Enron Hidden Debt
Early in December 2001, one of the biggest companies in the world went bankrupt. Enron was a world leader in natural gas and oil, or so the investors thought. What seemed to be a booming company in a booming economy turned out to be one of the biggest financial scandals in the history of the world. Executives at Enron misled investors into thinking they were continuously growing, when the real numbers insured that they were losing money every quarter. Enron, founded by Kenneth Lay in 1985, became popular based on its utilization of electricity and making it more affordable to everybody. In doing this, Enron became the biggest seller of natural gas in North America. By controlling the markets at this time, they could increase prices and create high revenue. This made Enron’s stock prices very attractive to investors. As demand decreased, and prices began to level, the stock price did the same. However, Kenneth Lay and CEO, Jeffery Skilling would not allow profits to level out. They created a new type of accounting called Market to Market accounting, where potential future profits could be recorded the beginning of the period. This means that no money could be collected and revenue could still be recorded. This is exactly what happened on many occasions. Enron attempted to diversify by growing into the broadband spectrum. They attempted to join with Blockbuster in order to stream movies online. They projected 54 million dollars as sales. Soon after, the deal fell through, and not a single penny was actually collected. Enron used many different tools in order to create profit on financial statements when there really was no profit. They had a very structured financing through many financial intermediaries. J.P Morgan Chase was a big dealer in this huge web that spiraled Enron into debt. Special purpose entities started to emerge. These were used in order to hedge risk for companies and create profit when there was none. Enron created hundreds of