FYI The Enron Implosion Until 2001, Enron Corporation, a firm that specialized in trading in the energy market, appeared to be spectacularly successful. It had a quarter of the energy-trading market...

FYI The Enron Implosion

Until 2001, Enron Corporation, a firm that specialized in trading in the energy market, appeared to be spectacularly successful. It had a quarter of the energy-trading market and was valued as high as US$77 billion in August 2000 (just a little over a year before its collapse), making it the seventh largest corporation in the United States at that time. Toward the end of 2001, however, Enron came crashing down. In October 2001, Enron announced a third-quarter loss of US$618 million and disclosed accounting mistakes. The U.S. SEC then engaged in a formal investigation of Enron s financial dealings with partnerships led by its former finance chief. It became clear that Enron was engaged in a complex set of transactions by which it was keeping substantial amounts of debt and financial contracts off its balance sheet. These transactions enabled Enron to hide its financial difficulties. Despite securing as much as US$1.5 billion of new financing from JPMorgan Chase and Citigroup, the company was forced to declare bankruptcy in December 2001, making it the largest bankruptcy in U.S. history.

The Enron collapse illustrates that government regulation can lessen asymmetric information problems but cannot eliminate them. Managers have tremendous incentives to hide their companies problems, making it hard for investors to know the true value of the firm.

The Enron bankruptcy not only increased concerns in financial markets about the quality of accounting information supplied by corporations, but it also led to hardship for many of the former employees who found that their pensions had become worthless.  Outrage against executives at Enron was high, and several were indicted, convicted, and sent to jail.