The Enron Papers

It turns out, however, that some of the biggest names in American finance were active participants in Enron's strategy. SmartMoney.com has obtained a number of financial documents and partnership records related to LJM2 Co-Investment partnership, one of the key entities relied on by Enron. The documents — four books altogether measuring more than two inches high — reveal that a virtual Who's Who of financial institutions invested in the $394 million fund established in 1999 by former Enron Chief Financial Officer Andrew Fastow. The documents provide a breakout of the estimated rates of return on the more than a dozen investments made by LJM2. They even offer an explanation for how those mysterious Raptors worked — the subsidiaries LJM2 established to carry on hedging activities with Enron. We're making selections from the documents available for download in PDF format.

The documents make one thing clear: LJM2 was anything but an arm's-length entity for Enron — as it would've had to be for Enron's accounting treatment of it to have been legitimate. "The Partnership expects that Enron will be the Partnership's primary source of investment opportunities and that the Partnership will co-invest with Enron," according to one document. The partnership was created and managed by then-CFO Fastow and was "focused on acquiring energy and communications assets primarily owned by Enron." And while Jeffrey Skilling, Enron's former chief executive who suddenly resigned last August, told the New York Times in December that he didn't have

Some highlights from the documents:

"LJM Rationale": LJM2 was formed in October 1999 with the stated goal of acquiring assets primarily owned by Enron and generating a 30% average annual return for its limited-partner investors. Why focus on Enron assets? The documents explain that some of those assets were diluting Enron's earnings and harming the ratios on which its credit ratings were based. It wanted to "deconsolidate" those assets and "create structures which accelerate projected earnings and cash flows."

A selling point to potential investors in LJM2: "The Partnership expects to benefit from having the opportunity to invest in Enron-generated investment

Investors: The papers contain a partial list of the biggest companies and financial institution that are known to have invested in LJM2, either directly, through subsidiaries or on behalf of third parties: American International Group (AIG), AON (AOC), Citigroup (C), CIBC, Credit Suisse First Boston, Dresdner Bank, General Electric (GE), J.P. Morgan Chase (JPM), Lehman Brothers (LEH), Morgan Stanley (MWD), Merrill Lynch (MER) and Wachovia Bank (WB).

Smaller institutional investors were also involved, including pension funds and private equity funds. These included Aero Capital, Alpine Investment Partners, C&I Partners, Cramer Rosenthal McGlynn, Fort Washington Private Equity, Freidenrich Family Trust (associated with Bay Partners, a big California venture-capital firm),

LJM2 Key Employees: As of early 2000, LJM2 was being managed by Fastow; Michael Kopper, former managing director of Enron's Global Equity Markets Group; and Kathy Lynn, a former Enron vice president. Fastow, during his tenure at LJM2, earned roughly $30 million in management fees.

Advisors: The partnership employed Big Five accounting firm PricewaterhouseCoopers and Chicago-based law firm Kirkland & Ellis, where Whitewater prosecutor Kenneth Starr is a partner.

Bankers: Two banks were LJM2's main lenders: Chase Manhattan Bank, part of J.P. Morgan Chase, and Germany's Dresdner Bank, a division of Dresdner Kleinwort Wasserstein.

Investments: LJM2 invested in a total of 23 investments — most of them involving Enron-related entities — with odd-sounding names like Bobcat, Osprey

NewPower is a deregulated electrical power company that Enron spun off in October 2000 (see related story). Bobcat is a so-called special entity, like the Raptors (see below) that Enron and LJM2 used to hedge investments. Osprey Trust is an investment vehicle set up by Enron and another limited partnership, Whitewing, which sold $1.4 billion in corporate bonds. Apex is a collaterized loan obligation — a derivative security whose underlying instrument is a commercial loan — that LJM2 has with First Union, which since has been acquired by Wachovia Bank. Zenith is one of the few

The Raptors: These are a structured finance vehicle — usually capitalized with Enron stock and an investment from LJM2 — that enters into derivative, or hedging, transactions all designed to reduce the risk associated with Enron's own investment portfolio. There were at least six Raptors created by LJM2. The Raptors helped manage the impact of price volatility of Enron's stock investments by purchasing put and call options on those shares. (A call option is a bet a stock will rise in price, while a put option is a bet it will fall.) But the Raptors posed a problem if Enron's stock dropped below $48 a share — something that first occurred in early August, around the time Skilling suddenly resigned.