Too Big to Fail?

At first, it seemed like Enron was too big to fail. It had all the tools needed to be a successful business in any emerging markets: always looking for ways to make changes, innovative ideas, exceptionally intelligent employees, Risk Management Control, high incentives to reward employees aligned to company’s satisfaction of outcome, and most importantly a high credit rating. Without this high credit rating, how would they be able to attract regional and foreign investors?

At the pace they were growing, there had to be some indication that something has to go wrong. Things just can’t be this good, this fast, for this long. Low and behold, the truth comes out and Enron begins to spiral downward uncontrollably. Enron’s non-transparent financials did not explicitly share its business operations with multiple analysts and investors. In other words, with the complexity of its business model, Enron was able to hide its unethical practices by using limited accounting practices to misrepresent is true earnings amount and change numbers on the balance sheet to show a successful performance for that period. During this time, investors are panicking as they are watching the current high, share price of $90.75 expire to nearly nothing. (less than $1)

Now everyone is in panic mode; CEO Jeff Skillings bails out on the company and leaves Chairman and CEO Kenneth Lay to clean up this massacre. At this point, there is nothing to clean up. All they can hope for is another company to save Enron by bailing them out. In fact, Dynergy offers a rescue buy-out for $10 billion in stock and agrees to pay back around $13 million dollars in Enron’s debt. Within days, a major credit rating agency, Standard and Poor lowers Enron’s credit rating to “junk-status” and Dynergy immediately terminates the contract. From here on out, everything was just a snow ball effect and kept tumbling down on Enron. It eventually had to file for the largest bankruptcy protection in U.S. history. Enron had to lay-off most of its staff and faced many court cases before its final termination as a business.

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One Response to Too Big to Fail?

  1. katiebaum13 says:

    I agree with this blog. After reading it, it made me think about the 13 Bankers article and all the problems companies that are “too big to fail” cause. When companies are too big to fail like Enron and AIG they are able to gain way too much power causing many problems such as the ability to take outside risk positions enabling them to push the risk off to other people and not themselves. If they fail and are not able to be bailed out, it can cause that entire market to crash because they hold such a majority of it. One thing that we discussed in class that is a good alternative, besides breaking these huge corporations up, is the whole idea that the regulations should be changed, so it doesn’t allow these huge corporations cause these sorts of problems.

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