[PEN-L:28699] Re: international regulatory arbitrage

["Ian Murray" <seamus2001@xxxxxxxxx>]

----- Original Message -----
From: "Ian Murray" <seamus2001@xxxxxxxxx>
To: "pen-l" <pen-l@xxxxxxxxxxxxxxxxxxx>
Sent: Friday, July 26, 2002 3:02 PM
Subject: [PEN-L:28618] international regulatory arbitrage


> http://thomas.loc.gov/cgi-bin/query/C?c107:./temp/~c1076KqCKI
>
> HR 3005 EH
> 107th CONGRESS
> 1st Session
> H. R. 3005
> AN ACT
> To extend trade authorities procedures with respect to reciprocal trade agreements.



> (2) TRADE IN SERVICES- The principal negotiating objective of the United States regarding trade in
> services is to reduce or eliminate barriers to international trade in services, including
regulatory
> and other barriers that deny national treatment and market access or unreasonably restrict the
> establishment or operations of service suppliers.
>
> (3) FOREIGN INVESTMENT- The principal negotiating objective of the United States regarding foreign
> investment is to reduce or eliminate artificial or trade-distorting barriers to trade-related
> foreign investment and, recognizing that United States law on the whole provides a high level of
> protection for investment, consistent with or greater than the level required by international
law,
> to secure for investors important rights comparable to those that would be available under United
> States legal principles and practice, by--
>
> (A) reducing or eliminating exceptions to the principle of national treatment;
>
===================================
http://www.washingtonpost.com/wp-dyn/articles/A9783-2002Jul27.html
For Vince Kaminski, the in-house risk-management genius, the fall of Enron Corp. began one day in
June 1999. His boss told him that Enron President Jeffrey K. Skilling had an urgent task for
Kaminski's team of financial analysts.

A few minutes later, Skilling surprised Kaminski by marching into his office to explain. Enron's
investment in a risky Internet start-up called Rhythms NetConnections had jumped $300 million in
value. Because of a securities restriction, Enron couldn't sell the stock immediately. But the
company could and did count the paper gain as profit. Now Skilling had a way to hold on to that
windfall if the tech boom collapsed and the stock dropped.

Much later, Kaminski would come to see Skilling's command as a turning point, a moment in which the
course of modern American business was fundamentally altered. At the time Kaminski found Skilling's
idea merely incoherent, the task patently absurd.

When Kaminski took the idea to his team -- world-class mathematicians who used arcane statistical
models to analyze risk -- the room exploded in laughter.

The plan was to create a private partnership in the Cayman Islands that would protect -- or hedge --
the Rhythms investment, locking in the gain. Ordinarily, Wall Street firms would provide such
insurance, for a fee. But Rhythms was such a risky stock that no company would have touched the deal
for a reasonable price. And Enron needed Rhythms: The gain would amount to 30 percent of its profit
for the year.

The whole thing was really just an accounting trick. The arrangement would pay Enron to cover any
losses if the tech stock dropped. But Skilling proposed to bankroll the partnership with Enron
stock. In essence, Enron was insuring itself. The risk was huge, Kaminski immediately realized.

If the stocks of Enron and the tech company fell precipitously at the same time, the hedge would
fail and Enron would be left with heavy losses.

The deal was "so stupid that only Andrew Fastow could have come up with it," Kaminski would later
say.

In fact, Fastow, Enron's chief financial officer, had come up with the maneuver, with Skilling and
others. In an obvious conflict of interest, Fastow would run the partnership, sign up banks and
others as investors, and invest in it himself. He stood to make millions quickly, in fees and
profits, even if Enron lost money on the deal. He would call it LJM, after his wife and two
children.

Stupid or not, Enron did it and kept doing more like it, making riskier and riskier bets. Enron's
top executives, who fancied themselves the best of the brightest, the most sophisticated
connoisseurs of business risk, finally took on more than they could handle.

Fastow's plan and Skilling's directive would sow seeds of destruction for the nation's largest
energy-trading company, setting in motion one of the greatest business scandals in U.S. history.

On Oct. 16, 2001, Enron was forced to disclose $1 billion in losses, more than half from LJM deals
gone bad. Thus began a chain of events that would drive Enron's stock price into the dirt and force
the company into bankruptcy proceedings, wiping out thousands of jobs and tens of billions of
dollars in savings.

Enron was the first of the recent business scandals that have devastated investor faith, contributed
to a multi-trillion-dollar market downturn and made corporate reform a political imperative.

[snip]