oh goody.............

["Ian Murray" <seamus2001@xxxxxxxxx>]

The International Herald Tribune | www.iht.com

Investor Beware: The Next Enron May Be Lurking in Europe or Japan
Eric Pfanner International Herald Tribune
Saturday, January 26, 2002



LONDON While American business practices have come under scrutiny
in the wake of the Enron scandal, international accounting experts
stress that Europe and Asia are no strangers to questionable
bookkeeping and corporate meltdown.

Litigation continues over accounting practices that are alleged to
have contributed to the downfall of the venerable British banking
institution Barings, and Enron's debacle harks back to the
near-collapse of a giant German trading company brought to its
knees after a disastrous foray into the oil futures market a decade
ago.

But some economists say the ingredients for a collapse that
resembles Enron - and on a colossal scale - exist in the Japanese
financial sector.

Some corporate practices in Europe have also raised eyebrows -
principally the willingness of telecommunications companies to
saddle themselves with extraordinary debt for a wild ride in
unproven mobile phone technologies.

What's more, some companies engage in legitimate bookkeeping
magic - in full accordance with international accounting
standards - but in the current environment, such behavior is
raising analysts' fears of wizardry.

In Japan, the banks - among them two of the 10 biggest in the
world - have been reeling for the better part of a decade, weighed
down by an ever-accumulating pile of uncollectible debts. Analysts
fret that it is impossible to discern a true picture of the banks'
dire straits because the institutions are not forthcoming with
disclosures.

Carl Weinberg, chief economist at High Frequency Economics, points
out that the big banks still have not published their midyear
balance sheets. They have only reported income statements, which
exclude key items such as the value of their stock holdings.

Even when the banks do finally provide balance sheets, economists
say, these complex documents may distort or understate the true
severity of their problems.

"I don't know anyone who really knows how to read a Japanese
balance sheet," said an analyst who insisted he not be identified.

He suggested that, like Enron, the banks may have found ways to
hide additional liabilities off their books: "Do I think there are
other problems lurking out there?" he asked. "Absolutely."

As the economic downturn unleashes a record round of corporate
bankruptcies, some economists say that the Japanese banks' problems
are coming to a head. "These latest hits are big ones for banks
that were arguably insolvent to begin with," Mr. Weinberg said.

The biggest hit could come from Daiei, a huge supermarket chain
that has struggled to put together a bailout.

Mr. Weinberg estimates that if it goes under, along with three
other big recent bankruptcies, the banks would face a collective
loss of nearly $40 billion.

That is on top of the tens of billions of dollars in nonperforming
loans that the banks carry on their books. Their problems will be
compounded by new regulations requiring banks to "mark to market"
the value of shares they hold in Japanese companies.

Because the Tokyo stock market is hovering near its lowest levels
in two decades, the banks' balance sheets for the fiscal year that
ends in March are likely to be an eye-opener - that is, if the
banks provide full disclosure.

There is no question about what the balance sheets of European
corporate champions, the telecommunications giants, are showing: a
massive amount of debt. France Telecom and Deutsche Telekom, for
instance, have E65 billion ($56.4 billion) each on their books.

The debt, accumulated in a spree of spending on advanced mobile
phone services, threatens the existence of some of the weaker
telecoms, former state-owned monopolies that have been thrown at
the mercy of the markets.

Most of these companies have seen their credit ratings slashed, and
the stock market has virtually closed to them as a source of new
financing.

To be sure, many analysts say that in controlling risk, corporate
Europe has gained an edge: a set of accounting standards that may
be superior to America's generally accepted accounting principles.

Even when companies adhere to international accounting standards,
some analysts worry that the procedures still permit enough fudging
to distort a company's true financial picture.

Consider the Swedish paper company Svenska Cellulosa AB. For a
paper machine that it is building in Austria, the company is using
a so-called sale-leaseback agreement with a group of banks to
finance half of the 2.5 billion krona ($237.4 milion) investment.
SCA, as the company is known, sold that 50 percent to the banks and
will pay them back over the term of the lease.

Results from that 50 percent of the investment will be kept off its
books, said Peter Nyquist, a spokesman for SCA, pointing out that
its auditor, PricewaterhouseCoopers, has certified that the
arrangement meets international accounting standards.

Still, Mads Asprem, an analyst who follows the paper industry at
Merrill Lynch, worries about such arrangements, even if they are
perfectly within the guidelines. "I think investors and analysts
will increasingly be preoccupied with what is the right thing to do
and will take a dim view of accounting tricks," he said.

In Enron's case, the practice of funneling debts and other
liabilities into off-the-books entities appears to have exposed a
weakness of American generally accepted accounting principles.
Under those standards, companies can exclude from their financial
statements any results from such entities as long as another
shareholder has at least 3 percent of the vehicle.

The irony is that while the United States has long preached about
the dangers, especially in Asia, of "crony capitalism," many
accountants say that such financial shifting would have been
impossible under international accounting standards being adopted
by many big companies.

Under these rules, companies can exclude results only if they can
demonstrate that they have relinquished control of the entity in
question.

While accounting tricks may or may not have contributed to Enron's
collapse, the root of the Houston-based company's problems was an
overly aggressive business strategy that critics have likened to a
Wild West approach.

But in reinventing itself from an old economy energy company to a
new economy trading business that ultimately imploded, Enron had a
precursor - in Europe.

In 1993, German banks were forced to arrange a $2 billion bailout
of Metallgesellschaft, a metals and mining company turned
derivatives trader, after the company lost millions of dollars on
bad bets on oil futures. The company has since been revived.

Another European institution, Barings Bank, was not so lucky.

In 1995 it was brought down by a rogue trader, Nicholas Leeson, who
piled up more than $1 billion in losses on derivatives trading.

Litigation continues against one of the auditors to Barings,
Deloitte Touche, over how Mr. Leeson was able to conceal those
losses for months. An action against another Barings auditor -
Coopers Lybrand, now part of PricewaterhouseCoopers - has
tentatively been settled.