A "structured finance" is defined as "a program where receivable interests and asset-backed securities issued by multiple participants are purchased by a special purpose entity that repackages those exposures into securities that can be sold to investors." It is also a service offered by many large financial institutions for companies with very unique financing needs which usually don't match conventional financial products such as a loan. In addition, structured finance usually involves highly complex financial transaction.
ÃÂÃÂ How structured finance work and its relationship with Enron problem
Generally speaking, structured financing are transactions backed by bonds or loans called collateralized debt obligations. They are always complicated and easily involve off-shore--and of balance sheet--special purpose entities. In the Enron agreements, the instruments of choice were contracts for the future delivery of oil or gas for which Enron received its payment in advance delivery. In 2001, Enron made several desperate last-minute attempts to make those of its third quarter 2001 numbers look good using aggressive accounting and the tools of modern finance.
A case in point is the "structured finance" transaction which took place on September 28, 2001, by which Enron was able to hide a $350 million six-month bank loan from Chase. The loan was instead reported by Enron as a normal merchant liability from its trading business.
To do this miraculous transformation of an ordinary loan into a derivative, a series of fixed-price and variable commodity trades were transacted between Enron, Chase, and an offshore entity called Mahonia, owned by Chase. The net result of these was the following: Chase/Mahonia agreed to buy natural gas for delivery in six months, and pay Enron $350 million upfront. Enron reported this transaction in its books as cash and a prepaid futures contract liability. Enron agreed to buy the same...