Enron, a brief history and how the company imploded.

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 the 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 let to the further decline in already low share prices. Being unable to pay its' creditors, with no forthcoming offers of merger from its competitors, and with no foreseeable rescue attempt by the government, Enron was forced into bankruptcy.

Enron Downfall

English: Enron Complex in Houston Texas

English: 1500 Louisiana Street building, built for...

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. 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 the 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...