December 3, 2001 - LA Times: Enron blowup compared to the Orange County bankruptcy

Peace Corps Online: Peace Corps News: Headlines: Peace Corps Headlines - 2001: 12 December 2001 Peace Corps Headlines: December 3, 2001 - LA Times: Enron blowup compared to the Orange County bankruptcy

By Admin1 (admin) on Sunday, January 13, 2002 - 10:33 pm: Edit Post

Enron blowup compared to the Orange County bankruptcy

Read and comment on this excerpt from the LA Times on the Enron blowup and it's similarity to the Orange County bankruptcy at:

Enron Files Chapter 11, Sues Ex-Suitor Dynegy*

* This link was active on the date it was posted. PCOL is not responsible for broken links which may have changed.

Enron Files Chapter 11, Sues Ex-Suitor Dynegy

LA Times, December 3, 2001

The Enron blowup has been compared with two earlier financial fiascoes: the Orange County bankruptcy and the collapse of the giant hedge fund Long-Term Capital Management. One key difference is that Enron's trading strategy never went sour the way that Orange County's and Long-Term Capital's did.

Instead, Enron's collapse in its final stages was a crisis of confidence among shareholders, lenders and customers that ultimately fled the company as in a run on a bank. Trading partners whom Enron owed cash or commodities began to fear that Enron would be unable to deliver, so they started pulling money back and refusing to extend credit for new trades.

What spooked the stock market and the trading community was Enron's surprise mid-October announcement that it had sustained a major loss in its third quarter and had reduced shareholder equity by $1.2 billion to reflect losses related to limited partnerships set up and run by then-company executives.

The Securities and Exchange Commission quickly announced an investigation, and Enron ousted the executive most closely associated with the partnerships.

When Dynegy agreed Nov. 9 to take over its much larger rival, it believed that the $1.5 billion being injected into Enron by ChevronTexaco plus a new $1-billion Enron credit line would be enough capital to tide Enron over until the deal could be consummated. But the "run" by Enron's trading partners was well underway by then, and Enron tore through most of the money in less than a month.

Adding to the pressure were Enron's tumbling stock price and the threat that its bonds would be downgraded to "junk" status by the major credit-rating agencies. When the downgrades came Wednesday, they triggered provisions in some earlier agreements that made $3.9 billion instantly come due when Enron had nowhere near that much cash.

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