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Chapter 10. Beyond Their Means: Balance ... > Red Flag 2: Avoid Anyone Boasting Ab...

Red Flag 2: Avoid Anyone Boasting About Using Financial Engineering to Reduce Debt

Back in June 1999, Enron’s Fastow boasted to CFO magazine of his ability to raise lots of capital without its showing up on the company’s balance sheet. In those days, it was the kind of maneuver that won financial engineers like Fastow awards. There was little thought in the mainstream investment, accounting, or media communities that this wasn’t quite kosher. “We accessed $1.5 billion in capital but expanded the Enron balance sheet by only $65 million,” he said, noting that this was “a very significant amount of leverage” that was not on the balance sheet. Fastow, who was talking about the debt associated with Enron’s $1.5 billion purchase of three New Jersey power plants, also told the magazine that “we have much more complex transactions as well.” Fastow did, though, say that the assets were completely segregated and couldn’t hurt Enron if anything went wrong. The bankers advising Enron seemed to fully understand what their master wanted. According to USA Today, one email discovered by congressional investigators had one Chase executive George Serice writing that “Enron loves these deals,” as they “are able to hide funded debt from their equity analysts because they (at the very least) book it as deferred rev [revenue] or (better yet) bury it in their trading liabilities.” Suffice it to say that when a new generation of Andrew Fastows comes along (and it will) and starts claiming to have played God with balance sheets, this should send shivers up any investor’s spine.


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