Enron's flameout explained and safe retirement investing

Thanks,
Jon

From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $

The sudden collapse of Enron, the former natural gas powerhouse that has lost $26 billion in value since mid-October, is prompting more questions than answers so far. As to the biggest question, "How could this happen so fast?" Enron will go down in history as an example of what can go wrong if a company loses its accounting credibility.

In October, when the company restated $586 million in earnings and announced possible conflicts of interest among some executives, it blindsided everyone from employees and Wall Street analysts to ratings agencies and independent auditors. There are significant questions about disclosure (and the lack thereof) that need to be asked.

In a nutshell, Enron had more debt -- a lot more debt -- than people realized. Apparently, some of this debt was held in off-balance sheet partnerships by Enron executives, making the balance sheet look more solid than it actually was. When the ratings agencies realized this, they lowered their rating on Enron debt from investment-grade to "junk" status. This move forced an immediate prepayment of around $1 billion in debt, and prompted Dynegy to call off its merger agreement with Enron. Left in the dust by Dynegy, Enron was forced to declare Chapter 11 bankruptcy.

Yesterday Enron announced that it obtained $1.5 billion in financing to continue operations, but it has fired nearly half its employees, the stock has fallen from $85 to 50 cents, and the legal proceedings surrounding this case are likely to go on for years.

For current shareholders of Enron, you can do one of three things: you can hold your shares and hope that they regain at least some of their former value; you could sell your shares in a taxable account and use the loss to offset capital gains elsewhere in your portfolio (then, if you want, you can buy the shares back in 31 days, if it's still trading) or, if you are very aggressive and can afford to lose 100 percent of your money, you could buy more shares and lower your cost basis, hoping that the company doesn't go under.

> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: 'Murray, Jonathan P.'
Subject: $

I presently have about 500 shares of Constellation Energy Group. I am dependent upon a decent dividend and, as you know, the dividends are almost zero.

What advice can you offer about this stock and what to do?

Many thanks for your opinion.

From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $

BGE (now Constellation Energy) doesn't pay the dividend that it used to. However, given the many changes taking place at the company, it is possible that they may reinstate a higher dividend--I don't know--that's a question for management.

If you need the income immediately, perhaps you don't want to wait for their answer. You may be forced to look for an alternative income-providing source, but if you can hold on, it might make sense for you to see what the new management team decides with respect to the dividend policy. Especially if you have held these shares for a long, long time, it would be a shame to sell, incurring a large capital gain, only to learn afterward of the company's decision to increase the dividend.

Either way, make sure that the sources of your income are diversified, and that you don't rely on just one stock to provide it.

> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: 'Murray, Jonathan P.'
Subject: $

I am less than 2 years from retirement. Considering my holdings and their losses over the past few months, I am thinking about purchasing a large -- approximately $100,000 -- CD at retirement so that a monthly income from its interest would be available. Thus, regardless of the market's fluctuations, I would be assured of set amount each month as income.

What problems do you see with this idea?

Thanks,
Joe

From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $

There's nothing wrong with your logic, but you may be disappointed in the amount of income currently being paid by CDs. With the aggressive easing by the Fed, interest rates are at multi-year lows.

Certainly, if you are two years away from retirement, some of your assets should be invested in fixed income instruments like CDs, bonds, money markets, Treasuries, munis, etc. Don't just buy the highest-yielding instruments, as often they often have longer holding periods, as well as greater interest rate volatility.

Keep in mind, too, that we're all living much longer now, so it's not uncommon to be retired for as long as you've been working. Because of this, it's important that some of your assets keep up with inflation. Don't rule out stocks entirely, as, over time, they are one of the only asset classes to keep pace with inflation. Look for some dividend-paying companies, and perhaps some preferred shares, which pay a higher income than common shares.

> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: 'Murray, Jonathan P.'
Subject: $

Thanks Jonathan,

Talk to you next week.