Enron Financial Techniques can be legal if used right. (Wall Street West).

ENRON'S travails have rightly cast a harsh light on such financial acrobatics as offbalance sheet transactions and limited partnerships. But used properly, these techniques can be perfectly legal, and even enhance shareholder value, said Marty Zalin, partner in Century City with the national law office of

Proskauer Rose.

One legitimate goal of an off-balance sheet transaction is to lower borrowing costs. "For example, a retailer may have receivables. It could borrow against the receivables, but any lender is going to know the retailer could declare bankruptcy," Zahn said. Then the lender would have to go to bankruptcy court and seek repayment.

So the retailer has to pay for the perceived credit risk of bankruptcy, in the form of higher interest rates and other terms. But a retailer can form a legally separate limited partnership, and sell the receivables to the partnership. In that scenano, a bank that extends credit to the partnership knows that even a bankruptcy by the operating parent company will not affect the receivables. The partnership lowers the risk profile for a lender, and thus lowers borrowing costs. Shareholders benefit by having cheaper IOUs.

Of course, what appears to have happened at Enron is far more complex, and not contrived to benefit shareholders.

Is there any way investors, even shrewd investors, could read annual reports, quarterly disclosures and other materials, and determine whether off-balance sheet accounting is well-intended or bogus? "Not really," Zahn said. "If there is an effort to fudge or polish the facts, an investor would be very unlikely to be able to ferret that out. Zahn pointed out that most analysts gave thumbs-up to Enron, some just days before it melted down.

Harvard-trained Zahn, a leading corporate reorganization lawyer, said investors might want to check who sits on the audit committee of a company's board. Those are the people charged with making sure audits are clean, and that the principle of "full disclosure" is primary. But Enron appeared to have a decent audit committee, so even that practice may not be effective for investors.

"It's the same old story," Zahn said. "You should diversify, because you never know when this sort of thing could strike a stock."

The move follows a good year for Anworth Mortgage, and on Wall Street they tend to strike while the iron is hot. In 2001, Anworth earned about $1.20 a share (the fourth quarter still not reported), meaning it provided a 12 percent dividend yield to investors (even those who bought the stock at the high end of the trading range) - not bad in today's singledigit interest rate environment.

But Anworth Mortgage's profits were juiced a bit last year by declining short-term interest rates - in general, Anworth Mortgage tends to "borrow short and lend long." So borrowing costs fell in 2001. Can 2002 be as sweet?

Don't look to Wall Street for the answer - as a microcap, Anworth Mortgage doesn't get much coverage, although one suspects that Wedbush Morgan, having assumed an underwriter role, may soon put a researcher onto the REIT.

Still, investors should note: A rise in shortterm rates would lessen Anworth Mortgage's profits, and a steep rise could turn black ink into red, warned the company's filing with the SEC.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by

Bloomberg Press.