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The History of the Largest American Bankruptcy of Enron

Updated August 25, 2022
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The History of the Largest American Bankruptcy of Enron essay

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Enron was founded in 1985 by Jeffrey Skilling and Kenneth Lay and its headquarters was located in Houston, Tx. It become one of the world’s leading companies in Electricity, Natural Gas, and Communications, and made it the fifth largest company even with its bankruptcy.

Its bankruptcy was about $63 billion and shocked many markets. The Enron scandal was caused by many unethical practices including the ideas proposed by Jeff Skilling, the high school mythology at Enron, Andrew Fastow and its partnerships, also Enron’s manipulation of electricity in the State of California. Ken Lay was found with a problem when his biggest money maker was behind bars but soon he found Jeff skilling who seemed to have the answer to the future of what The Natural gas Business was supposed to be. Ken Lay was interested in people with ideas and Jeff Skilling was a person with big ideas one of his ideas was to find a new way to deliver energy. Enron would become a Stock Market for Natural Gas which would transform energy into a financial instrument that would be traded as stocks and bonds. Enron 1992 became the biggest seller and buyer of natural gas due to Jeff’s idea.

But before Jeff Skilling joined the company he proposed an idea for him to join, he wanted to be allowed to use a certain type of accounting known as mark-to-market accounting treatment which would, later on, be one of Enron’s downfalls. Mark to market was about Enron creating future profits on the day a deal was signed no matter how little cash came in. Enron’s profits could be anything and unpredictable. He called this HFV (Hypothetical Future Value Accounting).

One of Jeff Skilling’s contributions to the company was creating tcompanieshe PRC (Performance Review Committee) which required people in the workforce to be graded every year from a 1 to 5 and about 10% of the people had to be a 5 which lead to them being fired. Even if the person was doing fine in his/her job it wasn’t enough to meet his requirements for the company because others could be hired and do a much better job. About 15% of the people were fired every year and this was known as “Rank or Yank.” He mentioned this was one of the most important processes as a company because it kept them growing. Only the best could be part of the company even if it meant leaving some people jobless. Traders were one of the most competitive people in the business they would have to “throw people in the ditch” just to keep their jobs.

The traders in Enron created it to be one of the biggest trading companies and if other company’s wanted to be in the market they had to deal with Enron. Its traders were said to be like the kids in high school who were never touched by the principles even with their bad behaviors because they had become one of Enron’s major profit makers. They took Skillings’s and Lay’s beliefs in the free market and created something new. Andrew Fastow was the CFO (Chief Financial Officer) and was familiar with the trading market and knew how to play it in Enron’s favor. He constantly kept stock prices up despite the financial conditions Enron was facing.

Fast how was able to do this by developing a select web of businesses that only worked with Enron to hide losses on its balance sheets and to outside investors, it looked like money was coming into Enron. One of his most successful companies was LJM which worked in Enron’s and Andrew Fastow’s benefits. He stole about $45 million for himself due to LJM. About 96 individual bankers invested in LJM and some major banks put up as much as $25 million each. He made millions of dollars cheating the system.

The EES (Enron Energy Service) was going down and would be facing $500 million in losses which would cause the problem of not being able to meet its numbers by the end of its quarterly report. However, somehow it would make the numbers due to California’s blackouts. California had enough power to meet its demands but somehow still had blackouts. Enron selected the state of California to experiment with deregulated electricity. Tim Beldon ran the West Coast Trading desk and looked for loopholes from which Enron could make money.

He found many strategies and one of them was called “Death star” which was the practice of shuffling energy around the California power grid to receive payments from the state for “relieving congestion (Wikipedia). Another strategy used was called “Ricochet” which was the act of exporting power out of the state and when prices went up they would bring it back to the state. Traders, later on, discovered they could create artificial shortages which would make prices get even higher. The west coast traders made about $2 billion for Enron.

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The History of the Largest American Bankruptcy of Enron. (2019, Apr 03). Retrieved from https://sunnypapers.com/enron-was-founded-in-1985-by-jeffrey-skilling-and-kenneth-lay-and-its-headquarters-was-located-in-houston/