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Enron Scandal Explanation, Analysis, and History

Abstract “Son, your ego is writing checks your body can’t cash.” (Paramount, 1986) The famous words of Admiral T.J. Cassidy in the high-flying action thriller Top Gun (Paramount, 1986) describe what occurred with Enron. Enron was a giant corporation (some say the largest energy company in the world), who depended on outside credit sources to finance its daily operations. In turn, its credit-worthiness depended on its performance as reflected in Enron’s share prices. When the price of Enron’s shares collapsed, so did its’ credit rating.

Consequently, cash credit to the company became either prohibitively expensive or outright unavailable. Without ready infusions of cash, Enron became unable to meet its earlier credit obligations. This depressed Enron’s stock even deeper, which in turn led to the further decline in already low share prices. Being unable to pay its’ creditors, with no forthcoming offers of the merger from its competitors, and with no foreseeable rescue attempt by the government, Enron was forced into bankruptcy. In the purely abstract form, merely for illustrative purposes, we can compare Enron’s debacle with an imaginary individual whose life or at least lifestyle depended much on borrowing – let’s say, it became dependant on loans from credit card companies.

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Without sufficient income to repay interest on these loans, this hypothetical individual is forced to apply for new credit cards, with which he is paying off his creditors. At some point, when the individual’s credit rating worsens and he or she is no longer able to get more financing from the credit card issuers, the finale becomes inevitable, and usually it is bankruptcy. We can also compare Enron’s disaster to a pyramid scheme.

In the classic pyramid scheme, fraudsters (here Enron’s executives, accounting firms, corporate lawyers and their clique in the government) have to keep their victims happy (in the case of Enron the victims were investors, shareholders, suppliers and the general public) by paying off unrealistic rates of return on victims’ investments (the inflated price of Enron’s shares).

Pyramid schemes go always bust when a crisis of trust suddenly erupts among creditors or when there are no more victims left to be duped in forking out more money for running the pyramidal operation (i.e., source of credit dries up and the scheme inevitably collapses). We can also liken Enron’s experience to a market bubble, similar to the spectacular crash of the entire Internet-related sector in the year 2000 or any other historic market bubble from the remote or recent past – more and more cash is pouring into the market (blowing the bubble bigger and bigger) until it finally bursts – proverbial “somebody” cries “fire” or the “king is naked”, a stampede – massive sellout – occurs – and the bubble is gone in an instant.

Certainly to equate Enron’s disaster to a private individual living off his or her credit cards or to a simple pyramid scheme or even to the mechanics of an uncomplicated historic market bubble would be to grossly oversimplify the issue. Enron was not a banal investment scheme, it was a strategic company, tightly linked to the US government and to the US energy policy (or lack thereof); a company that was extremely active in the domestic politics of the United States, in the political finance of the country’s two major parties, a company that was an unhesitant player in foreign markets and a bold participant in the international energy politics. Enron was a corporate equivalent of superpower.

One of the reasons why people invested in Enron was that the company was considered too big to fail (the blue chip kind of stock, the deceptive safe haven) and was engaged in supposedly safe business of buying and selling energy. Everybody needs electricity and heat nowadays, certainly not everybody needs hand-held computers. The majority of the investors, as well as the public, though that Enron was a rock-solid business, akin to the famed Swiss banks or the dividend-paying US government; few realized that Enron was a casino and that an investment in Enron – while could be financially rewarding at a certain point- was a chancy affair.

Enron’s collapse also raised painful questions about the supposed benefits of the deregulation of the public utility sector as well as of the role of the free market in the operation of deregulated public utilities and energy suppliers. The obvious problem with the idea of letting free-market forces control the fate of the utilities and public energy suppliers (in addition to the fact that the functioning of the entire society depends on these companies’ daily operation, and that historically free markets can experience sudden and violent upsurges and decreases in their activity) is the reality of the energy marketplace, which – unlike other sectors of the economy – is dominated by a few very large companies, whose control of the market is almost absolute, oscillating from the state of oligopoly (control usurped by a few major players) to that of monopoly (the market segment or the entire market in a certain geographic area is controlled by just one entity). In each instance, a failure of such an entity, whether induced by market forces or by corporate mismanagement, or alternately by a combination of both factors, could cause a catastrophic impact on society.

A brief history of Enron Corporation – the biography of a corporate disaster Enron was created when the Houston Natural Gas Company of Huston, Texas merged with InterNorth, a natural gas company based in Omaha, Neb., in July 1985. Originally Enron was an operator of interstate gas pipelines, but by 1989 Enron diversified into trading energy-related commodities.

In a few years, Enron becomes the largest merchant of energy in the United States and the United Kingdom. By 1994 Enron becomes the largest seller of electricity in the United States as well. In 1997 Enron goes ahead with a program to reshape its corporate image to a new, more modern, stylish-looking, environmentally-aware type of company. It introduces a new corporate logo and acquires Zond Corporation, one of the leading developers of wind energy power.

The purchase leads to the formation of the Enron Renewable Energy Corporation. By August 1997 Enron announces that it is entering the marketplace with new weather derivative products (bets against certain weather conditions); in addition to energy and trade in such ephemera as weather derivatives, Enron is already buying and selling cellulose, pulp, paper, fertilizer, plastics, metals and bandwidth. By the year 1999, Enron grew so big, that it became involved in about a quarter of all energy deals in the world. Enron has quite disliked in the developing world thanks to the major scandal it was involved in within India.

In 1999 Enron agrees to pay the US $100 million over a period of 30 years for the naming rights to Houston’s new ballpark, from now on it is proudly called the Enron Field. In the same year Enron Energy Services makes its first billion-dollar transaction with Suiza Foods and, soon afterwards, Enron launches EnronOnline, the first global Web-based commodity trading site. The year 2000: a Fortune magazine survey names Enron “The Most Innovative Company in America” for the fifth consecutive year, Enron’s rank among the nation’s best employers is 24th (Fortune – “100 Best Companies to Work for in America.” ).

The Energy Financial Group ranks Enron as the 6th largest energy company in the world at the beginning of the same year. In May 2000, Enron and its new strategic investors – IBM and America Online, – launched the so-called New Power Company, the first national energy service provider for residential and small businesses in newly deregulated U.S. energy markets. Just over a year later, in August 2001 — Enron’s chief executive officer (CEO) Jeff Skilling resigns after running the company for just six months. Chairman and former CEO Ken Lay return to his position atop Enron.

On October 16, 2001, Enron reports a $638 million third-quarter loss and announces a $1.2 billion reduction in shareholder equity, partly related to diverse partnerships run by Andrew Fastow, its’ chief financial officer. A few days later Enron acknowledges that the Securities and Exchange Commission (SEC) made an inquiry into a possible conflict of interest related to the company’s operations with those partnerships. Just two days later Enron breaks off its relationship with Fastow’s partnership and fires him. October 27, 2001, Enron borrows more than the US $ 3 billion, in a move that is supposed to boost the confidence of the investors and customers.

Four days later, on October 31, Enron announces that the SEC inquiry has been advanced to a formal investigation. Enron creates a special committee headed by, William Powers the dean of the Law School of the University of Texas, to help company respond to the investigation. On November 1, 2001 — Enron obtains yet another US $1 billion in new loans, using its pipelines as collateral. On November 6, 2001 – the price of Enron’s stock drops below US $10 a share — down from its 52-week high of US $84.87 on December, 28, 2000. The drop was caused by reports claiming that the financially troubled energy giant was seeking yet more financing to “shore up” confidence. The rumours or – in this case – the reports, as it usually happens, had the effect that was diametrically opposite from the one intended, instead of boosting confidence, the reports caused the stampede and collapse of Enron’s share prices. Enron was now firmly on the path to its end.

2.3. Timeline of Enron’s collapse July 2001 A protester, who blames Enron for California’s energy woes, throws a cream pie into the face of Jeff Skilling the CEO of Enron. California consumer groups accuse Enron of price-gouging practices during California’s power crisis while Enron stock drops to US $42.93 per share.

July 2001 Amidst provokes rolling blackouts in California, Pacific Gas and Electric Company filed for bankruptcy.. Pacific Gas and Electric Company is one of the three major utility companies in the region, along with Southern California Edison and San Diego Gas & Electric Company.

August 14, 2001 CEO Jeff Skilling resigns stating “personal reasons.” October 12, 2001, Enron announces that it made a US $638 million loss during the third quarter of the fiscal year 2001.

October 24, 2001 Andrew Fastow is ousted as the chief financial officer because of his involvement into questionable business transactions and partnerships. Jeff McMahon becomes Enron’s Chief Financial Officer.

October 31, 2001 Securities and Exchange Commission (SEC) upgrades its inquiry into Enron’s dealings into a formal investigation on Enron’s business transactions and accounting records.

November, 8, 2001 Enron suddenly revises its financial statements. The revision leads to reduced earnings by the additional US $586 million over the past four years, in large part due to losses with shady partnerships. It is also disclosed that Mr. Fastow earned US $30 million in assorted fees he charged and with profits from his involvement with the outside partnerships.

Enron announces it must pay US $690 million in debt. Another US $6 billion is due by next year.

Enron’s CEO Lay calls the U.S. Secretary of the Treasury, Paul O’Neill and asks to discuss Enron’s troubles, according to a spokesperson of the Treasury Department.

November 9, 2001 Dynegy, a much smaller energy company, offers a rescue plan for Enron and proposes a buy-out of entire Enron for US $10 billion in stock. Dynegy also agrees to pay back more than $13 billion of Enron’s debts, and Dynegy’s major shareholder, ChevronTexaco, promises to provide Enron with the immediate US $1.5 billion in operational funding.

November 19, 2001 Standard and Poor, a major credit rating agency, downgraded Enron’s debt to the status of “junk.” Dynegy realizes how really horrible is Enron’s financial plight. Dynergy withdraws its purchase offer.

November 28, 2001 Dynegy terminates its agreement with Enron.

December 4, 2001 Enron files for bankruptcy. This is the largest Chapter 11 bankruptcy case in U.S. history. Its two major investors, Citibank and J.P Morgan, two banks, provide US $1.5 billion in short-term emergency funding.

Enron announces that it will immediately layoff 4,000 employees from its Houston, Texas, headquarters. By that time many employees had lost up to 90 percent of their retirement savings as Enron’s shares plunged.

Enron files a lawsuit against Dynegy, claiming US $ 10 billion in imaginary damages, Enron claims that Dynergy is guilty of breaching an earlier contract while Dynegy files a countersuit and attempts to gain ownership over the Northern Natural Gas Pipeline, one of the prime assets with which Enron began its corporate history.

December 6, 2001 Enron discloses that it paid more than US $50 million to 75 of its most successful traders in an attempt to prevent these traders from leaving Enron as it intended to merge with Dynegy. From another series of Enron’s revelations, the public finds out that Enron paid US $ 55 million in bonuses just a few days before filing for bankruptcy on December 8, 2001, Amalgamated Bank of New York, a New York-based financial institution that is mostly owned by unions, files a lawsuit against 29 of Enron’s top executives and board members.

The bank claims that Enron’s officials maliciously inflated the company’s stock value, fraudulently gaining millions of dollars for themselves, using false financial records, just before the nose-dive of the Enron stock. The suit requests that a federal judge freezes bank accounts containing over US $1 billion belonging to 29 Enron top executives and board members. The law suit stresses that the company illegally froze employees’ retirement savings (401(k) savings), which by the time of the lawsuit become almost worthless anyway for the bulk of employees’ savings were invested in Enron’s stock.

December 10, 2001 The US Department of Labor launches an inquiry into Enron’s mishandling of employee retirement pensions. From 70 to 90 percent of former Enron’s employees lost their retirement savings in Enron’s stock crash.

at the same time, the SEC (the Securities and Exchange Commission) begins an investigation into the role played by Enron’s independent auditors, Arthur Andersen.

December 12, 2001 The House Financial Services Committee proceeds with a hearing on Enron’s financial troubles; speakers include officers from the Securities and Exchange Commission (SEC), Arthur Andersen (Enron’s faithful accounting firm) and union representatives.

Joseph Berardino, the CEO of Arthur Andersen, testifies that Enron might have committed “illegal acts” in financial accounting practices, this statement leads to a criminal investigation by the US Department of Justice.

January 4, 2002, Enron and Dynegy come to the settlement of their dispute. Enron lost the legal battle and it turns over the ownership over the Northern Natural Gas Pipeline to Dynergy by end of January.

January 10, 2002 The Department of Justice launches a criminal investigation of Enron. Attorney General John Ashcroft and his Chief of Staff, David Ayres, refuse to participate in the investigation because Enron was a major contributor Ashcroft’s failed 2000 senatorial bid.

Timeline of Enron’s collapse July, 2001 A protester, who blames Enron for California’s energy woes, throws a cream pie into the face of Jeff Skilling the CEO of Enron. California consumer groups accuse Enron of price-gouging practices during California’s power crisis while Enron stock drops to US $42.93 per share.

July, 2001 Amidst provokes rolling blackouts in California, Pacific Gas and Electric Company files for bankruptcy.. Pacific Gas and Electric Company is one of the three major utility companies in the region, along with Southern California Edison and San Diego Gas & Electric Company.

August 14, 2001 CEO Jeff Skilling resigns stating “personal reasons.” October 12, 2001 Enron announces that it made a US $638 million loss during the third quarter of the fiscal year 2001.

October 24, 2001 Andrew Fastow is ousted as the chief financial officer because of his involvement into questionable business transactions and partnerships. Jeff McMahon becomes Enron’s, Chief Financial Officer.

October 31, 2001 Securities and Exchange Commission (SEC) upgrades its inquiry into Enron’s dealings into a formal investigation on Enron’s business transactions and accounting records.

November, 8, 2001 Enron suddenly revises its financial statements. The revision leads to reduced earnings by an additional US $586 million over the past four years, in large part due to losses with shady partnerships. It is also disclosed that Mr. Fastow earned US $30 million in assorted fees he charged and with profits from his involvement with the outside partnerships.

Enron announces it must pay a US $690 million in debt. Another US $6 billion is due by next year.

Enron’s CEO Lay calls the U.S. Secretary of the Treasury, Paul O’Neill and asks to discuss Enron’s troubles, according to a spokesperson of the Treasury Department.

November 9, 2001, Dynegy, a much smaller energy company, offers a rescue plan for Enron and proposes a buy-out of entire Enron for US $10 billion in stock. Dynegy also agrees to pay back more than $13 billion of Enron’s debts, and Dynegy’s major shareholder, ChevronTexaco, promises to provide Enron with the immediate US $1.5 billion in operational funding.

November 19, 2001 Standard and Poor, a major credit rating agency, downgraded Enron’s debt to the status of “junk.” Dynegy realizes how really horrible is Enron’s financial plight. Dynergy withdraws its purchase offer.

November 28, 2001 Dynegy terminates its agreement with Enron.

December 4, 2001, Enron files for bankruptcy. This is the largest Chapter 11 bankruptcy case in the U.S. history. Its two major investors, Citibank and J.P Morgan, two banks, provide the US $1.5 billion in short term emergency funding.

Enron announces that it will immediately layoff 4,000 employees from its Houston, Texas, headquarters. By that time many employees had lost up to 90 percent of their retirement savings as Enron’s shares plunged.

Enron files a lawsuit against Dynegy, claiming US $ 10 billion in imaginary damages, Enron claims that Dynergy is guilty of breaching an earlier contract while Dynegy files a countersuit and attempts to gain ownership over the Northern Natural Gas Pipeline, one the prime assets with which Enron began its corporate history.

December 6, 2001 Enron discloses that it paid more than US $50 million to 75 of its most successful traders in attempt to prevent these traders from leaving Enron as it intended to merge with Dynegy. From another series of Enron’s revelations, the public finds out that Enron paid US $ 55 mllion in bonuses just a few days before filing for bankruptcy on December 8, 2001, Amalgamated Bank of New York, a New York-based financial institution that is mostly owned by unions, files a lawsuit against 29 of Enron’s top executives and board members.

The bank claims that Enron’s officials maliciously inflated the company’s stock value, fraudulently gaining millions of dollars for themselves, using false financial records, just before the nose-dive of the Enron stock. The suit requests that a federal judge freezes bank accounts containing over US $1 billion belonging to 29 Enron top executives and board members. The law suit stresses that the company illegally froze employees’ retirement savings (401(k) savings), which by the time of the lawsuit become almost worthless anyway for the bulk of employees’ savings were invested in Enron’s stock.

December 10, 2001, The US Department of Labor launches an inquiry into Enron’s mishandling of employee retirement pensions. From 70 to 90 percent of former Enron’s employees lost their retirement savings in Enron’s stock crash.

at the same time, the SEC (the Securities and Exchange Commission) begins an investigation into the role played by Enron’s independent auditors, Arthur Andersen.

December 12, 2001 The House Financial Services Committee proceeds with a hearing on Enron’s financial troubles; speakers include officers from the Securities and Exchange Commission (SEC), Arthur Andersen (Enron’s faithful accounting firm) and union representatives.

Joseph Berardino, the CEO of Arthur Andersen, testifies that Enron might have committed “illegal acts” in financial accounting practices, this statement leads to a criminal investigation by the US Department of Justice.

January 4, 2002 Enron and Dynegy come to the settlement of their dispute. Enron lost the legal battle and it turns over the ownership over the Northern Natural Gas Pipeline to Dynergy by end of January.

January 10, 2002 The Department of Justice launches a criminal investigation of Enron. Attorney General John Ashcroft and his Chief of Staff, David Ayres, refuse to participate in the investigation because Enron was a major contributor to Ashcroft’s failed 2000 senatorial bid.

4. Conclusions – how can investors and the public protect themselves from Enron’s kind of companies; lessons drawn from Enron’s experience.

Many observers blame the recent Enron’s collapse on the deregulation and free markets. Here is what writer Thomas Frank had to say at salon.com: “Enron was the peerless darling of the all those who believed that free markets were the acme of existence. Its wreckage is as good a place as any to sit down and take stock of the deregulated, privatized state into which we’ve been so rudely hustled over the last decade.

And here is what it looks like: Top management walking off with hundreds of millions of dollars while employees lose their jobs, investors lose millions and customers get to look forward to more rolling blackouts. Profiteering. Bought politicians. Stock market bubbles that eventually burst. Workers thrown out on the streets. Left to its own devices, this is what the free market does.” While this statement might be partially accurate, it is worth to remember when analyzing the collapse the Energy giant, that it did not fail in conditions of a pure free market. It is generally assumed that in order for free markets to function successfully, they should be transparent and be free of government interference and patronage.

This was certainly not Enron’s case – Enron operated in a shady fashion, its accounting system involved a complex web of off-shore partnerships and holdings, specifically created with the purpose of deceiving the market, inflating profits by hiding debt. Enron’s success in the United States and abroad often depended on government patronage and “privileges” obtained through political sponsorships and, in some cases, corruption practices. Healthy competition and the force of the free-market played a secondary role in Enron’s operation. It would be worth quoting a quite lengthy passage from the Guide to Enron Collapse by Darren Puscas at the Polaris Institute (http://www.polarisinstitute.org/) in Ottawa, Ontario, Canada “Enron is the only company in history to be the subject of a full Amnesty International Report.

Beyond the now-famous California energy crisis set off by Enron’s (and others’) greed, here are a couple of examples of their nastiness: Dabhol Power Plant in India – Many have heard the accusations that Vice President Cheney tried in 2001 to use his political muscle to help Enron, which was facing nonpayment by the Indian government, to sell its interest for $2.3 billion to settle this dispute over Enron’s investment in the Dabhol Power plant. Or they know that the National Security Council (NSC), Bush’s ‘nerve center’ for international crises and strategy, had a Dabhol Working Group that acted as a ‘concierge service’ for discussions between Ken Lay and India’s national security adviser, Brajesh Mishra.

Or that US Trade Representative (USTR) Robert Zoellick, the Bush Administration’s negotiator of trade deals through the World Trade Organization (WTO) and the Free Trade Area of the Americas (FTAA) who had also been a paid advisor for Enron before joining Bush, was to go to India on behalf on the NSC’s Dabhol Working Group in September 2001.

However, the scandal and abuse involved in this case go much further into the past. When local villagers protested against the original construction of the plant because of its threat to the environment and their livelihood, Enron, among other mistreatment, paid “abusive state forces for the security they provided to the company.” According to Human Rights Watch, “Dabhol Power Corporation benefited directly from an official policy of suppressing dissent through misuse of the law, harassment of anti-Enron protest leaders and prominent environmental activists, and police practices ranging from arbitrary to brutal.

The company did not speak out about human rights violations and, when questioned about them, chose to dismiss them altogether.” As well, Enron’s bankruptcy leaves the U.S. Government-run Overseas Private Investment Company (OPIC) exposed to more than $1 billion in risks related to projects sponsored by Enron, with the Dabhol collapse accounting for $340 million of this. OPIC is an agency that offers corporate welfare loans of taxpayer money to companies for overseas projects (especially privatization projects). Thus, U.S. taxpayers are ultimately in the lurch for this money which had been used to sponsor human rights abuses overseas.

Bolivia – The Overseas Private Investment Corporation (OPIC) also gave Enron a $200 million loan to construct a very controversial natural gas pipeline right through Bolivia’s San Matias Integrated Management Area, which is the only protected area for the world’s largest intact dry tropical forest. Enron contends that it is a ‘secondary’ forest due to some previous logging and should be allowed to work there. ” /end of quote/ This excerpt serves as an illustration to the Enron’s modus operandi – not free markets, but government assistance, corruption, harassment and physical abuse of its opponents paved the road to Enron’s “success” overseas. Add the political sponsorships – Enron’s fabulous generosity to Republic candidates in the United States to the above, combine them with the Enron’s maze of off-shore partnerships hiding unmanageable debts – and the image of Enron comes to light in its full splendour. This was not the ideal free market corporation, the entity of the kind that the modern free market and the entire world economy is supposedly built upon – transparent, apolitical and honest.

In fact, it was exactly the opposite from the ideal, – Enron was a secretive, politicized and fraudulent outfit. Its trumped-up success was of illusory nature, as its sordid collapse so well demonstrated. The main question the Enron debacle raises is how free is the free market if its principal participants voluntarily chose to base their operations on government patronage, public subsidy, corruption, abuse of their critics and outright fraud instead of relying on the “mercy” of market forces. Of course, in the case of corruption, one can also argue that official patronage had always been a market commodity.

It can also be claimed that the Enron disaster was an exception and that the modern market economy otherwise operates differently. Only time can prove this assumption to be either correct or wrong, are more dramatic failures of Enron’s kind to follow in the near future (and we can hardly failures any more dramatic than the collapse of the world’s biggest energy company unless suddenly the government of the United States declares a bankruptcy), the public opinion, not to mention impoverished investors, unpaid suppliers, and jobless employees will certainly ask for more regulation of the so-called free market and more transparency and responsibility on the part of its major participants.

What are the lessons of the Enron debacle and how can ordinary investors protect themselves from becoming casualties of such disasters? The popularly accepted axiom that there are indeed safe havens in the US marketplace, that there are businesses that are too big to fail or are too intertwined with the interests of the (US) government to allow their failure – is no longer valid.

Now we know that any company of practically any size and any degree of intimacy with American officialdom can suddenly fail. We also know that reports of corporate performance, debts to earning ratios, official earning forecasts, just statistics endorsed by supposedly independent giants of international accounting or by governments – can be false, fraudulent, inaccurate or meaningless. Comprehension of new facts (or rules?) in their brutal enormity brings an additional element of uncertainty into an already insecure world of investments.

In the long term, the logical conclusion drawn from the Enron debacle is the assumption that no publicly listed company in the US is immune to failure, and if we’ll take this kind of reasoning further (if we remember the scandalous degree of intimacy between the government and failed Enron), we can assume that no sovereign entity, including the US government, is immune to financial failure as well. Dramatic and unforeseen events can lead to spectacular disasters – in the case of hapless Enron a few independent “reports” sufficed in toppling the giant.

From a historic perspective, extraordinary and unexpected calamities can destroy sovereign entities as well. Less than a century ago, in 1914, the Austrian, German and Russian empires were superpowers, all three were experiencing a spectacular economic boom, they were prime issuers of sovereign bonds (read Enron shares) and their paper was considered to be as good as gold. By the end of that decade, in a historic instant these three superpowers disappeared from the map of the world, and their financial instruments and bonds, held by millions around the world, became practically worthless.

As we live through another turn of the century, in the world which seems to be far less secure than it was 100 years ago, a prudent long-term investor might think of setting some of his or her savings aside into something other than just unsecured paper.

Investments in gold and property, especially if the property is not overpriced and is located in politically stable areas where it is not subject to high taxes and bureaucratic entanglements, might not sound financially rewarding in the short term, but can be seen as a way to preserve at least some value in the long term, as opposed to reliance on paper – corporate or sovereign, if the paper is unsecured with anything or is only backed by ethereal substances like statistics or “faith.”

Most people would say that this amounts to investment advice for the doomsday. To a degree it is. However, the spectacular failures of Enron, as well as the sombre history of unexpected failures, caused suddenly by unexpected circumstances, do not inspire much confidence.

The sensational downfall of the Barings bank is worth recalling. Barings was a venerable financial institution that was funded in the 18th century and which became bankrupted almost overnight by actions of a single person at the end of the 20th. While the Barings’ case might have been a freak accident, the collapse of Enron was certainly not, and Enron’s disastrous finale might foreshadow the taste of things to come if the Enron’s debacle is indicative of hidden systemic faults. This we and the investors do not know until, and if, similar failures occur.

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