Magazine article Risk Management

Enron's Escalating Price Tag

Magazine article Risk Management

Enron's Escalating Price Tag

Article excerpt

Although trial dates are still pending from Enron's 2001 collapse, many of the financial institutions named in the various lawsuits have been agreeing to increasingly large settlements in an effort to avoid what could become even more costly judgments after trial. For these litigants, the situation has become more complex since many are facing charges from both class action suits brought by defrauded Enron investors and a so-called "megaclaims" lawsuit filed by Enron itself.

Thus far, the class action settlements have proven to be the costlier of the two, totaling more than $7 billion. (The losses suffered by Enron investors are estimated to exceed $40 billion, however.) The most recent such settlements occurred this past summer when the Canadian Imperial Bank of Commerce (CIBC) paid out $2.4 billion in August and Citigroup and J.P. Morgan Chase paid $2 billion and $2.2 billion respectively in June.

For CIBC, the hit was especially painful. Not only was it the largest settlement to date in an Enron-related lawsuit but also the largest in Canadian banking history, in fact, the $2.4 billion figure exceeded CIBC's entire earnings for 2004 of $1.8 billion and was ten times greater than the $247 million the bank originally set aside for Enron litigation.

On top of that, CIBC's settlement may be a harbinger of things to come for the remaining companies who have yet to settle themselves. Since Arthur Anderson settled for $40 million in 2002 and Bank of America paid out $69 million in 2003, the price tags of settlements in Enron investor lawsuits have increased dramatically. By contrast, before these billion-dollar agreements, only about $500 million had been paid in all previous settlements. The fact that Citigroup's settlement amounted to only about 2% of its book value while CIBC had to pay 22% of its book value is seen as further evidence that the potential costs to defendants will skyrocket as a trial date looms ever closer. …

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