LJM2’s general director was not viewed as a onflict of interest was easily laid aside. LJM2, which is a partnership created to buy assets owned by the Enron Corporation to help move debt off of the balance sheet and transfer risk for their other business ventures. These special Purpose Enutles (SPEs) was established to keep Enron’s credit rating stay hgh, which was very Important in their fields of business.
A special purpose entity Is a trust, corporation, limited partnership, or other legal vehicle authorized to carry out specific activities as enumerated In its establishing legal document. LJM2 entered Into 26 deals with Enron to help the company move debt and assets off its books. The SPES provides its sponsor with financing and liquidity while offering creditors protection against the sponsor’s bankruptcy. Anyway, the executives believed that if Enron’s long-term stock values could remain high, they would have ways to use the company’s stock to hedge its investments in these other entities.
They did this through a very complex arrangement of SPES they called the Raptors, a group of entitles designed to both uffer Enron’s earnings from mark-to-market write-downs and to pay millions of dollars toa handful of Enron executives and their friends The Raptors were established to cover their losses If the stocks In their start-up businesses fell. It was very clever, but wrong. In order for the Raptor to come through, the telecom industry had to perform outstanding, instead the telecom Industry begin to suffer Its first downturn, which caused Enron to suffer as well.
Business analysts began trying to unravel the source of Enron’s money. The Raptors would collapse if Enron stock fell below a certain point, because they were ultimately backed only by Enron stock. Accounting rules required an Independent Investor In order for a hedge to work, but Enron used one of their SPEs. When Enron’s stock began to decline, the Raptors began to decline as well. The deals were so complex that no one could really determine what was legal and what wasn’t. Eventually, the house of cards began falling.
As Enron attempted to maintain its bad investments and then hedged them, and as the Enron stock supporting these oney-losing hedges dropped in value, the Raptors rapidly lost the credit capacity it needed to support further hedge activity, leading to Enron’s tumble. Enron, at one time was the seventh-ranked company in the united States with stock trading as high as $80 per share In 1999, filed for bankruptcy protection on Dec. 2, 2001 and its stock became virtually worthless. It was a company recognized by everybody from Wall Street to government as the future way that American companies would be run.