Enron is a U.S. company that was formed in 1985 by Kenneth Lay, an economist. On the 2nd of December 2001 the company had been filed for bankruptcy as a result of a great accounting fraud. Enron had been expanded by borrowings of money to buy up other companies which lead them to a 75% debt capital. To help encounter this problem, Jeffrey Skilling was appointed as head of Enron’s finance department. As the U.S. government deregulated energy prices, the price of gas became very unstable. Skilling came up with countermeasures by releasing contracts between buyers and sellers that would make them buy their gas for a fixed number of periods and at a fixed price. These long-tem contracts lifted the risk for both buyers and sellers thus; Enron became the leading company in the profitable energy trading business. For further expansion and growth, this idea was applied to their trading businesses of commodity markets including electricity, coal and paper pulp. The financial wizard Andrew Fastow, who helped the trading business, had helped to persuade the U.S. Securities of Exchange Commission to allow them to use the “mark to market” method in which the value of assets is recorded in the financial reports as market value, by forecasting future price of the contracts and recording net present value as true value, Enron was able to report many ‘profits’.
The above mentioned plus the fact that its capital is 75% debt financed, leads Enron to an even massive dilemma. In order to enter into other commodity markets, a large amount of money is required to purchase the infrastructure needed in the trading process and the means of obtaining the money would be via more debt. Such a scenario would further raise the already high level of debts and will result in loss of both buyers and sellers for Enron. Simultaneously, the possibility of failure increases and investment will fall. Given that such were to happen, banks might have to recall back their current Enron loans and leave...
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