Chart produced using Advanced GET End-of-Day

To date, most of the newspapers have focused on the bank debt (some secured and some not) outstanding from Wall Street to Enron.

In my opinion, the real risk in this situation is that Enron was easily one of the largest derivatives traders in the world in energy, FX, and interest rates. All those trades (excepting a small percentage where cross-margining existed) are now in quasi-limbo. No one knows whether they will be honored or not. Thus an entire financial system doesn't really know what its market exposures really are.

This is the type of "daisy chain" risk to derivatives that I have previously spoken of. When one major credit drops out, the trickle-on effects to bank and counterpart books elsewhere is very hard to quantify.

I spoke with two savvy hedge fund managers in New York City today, and both were concerned that the Enron situation could dwarf the problems caused by Long Term Capital Management.

I'm not sure if that will be the case or not, but reputedly the reason Dynegy was interested to buy Enron is that 20% of their many hedges have Enron as a counterpart. If Enron goes puff, could this bring Dynegy down as well?

That's another question to which I don't have an immediate answer to, but the chart pattern above of Dynegy certainly looks dangerously poised. In the words of one manager with whom I spoke today: "If we get news of just one other company being forced into Chapter 11 courtesy of the Enron situation, all hell is going to break loose in our financial system."

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