Footnote 8

2governs the securitization of financial assets. As such, it defines the accounting by which transfersof financial assets (and their liabilities) to SPEs are recorded. By 1998, the Insiders had becomevitally interested in structuring FAS 140 transactions because FAS 140 allowed asset transfers tobe accounted for as sales. The beauty of accounting for a transfer as a sale was that the saleremoved the asset (and its corresponding liabilities) from Enron’s balance sheet and allowed Enronto recognize gain and operating cash flow from the transfer.199. These benefits became particularly important over time, as it grew obvious to theInsiders that Enron’s merchant portfolio was rapidly declining in value. By November 2000, overa year before Enron filed bankruptcy, Enron documents show the Insiders knew that• 59% of originally expended capital was not meeting expectations,• Enron had $3.8 billion of earnings exposure on assets performing belowexpectation,• 81 out of 167 equity transactions were underperforming,• 43% of originally expended debt capital was not performing or “had issues,”• Enron had $315 million of earnings exposure on debt that was nonperformingor “had issues,” and• 31 out of 55 debt transactions were nonperforming or had issues.200. Of course, because of MTM accounting, each underperforming asset had beenoriginally recorded on Enron’s financial statements at “fair value” based on a then-rosy assessmentof the value of that asset, determined in the afterglow of the transaction. As assessmentschanged – and the document quoted above shows that they did, radically – MTM accounting2FAS 140 replaced FAS 125 effective April 1, 2001. Some of Enron’s transactions were governedby FAS 125 and some by FAS 140. All of Enron’s FAS 125, FAS 140 and other similar transactions arecalled FAS 140 transactions throughout this Complaint.604041v1/007457-55-