What is the real reason for Enron's bankruptcy?
Enron Corp.ENE once ranked16th among the world's top 500 companies, was awarded the title of "the most innovative company in America" for four years in a row, and was named the most praised company in the world by Fortune magazine in 20001year. On September 30th, 20001year, the total assets shown on its balance sheet reached $61800 million; In August 2000, its share price exceeded $90, and its performance even surpassed that of IBM and AT & amp； Test companies that perform well in these markets. However, even this once "excellent performance" giant company, after the news that it was suspected of making false accounts [1] was investigated by the US Securities and Exchange Commission was announced, its share price fell sharply, and rating agencies such as Standard & Poor's downgraded its bond rating to junk [2] and had to file a bankruptcy protection application, making it the largest corporate bankruptcy case in history [3]. At present, the company is also doing business in China [4], and its bankruptcy caused great shock in the global securities and banking industry. Based on the Enron bankruptcy case in the United States and the practice of domestic banking industry, this paper puts forward some suggestions and views on bank credit decision.
1. To correctly judge the asset value of a company, we should not only analyze the company's financial statements, but also pay attention to the market price of the company's assets and its influencing factors.
Evaluating the value of enterprise assets is one of the three pillars of financial analysis [5]. A correct understanding of the core principles of asset-liability value measurement is very important for financial institutions to make correct decisions and prevent credit risks.
Usually, when we examine the borrower's financial situation, the financial information about the enterprise mainly comes from its financial statements, but because these financial statements (including balance sheet, income statement and cash flow statement) are formulated according to accounting principles, we only measure the price of assets at the original cost and record them after considering depreciation. Obviously, the value of an asset or debt it measures not only fails to consider the current market price of assets and liabilities, but also ignores some assets and liabilities with very important economic significance. Therefore, in a sense, the assets and liabilities in the statements are only book values, and if they are not combined with their market prices, it is impossible to make a comprehensive and accurate judgment on the situation of indebted companies.
For example, a company has scientific and technological property rights with market advantages because of its reliable product quality and good reputation, or because of its high research and development efficiency. Although these may not be directly represented as actual assets, they will affect the market value of the company. Similarly, the information about its future prospects, although not directly manifested as real assets or liabilities, is an important expected factor affecting the company's future development. For example, if the company is a listed company, the stock price will be reflected accordingly [6].
Compared with the book accounting value of assets and balance sheets, its market price is more closely related to the company's cash flow and credit, and it is more sensitive and has a deeper impact on the company's operating conditions. Enron Corporation of the United States is one of the proofs. Enron's poor performance in the securities market soon greatly affected its energy trading and marketing business. It used to be the largest online energy trading platform in the United States (with an average daily turnover of $3 billion)-online system trading basically came to a standstill and the trading platform was closed on the same day. The bankruptcy of Enron in the United States makes it easy for us to see that financial accounting statements can only partially reflect the operating conditions of enterprises. Only by correctly analyzing and predicting the market price and influencing factors of the company's assets can we correctly evaluate the true value of the company's assets.
On the other hand, it also reminds us that the connection between the company and the capital market makes the evaluation of its asset value more complicated. While financing in the capital market, listed companies are also facing greater credit risks due to the sensitivity and responsiveness of the market. It is conceivable that Enron might not go bankrupt in such a short time if it were not for the strong reaction of the capital market.
Unfortunately, at present, in China, when banks conduct project evaluation and credit management, most of them still adopt traditional methods, paying more attention to accounting statements, while paying insufficient attention to the true value and influencing factors of listed companies' assets; When evaluating the company's credit, many people think that the credit of listed companies is generally good and can be supervised by the market, but they don't know enough about the sudden or even devastating risks that may be brought about by the market reaction.
Second, general enterprises tend to expand their liabilities. When the liabilities are higher than a certain proportion, they have the motivation to hide their real liabilities.
Generally speaking, company managers make capital structure decisions in order to increase the wealth of shareholders. According to MM's theory on enterprise capital structure, in an ideal and frictionless market environment [7], the market price of all securities issued by a company is determined by its profitability and actual risk, and has nothing to do with its capital structure. Because there is no frictionless environment, the value of company assets will change with the capital structure. For example, due to the existence of corporate income tax, companies can reduce the tax amount by means of debt financing. The present value of debt interest tax deduction will be reflected in the stock price. For a debt-free company, when the manager announces that the company will issue a certain amount of bonds to buy back shares, the share price will definitely rise. Therefore, in order to maximize the wealth of shareholders, the general manager will try his best to improve the debt ratio in the company's capital structure.
However, it is generally believed that when the proportion of debt in the company's capital structure gradually increases, the company's default risk is also increasing, and when the debt ratio is too high, the possibility of financial crisis increases. Therefore, when the company's debt ratio is higher than a certain value (optimal debt ratio), its share price will decline with the increase of debt ratio.
The above picture is a representative case of a foreign company, which generally reflects the changes of listed companies' share prices with the increase of debt ratio. The debt ratio with the highest share price is the best debt ratio (about 60%).
The goal of enterprise managers is to maximize the value owned by enterprise shareholders. The existence of the optimal debt ratio tells us from another angle why listed companies try to expand the debt ratio as much as possible, but when the ratio reaches a certain value, they have the motivation to hide their debts. Take Enron Corporation of the United States as an example. By the end of 200 1 10, the company's liabilities reached $31200 million (assets were $49.8 billion), and the asset-liability ratio was 62.7%. Judging from the current disclosure, it shows that the company has been adopting a false financial structure and radical accounting policies for a long time, lacking a prudent and prudent style. Although it has the so-called strong innovation spirit [8], the risk of financial crisis is also increasing simultaneously. When the company continuously expands its liabilities, in order to prevent the debts from being immediately understood by investors, it deceives investors through accounting irregularities and records the debts in another business department instead of reflecting them on the balance sheet.
The debt ratio of some borrowing enterprises in China is relatively high. According to the regulations, the capital ratio of new projects is generally 35-20%. According to this calculation, the debt ratio of some new enterprises is as high as 65-80%; The debt ratio of some old enterprises is as high as 60%.
From the perspective of bank creditors, we should pay special attention to the authenticity and changes of debts of highly indebted companies. We can strengthen our understanding of the borrower's actual liabilities through information communication among financial peers.
Third, when the company's real debt is higher than a certain proportion, profit-driven enterprises tend to choose high-risk management.
The capital structure of a company determines who will get how much cash flow in the future. Bonds and bank loans require fixed cash payments, and shareholders' returns are the remaining after all liabilities are paid. When the amount of corporate debt is large, there will be conflicts of interest and coordination problems between shareholders and creditors of the company. Managers who represent the interests of shareholders tend to choose risky investments in order to obtain high returns, because if the project fails, creditors will bear most of the losses, and when the project is successful, most of the benefits will be obtained by shareholders. For example, if the value of the company's current assets is 65.438+0 billion yuan, the face value of the debts due after one year is 65.438+0.05 billion yuan. Managers can choose two investment projects, one is risk-free, with an interest rate of 5% and a term of one year; The other is risky investment projects, which either get 200 million yuan or get nothing after one year. Even if the latter is less likely to succeed, managers will choose it, because if managers invest in government bonds, the company value will be zero after one year, and if the company value may be greater than 1.05 after one year, no matter how small the possibility is, the wealth of shareholders will be greater than zero. In this case, creditors bear all the risks of venture capital, but shareholders can get all the risk premium income. Therefore, when the company's debt ratio is higher than a certain value, creditors will face moral hazard in the debtor's business choice.
Enron's bankruptcy has proved this in practice. Enron, with a large debt ratio, was once considered as a model for adopting a new business model. At first, it mainly engaged in energy assets such as power plants. After the so-called "revolutionary transformation", the business changed from traditional operation to energy trading and contract trading. Enron has become a bold trader in public utilities such as electricity and new financial instruments such as "weather derivative financial products" (a form of weather-related insurance). These brought great success to Enron at first, but also left hidden dangers for the outbreak of the financial crisis later.
Therefore, when the debt of an enterprise is higher than a certain proportion, it is necessary to guard against moral hazard in its business choice. The better the loan conditions for enterprises, the more attention should be paid to the changes in their business scope for enterprises with low capital adequacy ratio required by banks.
Fourth, pay attention to the financial crisis caused by insufficient liquidity of the company's assets.
Maintaining liquidity refers to ensuring the ability to pay due debts. Liquidity requires not only maintaining operational liquidity in daily operations, but also ensuring that financing needs can be met in time in crisis situations. Therefore, if one of the above two conditions is not met, it may fall into financial crisis or even bankruptcy.
Enron Company in the United States, like APP Company (mainly engaged in forestry, pulp and paper) which was suspended by NYSE at the beginning of 20001,fell into crisis directly due to insufficient liquidity caused by insufficient cash and credit. Although Enron has power plants and oil pipelines all over the world, it doesn't have enough cash and credit to repay its debts, so it can't guarantee its liquidity and the company can't operate normally. When the financial crisis broke out, Enron also promised stable asset flow, but in less than three weeks, its cash was still exhausted. Enron's case is likely to make American regulators pay close attention to companies that have announced huge profits but have little operating cash income.
It is conceivable that if Enron managed to solve the liquidity problem at that time, the company would have a chance to come back to life without being forced to liquidate in a hurry.
The case of Enron Company enlightens us that in project evaluation and credit management, we should not only pay attention to the overall situation of the borrower's assets, but also analyze its asset structure, especially the liquidity and cash management of enterprise assets. In my opinion, in the balance of liquidity, profitability and security, steady operation is the foundation, and maintaining reasonable liquidity and avoiding payment risks are the keys to achieving steady operation. In this regard, simple external constraints can not fundamentally solve this problem. Enterprises must pay attention to internal factors and adopt sound management and financial policies. As a bank, we should also realize this from a higher level to avoid the liquidity risk of the loan object spreading to the banking system and causing the liquidity problem of the bank.
Five, on the principle of decentralized bank loans.
The principle of appropriate diversification of investment shows that the overall risk exposure can be reduced without reducing the expected rate of return by diversifying the holding of risky assets.
The case of Enron in the United States shows that if large companies can't operate steadily, there will be a major financial crisis. Therefore, even loan projects with good prospects, such as high loan ratio, need to be cautious, because this will concentrate the risks on a few loan projects.
Enron's debt is as high as $312 billion, but experts have analyzed that although the Enron incident will have a considerable impact on American financial institutions [9], many creditor banks lend to Enron in the form of syndicated loans, so the loan amount of each bank is relatively small, which is conducive to diversifying risks. Therefore, it is expected that Enron's debt problem will not have a great impact on the banking system.
Enron's case shows that for the same project and projects with strong risk correlation, it is necessary to grasp the decentralized credit policy. However, the current situation in China is that even for very large projects (such as loans of tens or even tens of billions of yuan), financing is often undertaken by one bank or several banks. In order to get a loan for a big project, it is very common to borrow a project alone. In order to prevent risks, it is a good choice to carry out syndicated loans according to the principle of appropriate dispersion, and banks should attach great importance to this.
6. Prudently issue credit loans without any guarantee.
Risk is uncertainty, which is very important because it is related to investment security. Although uncertainty is a necessary but not sufficient condition for risk, the situation of any kind of risk is uncertain, and there is great uncertainty and risk in credit loans without any guarantee. As a bank, we should be cautious in issuing credit loans.
The development of the new economy has accelerated the depreciation of technology and shortened the economic cycle. The combination of various derivative financial instruments and the real economy makes the factors that affect the operation of enterprises more complicated and have a deeper and wider impact.
Any company is faced with the risk of uncertainty, even large companies that have made great achievements. If the company chooses rights and interests or assets as collateral, when the company cannot repay the loan, the borrower has the first priority to these rights and interests or assets. Before bankruptcy liquidation, secured creditors can get their due income by selling collateral, while creditors without collateral have a great risk of being unable to recover their claims. It can be considered that in Enron's debt of $365,438+$200 million, the banks that take credit loans have different repayment guarantees from the creditor banks that take guarantee measures.
When the loan term is as long as several decades, it is often difficult to accurately predict the risks and losses that the debtor may encounter. Therefore, even for companies that are still in good financial condition, banks should be cautious in issuing long-term loans without any guarantee. However, at present, in our country, in order to win over loan customers, banks issue a large number of long-term loans without any guarantee to some customers who are in good condition at present (some loans have a term of 15-20 years). Enron's bankruptcy tells us that forever strong's companies do not exist, and the lessons of its unsecured creditors are worth learning from domestic banks.
Objectively speaking, the bankruptcy of Enron in the United States has a far-reaching impact on the capital market, especially the financial industry. As a bank, how to correctly analyze the borrower's asset-liability structure, how to measure the actual value of the borrower's assets, and strengthen the credit management of the borrower's operating conditions are very important. In terms of credit risk prevention, it is an urgent task for China's banking industry to adopt appropriate diversification principles and correctly handle the credit loan problem.
References:
Portfolio Theory and Capital Market, original edition, McGram-Hill Company.
Finance, first edition, prentiss Hall Company.
[1] Reason: A law firm in new york filed a lawsuit against Enron on behalf of investors who bought Enron's common stock during the period from 1998 10 to 200110, accusing the company of publishing a series of documents related to its business. The lawsuit accuses some senior managers and directors of Enron, with the extensive help of Enron's audit company Andersen LLP, of violating the securities law and artificially pushing up its share price in a series of substantive statements about the company. In addition, Enron employee stock ownership plan participants also sued Enron and filed a class action lawsuit, accusing Enron's illegal behavior of causing thousands of plan participants to lose millions of dollars in the stock decline. 200 1 1 1 year1October 20th, participants in Enron's employee stock ownership plan sued Enron, demanding a class action lawsuit, accusing the retirement plan managers of knowing the key information about the risk of holding stocks but not disclosing it. United Bank also sued Enron, demanding a class action lawsuit, accusing Enron of making a profit of up to $65,438+0,654,380+0 billion by selling shares when its share price rose sharply due to false financial reports.
[2] In just one day, Enron's market value lost $2.6 billion, setting a record for the decline and trading volume of a single stock on the new york Stock Exchange. The stock fell to 26 cents per share on1October 30.
[3] The largest bankruptcy application before was Texaco, 1987 filed for bankruptcy protection, with total assets of $35.8 billion.
[4] Enron Oil&Gas China Co., Ltd., the subsidiary of American Enron Corporation in China, issued a statement on 2001212, and decided that "Enron Oil&Gas China Co., Ltd. and its Chengdu branch now decide to terminate their business in China." The company is mainly engaged in natural gas exploration and development in China, and its Chengdu branch is mainly responsible for the development of Sichuan oil and gas fields.
[5] The other two are the time value of money and risk management;
[6] This is also in line with the content revealed by the Efficient Market Hypothesis (EMH), that is, under the condition of complete and sufficient market information, all factors affecting asset value have been reflected in asset prices.
[7] refers to the financial environment with zero transaction cost and no tax cost, which is an idealized financial environment and does not exist in real economic life.
[8] In February 2006, Fortune magazine named it as the most innovative company in the world, 5438+0.
[9] The largest creditor banks of Enron are Citibank Group, Bank of JPMorgan Chase and Bank of new york.