Kenneth R. Szulczyk
Enron’s managers invested Enron stock in the SPEs. As Enron’s stock price soared, the
SPE's finances remained healthy until Enron’s stock price peaked at $90 per share. Once
Enron’s stock price began plummeting until it fell below one dollar per share in 2000, the SPEs
earned substantial losses. Enron hid the losses and asked banks for more loans that would keep
the company afloat, but Enron failed to obtain new loans. The U.S. economy entered a recession
in 2001 after many internet companies bankrupted in 2000. A recession always exposes an
organization’s weakness. Unfortunately, Enron employees’ pension funds were invested in
Enron stock, and many employees lost their pension funds and became unemployed.
Almost everyone in the financial world overlooked the SPEs, including Enron’s auditor,
Arthur Anderson, Enron’s law firm, and the regulators from the Securities and Exchange
Commission (SEC). Then the U.S. government passed the Sarbanes-Oxley Act in 2002, which
required CFOs and CEOs to sign their company’s financial statements. Law’s goal was to
increase transparency. Transparency means outsiders can look at an organization, and know the
rules and can accurately assess a firm's true finances. Unfortunately, Enron was “a black box,”
and only a few insiders knew Enron’s genuine financial picture. On the other hand, a non-
transparent government tends to be corrupt. For example, if government officials do not write
down the laws and rules, or the laws and rules are vague, subsequently, the bureaucrats have
wide discretion whether to approve a business license or activity, fueling corruption.
The U.S. economy rebounded from the strong, overly optimistic real estate market.
Everyone forgot Enron’s misdeeds until the 2007 Great Recession, when the scale of fraud
became much larger. For example, Lehman Brothers used exotic securities such as credit default
swaps and collateralized debt obligations to buy real estate (Discussed in Chapter 18). After the
recession had struck, unemployment doubled, and many households started defaulting on their
mortgages. Commercial and investment banks stopped lending overnight, and real estate prices
began tumbling. Unfortunately, Lehman Brothers went on a spending spree, buying real estate
toward the peak of the housing bubble. It held $768 billion in bank and bond debt while it had
$639 billion in assets that dropped rapidly as real estate prices fell. Lehman Brothers filed for
bankruptcy in 2008 and had closed its doors after 158 years of business.
Countries differ in corporate structure and planning. The U.S. corporations usually focus on
short-term profits, and thus, they have problems with corporate fraud. On the other hand, the
Japanese plan long term and they form a Keiretsu, a conglomerate of many companies with a
bank member. Consequently, the bank could grant low-interest loans to its partner companies,
and the Keiretsu usually focuses on long-term profits and market shares. Furthermore,
corporations in South Korea, Germany, and Russia also established conglomerates, which are
similar to a Keiretsu.
Some governments become a shareholder in a company, which the former communistic
countries often use. Government retains control over the company, and it attracts partners who
bring technology and efficient management practices. Unfortunately, government as a
shareholder becomes susceptible to corruption because a government can use its authority to
protect the company and isolate it from competition.
Some corporations suffer from the principal-agent problem, when two related parties have
different incentives, creating conflicts and odds with each other. For example, the corporate