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December 11, 2001
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Banks eyeing Enron trading rescue face tough task

Three banks vying to salvage the core trading operations of fallen power company Enron Corp raced on Monday to put together a deal before the business lost market share or key trading employees.

People familiar with the situation said none of the three banks -- JP Morgan Chase, Citigroup and Swiss bank UBS AG -- had submitted their proposals but could start doing so as early as Tuesday.

The banks are working on creating a joint venture to own the trading business with Enron, which is trying to reorganise under Chapter 11 bankruptcy protection. The banks would inject fresh capital into the trading arm, which dominated world energy trading until Enron collapsed this month.

"Our first priority is to salvage the trading operations," said Steve Zelin, senior managing director of Blackstone Group, which is advising Enron on its restructuring.

Bankers and lawyers watching the reorganisation closely said the key to salvaging the trading business would be the creation of a new entity shielded from liabilities from the rest of Enron.

"And you would need pretty strong indemnities for that," said Tom Dewey, partner at law firm Dewey Pegno & Kramarsky.

The banks will have to move quickly to retain key staff.

Enron has about 800 trading desks in the United States manned by MBA and Ph.D holders, most of them experts in mathematics, statistics and finance. They have mastered the country's electricity network and blended the knowledge with risk studies on various economic and weather conditions.

"If the job market had been stronger, Enron would have lost all these talented people. They should act quickly to retain them," said an investment banker who has closely watched the business.

TWO BANKS MAY JOIN TOGETHER

While all three banks are working on independent plans to revive the trading business, Citigroup and J P Morgan Chase may decide to come together.

J P Morgan Chase and Citigroup are also among Enron's long list of creditors and have committed $1.5 billion in loans to guide the Houston company through the bankruptcy process.

One major headache that could confront Enron the moment trading is revived is a quick liquidation of positions by some trading parties who were exposed to the company.

"There are special provisions of the Bankruptcy Code that protect the right of commodity brokers and other specified participants in the commodities markets," Joel Greenberg, a lawyer with Kaye, Scholer, said.

Bankers and traders warn that if the banks succeed in reviving the trading business its operating style will have to be vastly different from what it was.

Instead of getting involved in direct trading they should focus more on risk management and risk analyses," said one trader.

He said that while the rest of the trading industry had the ability to absorb Enron's 25 per cent market share, any signs of a revival of Enron's trading business would be good for the overall liquidity of the market.

If the three banks can pull off a deal it would mark a deeper relationship between investment banks and the energy industry.

Goldman Sachs, Lehman Brothers and BNP Paribas are already big players in the deregulating US energy industry. Merrill Lynch was a major player until it sold its business recently to Allegheny Energy.

"It is seen as just another platform to earn market making fees," said a banker with a top Wall Street firm.

ALSO READ:
The Enron Saga

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