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Bursting The Bubble

Merchants' trading volumes and revenue are still too inflated.

Fortnightly Magazine - June 1 2002

to create the perception of business being done, or at least create an illusion of volume.

But this illusion has cost Dynegy dearly. Its stock has tumbled more than 59 percent after revelations of the first SEC investigation into its now infamous Project Alpha, as well as a result of the investigation into its so-called volume deals.

In fact, Reliant Resources scrambled to pull a recently priced debt placement after deciding that some of its power transactions were a lot like those that had earned fellow power merchant Dynegy the scrutiny of regulators.

Trading of Reliant Resources' stock was halted on the New York Stock Exchange the same day of the announcing of the "Dynegy-like" deals, and the company witnessed its stock fall 17 percent to $12. Naturally, some of these volume deals might have been motivated simply to show how big a trader they were to the industry.

No doubt, after the millions lost in stock depreciation, after a drop in prestige, and along with an increased cost of capital due to impending or possible debt ratings downgrades, those marketers might be wishing they were a little more conservative in reporting volumes.

So too are the many shell-shocked investors who found out quite unexpectedly that ballooning trading volumes were full of hot air.