9At the time Enron’s share price was $68. The option was structured that as long as Enron stock did not declinebelow $57.50 a share, it would expire after six months. In fact, the option was settled in August.10Enron had contributed stock under an agreement that its total value would amount to $1 billion. As the marketvalue of Enron shares declined, this required that increasingly larger amounts of stock had to be supplied.Eventually, this proved impossible and contributed to the decision to unwind the raptors.11The name “Hawaii 125-0” was based on the old television show “Hawaii 5-0”, with a sly reference to Statement ofFinancial Accounting Standards 125, according to (Smith (2) 2002) 9EnronHarrierLJM2Talon(SPE)100%Onwership$41M Premium on PutShared Settled PotLLC InterestPromissory Note$50MEnron Stock andStock ContractsPromissory Note$50M$1,000 CashDerivative Transactions$30MLLC InterestFair Market Value Put of LLC Interest
make a public offering of TNCP at a price between $18 and $20 one week later. The actual price for the IPO was$21 per share, closing at $27 on the issue date.Exhibit 5: Raptor III (Porcupine)Source:Powers p. 116As with Raptor I, the outside partners contributed $30 million to each of the raptors and received $41million from Timberwolf and Bobcat and $39.5 million from Porcupine, one week after making the investment. Theinvestment in Porcupine generated an internal rate of return of 2500% for LJM2 (Powers, p.118)Hedging Activities and Revenue Recognition from the RaptorsThe purpose of the Raptors was to protect Enron’s financial statements against fluctuations in the marketvalue of Enron investments that had to be “marked to market”. Enron entered into about 20 hedges with theRaptors; by November of 2000 they had a notional value of $1.5 billion. As a result, Enron offset losses in itsinvestments of $500 million by corresponding gains on the hedges.12Following are two examples:Talon and Avici: Talon was used to hedge Enron’s investment in Avici Systems, Inc. (Avici), an Internetarchitecture firm. Enron owned a large share of the company’s stock and on September 15, 2000 it entered into atotal return swap with Talon on Avici stock. At that time Avici traded for about $95.50 a share. However, the swapagreement was dated as of August 3rd. This was also the day on which Avici stock traded for $162.50 per share, itsall time high. By September 30 when Avici had dropped to $95 a share, Enron offset $75 million in losses as aresult of the swap.13Porcupine and TNCP: Enron and Porcupine entered into a total return swap on $18 million shares ofTNCP stock at $21 a share. This enabled Enron to lock in a gain on its transactions with Hawaii 125-0 in theamount of $370 million. Problems with the RaptorsThe Raptors were designed to protect Enron’s financial statements against losses from declines in themarket value of a variety of investments held in its “merchant portfolio”. This depended on the credit worthiness of12For a detailed description of Enron’s transactions with the Raptors see Enron’s Form 10Q, pages 22 through 24.