At Least "Black Box" Glencore Is Less Complex Than Enron

Tyler Durden's picture

Over the past month, as a result of the increased focus on Glencore which has resulted in many investors suddenly realizing they knew very little about the company and certainly Glencore's "black box" trading desk which coupled with the historic crash in its stock price, Glencore has, in some circles, been called not only the Lehman of the commodity-trading world but even gained the far less reputable nickname of Glenron.

But is it deserved? As the following org chart of Glencore shows, the company - at least on the surface - appears to be far "simpler" than Enron was in the days preceding its biggest, for the time, and quite unexpected, bankruptcy.

Glencore org chart:


Compare this to the org chart of just Enron's Special Purpose Entities as it appears in Appendix D beginning on Page 372 of the infamous Enron whistleblower's book

So this should be enough to confidence that Glenron, pardon Glencore, is a far more transparent corporation, right? Apparently not.

As the WSJ reports, "some investors have described Glencore’s trading business as a “black box” in which the risks are impossible to value... Brompton Group, a Toronto fund that manages $2.2 billion, doesn’t invest in commodity-trading houses because of the lack of transparency, said Laura Lau, senior vice president specializing in resources. “They are black boxes,” she said. “It’s difficult to know what goes on inside, difficult to project their earnings. Companies like Glencore say, ‘Trust us,’ but trust is not enough of a reason to invest your money."

The WSJ continues:

Of particular concern, they said, was Glencore’s use of financial instruments such as derivatives to hedge its trading of physical goods against price swings. The company had $9.8 billion in gross derivatives in June 2015, down from $19 billion in such positions at the end of 2014, causing investors to query the company about the swing.


Glencore told investors the number went down so drastically because of changes in market volatility this year, according to people briefed by Glencore. When prices vary significantly, it can increase the value of hedging positions.


Last year, there were extreme price moves, particularly in the crude-oil market, which slid from about $114 a barrel in June to less than $60 a barrel by the end of December.


That response wasn’t satisfying, said Michael Leithead, a bond fund portfolio manager at EFG Asset Management, which managed $12 billion as of the end of March and has invested in Glencore’s debt. He said he wants Glencore to be more open about how its financial derivatives would be affected if banks reduced credit to its trading arm, also known as its marketing business.


“The concern is that if banks cut the amount of credit they were prepared to extend the company, it would have to reduce its hedging or derivatives business and, therefore, that shrinks its ability to do its marketing business altogether,” Mr. Leithead said.


He said he didn’t believe the company was at risk of default, but Glencore could get hit by a credit crunch “at a point in time when it was most damaging to them.”

The good news is that as shown above, at least Glencore's publicly disclosed org chart does not reveal any potential SPE "black box" to add to investor worries. At least none that we are aware of.

However, the debt issue is certainly a problem, and as we will show shortly in a follow up post, there is very good reason to worry about Glencore's debt... all $100 billion of it.

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Grandad Grumps's picture

But then all of incriminating ENRON evidence that showed it to be a massive conspiracy was destroyed when building 7 mysteriously came down in a controlled demolition. (Just as trucks pulled up to the Murrah building to load up boxes of incriminating documents not destroyed in the building when all of the charges failed to detonate. They had a contingency plan. Who did the documents incriminate? Bill and Hillary of course.)

Who would have thought that the government would have rigged their own buildings to blow? Or was there no security in the building and Arabs with box cutters brought all of the explosives in past the guards and planted the charges for the "pulling" of the buildings? How can that happen?

Do you see why they cannot admit the obvious, that building 7 was intentionally demolished?

VinceFostersGhost's picture




Less Complex Than Enron


Sooooo.....not the smartest guys in the room?


How do they stack up to Bre-X?

fowlerja's picture

Was that an organizational chart or a puzzle where I connect the dots to form a figure? ...I did it..I put the dots and lines together and it forms..let me look closely...why a dumb shithead CEO... that wasn't very flattering... guess he will have to take his multi million dollar parachute payout and try again...  damn another millionaire added to the unemployed ranks... guess he needs to tweet Benny  Bersankme and ask how to make money as a speaker... his I made millions while sinking the ship...

ItsDanger's picture

LOL, that Enron org chart is actually pretty basic.  Most auditors have seen far more complex structures.

ElixirMixer's picture

Considering that the complex structures are designed by the Big 4, I would hope that the auditors would understand them.

RockySpears's picture

Glencore still up 10.28% as of now on FTSE


So some one "believes".

Urban Redneck's picture

It is a black box, and institutional investors don't usually have the skill set to properly conduct that due diligence, and remarkably few private equity firms (who would be more appropriate investors) still have that skill set.  

What you put in "your" excel spreadsheet as an investor is irrelevant, you need need a top team to go onsite and go line-by-line through "their" spreadsheets and then spot verify their validity with banks, custodians, warehouses, et al.


firstdivision's picture

How much of that debt was used with leverage to play the global commodities roulette wheel?  I bet if Glencore implodes, it'll make Enron look like a simple bounced check by comparison.  We will now have the true reason why gobal commodity prices are elevated compared to global ecnomic demand.  Of course I expect the BOE/BOJ/PBOC/Fed/ECB to come to the rescue by buying the debt and never marking it to market thus relieving Glencore of margin calls that will kill it.  I eagerly await the first junk raiting.

petroglyph's picture

When you owe a bank a thousand dollars, it is your problem.

When you owe a bank a hundred billion, it is their problem.

yrad's picture

Andy Fastow was a f-ing genius.