The Konformist

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January 2002

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ENRONOMICS

ENRON EXPLAINED

In case you were wondering how Enron came into so much trouble, here is an explanation reputedly given by a ColoradoAggie professor to explain it in terms his students could understand.

 

Capitalism

You have two cows.

You sell one and buy a bull.

Your herd multiplies, and the economy grows.

You sell them and retire on the income.

 

Enron Capitalism

You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned your CFO who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on six more.

 

Now do you see why a company with $62 billion in assets is declaring bankruptcy?

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