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Assignment 1: Enron’s risk

According to the movie Enron: The smartest guys in the room there are some risk that occurred before a bankruptcy of Enron that I will discuss about it later. First lets me introduce some information about Enron. Enron Corporation was an American energy and natural resources company. Before a bankruptcy Enron was the 7th largest company in US with $65 billion of asset and 20,000 staffs were employed by the company. Fortune Magazine named Enron “America’s most innovative Company” for several years. Why Enron went bankrupt? What risks that hey confronted with before the collapsed? In my opinion, operational risk was the most dangerous risk that Enron had. Enron lacked of proper and transparent operational system. As we can see, Enron manipulated its own accounting by using mark-to-market method to make an artificial prosperity of the company and fraud of its manager. These problems not only affect outside investors but also affect the company in the end. In the past, some of Enron’s investment was not related to other business of Enron, for example, Enron’s power plant in Dabhol, India. At that time nobody knew much about country name India so they tried to avoid the investment in that country, which made Enron decided to cancel this project. Enron also invested in water business and broad-band communication but it did not work well as a result it caused a huge burden of debt to the Enron. Another business that created a large amount of debt to Enron was trading energy and resources, Enron made itself as middle man between seller and buyer. This business made good profit but it also made liabilities that Enron had to deal with. Next is credit risk. Since Enron got 70 percent of its revenue from trading as a middle man. It had to handle with a huge amount of liabilities and debt so Enron had to raise a fund, Enron’s manager came up with some brilliant idea. First, Enron established a new company, Whitewing, to make a loan from the bank...