Footnote 8

specifically, when the relevant trades involved in a typical Enron prepay are pieced together, it isclear that neither party assumed commodity price risk. In fact, the commodity price was irrelevantto the transaction.transactions:Id. 13.183. As the SEC explained (in the context of JP Morgan Chase), the Enron prepayemployed a structure that passed the counter-party commodity price risk back toEnron, thus eliminating all commodity risk from the transaction. As in typicalprepays, Enron received cash up front. In contrast to typical prepays, however, withall elements of the structure taken together, if all parties performed as expected,Enron’s future obligations were distilled to repayment of that cash with negotiatedinterest. The interest amount was set at the time of the contract and was independentof any changes in the price of the underlying commodity. This was accomplishedthrough a series of simultaneous trades whereby Enron passed the counter-partycommodity price risk to a Chase-sponsored special purpose vehicle, which passedthe risk to Chase, which, in turn, passed the risk back to Enron.184. The “trick” to the Enron prepay transactions was a circle of three. That is, eachprepay transaction involved three essential parties: an Enron affiliate, a financial institution, and apass-through entity (usually controlled by the financial institution), each of which, at the end of thetransaction, owed obligations to the other. Although their details differed, from 1997 forward, theEnron prepay transactions always included three steps that, viewed together, eliminated commodityprice risk for all three parties while producing reams of paper giving the appearance of commoditytrades. As the Enron Examiner explained, “Thus, in substance, the prepayments to Enron simplycreated Enron debt.” Exam. II at 64. And the Enron prepay transactions were actually loans.185. The Insiders understood and intended that the three steps be viewed together, and thatthey effectively eliminate commodity risk. In June 2000, a recently completed $650 million prepaytransaction with Chase was commemorated with a tombstone that included a triangle, to represent604041v1/007457-49-