December 4, 2001 - AMR Research: What I learned from Enron ...and Orange County

Peace Corps Online: Peace Corps News: Headlines: Peace Corps Headlines - 2001: 12 December 2001 Peace Corps Headlines: December 4, 2001 - AMR Research: What I learned from Enron ...and Orange County

By Admin1 (admin) on Sunday, January 13, 2002 - 10:17 pm: Edit Post

What I learned from Enron ...and Orange County





Read and comment on the similarities between the bankruptcies of Enron and Orange County and their conclusion that these financial horror stories occur where the weakest links are inevitably firms’ own employees and internal practices. Read the story at:

What I Learned From Enron (...and LTCM...and Orange County...and Barings Bank...)
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What I Learned From Enron (...and LTCM...and Orange County...and Barings Bank...)

Tuesday, December 04, 2001

Forget about watching your back: Look under your nose. Enron’s spectacular demise highlights major paradoxes of finance and technology. Over the past weeks we have witnessed the dodgy CFO get the boot, the share price plummet from $85 to spare change, the shut-down of the highly regarded private marketplace, the buy-out brush-off from the once-lowly competitor, the filing for Chapter 11, the layoff of 4,000 people, and a last-minute debtor-in-possession deal with JP Morgan, Citibank, and others. There are no new stories here—just recurring themes. We know full well this is not the first time that:

Internal controls failed even as millions were spent to ensure internal compliance and external security

The Over the Counter (OTC) derivatives market proved a minefield where even (sometimes especially) the best and brightest got burned

Despite improved risk management technology and governance capabilities, landmark financial fiascoes continue to fall into one or both of the above categories. Every few years, we see an “unprecedented” disaster—unprecedented until we find out what went on behind the scenes. Left to their own devices, Nick Leeson at Barings Bank and Orange County’s municipal treasurer made risky bets. When they lost, both believed they could fix it, costing their employers extra millions in the process. Long-Term Capital Management’s (LTCM) high-profile strategists missed the forest (the ruble collapse and Asian financial crisis) for the trees (sophisticated investment models supposedly impervious to risk). Senior officers at the Bank of New York helped smuggle $7B out of Russia.

Enron’s death throes are an e-commerce version of previous events and provide a strangely subdued final chapter to the e-marketplace age. Until today, no one was willing to step in and clean up—the mess underlying the mess being unpalatable and most likely illegal. JP Morgan, Citibank, and their partners in the bailout will spend the coming months and years trying to squeeze some value from a bad bet. And Enron joins the ranks of financial horror stories where the common (weakest) links are inevitably firms’ own employees and internal practices.



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