Can Enron Pry Billions from Its Banks?

The new board is aggressively suing Citi, Barclays, and others in an attempt to recover some meaningful cash for creditors

Before its collapse, Enron flooded Wall Street with a river of cash. Banks, lawyers, and accountants earned billions of dollars by advising the energy trader's dealmakers. Now, Enron is suing its former advisers. Since emerging from bankruptcy, Enron has recovered $2.2 billion in assets from JPMorgan Chase (JPM ) and four other banks.

That may be just the beginning. Suits against five banks -- Citigroup (C ), Barclays (BCS ), Credit Suisse First Boston (CSR ), Merrill Lynch (MER ), and Deutsche Bank (DB ) -- are still outstanding.

In an exclusive interview with BusinessWeek Online, Enron directors disclosed that they're trying to recover $8.2 billion from Citigroup alone. They're also seeking $3 billion in cash and pressing the bank to drop $5.2 billion of its claims against Enron. The directors also want $2 billion in cash from Deutsche Bank and more than $500 million in total from Merrill, Barclays, and CSFB. "We've got five recalcitrant banks, and we're going to prosecute them. The estate clearly has the wherewithal and the assets to [do so]," Enron Chairman John J. Ray III says.

ASSET AUCTION? Enron's collapse four years ago was one of the most spectacular scandals in financial history (see BW, 3/21/05, "Inside Enron's House of Cards"). The $32 billion bankruptcy -- second in size only to WorldCom, now known as MCI (MCIP ) -- created more than 30,000 unsecured creditors. They ranged from big bondholders like Oaktree Capital Management to energy-trading partners and rank-and-file Enron employees, whose retirement funds were wiped out by the company's failure.

The suits against the five banks are part of a massive liquidation of Enron's remaining assets. Ray and the other directors are trying to raise money on behalf of Enron's creditors, who still have more than $100 billion in active claims against the company. The board could end up with $20 billion or more to distribute to creditors. That would allow them to recover about 20 cents on the dollar, which is roughly comparable to what WorldCom creditors received (see BW Online, 7/14/05, "The Message in Ebbers' Sentence"). In the process, they're crossing swords with powerful interests from Wall Street and Washington.

Enron's board hopes to raise money through the liquidation of the company's remaining assets, including Prisma, a collection of overseas gas pipelines. Ray declined to comment on the sales process, but private-equity giant Blackstone has been hired to run an auction, according to one person familiar with the matter. The books were distributed to potential buyers in late October.

LAY ON TRIAL. Portland General, an Enron-owned electric utility in Portland, Ore., will be spun off to Enron creditors, Ray says. Regulators in Oregon nixed an earlier sale agreement to a private-equity firm. Ray says another buyout offer is unlikely.

Enron's board is fighting a major battle in Washington, too. Several public utilities terminated their contracts with Enron before it filed for bankruptcy protection in 2001. Enron claims that it's entitled to nearly $500 million in termination fees. A U.S. bankruptcy court upheld Enron's claim, though an appeals judge ordered the bankruptcy court to reconsider the issue. Senator Maria Cantwell (D-Wash.) has amended President Bush's energy bill to bar Enron from collecting the fees, which would be distributed to creditors.

The board hopes to have bids before January. That's when the criminal trial of former Enron Chairman Key Lay (see BW Online, 7/26/04, "Ken Lay's Lame Excuse"), former CEO Jeff Skilling, and former Chief Accounting Officer Rick Causey is scheduled to get under way in Houston. The trial could prove distracting, or even damaging, during negotiations.

STALLED TALKS. The suits against the five banks, should Enron succeed, would supplement a pile of cash that's already worth $12 billion. It includes money Enron raised in settlements with other banks and from other sources, such as the sale of domestic gas pipelines several years back.

Ray says the suits are crucial for the creditors. "The only litigation that the creditors will benefit from is the litigation we're bringing. This is a very, very important recovery for the creditors of Enron," he says. But the remaining suits are proving to be more difficult than the first five, which were settled during a 40-day period over the summer.

Ray told BusinessWeek Online that talks with Citigroup have broken down. Negotiations with Deutsche Bank, Merrill, Barclays, and CSFB are at various stages. Citi and CSFB declined comment, and the other banks didn't respond to requests for comment.

Continued on next page>> | 1 | 2

BW MALL SPONSORED LINKS

Live Forex Practice Account Practice Forex Trading in Real Market Conditions with a Free Trial.
Learn Personal Financial Planning Online Enhance Your Resume, Prepare For A New Career, Or Just Learn How To Manage Your Money Better.
ExxonMobil Taking on the world's toughest energy challenges.
Buy High-Yield Bonds Our Bonds Cost Less. Period. Wholesale Prices, $10.95/Trade.
Try 4 Risk-Free Issues of The Economist Great minds like a think.