What Happened to Enron?

The collapse of Enron caught almost everyone by surprise, from employees and investors to analysts and creditors. But how did the seventh largest company in the Fortune 500 plummet into bankruptcy and implode so quickly? The Enron story comes in three stages. Stage 1: The Company leveraged itself through debt, which it used to grow its non-core wholesale energy operations and service business. Some of this debt was reportable on the company's balance sheet, and some was not. No problem for the company, as long as the stock price held up. Stage 2: The stock price fell. When that happened, off-balance-sheet liabilities put pressure on debt agreements, and eventually led to credit downgrades. Stage 3: The margins in this business are very thin and lower credit quality increased Enron's cost of borrowing to the point where the whole company fell into a liquidity trap.

Movement of Enron’s share price (USD)

As the energy markets. Income had raised by 40% in three years. . On 14 Aug. Enron contributed nearly $6 million to federal parties and candidates It was one of the first amongst energy companies to begin trading through the Internet.Enron: A Background Enron was born in July 1985 when Houston Natural Gas merged with Omaha-based Inter-North. raise investment against it own assets and stock and maintain the impression of a highly successful company. According to the Center for Responsive Politics. Kenneth Lay. But while Enron boasted about the value of products that it bought and sold online – a mind-boggling $880bn in just two years – the company remained silent about whether these trading operations were actually making any money. Kenneth Lay became chief executive once again. At about this time. Enron needed the federal government to allow it to sell energy and other commodities. 2001 Arthur Anderson legal counsel instructs workers who audit Enron’s books to destroy all but the most basic documents. 16 Oct. it is believed that Enron began to use sophisticated accounting techniques to keep its share price high. 2001 A Fortune story calls Enron a highly impenetrable Co. an energy economist became chairman and chief executive. The Chronology of the fall: 20 Feb. Enron’s business expanded into brokering and trading electricity and other energy commodities. 2001 Jeff Skilling resigned as chief executive. Enron's 2000 annual report reported global revenues of $100bn. between 1989 and 2001. Some of Enron’s top executives became frequently named corporate political patrons of the Republican Party. citing personal reasons. 2001 Enron reports a third quarter loss of $618 million. The deregulation of these markets was a key Enron strategy as it invested time and money in lobbying Congress and state legislatures for access to what traditionally had been publicly provided utility markets. that is piling on debt while keeping the Wall Street in dark. 12 Oct. and in particular the electrical power markets were deregulated. offering a free service that attracted a vast amount of customers.

Hence within three months Enron had gone from being a company claiming assets worth almost £62bn to bankruptcy.S.2001 Enron filed for Chapter 11 bankruptcy protection and on the same day hit Dynegy Corp. It effectively admitted that it had inflated its profits by concealing debts in the complicated partnership arrangements. Andersen has dismissed Mr Duncan and Andersen’s chief executive at the time of the Enron collapse. run by Enron executives who profited richly from them. these shell companies. Role of Andersen: Arthur Andersen – one of the world's five leading accounting firms . Justice department launches criminal investigation. Andersen also faces charges that it improperly approved of Enron's off-balance-sheet partnerships.was the auditor to Enron. Its share price collapsed from about $95 to below $1. But once stock analysts and financial . 2Dec. It admitted accounting errors. 9 Jan 2002 U. 8 Nov 2001 The company took the highly unusual move of restating its profits for the past four years. ordered the shredding of thousands of documents that might prove compromising. Andersen’s chief auditor for Enron. resigned at the end of March 2002 Besides obstruction of justice. which the company used illicitly to hide losses from investors. with a $10 billion breach-of-contract lawsuit. When the scandal broke.24 Oct 2001 CFO Andrew Fastow who ran some of the controversial SPE’s is replaced. allowed Enron to keep hundreds of millions of dollars in debt off its books. inflating income by $586 million since 1997. David Duncan. called "special purpose entities". Jo Berardino. Creative Accounting: The Special Purpose Entities (SPE’s) At the heart of Enron's demise was the creation of partnerships with shell companies. 12 Dec 2001 Anderson CEO Jo Berardino testifies that his firm discovered possible illegal acts committed by Enron.

LJM2 Co-Investment. when Enron filed for bankruptcy. Merrill Lynch handled the sales pitch for one such vehicle. hide their losses. Deutsche Bank and Dresdner Bank . investors began to lose confidence in the company's finances. did not have independent outside partners that prevented full disclosure and did not disclose the risks in their financial statements. The results: a run on the stock. directly or indirectly. What they did wrong was that they apparently tried to manufacture earnings by manipulating the capital structure of the SPEs. lowered credit ratings and insolvency. JP Morgan Chase. How Enron used SPE’s for off balance sheet financing: The above flow chart explains how Enron used the SPE’s taking most of its debt off balance sheet.journalists heard about these arrangements.were still involved in the partnership. . many of the most prominent names in world finance .including Citigroup. it appears that initially Enron was using SPE's appropriately by placing non energyrelated business into separate legal entities. According to claims and counter-claims filed in Delaware court hearings. CIBC. Originally.

00. in order to circumvent the outside ownership rules funneled money through a series of partnerships that appeared to be independent businesses.time.193520.There should be no interlocking management: The managers of the off balance sheet entity cannot be the same as the parent company in order to avoid conflicts of interest.html http://www.8599.com/enron/FT3LTT9G2XC. Enron. but they were no secret to many Wall Street firms.ft. according to company estimates. but which were controlled by Enron management. By the end of 1999.asp Authors: Anuj Thakur Samir Kalra Rahul Karkun .html http://www.com/commentaries/equity/01-11-30_madden. References: http://specials. The ownership percentage of the off balance sheet entity should be higher than 3% and the outside investors should not be controlled or affiliated with the parent: This was clearly not the case at Enron. The scope and importance of the off-balance sheet vehicles were not widely known among investors in Enron stock.federatedinvestors.com/time/business/article/0. it had moved $27bn of its total $60bn in assets off balance sheet.

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