Enron Corp. - University of California | Office of The President

FINANCIAL RISK MANAGEMENT
* * *
Enron has performed an entity-wide value at risk analysis of virtually all of
Enron's financial instruments, including price risk management activities and
merchant investments. Value at risk incorporates numerous variables that could
impact the fair value of Enron's investments, including commodity prices, interest
rates, foreign exchange rates, equity prices and associate volatilities, as well as
correlation within and across these variables.
The value at risk for equity exposure discussed above is based on J.P. Morgan's
RiskMetrics (TM) approach.
Enron's other Offering Documents for securities offerings during 00-01 contained the same language.
626. This disclosure was false and misleading. Enron had not done an "entity-wide value
at risk analysis" and it had not analyzed its equity exposure because, as the banks knew, the results
of the value-at-risk analysis, or "VaR," did not reflect the Company's leveraging of its equity in
99-01. For example, the banks' VaR, stress-testing and scenario analyses for risk management/risk
measurement produced results materially different than the results presented in the discussion of
Enron's Financial Risk Management in Enron's Offering Documents for the securities offerings in
00-01. For example, in Enron's Offering Documents in 01, at a minimum, the results of the VaR did
not reflect the massive amount of derivative securities trades that the banks had engaged in with
Enron in negotiating and structuring the LJM/Raptors transactions and in participating as LJM2
investors. The derivatives trades Enron executed through LJM2 and the Raptors, in its bogus
hedging transactions, with over $2 billion notional principal, destroyed Enron's Financial Risk
Management because those trades leveraged Enron's own equity to extreme multiples. As a matter
of market risk, these transactions were so dangerous to Enron that, internally, the banks referred to
the trades or the risk they presented as "toxic waste" or "toxic."
- 402 -