damaged companies. Just ask the folks at Enron, whose once-valuable company and pension fund are now in ruins. 
--- 
Mr. Fuller is CEO of the Monitor Group. Mr. Jensen is a managing director at the Monitor Group and a professor emeritus at Harvard Business School.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Missed Signals: Stock Gurus Write Off Most Big Write-Offs, But They Shouldn't --- `Special' or `Unusual' Charges Often Hold Vital Clues To Companies' Prospects --- At Home's Future Foretold
By Jonathan Weil and Steve Liesman
Staff Reporters of The Wall Street Journal

12/31/2001
The Wall Street Journal
A1
(Copyright (c) 2001, Dow Jones & Company, Inc.)

Conventional wisdom among Wall Street stock analysts holds that investors should ignore large write-offs because they provide little insight about future performance. Now, amid the biggest wave of write-offs in history and mounting bankruptcies, it may be time to revisit that wisdom. 
Consider recent events at Bethlehem Steel Corp. In July, it reported a $1.13 billion second-quarter loss, the bulk of it a $1 billion "unusual noncash" charge against earnings to write off the value of a deferred tax asset.
The charge didn't bother Salomon Smith Barney analyst Michelle Galanter Applebaum. It "masked what was essentially an improved quarter," she wrote on July 25, retaining her buy recommendation on the stock and predicting it would more than triple. 
Three months later, Bethlehem filed for Chapter 11 bankruptcy reorganization. 
Far from being something investors could safely ignore, Bethlehem's write-off of deferred tax assets -- mainly deductible losses carried forward from prior years -- held a clue to its future. Such assets can be used to offset future income-tax bills. But, of course, they can be used only by companies that are profitable and paying income taxes. By taking the charge, Bethlehem was signaling that it wasn't likely to use the assets, because it probably wouldn't have taxable profits anytime soon. 
Almost any kind of write-off can send a message about the soundness of a business, the competence of its management or its prospects for growth. Although Wall Street stock analysts and financial executives routinely tell investors to disregard these entries, others say they're among the things investors should most closely heed. 
"When you see these large write-downs, the antenna should go up immediately, and you should start digging for the underlying business reasons for these losses," says Lynn Turner, an accounting professor at Colorado State University and a former chief accountant for the Securities and Exchange Commission. 
The sheer size of recent write-offs has made understanding their nature more urgent. Companies in the Standard & Poor's 500-stock index have reported more than $165 billion of so-called unusual charges so far this year, says research firm Multex.com Inc., more than in the prior five years combined. Meanwhile, Chapter 11 and Chapter 7 bankruptcy filings by publicly traded companies through mid-December hit a record 241, compared with 176 all of last year, according to New Generation Research Inc. in Boston. 
Even if bankruptcy seems like a remote prospect, an "unusual" charge against earnings -- often called a "special," "one-time" or "nonrecurring" charge -- can provide an exit signal to investors. While stocks sometimes rally on news of such a charge, as a company announces a bold housecleaning move, the rally often doesn't last. A study by Multex.com and The Wall Street Journal found that companies taking the largest unusual charges as a percentage of sales have substantially poorer stock returns in the three months following the announcement of the charge than companies with minimal or no such charges. 
The study, covering the past six years, looked at stocks of all public companies with market capitalizations of $1 billion or more. It divided those that took unusual charges into 10 groups, from the smallest to the largest such charges as a percentage of revenue. Stocks of companies with the largest charges relative to sales had a median decline of 9.4% in the 90 days after the charge was taken. Stocks of companies with the smallest charges relative to sales had a median gain of 1.48%. 
While it could be argued that the shares might have fared worse without the charges, Marc Gerstein, director of investment research at Multex.com, says the study shows that "if you want to weed out stocks to look at for investment purposes, companies with unusually large write-offs are a good place to start." 
Sometimes the significance of special charges isn't immediately clear. But some investors grow suspicious anyway, on the "cockroach theory": Where there's one problem, there probably are more. "From seemingly minor or immaterial charges, sometimes investors can glean insight into how a company either correctly or incorrectly accounts for its business and whether a company is pushing the envelope," says James Chanos, president of Kynikos Associates, a firm that specializes in short-selling, or betting on stock declines. 
Many short-sellers raised their bearish bets on Enron Corp. in mid-October after it took a $1.01 billion charge largely to write down the value of soured investments. Inside the charge was a $35 million write-off of investment losses at a partnership controlled by the company's chief financial officer. Later revelations about that and other partnerships, which weren't consolidated into the Houston-based energy concern's financial statements, led the market to lose faith in the company's finances. Its stock now trades for under a dollar a share as the company seeks to restructure under bankruptcy law. 
The significance of special charges -- whether they represent old baggage from the past or illuminate the future -- is at the center of a lively debate under way in the accounting world. One side holds that generally accepted accounting principles, or GAAP, provide the best available snapshot of a company's financial position. GAAP, which companies must use in their official financial statements, requires that nearly all charges be treated as ordinary expenses. 
Others, including many stock analysts, contend the best view comes from "pro forma" financial results -- calculated "as if" many expenses didn't really exist. The idea is that these expenses aren't relevant to future performance. 
Companies increasingly highlight the pro forma view in news releases they generally put out before their official filings with regulators. But pro forma calculations adhere to no particular standard. Companies essentially do what they want. Now, accountants and economists say the practice of excluding blemishes is so widespread that companies and analysts often guide investors to dismiss charges that contain prescient warnings -- like the one at Bethlehem Steel. 
Ms. Applebaum, the Salomon Smith Barney analyst who played down Bethlehem's big write-off, explains that she has covered other steel companies that returned to profitability shortly after writing off deferred tax assets. She thought Bethlehem would do the same. She notes that GAAP rules on such assets obliged Bethlehem to follow strict criteria in assessing its chances of future profitability -- stricter criteria than stock analysts typically use. 
As for Bethlehem, Chief Financial Officer Leonard M. Anthony says the charge the company took was to some extent "predictive of the future." 
GAAP also has well-established standards for writing down other kinds of assets. Companies must reduce the value on their books of anything from a customer loan to a manufacturing plant when its worth has diminished. Again, Wall Street stock analysts tend to dismiss the resulting charges as one-time events. 
Sometimes that makes sense. During the 1981-82 recession, restructuring was a part of many corporations' strategies. They took charges for streamlining, outsourcing and otherwise shedding costs to position themselves for recovery. Because the resulting earnings volatility made it hard to compare companies' growth rates or price-earnings ratios, and because the charges weren't expected to recur, there was logic to excluding them to come up with "smoothed" earnings trends. 
"Investors came to look upon the charges, correctly in many cases, as evidence that those firms had recognized past mistakes and had made tough decisions to become more efficient," said a September 2001 study by the Jerome Levy Economics Institute at Bard College in Annandale-on-Hudson, N.Y. 
But the practice soon got out of hand. Some companies became habitual restructurers. The Levy study estimates that "operating earnings" -- another term for pro forma earnings -- at companies in the S&P 500 index have outstripped net income by more than 10% annually on average over the past two decades, and by as much as 20% annually in recent years. One reason: While companies readily exclude all sorts of special losses from their operating earnings, they are far less likely to exclude one-time gains, such as profits from asset sales. 
Investors ignore write-offs at their peril, says economist David Levy at the institute. The reason is that when a company writes down an asset, it usually has concluded the asset won't generate as much cash as once assumed. That suggests the company as a whole won't, either. "The write-down of an asset is a recognition . . . that the future is not going to be as profitable as expected," Mr. Levy says. 
And if the company borrowed to buy the assets it is writing down, it could find itself squeezed by debt, as At Home Corp. was. At the start of 2001, the provider of high-speed Internet access, which did business as Excite@Home, announced a $5.43 billion net loss for the 2000 fourth quarter, on just $169.1 million in revenue. Much of the loss -- $4.63 billion -- reflected write-downs of "goodwill," the intangible asset created when one company pays a premium to buy another. 
One such write-down concerned At Home's purchase of Bluemountain.com, an online greeting-card service. At Home paid $1 billion in stock and cash for the company in late 1999, taking on $350 million of debt to do so. But Bluemountain had little revenue. A year later, At Home took a $684.2 million charge for the goodwill it created by buying Bluemountain at a price far above its net worth. 
Rather than its $5.43 billion net loss, At Home highlighted its self-defined "net operating loss" for the 2000 fourth quarter -- a mere $36 million. At Home Chairman George Bell said in a conference call that the charges had "no direct impact" on the company's operating performance. 
Most stock analysts following the stock seemed to agree. Bank of America Securities' Douglas Shapiro, in a report following At Home's news release, didn't even mention the gigantic charge or net loss. "With the worst case already largely discounted into the stock, we retain our Buy rating and year-end 2001 $20 price target," Mr. Shapiro wrote on Jan. 26, 2001, when At Home stock stood at $6.47. 
At Dain Rauscher Wessels, senior analyst David Lee Smith also ignored the net loss in his commentary after At Home's earnings news release. He retained his buy rating, although he lowered his price target to $15 from $38. The company "has a long-term asset base and is appropriately valued for long-term investors," Mr. Smith wrote when the charge was announced. 
But some investors voted with their feet. At Home's stock sank about 32% in the following two weeks. Even though At Home was writing down Bluemountain, it still had to pay for it. Faced with growing cash needs for interest payments and service upgrades, At Home filed for Chapter 11 bankruptcy protection in September. Its stock was last quoted at a penny. 
Looking back, Mr. Smith says At Home's huge write-off was a "perfect example" of a charge overlooked by himself and other stock analysts that would have helped predict the company's future performance. "Probably too frequently we have given companies the benefit of the doubt without burrowing in and asking, `What does it say about the financial condition of the company?' " says Mr. Smith, whose firm is now called RBC Dain Rauscher Inc. 
At Bank of America, Mr. Shapiro says he felt At Home's stock price already reflected how little value there was in its media businesses such as Bluemountain and the Excite Web portal. He felt cash flow from At Home's stronger business, a network for cable companies to deliver Internet access, would be sufficient -- and if it wasn't, he figured the cable companies would put up the cash to save At Home. "I was wrong about my assumptions about the fundamentals of At Home's business. But I don't think the implications of the charge itself were that significant," Mr. Shapiro says. At Home says that the actions it took "were in accordance with general accounting principles." 
Companies frequently portray charges as part of a broader restructuring effort to restore profitability. But at Lucent Technologies Inc., they signaled a business plan that had failed and a management team that was struggling to find a remedy. 
The telecom-equipment maker told investors in late 2000 it would drive out $1 billion of costs and take other unspecified charges over the coming months. On Jan. 24, 2001, with the stock at about $19, Lucent forecast that the charge would range from $1.2 billion to $1.6 billion. But in April, Lucent announced $2.7 billion in "one-time" charges for the just-ended quarter. 
Its news release -- excluding the charges and adjusting for the spin-off of some businesses -- highlighted pro forma results, which showed the loss narrowing to $1.26 billion from $1.31 billion in the immediately preceding quarter. "Lucent delivered much improved performance in the quarter, despite continued softness in several key markets world-wide," said Chairman Henry Schacht. 
Results as tabulated according to GAAP pointed to a different trend. Lucent's loss from continuing operations widened to $3.38 billion from $1.58 billion in the preceding quarter. 
And the write-offs kept coming. In all, Lucent recorded $11.42 billion of "restructuring and one-time charges" in the fiscal year ended Sept. 30. Its stock, which was in the 80s two years ago and in the high teens when Lucent announced the first one-time charges, closed Friday at $6.18. 
Were there clues in Lucent's early charges that might have foretold this future? Lucent's April announcement detailed an amalgam of write-offs and other expenses that showed weakness in many parts of the company's business. 
A charge for layoffs, for instance, showed the company had deployed large numbers of employees in key divisions where it no longer expected profits. 
A write-off for accounts receivable from a significant customer -- Winstar Communications Inc., which filed for Chapter 11 in April -- showed that some past sales had failed to bring in cash and that future sales growth could be hurt because the customer base had shrunk. 
A write-off of goodwill revealed that some acquired assets wouldn't generate the expected profits. Inventory write-downs showed that previous sales projections were too high and future revenue was likely to slip. 
"When you're making cuts that deep, it means the company has fundamental problems," says Mr. Turner of Colorado State. That should prompt investors to ask whether "this is the management team that's going to be able to get you back where you need to be," Mr. Turner says, and it also signals "that there's probably more to come." Indeed, had investors focused on explanations of the charges contained on page 16 of the quarterly report Lucent filed with regulators in May, they would have learned that the company anticipated taking additional restructuring charges during the year. 
So why the news release's emphasis on the pro forma figure? "We highlighted it because it's the way many of our competitors provide their earnings," says Michelle Davidson, a Lucent spokeswoman, who notes that the GAAP earnings numbers were included in the release. 
Asked whether the charges amounted to a warning of a deteriorating financial position, the company declines to comment. Investors, says Ms. Davidson, should focus on Lucent's progress in delivering on its pledges of reduced capital spending and employment and increased working capital. The current management team has "dealt with the tough issues head-on, restructured in a tough market and built a solid track record in creating a plan and delivering on a plan," she says. 
Sometimes, even what seems clearly to be a one-time charge can flag fundamental problems. Providian Financial Corp., a San Francisco-based credit-card issuer, reported profits soaring at a 37% compounded annual rate from the end of 1995 through 2000. Its stock more than quadrupled to $57.50. 
But Providian's sales tactics came under attack. In mid-2000, Providian said it planned to settle with state and federal regulators over allegations of consumer fraud. Without admitting wrongdoing, it agreed to soften its practices by, among other things, extending late-payment grace periods and toning down telemarketing scripts. Providian recorded a $272.6 million "one-time" charge for the 2000 second quarter as a result of the settlement. It posted net income of $62.8 million. 
Many stock analysts treated the charge as positive news. At CIBC World Markets, analyst Steven Eisman wrote on June 20, 2000, that "for the past year, legal issues concerning the company's sales tactics and back-office processes clouded the stock. By taking a provision for all potential future legal inquiries, we believe the financial risk associated with such legal inquiries is now behind them." Mr. Eisman has since left CIBC and says his new employer doesn't permit him to comment. 
In contrast to stock analysts' optimism, bond analyst Kathleen Shanley at Gimme Credit, a New York research firm, saw a red flag. Her concern: "the potential impact of a change in marketing practices on previously sizzling revenue-growth rates." 
Although Providian said it had already implemented its sales reforms by the time of the settlement, Ms. Shanley doubted their full impact was reflected in the earnings outlook. Besides worrying that Providian wouldn't have the same marketing tools to deploy in its push for customers, she thought the settlements exposed the degree to which growth had been based on loans to people with shaky credit. 
Then, for the first quarter of 2001, Providian reported declining noninterest income and growing credit losses, due to rising bankruptcies and the slowing economy. Alan Elias, vice president of corporate communications, acknowledges that the settlement affected future revenue a little, by applying "some additional pressure in regards to marketing certain membership products." 
Mr. Elias says there was nothing about the settlement that spoke to credit quality, even though Providian eventually had "higher-than-expected loss rates in our low-end portfolio." He adds: "To make a direct correlation that this is what is going to happen two years down the road [as a result of the settlement charge] is preposterous." 
In any case, beset by rising consumer defaults and declining revenue, Providian issued a series of further profit warnings. On Oct. 18, it reported a 71% fall in third-quarter earnings, knocking the stock down 58% in a day. The stock closed Friday at $3.55, down 94% for the year.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Politics & Policy
Enron Debacle Will Test Leadership of SEC's New Chief --- Harvey Pitt's Handling of Energy-Trading Firm's Collapse to Be Watched Closely
By Michael Schroeder
Staff Reporter of The Wall Street Journal

12/31/2001
The Wall Street Journal
A10
(Copyright (c) 2001, Dow Jones & Company, Inc.)

WASHINGTON -- Harvey Pitt's mission since becoming Securities and Exchange Commission chairman in August has been to ease the tough-enforcement policies of predecessor Arthur Levitt. Now comes the notorious case of the Enron Corp. debacle. 
More than ever, leaders of industry, labor and politics will be watching -- many skeptically -- how the new Pitt SEC will perform. Mr. Levitt specialized in rooting out accounting fraud; Mr. Pitt, a former securities lawyer whose clients included all "Big Five" accounting companies and major corporations, has said he wants the regulatory agency to be less adversarial.
The rhetoric played well enough -- until Enron's implosion punched big holes in investors' portfolios, and leveled many employees' retirement savings. The scrutiny the SEC will come under for its own scrutiny of Enron was evident Friday: Aides to Democratic Sen. Joe Lieberman of Connecticut, chairman of the Senate Governmental Affairs Committee, said he will soon hold hearings on Enron. 
Democrats have been itching for Mr. Lieberman to do so, believing the revelations could embarrass Republicans who have benefited from Enron's past political largesse -- and in particular President Bush, whose political ties to Enron and Chairman Kenneth Lay date to his first election as Texas governor. 
But Mr. Bush, who named Mr. Pitt to the SEC, also on Friday indicated he wants no slack cut for the giant Houston energy-trading concern. 
"I think it's very important to understand what took place," he told reporters at his Texas ranch. "The SEC will be looking into matters, Congress appears to be looking into matters. There will be a lot of government inquiry into Enron and what took place there," he added. "I'm deeply concerned about the citizens of Houston who worked for Enron who lost life savings." 
Broadly speaking, Mr. Pitt is resolute about his regulatory approach. Rep. John Dingell, the Michigan Democrat who has made a career of riding herd on regulators he deems soft, recently wrote Mr. Pitt to blast him for "repudiating" the Levitt legacy, and to demand a tough investigation of Enron, which filed for protection under Chapter 11 of the U.S. Bankruptcy Code earlier this month. Mr. Pitt replied that he was "perplexed" by Mr. Dingell's assertions; as he sees it, in fact, the Levitt commission's "adversarial attitude toward industry and professions in almost all respects" sowed the seeds of the Enron mess. 
Although Mr. Levitt earned a fortune as a Wall Street executive and chairman of the American Stock Exchange, in eight years as SEC chief he pushed a number of small-investor initiatives that rankled the financial-services industry. 
Mr. Pitt comes to the job after more than two decades as a securities lawyer representing, among others, infamous inside-trader Ivan Boesky. Mr. Pitt had worked for the SEC early in his career in the 1970s, serving as its general counsel before joining the Washington office of Fried, Frank, Harris, Shriver & Jacobson. 
What has raised red flags is Mr. Pitt's policy that the SEC will consider a company's cooperation and self-policing efforts in deciding penalties -- or whether to bring an enforcement case at all. In some unusual public criticism, Lynn Turner, former chief accountant under Mr. Levitt, said in an interview in late October that a company's senior management could in effect shift blame for securities violations to lower-level employees. 
Through a spokesman, Mr. Pitt declined an interview, but referred to recent speeches in which he complimented Mr. Levitt and disputed his critics. "Those who are counting on a lack of aggressiveness on our part to police improper market activities will be sorely disappointed," he told the Consumer Federation of America last month. 
Former SEC officials say that, as a practical matter, SEC enforcement attorneys are independent and wouldn't buckle to a commissioner's pressure to back off a probe of possible wrongdoing. Meantime, in answer to his skeptics, Mr. Pitt is expected to showcase two coming enforcement cases, against as-yet-unnamed companies. 
He said one case involves the use of "pro forma earnings" in a way that misled investors and broke accounting rules, while the other case alleges a violation of "Regulation FD." That Regulation Fair Disclosure is a Levitt SEC rule, strongly opposed on Wall Street, intended to ensure that important corporate information is available to individuals at the same time as it is to professional investors. 
Mr. Pitt also has endorsed some Levitt initiatives, and he has tried to go beyond Regulation FD in making corporate information available in a more broadly and timely way, by proposing a new system for companies' disclosure of market-moving news as events occur, rather than quarterly. 
But the Enron case offers the most visible opportunity for defining Mr. Pitt as an enforcer. He has made it a high priority, assigning a team of about six attorneys and accountants to unravel the company's complicated books, according to a person familiar with the probe. He pesters probers for regular progress reports, and even questions investigation strategy at times, according to this person. 
Mr. Pitt has said he intends to make Enron an example of his push for "real time" enforcement, to speed up the slow pace of some SEC investigations. But Gregory Bruch, a former SEC enforcement attorney, says Enron's involvement with partnerships and extensive energy-derivatives trading probably would take a year for the SEC to unravel. The SEC would have to "cut corners" to bring a case more quickly, perhaps naming fewer defendants than it otherwise might. 
Mr. Pitt declines to comment on specifics of the Enron case, except to say "the public can be confident . . . that we will deal with any wrongdoing and wrongdoers swiftly and completely." 
Yet even as Mr. Pitt stands to be judged for the SEC's handling of the Enron matter, the case holds particular complications for him that will restrict the chairman's own role. If the commission staff ultimately does recommend filing an enforcement action against Enron, Mr. Pitt must recuse himself at that point because a former client, Arthur Andersen LLP, also is under SEC investigation for its role as Enron's auditor. 
Mr. Pitt is required by SEC rules to recuse himself for at least a year from matters involving his former law firm or clients. He has already done so on several involving Big Five accounting firms, including an enforcement case involving a foreign affiliate of KPMG International in September. 
The possibility of his recusal in an Enron case adds to the pressure on the White House to fill four openings on the five-member commission. On Dec. 20, the administration announced plans to nominate two Republican accounting-firm executives: Paul Atkins, a partner at PricewaterhouseCoopers LLP, and Cynthia Glassman, a principle at Ernst & Young LLP. But the Senate isn't likely to confirm them until Mr. Bush has nominees for the two other seats designated for Democrats. Without new commissioners, a decision on an Enron enforcement action would be left to the lone current commissioner besides Mr. Pitt -- Republican Laura Unger, who is serving under an expired term. 
Meantime, Mr. Pitt has been trying to mend fences with critics. At Mr. Pitt's request, he went to Capitol Hill to meet with Mr. Dingell on Dec. 12. Mr. Pitt "wants to be judged on what he does rather than what he's said in the past," recalls Mr. Dingell about that meeting, adding: "I think that's a wise choice." 
--- Chairman Pitt vs. Ex-Chairman Levitt

The rhetoric of the current chairman of the Securities and Exchange
Commission differs sharply from his predecessor's.

Harvey Pitt, 56

Last job before SEC appointment in August 2000: Securities attorney
at Washington office of Fried, Frank, Harris,Shriver & Jacobson

"The record makes abundantly clear that the commission's approach of
recent years-reflected in an adversarial attitude toward industry and
professions in almost all respects-has not yielded the kinds of
positive results that you and I wish for the benefit of investors."
Dec. 6, 2001

Arthur Levitt, 70

Last job before SEC appointment in July 1993: Owner of publishing
company, which included "Roll Call," a Capitol Hill political newspaper

"I fear that the audit process, long rooted in independence and
forged through professionalism, has diminished . . . . As I look at
some of the audit failures today, I can't help but wonder if the staff 
in the trenches of the [accounting] profession have the training and
supervision they need to ensure the audits are being done right." Oct. 
7, 1999

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Heard on the Street
How to Spot Signs of Companies' Distress
By Henny Sender
Staff Reporter of The Wall Street Journal

12/31/2001
The Wall Street Journal
C1
(Copyright (c) 2001, Dow Jones & Company, Inc.)

On Friday, Nov. 30, two days before Enron filed for bankruptcy-court protection, its shares were trading at 26 cents -- down from a high of $90 and a little late for investors to decide to ditch the stock. Ditto for investors in any number of other big corporate casualties this fall, including Bethlehem Steel, Federal-Mogul and Polaroid. 
But astute investors realize there are some early-warning signals that work better than plunging stock prices to tell them to head for the exits. And as more companies seek protection from U.S. Bankruptcy Court, predicting whether a company may file becomes an ever-more-relevant skill.
The stakes are higher than they used to be in reading the market equivalent of tea leaves. First, the number of bankruptcy filings is up sharply this year, and many experts believe more are to come in the current unsettled economic climate. Chapter-11 bankruptcy filings by publicly traded companies hit a record 143 this year, affecting $76 billion of debt, compared with 119 the previous year on $30 billion of debt, according to David Hamilton, a specialist on defaults for Moody's Investors Service in New York. 
Moreover, many companies that file for bankruptcy protection nowadays are more likely to end up in liquidation than in the past, analysts say, making the stock of a distressed company less likely to be worth much. It isn't only New Age telecommunications companies -- becoming famous for the plummeting values of their fiber-optic networks and other assets -- that may be valued less in bankruptcy court than their shareholders hoped. The same may prove true for retailers now in Chapter 11 proceedings, restructuring advisers warn. 
Here is a guide to a half-dozen barometers of financial health watched by sophisticated investors for signs of potential bankruptcy, some are easier than others for average investors to follow on their own: 

SWAPS THAT SWEAT IT OUT: The derivatives markets can be especially valuable as an early-warning signal -- particularly the credit-default swap market, where institutional investors seek financial protection against corporate bankruptcies. The default swap market is probably the most sensitive measure of how market participants view corporate prospects. 
For example, the credit-derivatives market was far ahead of the rating agencies in suggesting that once-mighty energy trader Enron was a weak credit. Weeks before the Houston company sought bankruptcy-court protection, pricing on Enron protection was far more expensive than it should have been, given Enron's then investment-grade rating. Essentially, these credit swaps are a form of insurance on Enron debt; if Enron defaults, the buyer of such a swap goes to the seller of the swap and receives 100 cents on the dollar, regardless of how worthless the debt may have become. 
In September, shortly after Enron Chief Executive Jeffrey Skilling stepped down, there was a drastic increase in Enron credit-default swap volumes, and spreads doubled on Enron risk to a steep 2.75 percentage points over the London Interbank Offered Rate, the short-term rate off which banks price some loans. 
By October, with the announcement that the Securities and Exchange Commission was investigating Enron's financial statements for accounting irregularities, spreads doubled again, to more than five percentage points. Then, after Enron lost access to the commercial-paper market, spreads rose to an almost prohibitively expensive 15 percentage points, according to data from KMV LLC, a credit-risk-management service in San Francisco. Meanwhile, the shares edged down to $13 from $37 during the course of the month, levels that didn't hint at the fate that would overtake Enron just a few weeks later. Indeed, the shares didn't drop below $1 until Nov. 28, from above $4 on Nov. 27. 
(Unfortunately, there isn't a market for many corporate names below investment grade, unless, like Enron, they plunge rapidly into junk territory.) 

DEBT THAT DIVES IN VALUE: Often the secondary bond market can provide valuable clues about a troubled company's fate, as bond analysts are much more focused on a company's ability to repay its debts. They scour information pertinent to the sort of distress that leads to a filing. 
Henry Miller, vice chairman of Dresdner Kleinwort Wasserstein, an investment-banking and advisory boutique, has worked out a formula as follows. "When the bonds start trading between 90 cents and 80 cents on the dollar, a light bulb goes on," he says. "When the bonds then fall to between 60 cents and 80 cents, that tells you that somebody is nervous. And when they start trading between 40 cents and 60 cents, it is a question of when, not whether. And when they go below 40 cents, a filing is -- to varying degrees -- imminent." 

BANKING ON TROUBLE: Another indication that a company may be about to seek bankruptcy-court protection is when it draws down all its credit or standby credit lines from its bankers, according to Brad Eric Scheler, head of the restructuring practice for law firm Fried Frank Harris Shriver & Jacobson in New York. Such drawdowns are also an early-warning symptom that a company anticipates a turn for the worse in its fortunes. 

CONSCIOUSNESS OF RATIOS: Financial distress quickly translates into a company violating its lending agreements with its bankers. Such violations allow the banks to pull their lending lines or even declare a company in default. While information about the relationship between bank and client usually isn't public, there are certain relevant financial ratios that can provide clues. For example, lending agreements oblige most companies across a wide range of industries to keep the debt level at no more than about seven or eight times earnings before interest payments, taxes and depreciation. If the amount of the debt is far greater, investors can assume the banks aren't happy. Unhappy bankers can even petition the courts to push their client into involuntary bankruptcy. 

A DATE WITH DEBTHOLDERS: Figuring out the timing of a filing can be tricky, of course. One indicator watched by many hedge funds: whether a potential Chapter 11 candidate has an onerous interest payment coming up. Managers of these sophisticated investment pools assume that a troubled company would prefer to file before, rather than after, paying out large sums of precious cash. 
But that may not be a sure thing. For example, in advance of a scheduled payment on Global Crossing bonds in November, many hedge funds made bearish bets on the telecommunications company, which already had drawn down bank lines, anticipating it soon would be in violation of its bank covenants and would seek bankruptcy protection. The company, though, met the cash call, and the hedge funds closed out their losing positions. On Friday, Global Crossing announced it had come to agreement with its bankers on loan covenants. 

FLASHING RED LIGHT: Some signals couldn't be more glaring. If a company retains bankruptcy counsel or calls in restructuring-advisory boutiques, such as Greenhill & Co. or Blackstone Group or Lazard Freres & Co., it is reasonably certain a company is at least considering bankruptcy. (Another reason for some hedge funds' bearishness on Global Crossing: It has hired a restructuring adviser, according to people familiar with the matter; it won't comment on the matter, saying its relationships with any advisers are confidential.) 
One of the messages that restructuring advisers tell their clients is to file early. That means investors can be caught off guard more easily since some recent bankruptcy-court filers, such as Covad Communications Group, have had significant amounts of cash on their balance sheets.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business; Business Desk
Investors Forecast Unreal 401(k) Gains Savings: Study finds near-term expectations subdued, but long-term projections of returns overly optimistic.
JOSH FRIEDMAN
TIMES STAFF WRITER

12/31/2001
Los Angeles Times
Home Edition
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Copyright 2001 / The Times Mirror Company

Two straight years of stock market losses have left America's 401(k) retirement savers with muted expectations for 2002, but in many cases their longer-term forecasts remain wildly optimistic, according to a new survey. 
The November poll of 500 participants in 401(k) plans, to be released this week by No. 2 mutual fund provider Vanguard Group, found that respondents expect an average 7% annual return on stocks over the next year or two. It's the first time a national survey has found 401(k) investors expecting less than double-digit returns on their accounts, according to Vanguard.
But many savers still have a rosy long-term view of the market, the poll found. Nearly one-fourth of respondents expect stock prices to rise 30% to 100% a year over the next two decades--in line with the results of public-opinion surveys from the height of the late-1990s bull market. Even the respondents' median forecast of 15% annual gains is well above historical stock market returns, which have averaged 10.7% a year since 1926. (Median means half the forecasts were higher and half were lower.) 
Experts say the optimistic responses indicate that, for some investors, the euphoria of the bull market that crashed in the spring of 2000 still lingers. 
"There's some recognition of how tough the current market environment has been," said Barbara Fallon-Walsh, a Vanguard principal who oversees the firm's 401(k) education programs. "But longer term, it might be that hope springs eternal." 
Still, she said she was encouraged by investors' "reasonable" near-term expectations, by the fact that most savers have stayed the course in a rough environment for stocks and that many recognize the need to save more money to meet their goals. 
Only 15% of respondents reported making a 401(k) portfolio change in the last six months. Twenty-two percent said they intend to contribute a higher portion of pay in the next six months, compared with 12% who raised their savings rate in the previous six months. 
When it comes to long-term expectations for stock prices, several prominent professional investors have issued far tamer forecasts than those recorded by Vanguard's pollsters. 
Billionaire Warren Buffett, for example, said investors should be happy with 7% to 8% annual returns over the next decade. New York-based Standard & Poor's Corp. predicts returns of 6% to 7% a year over the next five to 10 years, and Roger Ibbotson, head of Chicago investment research firm Ibbotson Associates, expects gains averaging 9.4% over the next 20 years. 
That's a far cry from the 20%-plus annual gains investors came to expect during the 1990s. The pros cite several reasons for their conservative expectations, including the fact that stocks are still pricey by historical standards. 
Vanguard's survey also found that investors' expectations for bonds and money market funds are modest for the near term, but unrealistically buoyant over the long haul. Respondents expect annual returns of 7% for bonds and 4% for ultra-safe money markets over the next year or two--close to historical averages. But over the next decade or two, the median forecast is for 10% annual gains for both asset classes, while the average forecast, skewed by the extreme optimists, calls for 15% returns for bonds and 16% for money markets. 
So-called defined contribution retirement plans, including 401(k)s, allow workers to save for retirement by investing tax-deferred income through a menu of investment options that typically includes stock and bond mutual funds, their employer's company stock and a money market fund. More than 40 million Americans take part in the plans. 
The hazards of owning company stock in a 401(k) account is poorly understood, according to Vanguard's analysis. Respondents rated company stock as less risky than stock mutual funds, which experts consider much safer because of their diversified holdings. But respondents correctly identified individual stock in general as riskier than stock funds. 
"There are analogies in other areas, such as people's [often negative] perceptions of stock brokers and politicians," Fallon-Walsh said. "It's the attitude that 'mine is different.' It's the comfort of the known." 
Thousands of 401(k) savers at companies such as Enron Corp. and Lucent Technologies Inc. have seen their retirement savings crumble in the last two years because they invested too much in company stock. Many financial planners say workers shouldn't put more than 5% of their 401(k) holdings in their employer's stock, especially since their paycheck is also tied to the company's fortunes. 
The unrealistic long-term expectations of many, and the misperceptions of relative risk, point to the importance of 401(k) education programs, Fallon-Walsh said. 
"Between all the Web sites, company meetings with employees and the printed materials available, the table is set. It's just a question of getting people to sit down and eat the dinner."

GRAPHIC: Misunderstanding Risk?; ; CREDIT: Los Angeles Times 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business; Business Desk
Executives' Bonuses Stir Anger as Polaroid Sinks
JUSTIN POPE
ASSOCIATED PRESS

12/31/2001
Los Angeles Times
Home Edition
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Copyright 2001 / The Times Mirror Company

BOSTON -- In 1996, when Gary DiCamillo joined Polaroid Corp. as chief executive, the company had 10,000 employees and its stock was trading at more than $40 a share. Five years later, Polaroid is in bankruptcy proceedings, thousands have been laid off, and its shares trade for pennies each. 
But even as former workers scrounge for medical coverage, DiCamillo, who was paid nearly $850,000 last year, stands to earn up to twice that in bonus pay under a plan Polaroid has asked a U.S. Bankruptcy Court to approve.
The justification? Polaroid said it must pay millions to 45 top executives to make sure they don't jump the sinking ship before they can use their expertise to disassemble the company and pay off creditors. Some of the payments would be tied to how well the sales go, but others would be guaranteed. 
The plan has angered some former Polaroid workers, many of whom never got severance pay and lost thousands of dollars in an employee stock plan. 
"[DiCamillo is] looking after his cronies at the top and he forgot about the people that have been there for years," said Noel Barry of Bellingham, Mass., a former employee who is on long-term disability and recently received word that Polaroid no longer will contribute to his insurance. 
These payments to executives, known as retention bonuses, are common in bankruptcy cases, and often creditors say it is money well spent--smart employees are as essential in bad times as in good. 
"It's not a crazy idea," said Alan Johnson, managing director of the executive compensation firm Johnson & Associates, who has testified for companies seeking approval for retention bonuses. "It's almost a necessity. The question is to whom and how much." 
Others say the ensuing bad publicity can outweigh the benefits. 
"From just a perceptual point of view, it certainly seems not to pass the ethical stink test," said W. Michael Hoffman, executive director for the Center for Business Ethics at Bentley College in Waltham, Mass. 
Generally, such arrangements mix guaranteed payments with incentives based on how long employees stay and how successful they are in selling assets. 
At Houston-based Enron Corp., nearly 600 employees received more than $100 million in bonuses last month as the company faced a merger that unraveled and then filed for Chapter 11. 
Boston bankruptcy lawyer Paul Daley said such payment proposals are increasingly common. 
"When I started 30 years ago, when someone filed a Chapter 11, one of the things you recommended was they take a cut in salary," Daley said. "Now the fear is always that executives without the bonuses would leave and would spend their time looking for their next job rather than concentrating on the needs of the company." 
Polaroid retirees ridicule such arguments. With a weak economy and Polaroid's reputation in tatters, they doubt recruiters are actively wooing the company's top executives. 
"Maybe they're right, these 45 people are essential to the reconstruction of the company, and if so, obviously shareholders ought to applaud such a move," Hoffman said. "I guess it's possible, but it does raise not only factual eyebrows but ethical eyebrows." 
Company spokesman Skip Colcord said: "This is an incentive to get key people with key skill sets to remain with the company through the Chapter 11 process." 
In considering retention bonuses, bankruptcy judges must determine whether the plans show proper business judgment. Among the factors considered are whether the employees are to blame for the bankruptcy and how likely they are to leave. 
Bill Coleman, vice president of compensation at Salary.com, a Wellesley, Mass.-based executive compensation firm, said the bonus plans are feeding on one another: Each time a plan is approved, it serves as justification for others. 
But scrutiny also is on the rise, because so many more Americans are invested in the markets than during the last recession. 
"When you have employees losing their pensions or locked out of selling stock when executives weren't, or kept out of their severance while the CEO is getting one," Coleman said, "those kinds of patterns create huge negative feelings toward the company."

PHOTO: Disabled employee Noel Barry loses medical benefits Tuesday.; ; PHOTOGRAPHER: Associated Press 
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

Business; Business Desk
Fewer Power Plants Slated; Worries Rise Energy: Electricity producers' spending cuts lead to a slowdown in construction, which may mean tight supplies as the U.S. recovers from recession.
MARK JOHNSON
BLOOMBERG NEWS

12/31/2001
Los Angeles Times
Home Edition
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Copyright 2001 / The Times Mirror Company

HOUSTON -- Electricity producers' plans to curtail expansion, aimed at reassuring investors rattled by Enron Corp.'s collapse, are raising concerns that the U.S. may face power shortages in the next few years. 
Mirant Corp., NRG Energy Inc. and some rival generators shelved or postponed billions of dollars in projects this month to bolster their credit ratings after downgrades helped push Enron into Chapter 11 bankruptcy.
A decline in electricity prices has further reduced the incentive to build plants. The slowdown in construction may lead to tight power supplies as the U.S. economy recovers from recession, possibly next year, and energy demand picks up, investors and analysts say. 
"When the economy snaps back, we're going to have howls again asking, 'Why didn't we build more power plants?'" said Donald Coxe, manager of the $352-million Harris Insight Equity Fund. "In 12 months people will once again be predicting an energy crisis and asking why we were so stupid not to build more." 
Enron filed for Chapter 11 protection from creditors Dec. 2 after investors grew concerned that the company, formerly the largest energy trader, was hiding debt at affiliated partnerships. Customers defected as the company's credit rating was cut to junk status and it couldn't raise cash needed to back trades. 
To avert similar downgrades, Atlanta-based Mirant is slashing capital spending by 40% and Minneapolis-based NRG is delaying $900million in spending on generators. Dynegy Inc., based in Houston, will spend less than $1.5 billion on projects, down from a budgeted $1.7 billion. 
"The last thing the market wants to see is a huge expansion program that requires huge cash flow," said Jeffrey Gildersleeve, an Argus Research analyst. "Management is going ahead with what's on the table now. The later stuff is being delayed." 
Shares of power traders and producers have fallen as investors fearful of an Enron-like meltdown shy away from debt-laden companies. In the last two months, Mirant shares have slid 43%, Calpine 36%, Dynegy 34% and NRG 14%. 
Gildersleeve projected about six months ago that about 320,000 megawatts of generating capacity would be built in the U.S. in the next five years. He now expects 150,000 to 200,000 megawatts. 
At least 185,000 megawatts must be added by 2010 to meet U.S. demand, the Department of Energy forecasts. A megawatt is enough power for about 1,000 typical U.S. homes. 
The deregulation of electricity markets in the U.S., first in New England and later in the Middle Atlantic states, California and parts of the Midwest, spurred developers such as Calpine and utilities such as Dominion Resources Inc. to break ground on new power plants in the last few years. 
Calpine, based in San Jose, added eight plants in the third quarter, quadrupling revenue in the period to $2.92 billion. Duke Energy Corp., the biggest U.S. utility owner, boosted third-quarter net income by 50% to $796 million as power sales rose. 
Profit from electricity sales is falling as the U.S. economy slows, in part because of caps imposed by federal regulators in the West to stem soaring prices that drove California's two biggest utilities to the brink of insolvency. 
This quarter, electricity prices at the California and Oregon border dropped to an average of $26.91 a megawatt, down 89% from $244.80 a year earlier. 
Calpine said it is now reviewing the company's plan to increase generating capacity to 70,000 megawatts by the end of 2005, a level that would make it the nation's biggest electricity producer. 
Even with the cutbacks, many energy company executives and analysts say they aren't worried about shortages. The industry will build plants where needs arise, they say. The western U.S. has added about 5,000 megawatts of capacity this year, an increase of 3%, with almost half coming in California. 
"If the players still see a need for power, the plants will get built," said Thomas Capps, chief executive of Dominion, owner of Virginia's largest utility. 
A lack of transmission lines is more likely to lead to shortages than would a dearth of power plants, said David Schanzer, a utility analyst with Janney Montgomery Scott. In some cities, such as New York and Boston, power lines can get overloaded, leading to blackouts during a heat wave.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

California
Commentary UC Fund Managers Were Asleep at the Enron Wheel
PETER NAVARRO

12/31/2001
Los Angeles Times
Home Edition
B-11
Copyright 2001 / The Times Mirror Company

The University of California is suing Enron to recover the $145 million it lost investing in the company's fallen stock. Methinks the lawyers got it wrong. Instead, folks like me--a UC professor and one of thousands of future pensioners--should be suing the university's portfolio managers. 
These "motley fools" apparently spent over a year riding a $90 stock all the way down toward 90 cents. This is a clear violation of the first three rules of modern investing: (1) cut your losses, (2) cut your losses and (3) cut your losses.
Maybe, with more than $50 billion of assets to track, UC's portfolio managers simply weren't paying attention when Enron began to circle around the Wall Street drain. More likely, these market un-wizards succumbed to the antiquated mind-set of traditional "buy and hold" investing. 
In the buy-and-hold investor's passive little world, the stock market is a "random walk" where stocks go up and down, but no one can predict the movements. So managers should buy stocks that broadly diversify one's portfolio and hang on for the ride. The problem with this theory is that Enron's meltdown was anything but random. 
Any prudent portfolio manager watching the stock could have seen the early-warning signs months ago. Fully one-third of Enron's business was in telecommunications--not energy. Like other telecom companies, Enron over- invested and wound up with a crushing debt when the sector collapsed. 
Add huge cost overruns on some projects in India and you have a certain recipe for the stock's long decline. 
The coup de grace came when word leaked of alleged accounting improprieties--the focus of UC's class-action suit. Yet this fraud came to light long after Enron had completed most of its collapse. 
Which leads me back to the original point. The stock took more than a year to fall because, while UC's portfolio managers were sleeping, most other large institutional investors were unloading Enron and cutting their losses. 
There are some lessons here. 
For individual investors, the stock market is very risky. To safely invest, buy broad-based index funds. If you pick stocks, have the discipline to sell any dog in your portfolio like Enron--or any one of a number of once high-flying tech stocks--that loses more than 8% to 10% of its value. 
For President Bush, who will soon press Congress to privatize Social Security, there is this troubling question: If supposedly sophisticated portfolio managers like those at the University of California can lose so much money, is it really prudent to allow individuals to gamble their Social Security on individual stocks? 
As for the courts, a jury will probably find Enron executives and some errant auditors from the Arthur Andersen accounting firm liable for actions worthy of a multibillion-dollar judgment. 
Personally, I would rather see any judgment used to make whole all of the Enron employees--below the executive ranks--who lost their retirement savings. 
Unlike the incompetent UC portfolio managers who could have sold their stock at any time and kept their losses small, these employees were forbidden to cash out. 
At least they have an excuse. 
* 
Peter Navarro, a business professor at UC Irvine, is the author of "If It's Raining in Brazil, Buy Starbucks" (McGraw Hill, 2001).

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	



Amer Elec Power Buys Indian Mesa Wind Project Facilities

12/31/2001
Dow Jones News Service
(Copyright (c) 2001, Dow Jones & Company, Inc.)

COLUMBUS, Ohio -(Dow Jones)- American Electric Power Co. (AEP) acquired the 160-megawatt Indian Mesa Wind Power Project in Iraan, Texas from Enron Wind Corp. of California. 
In a press release Monday, American Electric said it funded the $175 million acquisition internally, but it intends to seek project financing at a later time.
The energy company also agreed to assume responsibility for the fulfillment of previously announced long-term power supply arrangements with City Public Service, the municipal electric utility of San Antonio. Enron Wind will provide operations and maintenance services. 
The Indian Mesa Wind Project, which uses 107 Enron Wind 1.5-megawatt turbines, was completed in December. 
American Electric expects the acquisition to add to earnings. 
The company had 2000 earnings, before extraordinary items, of $631 million, or $1.96 a share, on revenue of $13.7 billion. 
Company Web site: http://www.aep.com 
-James McDermott; Dow Jones Newswires; 201-938-5400

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	

IN THE MONEY: CSFB Resigns From Enron Creditors Committee
By Carol S. Remond

12/31/2001
Dow Jones News Service
(Copyright (c) 2001, Dow Jones & Company, Inc.)

A Dow Jones Newswires Column 
(This column was originally published Friday.) 

NEW YORK -(Dow Jones)- "Either you're in or you're out."
But Credit Suisse First Boston apparently missed this memorable line from the movie "Ocean's Eleven." 
In fact, the Swiss banking giant can't seem to make up its mind when it comes to Enron Corp. (ENE). Just days after going through the trouble of getting a much coveted seat on Enron's unsecured creditors committee, CSFB had a change of heart and abruptly resigned. 
According to court documents filed with the U.S. bankruptcy court for the Southern District of New York, CSFB has now been replaced by Westdeutsche Landesbank Girozentrale. 
CSFB stepped down from its position on the 15-member creditors committee shortly after it was formed on Dec. 12. 
Large banks and other creditors normally vie for membership in various creditor committees formed after a company files for bankruptcy in order to gain access to otherwise difficult-to-obtain information. Creditors also see membership as a way to guide a company's restructuring process in their favor. 
A spokesman for CSFB said the bank resigned after only one meeting of the creditors committee. "We decided that membership would take up too much time and bring relatively small benefits given our limited exposure" to Enron, he said. 
Enron filed for Chapter 11 protection earlier this month. The energy trader listed a trade debt to CSFB of $70.66 million in its bankruptcy filing. 
Even given CSFB's relatively modest Enron liabilities, some restructuring specialists were puzzled by the bank's decision to step down from the creditors committee. 
"When you're on the committee you get a birdseye view of the company's financials. It's quite intriguing that they chose to resign," a lawyer said. 
CSFB's move could have been prompted by the banks' decision to sell its exposure, another lawyer suggested. 
"They may just have wanted to take a look and then decided that they wanted to get out of their position," the second lawyer said. 
In addition to Westdeutsche, Enron's unsecured creditors committee includes: Enron's two lead banks, J.P. Morgan Chase & Co. and Citigroup; ABN Amro Bank; Credit Lyonnais; National City Bank; Silvercreek Management Inc.; Wells Fargo Bank Minnesota N.A.; Oaktree Capital Management LLC; Bank of New York; St. Paul Fire & Marine Insurance Co.; Duke Energy Trading & Marketing LLC; National Energy Group Inc., Williams Cos. and Michael P. Moran. 
Separately, the creditors committee took steps late Thursday to set up procedures that would allow members to continue trading Enron's bonds and stock without violating their fiduciary duties. 
Such trading would be allowed "provided that any committee member executing such trades must establish and effectively implement the policies and procedures set forth herein, such as fire walls to prevent the misuse of non-public information obtained through its activities as a committee member," according to an application filed with the court by the creditors committee. 
Fire walls, also known as Chinese Walls, are a Wall Street staple, supposedly separating financial services groups' operations for ethical, fiduciary and legal reasons. 
The creditors' proposed application is scheduled to be presented to bankruptcy judge Arthur J. Gonzalez on Jan. 9 
-By Carol S. Remond; Dow Jones Newswires; 201-938-2074; carol.remond@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. 	


California Utility Regulator Lynch Comments on the Power Crisis
2001-12-31 03:03 (New York)


     San Francisco, Dec. 31 (Bloomberg) -- California Public
Utilities Commission President Loretta Lynch talks about the power
crisis that hit California this year. Millions of Californians
lost their power during six days of blackouts in January, March
and May, and the state's two largest utilities, units of PG&E
Corp. and Edison International, are insolvent.

On the state's electricity deregulation plan, approved unanimously
by the California Legislature in 1996:

     ``One thing that's clear to me when I talk to people who were
around in 1996 is that no one anticipated the complete meltdown of
our power market. There weren't any safeguards or triggers built
into the plan to either evaluate or stop it if things went awry.''

On investigations by the Public Utilities Commission and the
California attorney general into alleged market manipulation by
power generators and traders:

     ``For the first six months of our investigation, which
started last December, we were in huge document fights with the
sellers, which went to the California Supreme Court. We won those
fights eventually, but that put us behind by about six months.''

     The legal fights delayed the investigation, and thus the
filing of criminal charges or lawsuits, Lynch said.

     ``It's a huge job to be able to determine trends and
concerns. So I don't think it's a surprise. And I think it's well
within the range of these investigations to take the time both the
PUC and the AG have been taking.''

On the bankruptcy of Enron Corp., once the world's largest energy
trader:

     ``Enron's business plan depended on a Wild, Wild West with no
cop in the market. And they got it. They got it for a while. One
thing that hurt Enron was the feds coming in and bounding
California's market. What's volatile and good for Enron is
burdensome and bad for California. Enron could squeeze every penny
out of this market and hold it over a barrel. And they did that
this year.''

--Daniel Taub in the Los Angeles newsroom, (323) 801-1261 



Enron, Providian, Others Win the `Stocky' Awards: David Wilson
2001-12-31 00:43 (New York)


     (Commentary. David Wilson is a columnist for Bloomberg News.
The opinions expressed are his own.)

     Princeton, New Jersey, Dec. 31 (Bloomberg) -- Last year, this
column introduced the Stocky Awards, designed to commemorate some
of the year's standout performances in the U.S. stock market.

     It's time to bring them back for a second appearance. There
aren't any standing categories; each award is uniquely suited to
its recipient. The envelopes, please ...

     Rhymes with Dot-Com Award: Enron, naturally. The collapse of
Enron Corp., once the largest energy trader, produced the kind of
losses that investors in numerous ``dot-com'' companies sustained
during the past couple of years.

     Enron's shares plummeted 99 percent. Partnerships led by
Andrew Fastow, fired as chief financial officer in October, cost
the Houston-based company $1.2 billion of shareholder equity. The
company also restated 4 1/2 years of results, lost Dynegy Inc. as
a suitor, and made the largest Chapter 11 bankruptcy filing ever.

     Serves Them Right for All That Junk Mail Award: Providian
Financial Corp., the fifth-largest U.S. issuer of MasterCard and
Visa credit cards, was the year's worst performer among companies
still in the Standard & Poor's 500 index.

     Shares of the San Francisco-based company tumbled 94 percent
as loan losses mounted. The bank wrote off 10 percent of average
loans in the second and third quarters, and estimated that the
fourth-quarter figure would be 12 percent.

     Shailesh Mehta, chief executive officer since 1998, resigned
in October. In November, Providian said federal banking regulators
had prevented the company from issuing cards to less-creditworthy
consumers -- targeted in recent years -- and limited loan growth.

     It's a Family Affair Award: Ford Motor Co., the second-
largest automaker, and Hewlett-Packard Co., the No. 2 maker of
computers, share the honor.

     Ford named William Clay Ford Jr., great-grandson of founder
Henry Ford, as CEO. He replaced Jacques Nasser in October after
the Dearborn, Michigan-based company lost more than $1 billion
during the second and third quarters.

     The sons of Hewlett-Packard's co-founders, William Hewlett
and David Packard, decided to oppose CEO Carly Fiorina's plan for
the Palo Alto, California-based company to acquire Compaq Computer
Corp. for $23 billion.

     What's in a Name Award: Philip Morris Cos., the largest
cigarette maker, said in November that it wants to become Altria
Group Inc. and will ask shareholders to approve the name change in
April. Some similarly named companies weren't happy about that.

     Altira Group, a venture-capital firm in Denver, filed a
lawsuit seeking to block Philip Morris from making the change.
Altria Healthcare Corp., a Birmingham, Alabama-based provider of
health-care billing, consulting and training services, asked the
New York-based company to ``do the right thing'' and reconsider.

     Welcome to the S&P 500 Award: Real estate investment trusts,
omitted from the benchmark index since the 1970s, became eligible
again this year.

     Equity Office Properties Trust, the most valuable REIT,
joined the S&P 500 on Oct. 10. Equity Residential Properties
Trust, the second most valuable, followed on Dec. 3. Both are
based in Chicago, and billionaire Sam Zell is their chairman.

     Domino Theory Award: Companies targeted in asbestos-related
cases kept going into bankruptcy. Federal-Mogul Corp., W.R. Grace
& Co. and USG Corp., the owner of U.S. Gypsum, sought Chapter 11
protection as the number of claims increased. So did G-I Holdings
Inc., owner of GAF Corp., and U.S. Mineral Products Co. They are
among more than 40 companies to file since the 1980s.

     Claims tied to asbestos, which can cause cancer and lung
disease, also weighed on companies such as Halliburton Co., an oil-
services and construction company based in Dallas. Its stock
tumbled 42 percent on Dec. 7 after a Maryland jury ordered a unit
to pay $30 million in one case.

     Recession? What Recession? Award: The lineup of the S&P 500's
best-performing stocks hardly suggests that the U.S. economy ended
a decade-long expansion this year, or that the just-ended holiday
shopping season may have been the worst in 15 years.

     Retailers -- namely AutoZone Inc., Best Buy Co., Circuit City
Group, Office Depot Inc. and J.C. Penney Co. -- accounted for five
of the year's six largest percentage gains. Nvidia Corp., a maker
of computer-graphics chips, was the exception.

     Lowe's Cos., the second-largest chain of home-improvement
stores, also was a top-10 performer. The company's stock price
more than doubled, far surpassing the 13 percent gain for Home
Depot Inc., its bigger rival.

     Better Than Cipro Award: Providers of security software,
which safeguards computers against damaging programs such as
viruses, had a stellar year.

     Network Associates Inc., the maker of McAfee software, rose
more than sixfold. The Santa Clara, California-based company had
far and away the biggest gain in the S&P MidCap 400, an index of
smaller companies than those in the S&P 500. Its McAfee.com Corp.
unit, which sells software online, jumped more than sevenfold.

     Symantec Corp., which sells software such as Norton Anti-
Virus, more than doubled. The Cupertino, California-based company
finished the year by joining the Nasdaq-100 index, a gauge of the
Nasdaq Stock Market's biggest companies.

     I Remember California Award: Edison International and PG&E
Corp., the owners of California's two largest utilities, had an up-
and-down -- make that down-and-up -- year in 2001.

     Shares of both companies dropped in January to their lowest
price in more than two decades amid blackouts and a state takeover
of power purchases. PG&E, based in San Francisco, fell further in
April as its Pacific Gas & Electric unit filed for bankruptcy.

     Edison, the Rosemead, California-based parent of Southern
California Edison, and PG&E later rebounded as the state's power
crisis subsided. Their losses narrowed by the end of last week to
2.5 percent and 2.3 percent, respectively.

     The King Is Dead, Long Live the King Award: Video-rental
chains haven't disappeared, even as cable-television and Internet
companies pursue ``video on demand.'' Instead, their share prices
jumped amid growing demand for DVDs, which are more profitable to
rent than videocassettes.

     The largest U.S. chain -- Blockbuster Inc., owned by Viacom
Inc. -- more than tripled. Hollywood Entertainment Corp., the No.
2 chain, and Movie Gallery Inc., ranked No. 3, soared more than 10-
fold and were among the year's best-performing U.S. stocks.

     It's tempting to give an honorable mention to any stock
investor with an overall gain for the year, because the Dow Jones
Industrial Average, the S&P 500 and the Nasdaq Composite Index all
dropped. But there aren't any more awards around. Maybe next year.

--David Wilson in the Princeton newsroom (609) 750-4546