Enron The Classic Shell Game

Intro Video a=sp1001c63c&sp-k=Video&sp-p=all&sp-f=ISO &sp-s=doc_date a=sp1001c63c&sp-k=Video&sp-p=all&sp-f=ISO &sp-s=doc_date a=sp1001c63c&sp-k=Video&sp-p=all&sp-f=ISO &sp-s=doc_date a=sp1001c63c&sp-k=Video&sp-p=all&sp-f=ISO &sp-s=doc_date

Cow Explaination Here are some analogies to help explain what happened. In each of these next slides, remember that all we have is two cows. Here are some analogies to help explain what happened. In each of these next slides, remember that all we have is two cows.

Feudalism You have two cows. Your lord takes some of the milk. You have two cows. Your lord takes some of the milk.

Fascism You have two cows. The government takes both, hires you to take care of them and sells you the milk. You have two cows. The government takes both, hires you to take care of them and sells you the milk.

Communism You have two cows. You must take care of them, but the government takes all the milk. You have two cows. You must take care of them, but the government takes all the milk.

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. 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 You have two cows. You borrow 80% of the forward value of the two cows from your bank, then buy another cow with 5% down and the rest financed by the seller on a note callable if your market cap goes below $20B at a rate 2 times prime. You now sell three cows to your publicly listed company, using letters of credit opened by your brother-in-law at a 2nd bank, then execute a debt/equity swap with an associated general offer so that you get four cows back, with a tax exemption for five cows. The milk rights of six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more and this transaction process is upheld by your independent auditor and no Balance Sheet is provided with the press release that announces that Enron as a major owner of cows will begin trading cows via the Internet site COW (cows on web). You have two cows. You borrow 80% of the forward value of the two cows from your bank, then buy another cow with 5% down and the rest financed by the seller on a note callable if your market cap goes below $20B at a rate 2 times prime. You now sell three cows to your publicly listed company, using letters of credit opened by your brother-in-law at a 2nd bank, then execute a debt/equity swap with an associated general offer so that you get four cows back, with a tax exemption for five cows. The milk rights of six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more and this transaction process is upheld by your independent auditor and no Balance Sheet is provided with the press release that announces that Enron as a major owner of cows will begin trading cows via the Internet site COW (cows on web).

Players Kenneth Lay, CEO Enron Kenneth Lay, CEO Enron Jeffrey Skilling, Former Enron CEO Jeffrey Skilling, Former Enron CEO Andrew Fastow, Former Enron CEO Andrew Fastow, Former Enron CEO David Duncan, Chief Auditor, Arthur Andersen David Duncan, Chief Auditor, Arthur Andersen Ordered the Enron documents shredded Ordered the Enron documents shredded Nancy Temple, Auditor, Arthur Andersen Nancy Temple, Auditor, Arthur Andersen Sent an to staff *reminding* them about the “Document Retention Policy” Sent an to staff *reminding* them about the “Document Retention Policy” Thomas White, Secr. Of Army Thomas White, Secr. Of Army Former Vice Chairman of Enron Energy Services Former Vice Chairman of Enron Energy Services Pushed through energy privatization legislation Pushed through energy privatization legislation

The “Shady” Accounting Mark to Market Mark to Market Special practice for securities and commodities traders, as long as the market is LIQUID Special practice for securities and commodities traders, as long as the market is LIQUID Allows capital gains/losses to be just regular income Allows capital gains/losses to be just regular income Accrual Accrual Buying/selling securities is subject to capital gains taxes because this is an extraordinary item Buying/selling securities is subject to capital gains taxes because this is an extraordinary item Enron was allowed to use Mark to Market, even though the market they were trading in was NOT liquid enough. Enron was allowed to use Mark to Market, even though the market they were trading in was NOT liquid enough.

Enron Facts Employees Employees #7 in Fortune500 (Feb2001) #7 in Fortune500 (Feb2001) 2800 subsidiaries (874) offshore 2800 subsidiaries (874) offshore 2M$ to Bush-Cheney Campaign 2M$ to Bush-Cheney Campaign

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