I think there is a real possibility here.  It would be extremely challenging commercially.

How do we convince customers to participate?
Two distinct areas:  (i) Existing portfolio of business and (ii) New business.

New business is easier in one sense since everything is at the money, who would say no to a AAA credit?  Still requires significant amendment to existing trading documentation and where existing trades are present, separating them out as not netting with new trades.

Existing business is easy for counterparties who are already in the money -- they will want the improved credit.  But how do we convince the out of the money side of the equation to participate?  This seem to me to be the biggest hurdle.


Issues:

Requires consent of customers and significant amendment of existing contracts.
	Adequate incentive for customers currently out of the money to participate?
	Might make more sense where no current positions exist.
	
Contract hurdles:

	Need to allow for termination by defaulting party so Enron (VMAC) will be able to control termination on default.
	Need the consent of counterparty to assign contract to VMAC.
	May require changing permitted credit support from counterparties (letters of credit probably don't work).

If we are attempting to put an existing book of business into the structure, an initial chunk of money will have to be given to VMAC to secure the existing out of the money side of the portfolio - how much is it and do we have that money?

It's not clear how the proposal allows for credit lines to and from counterparties.  That is, if we have given an aggregate $200 million credit line to out of the money counterparties and have only been given an aggregate $100 million credit line to in the money counterparties, will VMAC be satisfied with the mismatch.  Will we continue to control the amount of credit we give to customers?  If we go to 100% collateral requirements for all participating transactions, this is solved since there can't be a mismatch.  (Will customers agree to 100% collateral requirements - i.e. no credit lines?)

Once the supported/participating portfolio is out of the money, Enron will have to post collateral to VMAC.  If we fail, VMAC can default all participating/supported contracts.  

When all of the contracts are terminated with Enron as the defaulting party, the payments to and from counterparties are calculated on their side of the market.  Presumably VMAC will require some cushion to cover this.


 -----Original Message-----
From: 	Kitchen, Louise  
Sent:	Tuesday, November 27, 2001 10:03 AM
To:	Taylor, Mark E (Legal)
Subject:	FW: VMAC Transaction 



 -----Original Message-----
From: 	Eichmann, Marc  
Sent:	Wednesday, November 21, 2001 2:51 PM
To:	Kitchen, Louise; Lavorato, John
Cc:	Richter, Brad
Subject:	VMAC Transaction 

Louise and John:

Here is a general description of the transaction we are negotiating with VMAC (Virtual Markets Assurance Corporation)-FSA (Financial Securities Assurance). FSA is an AAA rated insurance company large enough to provide us with a credible deal.  

Here are the deal highlights:

FSA would wrap Enron's credit exposure as follows:

1) In case of default FSA would liquidate the contracts sleeved to them by Enron and use the proceeds of in the money transactions to pay for out of the money transactions.

2) In case Enron is out of the money in the portfolio of trades sleeved to VMAC. FSA would pay the counterparties with the 100% collateral previously posted by Enron and managed on a day to day basis.

FSA has mentioned the possibility of extending a line of credit to Enron based on its net collateral position (~$1.3 billion as of today) and the net mark to market position (~ $1.4 billion to date). Haircuts on the line of credit would have to be negotiated and might be significant.

FSA-VMAC would receive as compensation the fee structure described under terms and conditions. Under the current structure the only risk FSA- VMAC is exposed to is the risk of simultaneous default by Enron and another counterparty and the operational risk of marking to market the positions and liquidating the contracts. 

Please find enclosed the following:

1) Transaction structure : 	Describes the payment logic in case of default
2) Terms and conditions :	Describes the terms and conditions under negotiation for the contract
3) Collateral Haircuts : 		Describes the collateral haircuts on the securities posted to FSA to guarantee our net mark to market position (if out of the money)
4) FSA snapshot
5) FSA rating: 			AAA qualification of FSA by Moody's

Please feel free to contact me or Brad Richter to clarify any doubts with respect to this,

Marc Eichmann
Work 713 345-8422, Cell 713 870-2696
Manager Transaction Development
EnronOnline LLC

 << File: VMAC Transaction structure.doc >>  << File: VMAC Term and Conditions.doc >>  << File: Collateral Haircuts.doc >>  << File: FSA snapshot.doc >>  << File: FSA rating.pdf >>