The BITSian CEO Award Event

Few Breathers in the current Gloom!

Greed, fear, hope, Regret, Misery, Lust, and guilt. And so the seven deadly sins roll out untamed. What stands now??? Will not be there few hours later!!!Forget tomorrow!!

In the midst of all the negative cues and fallacies, here's some very optimistic outlook of the present scenario....

Firstly, Observed glut in Global savings, but investment climate in the developed countries not so conducive to productive investment. So, the global savings will seek an outlet. Developing countries like India display a strong urge to grow, will continue to attract these funds. Future or say long run seems very fruitful and rewarding no matter where the Inflation or GDP takes us this fiscal year but the fundamentals of economy being so strong and robust that the bears will succumb.

Secondly, The main channel through which the global forces can impact India are Exports and Capital inflows. Capital inflows this quarter have been depressing but then so far we haven't been affected by the global slowdown on the export front. Though export of services has been affected to an extent, but so far there has not been any serious impact on the export of IT and ITES (IT Enabled Services).

Thirdly, it is unanimously reckoned that developed countries are under pressure to cut costs and this could lad to increased outsourcing to countries like India and China due to availability of Cheap and efficient labour.

Fourthly, Easing oil prices would ease pressures on the balance payments, Inflationary pressures(though domestic prices would not ease simultaneously as Oil Cos. continue to bleed). Already Trade deficit (Excess of Imports over Exports) expected this year is 10.4% this year up from previous year 7.7%. Easing Oil would decrease this figure as Oil exports bill will decrease. Also the off budget liabilities (oil & fertilizer subsidies) shall tank. Iran, Israel, Russia being the Spoilsports. The Bad men!!!!!!!

Fifthly, Recently IIP data (April June 08-09) of 5.4% down from 10.3% during the corresponding quarter last year, have shown a reasonably good growth in consumption goods indicating investment growth would be sustained (No wonder why FMCG sector shows strong resilience in spite of the strong market crash) but there is a decline in savings rate both public and private Corporate savings thus widening the CAR (Current Account Deficit).
Electricity Generation, an IIP component grew by just 2% in the first quarter (against 8% last year) which is totally unacceptable and unreasonable for a fast growing economy like INDIA. So quite reasonably, we can expect substantial improvement in the sector for the next three quarters. This would help to achieve robust industrial growth expectation of 7.5% for the whole fiscal year. PowerGrid, NTPC, Reliance Power (for obvious reasons) become hot picks.

Sixthly, Fiscal revenues to be buoyant because of revenue from disinvestments (reduction in capital investment) & Telecom( 3G) licensing. This would moderate the fiscal deficit (amount by which a government spending exceeds its income over a particular period of time) and help it to cool off to the expected 2.5% of GDP by the end of this fiscal.


These points might seem too optimistic, affirmative but INDIA continues to be a hot selling cake that every one yearns to have. India enjoys certain growth enablers such as its culture of tolerance, educational base, skilled individuals, economic factors like a well-developed entrepreneurial class, vast natural resources, strong resilience, strong democratic foundations, secular fabric and finally its young population.

All these would definitely catapult the economy in the coming quarters.

QWERTY Economics

Superior technological products need not always dominate the market! Wondering? Let Economics explain… Even today people use badly designed keyboards and suffer from pain in their hands. In 1936 August Dvorak designed a new keyboard. People using QWERTY (these are first five keys on the top row) keyboards did not prefer DVORAK keyboards because there would be compatibility problems. People who first used the QWERTY keyboard influenced subsequent users to us them and so on. So, the market was filled with QWERTY users. QWERTY, hence, remains the accepted design. This suggests that superior technology need not be the reason for product dominance. Consumer decision process plays a vital role. Economics calls this decision process "path dependence". That is, our decisions are based on others who earlier, took their decisions. And so it goes on.

NeuroEconomics

Weird, huh? Not very, in the world of stock market. Neuroeconomics is the science of the way our brain reacts when we take a decision. This incorporates using brain-scanning technologies to observe the way neurons react when you make decisions. Neuroeconomists, for instance, study how emoticeuticals (drugs that stabilize emotions) help equity traders take decisions during market crashes. By studying similar market conditions when traders did not take emoticeuticals, neuroeconomists may be able to measure change in behavior and accordingly design drugs to improve their decision taking ability.

Uncle Sam in deep waters

Recently,I read an article by Martin Feldstein, Professor of Economics,Harvard posted at his blog named a tale of two monetary policies.It commented on the monetary policies by the European Central Bank and the Federal Reserve to rein in inflation.It was interesting to learn that both were facing similar problems but pursuing different policies.Fed had cut down the interest rates and ECB had increased the same.I have my own bit of reasoning to believe why the Fed decided to take a different route altogether. I understand that the Fed does not want to raise interest rates because that would just plain hit the economy in the gut with the left fist. The politicians would scream. The people would go mad.But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other — a left or a right to the gut — our Uncle Sam is getting beat up.The only medicine that one could prescribe is the stabilization of dollar.Its simple if the dollar stabilizes, oil should level off. And we could see the market begin to recover.But mind you this itself is a hard nut to crack! But let me discuss this in terms of energy and oil and in terms of Rising U.S. Energy Costs…
In June, as you know, the price of oil just rocketed up (as the dollar fell). I follow oil like a hawk, and even I was astonished at the pricing trajectory. I really thought that profit taking and the general negative impact on the world economy would have to slow down oil’s rise. But no, oil kept moving up.Of course now it took a back seat.But then I kept wondering at that time… Who the heck is buying this oil? Are you broke yet?But somebody is buying the expensive oil, and we are in the midst of the greatest transfer of wealth in history. Entire nations are being impoverished. Interestingly,other nations are being enriched beyond their wildest dreams.
Rising energy prices, and the related transfers of wealth, are among the great strategic movements of our time. Since the dawn of the oil age, U.S. has had some semblance of control over energy prices. Heck, at one point, prices were so low that the state of Texas empowered the Railroad Commission of Texas to stabilize prices.
It’s a long story, but the West has, more or less, always had a handle on energy prices, even in the face of OPEC, over the last 40 years or so. At the end of the day, the West could have faced down the major oil exporters and kept some sort of lid on the upside of energy pricing. Not any more.
The people who sell oil are, of course, more than happy to take US money. They are ecstatic, truth be told. In a matter of a few years, Western energy demand is moving the wealth of many generations into new hands. Some nations are getting rich, while others are getting poor — fast.
A few years ago, Russia was a post-Soviet basket case. Now the Russians are buying up much of Western Europe.
A few years ago, the United Arab Emirates was a dusty backwater. Now the UAE is becoming a world destination, and its sovereign wealth fund is buying the Chrysler Building in New York.
Meanwhile, expensive oil is breaking the backs of the middle classes in the U.S. and many other countries. Wait until next winter, when millions of households in the U.S. and Europe cannot afford to heat their homes. Ugh!
And world economic growth is stalling as oil prices rise. So it really seems as if the rising prices have to moderate and it actually did .Finally, a breather. Whew! .Whatever my point is straight n simple and it is a opinion shared by many, the cracks in US economy are getting deeper and there is very little it can do to regain its glory of the 90’s .Its showtime for the third world . We all know every dog has its day.And I would like to believe that Uncle Sam knows it well too.

Analogy: GrassHopping- Backward Classes!!!

This one came in as a comment to my last post. I found it very interesting so thought should share it up...
It actually explains the widening gap between the Rich and the poor...
It goes like this...


*OLD VERSION*

The ant works hard all summer laying up supplies for the winter. The grasshopper thinks the ant's a fool and laughs & dances & plays the summer away. Come winter, the ant is warm and well fed. The grasshopper has no food or shelter so he dies out in the cold.


*MODERN VERSION*

The ant works hard in the withering heat all summer long, building his house and laying up supplies for the winter. The grasshopper thinks the ant's a fool and laughs & dances & plays the summer away. Come winter, the shivering grasshopper calls a press conference and demands to know why the ant
should be allowed to be warm and well fed while others are cold and starving. NDTV, BBC, CNN show up to provide pictures of the shivering grasshopper next to a video of the ant in his comfortable home with a table filled with food. The World is stunned by the sharp contrast. How can this be that this poor
grasshopper is allowed to suffer so?

Arundhati Roy stages a demonstration in front of the ant's house. Medha Patkar goes on a fast along with other grasshoppers demanding that grasshoppers be relocated to warmer climates during winter. Amnesty International and Koffi Annan criticize the Indian Government for not upholding the fundamental rights of the grasshopper. The Internet is flooded with online petitions seeking support to the grasshopper (many promising Heaven and Everlasting Peace for prompt support as against the wrath of God for non-compliance) . Opposition MP's stage a walkout. Left parties call for
" Bharat Bandh" in West Bengal and Kerala demanding a Judicial Enquiry.CPMin Kerala immediately passes a law preventing Ants from working hard in the heat so as to bring about equality of poverty among ants and grasshoppers.

Lalu Prasad allocates one free coach to Grasshoppers on all Indian Railway Trains, aptly named as the 'Grasshopper Rath'. Finally, the Judicial Committee drafts the Prevention of Terrorism against
Grasshoppers Act [POTAGA]", with effect from the beginning of the winter.

Arjun Singh makes Special Reservation for Grass Hopper in educational Insititutions & in Govt Services.

The ant is fined for failing to comply with POTAGA and, having nothing left to pay his retroactive taxes, his home is confiscated by the Government and handed over to the grasshopper in a ceremony covered by NDTV.

Arundhati Roy calls it "a triumph of justice". Lalu calls it 'Socialistic Justice'. CPM calls it the revolutionary resurgence of the downtrodden' Koffi Annan invites the grasshopper to address the UN General Assembly. Many years later...The ant has since migrated to the US and set up a multi billion dollar company in silicon valley.100s of grasshoppers still die of starvation despite reservation somewhere in India...

As a result, India has lost a lot of hard working ants and is still feeding the grasshoppers...

India still remains a developing country!!!

SINGH MIGHT BE THE KING; BUT THE PEOPLE ARE STILL FOOL

Happy Singh rules Bollywood charts:
Happy Singh's goofball antics are all set to rewrite box office history with a staggering weekend take of Rs 28 crore for Singh is Kinng .

This has supposedly surpassed the two other mega-flicks which saw an unprecedented initial hoopla, Om Shanti Om with Rs 26 crore and Dhoom 2 with Rs 24 crore as their opening weekend collections. And with trade pundits predicting a first-week run of Rs 40 crore for the Akshay stunner, the Singh is Kinng juggernaut might just steamroll competition with collections mounting to nearly Rs 100 crores at the end of a three-four week run.

Considering that the film is billed at a production cost averaging Rs 50 crore, it’s easy to see Happy Singh grinning his way to the bank. Blockbuster hits like OSO and Dhoom 2 have a first-week take of Rs 36 crore and Rs 34 crore respectively.
Source :TOI
http://timesofindia.indiatimes.com/articleshow/3349699.cms

Poor country, struggling middle and lower middle class, poverty a major problem, terrorism a major major concern, and some stupid movie makes more money than would be needed to feed millions of unfed Indians. Reminds me everytime I see a ball game on Yankee TV about the claim America is at War. And then you see the scantily clad cheerleaders, the thousands of screaming fans, the over-paid and underworked ball players, and the stupid ads and you wonder where's the sacrifice and where's the desire to conserve while this war is going on. Some things never change. Waste!


Imran, NJ USA
(comment in response to the above news)

Minimum earning required, as per WORLD BANK, to live at above poverty line, for underdeveloped countries like India,China etc, about US$ 1.0 per day or US$ 30 per month i.e. Rs. 1,410

POVERTY LINE definition, as per Government of India, see below for explanation, at Rs. 10 per day, per person, approx. i.e. Rs. 300.

The World Bank's definition of the poverty line**, for under developed countries, like India, is US$ 1/day/person or US $365 per year. As per this definition, more than 75% of all Indians are, probably, below the poverty line!

As per the Government of India, poverty line for the urban areas is Rs. 296 per month and for rural areas Rs. 276 per month, i.e. people in India who earn less than Rs. 10 per day. As per GOI, this amount will buy food equivalent to 2200 calories per day, medically enough, to prevent death. At this level of earning, even in a poor country like India, survival on Rs. 10 per day is a nightmare! This actually translates to Rs. 3650 per year or US $ 75 per year.

On what basis have our planners decided this definition of "Poverty Line"?
Does it mean that one is expected to spend his entire earnings on fooding only? How and where is he or she supposed to cook it? What about the minimum needs in education, housing, health services, clothing,and other basic necessities? Are we supposed to live on pavements and sleep under trees from birth till death? YOU BE THE JUDGE!

Source: http://www.wakeupcall.org/administration_in_india/poverty_line.php

The first step towards eradicating poverty is to understand just how many of us are poor, and what that means. Thus far the government's measurement of poverty has simply been a self-serving one, and it's time we adopted a more honest calculation.

Compiled by:Lalit Kumar,Riddhiman Jain

Is Rupee Strengthening an option to curb Inflation????

"Bringing down inflation from the current high levels and stabilising inflation expectations assume the highest priority in the stance of monetary policy,”
RBI in its Quarterly review

9% repo rate, 9% CRR.
Where are we heading to????
Wholesale Price Inflation is currently at whopping 12.1% for the week ended July 26 touching a 13 year high.
Consumer Price Inflation data is not avaliable for the recent week but it is less alarming than Wholesale inflation but has easily breached tolerable levels of 5%.
Majority economists predict the worse is yet not done!!! If majority is to be believed than what will be the immediate next move by the government or the RBI?? Many leading Economists have been intrigued by this question and all have their own way of answering. One interesting answer i came across was Rupee strenghthening.
My assumptions and knowledge, though little, predict this method not viable and has many fallouts.
But lets see what and how Rupee Strengthening cures this WideSpread Social Disease.
A stronger rupee increase Importers margin. How??????? Importers pay in dollars. A stronger rupee means they have to pay less to the foreign suppliers and inturn this increases their profit margin.
How importers making profit can help curb inflation???? If you think about,its quite obvious.
Increase in imports will introduce stiff competition in our domestic market and inducing thereby an explicit downward pressure on the commodity prices. Hence checking the major price increase. This will also be inline with the principles of FREE MARKET, free entry of new players.
All said and done, 4 reasons for not Strengthening rupee in the current scenario.

First, more imports means lesser domestic commodity demand. The IIP(Index for Industril Production) numbers released a month back were pathetic and had an adverse effect on the market. In the midst of all such volatality, Markets wont be able to take another blow in the form of lower IIP numbers. Already interest rates have done the spoil that they had to and now IIP would kill the RBI expectations of Indian GDP to be around 7.9.

Second, a weaker dollar will have a direct impact on American Economy, NASDAQ. And American fall will trigger up a fall in Indian markets also due to Arbitrage and many other reasons. Already the Gulf blames weaker dollar for soaring Crude Prices.

Third, FII's are largely dollar based.Since Dollar reaps lesser Rupees, FII's in India will be at loss. India will therefore become less rewarding for the FII's. This will lead to FII's investing in other developing sound markets like China.

Fourth, but obvious a reason, Exporters loss. Exporters are paid in dollars, that reap them lesser rupees and hence hitting their bottomline hard.

Other non viable option avaliable is increasing the supply side of the graph. But given time and the infrastructure constraints increasing supply becomes a humoungous task. Therefore as we see, to tame Inflation we have to forgo Growth by a percentage or so. Or putting it other way, the opportunity cost of curbing Inflation will be growth be it further interest rates hike or the less likely, rupee strengthening.


Riddhiman Jain

Cow Economy (Absurd & Simple ideas succeed)

Seems like now a day’s everyone is speaking on the Inflation.....

How has the world changed in the 20th century….I almost spent some 15k in the last 30 days of my ps1…Each and every price has hiked…

Yesterday night I was going through the thesis written by J.C.Kumaraapa on the Cow Economy[He did his B.Sc. in Business Administration at Syracuse and M.A. in Economics at Columbia University under Prof. Dr. Seligman. His thesis, "Public Finance and our (Indian) Poverty" changed him from an European loyalist to a committed Indian nationalist.]….. I will try explaining it to you of whatever little I know about the cow economy…...Cow economy is basically a concept of using cows as an economic tool all over the country to reduce the inflation and the nuclear wars happening over the earth.

80 % of India live in rural areas and the place where we live consist of only 20 %. This concept is for the greater good. All the capital resources are becoming scarce because of over population and the wars...All these things can stop once ppl start utilizing the cow economy......

Implementing the cow economy might be very difficult. It looks like some weird idea...Sometimes these sort of ideas succeed tremendously.

Who thought that the sweetened water will one day become a global based company.....who thought that ITC e choupal would succeed ….Look at this website

http://www.milliondollarhomepage.com/

It earned a million dollar for making a website (bhai 5 crores within 4 months)………….It’s all based around pixel advertising and generating big traffic for advertisers. Visitors play for free - all they have to do is click on the ads for chances to win the jackpot. The more they click, the more chances
they have - and the more traffic you receive.

Now coming to the Cow Economy idea...The cow is the foundation of one of the greatest economies in the world.


How the Cow Economy will help the developing countries like India:

1).DEFENCE---Causes of War :

The recent bomb blasts at blore....ahmedabad...etc have some one behind them...who do not want india to flourish....Being centralized in nature the whole India is affected because of the blasts in some city....

Once India becomes decentralized no one would be interested in putting up the bombs....

When we use the cow and cattle wealth as helpers in our production there is a natural limit to the quantity of production in comparison to the state of affairs that ensues when coal or other such resources of power are utilized, on the expenditure of which there can be no natural limit. Thus the self-sufficiency or the measures of it which is attainable in a cow economy is distorted and disturbed when we depart from it. When the quantity of produce increases, markets are to be sought for it. Europe’s hunt for the markets in the last two centuries was motivated by this economic factor; thus as soon as man changed over from animal economy to power economy violence became necessary. They fought with each other for markets. The result was the first World War-when the countries depending upon the coal economy fought with each other for the market areas.

In the cow and the horse-centered economies we have unlimited sources as we could breed as many bullocks and horses as we needed and, therefore, there being no restriction on the amount available, it does not arouse anybody’s greed or jealousy; but coal and petrol being limited in their supply and quantity, uses of such sources of power lead to friction amongst nations as the source dries up. It is now well recognised that these global wars are in no small measure due to different nations seeking to get control over oil fields. Hence the coal and oil economies lead to conflict amongst nations.

2).Fossil Fuels….

In our villages, the traditional cow dung cake along with firewood is the common fuel. In cities like Bombay if electricity or gas is not available, may. be on account of strike or damage to the plants even for a day than what disorder and discontent life hell is created. Then if these 575000 villages are Deprived of their only source of fuel what would be the result? Even the thought is staggering.

Life needs cooked food. For 82% population of India in villages, kerosene gas or electricity is neither available nor within the villager’s means. For them the only economic and easily available fuel is cow dung cakes and firewood. Cow-dung cake ash becomes a very good fertilizer."

3).Farming:

The bullock pulls the plough, manures the land by its dung, and feeds itself on the left over stalks of the cereal crops which man consumes.

We have nearly 40 crore acres under the crop. To switch this area over to mechanised farming, we shall need five million tractors against which we have today only a meagre 31000.To make these tractors we will need 30 mm. tons of steel and our annual production of steel is 4.5 min. tons.And as we have during the last 20 years made 12000 locomotives, 0.6 min. trucks and automobiles, what a long span of time shall we need to make the needed five million tractors?

The problem of farming does not solve itself by employing 5 ml. tractors at the cost afore-estimated. No cow, no manure. So we shall need to make fertilizers. Our annual needs would be .40 min. tons (against our fourth Plan target of 1.6 min. tons) of different fertilizers Let us see how cow slaughter has contributed to our spiraling costs and unemployment. Unlimited slaughter of cattle and imported economic policies of the Government have brought about a steep price rise.

On account of the bullock and the manure shortage, our food production per acre Is diminished by stages on one hand and on the other hand, because of the ghee and milk shortage cereal consumption increased. The Imbalance between consumption and supply thus created. resulted In higher and higher prices. An accepted principle of economy is that when food prices rise all
other things and commodities start up the price ladder.


4). TRANSPORT:

Our agriculture and industry produce about 1,000 mln. tons. This 1,000 mln. tons of commodities have to be transported from fields to factories and from factories to the consuming centres which are spread over this vast areas, and the major bulk of this transport is carried by the bullock.
For transport we have 12.1 min. bullock-carts, 3,58,000 railway wagons and 2,20,000 motor trucks. Obviously, if these 12.1 mln. bullock-carts were to be removed from the operation, our transport and distribution system, and as a result both agriculture and industries and the resultant national life, would be in a chaos, for the reason that the railway carries only 180 mln. tons and trucks only 120 min. tons. whereas the balance 70 per cent, or 700 mln. tons, is carried by the age old bullock-carts. Therefore it will be seen that if this poor bullock is done with either by slaughter or by negligence, nothing but chaos will result.

Slaughter your cow, and your bullock supply is slaughtered.. Neither trucks nor railways can be built up to replace this transport for obvious economic and technical reasons, roads and so on. A farmer grows food in his field If he has bullocks he would bring his produce to city in his cart and therein he incurs no extra expenses. But once we slaughtered bullocks, his produce has to be transported by truck and of course the cost thereof, resulting in higher price of his produce, will be borne.

This is not imagination, it is a fact based on careful study.

To this our city-educated youth may reply- "If the bullock is inefficient, scrap it, and use the tractor and other modern devices." The only difficulty about accepting this advice is that it is impracticable under present conditions. It is of no use telling us what should be done at some future date. We have to face the problems of our people today, and suggest means of improving their condition under present circumstance and within the resources now available to them. Which villager can afford a tractor and other modern agricultural machinery ?

This thesis if seen has got a great impact for India…..at least this should be implemented in the 82 % of the India…..

NOTE: The thesis on Cow Economy was written by J.C. Kumarappa.This thesis attempts to bring out the most important phase of the basic Indian economy thrown overboard in its stride by the frenzied industrial tempo. Let me state clearly that I am not against industry but most emphatically insist that all industrial development must be in consonance and in conformity with the herein discussed basic Indian economy. Industry should support and not distort this basic cow economy of the country.

PS: Ur comments are welcome. Any doubts or suggestions would help a lot……

Is the notorious Inflation Curving??

The WPI index continued soaring upwards for 14 continuous weeks now.
But are the mixture of Monetary and fiscal policy, that hit the markets hard, are helping inflation curve ???After a drastic hike to 11.05 on 21st April Inflation was supposed to touch 13% by this week.
But known for its surprises inflation,which has undone all the maths of the speculators,has barely touched 12%.
Is this a sign of Optimism????Is it that Bulls are going to take the game away from the Bears now????
The moment we say yes, we might be hit hard by market downfall.
The moment we say no, there might be series of short covering in the market that can move the markets up.
Markets have over corrected, i.e we have returned to the point from where the BULL Run began last year.
None of us know, none of us can predict.
Already major of the speculations have been undone and proven wrong this year.
Lets look at the positive news of the markets-
1) Price of Wheat and similar commodities(food items) have actually reduced under the shadows of high inflation due to good yield this year.
Already the government is planning for increasing more subsidies in wheat as the government have more than required wheat in its reserves.
2)Arbitragers have made some money in this downfall.
3) Volumes have returned to the psychological Reliance group. With RNRL leading the race as far as volumes are concerned.
4)Markets have over corrected, i.e we have returned to the point from where the BULL Run began last year.
5)Bonds Yield hitting new seven years high. 10 year yield to cross 8.86 soon.
6)Despite all the bad news on the oil front, Indian consumers can hope to remain insulated from any price hike for the next couple of months. It is learnt that the government is planning to review oil prices only in October.
7)Rising price of steel once again spurred the government machinery into action with the steel ministry on Thursday getting all the major producers to agree for a set of stringent administrative action to check price rise and curb inflationary pressure. Steel companies have now agreed not only to check hoarding and price rise at retail level but have also decided to introduce a new system of MRP-based pricing for preventing consumers from getting cheated by retailers. Steel pipe and tube makers have also agreed to cap their product price after reducing market price by over 10 per cent.

Bad news!!We all know it well!!
But for the time being all we can do is sit back and watch market being butchered by Politics and not inflation and listen to our Finance minister commenting on how our Economy's fundamentals are strong and what GDP we will be pursuing for the coming year.

Enron, the company that grew from nowhere to become America's seventh largest company, employing 21,000 staff in more than 40 countries and a six time winner of the award ‘The Most Innovative Company’ From Fortune 500 and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000. It took Enron only 15 years to achieve all this glory.

And ironically it took Enron only 24 hours to go bankrupt. The firm's success turned out to involve America’s biggest bankruptcy which had far-reaching political and financial implications.

It achieved infamy at the end of 2001, when it was revealed that it’s reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. Enron lied about its profits and was involved in a range of shady dealings, including concealing debts so they didn't show up in the company's balance sheet. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December 2001.

Enron has since become a popular symbol of willful corporate fraud and corruption.

Brief Overview of Enron:

Enron began as the Northern Natural Gas Company, which was formed in 1931 in Omaha, Nebraska. InterNorth, a holding company, bought the company and reorganized it in 1979. They later purchased the smaller Houston Natural Gas in 1985 and changed its name to Enron in the process. After building a large, new corporate headquarters in Omaha, the new Enron named former Houston Natural Gas CEO Kenneth Lay as CEO of the newly merged company, and soon moved Enron's headquarters to Houston.

Enron's famous "tilted E" logo was designed by the late American graphic designer Paul Rand.

Enron was originally involved in the transmission and distribution of electricity and gas throughout the United States and the development, construction, and operation of power plants, pipelines, and other infrastructure worldwide

Enron grew wealthy, it claimed, through its pioneering, marketing and promotion of power and communications bandwidth commodities and related derivatives as tradable financial instruments, including exotic items such as weather derivatives. And may be for these creative ideas Enron was named "America's Most Innovative Company" by Fortune magazine for six consecutive years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America" list in 2000, and had offices that were, in hindsight, stunning in their opulence.

Enron was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud.

It’s most valuable asset and the largest source of honest income, the 1930s-era Northern Natural Gas, was eventually purchased back by a group of Omaha investors, who moved its headquarters back to Omaha, and is now a unit of Warren Buffett's Mid-American Energy Holdings Corp.

The Diverse Strategies:

As already told Enron was founded in 1985 a gas company. This was the time when the U.S. Government introduced the policy of Deregulation. Through a fusion of a vast network of natural gas pipelines Ken Lay thought that Enron was poised to take advantage of the prices which were floated with the currents of the market as a result of deregulation.

Oil Trading:

In 1987 two oil traders made bets for Enron whether the price of oil would rise or fall. This was a strategy that viewed the energy markets as capital markets. This was like gambling where a huge risk was involved and you win some and lose some. But Enron always seemed to win. This concept was evolved by Skilling who set up a gas bank called Enron Gas Services, and later, Enron Capital and Trade Resources (ECT). At a board meeting Lay was told by the auditors that Borget, the president of the company along with his traders were manipulating earnings, destroying daily trading records and gambling way beyond limit. Lay took no action on the situation saying it was the only part that was making huge profits. And at one time the traders drew $90 million in 5days and eventually all of Enron’s reserves. This led to the firing of the traders and Borget was convicted and sent to prison for 1year.

With the main money-maker gone Lay had to find someone who could make money for Enron. And he found Jeff Skilling, the man with the big idea. Skilling, an MBA graduate from Harvard, came up with the idea to transform energy into financial instruments that could be traded like stocks. Enron would become like a stock market for natural gas. Skilling followed a certain kind of accounting called Mark-to-Market (or Hypothetical Value at Future). HVF allowed Enron to book potential profits on the very day the transaction was made no matter how much money flowed in. This activity was hence open to a lot of manipulation.

“To the outside world Enron’s profits could be whatever Enron said they were”

Enron Energy Services (EES):

EES was a company EES was a company which sold energy services to industrial users and it was headed by Lou Pai. Once its profits got higher Pai lost interest on running EES.

He sold out his entire stock worth no less than $250 million and quit the job.

The splits that left behind lost a total of $1billion but Enron managed to disguise those.

Enron used to beat street expectations when it came to earnings and hence its stock prices skyrocketed but in reality profits weren’t going up. It was the opposite.

The Malpractices:

Dabhol Project:

Enron had vast natural gas operations all over the world. It cost them billions os dollars to build them. They built a power plant in Dabhol, India when no one was even daring to invest in India. What they didn’t realize was that India couldn’t afford to pay for the power Enron’s plant produced. Dabhol project was a ruin. Though they lost a $1billion on the project, Enron paid multimillion dollar bonuses to executives based on imaginary profits that never arrived. The real money and the next big idea had to come quickly.

Enron announced a buyout of Portland General Electric(PGE) which put it in the electricity business and gave access to the newly deregulated market in California.

Enron’s Stock:

Almost all the Wall Street analysts who covered Enron had a buy rating on the stock. Any analyst who didn’t buy the idea was an enemy. Merrill Lynch (investment bank) was even gifted money to put a strong buy recommendation on the stock. Enron’s stock was hence zooming ahead whereas its business was on a downturn.

Broadband Business:

Enron entered the broadband business and tied up with Blockbuster to deliver movies on demand. Its stock jumped 34% in two days but its idea to trade bandwidth failed and the deal collapsed. But, with the magic of mark-to-market Enron used future projections to book $53million in profits on a deal that failed miserably.

By the end of 2000, Enron was running short of ideas and its executives started selling their stock. Ken Lay sold $300million, Skilling $200million worth of stock.

Fakes Companies:

Enron was losing money year by year but was amazingly reporting profits. The mastermind behind this was its CFO Andy Fastow. Fastow created hundreds of special companies which worked with Enron to cover up Enron’s debt which was then a huge $30billion. To outside investors it looked like cask was flowing in but what actually was happening was that they were hiding Enron’s debt within them and investors didn’t have access to it. Many of the companies had exotic names like Chewco, Raptors, and Jedi. LJM was Fastow’s most ambitious creation which worked wonders for Enron and also made Fastow $45million.These SPEs will essentially hold shares of Enron and would cash in the increase in stock prices. The gains of which are again directed towards Enron. So the first SPE, LJM was started by Fastow himself and 15 other investors. This again was highly contradictory as the CFO of a company is chairing another company.Inspite of the loop holes the decision was passed amongst the board and they approved Enron’s deals with LJM.

Other Frauds:

Enron took advantage of the deregulation in power in California. Enron’s traders headed by Time Beldon found loop holes in the policy which helped cover the debts in Enron’s pockets. Enron was manipulating the power supply into California. They used to export power out of the state during crisis and when the prices soared they brought it back, hence earning millions arbitrage profit.

The Downturn:

Enron’s stock price gradually began to fall and on August 14 2001, in a shocking announcement its CEO Skilling quit his job and stating personal reasons as the excuse. And Ken Lay took over as the CEO of the company. The accounting frauds came out immediately after Skillings’ resignation. Fastow was identified as the crook behind the scam. Sharon Watkins was the person who discovered the accounting irregularities. It was a jolt as the accounting firm which took care of Enron was Arthur Andersen. Arthur Andersen destroyed nearly a ton of its Enron files. On December 2^nd 2001 less than four months after Skillings resignation Enron declared bankruptcy.

The Consequences:

February 11, 2004 Jeffrey Skilling was arrested by the Federal Bureau of Investigation, and charged a few days later with 35 counts of fraud, insider trading, and conspiracy to defraud investors.

April 7, 2004 Andy Fastow pled guilty and was sentenced to 10 years imprisonment.

May 25, 2006 Kenneth Lay found guilty by a jury on six counts and by a judge on four other counts in a separate bench trial.

Conclusion:

Enron’s accounting firm Arthur Andersen was convicted of obstructing justice. With its reputation for honesty destroyed America’s oldest accounting firm fell down along with Enron.

29000 people lost their jobs and medical insurance. Employees $1.2billion in retirement funds was lost. Retirees lost $2billion in pension funds.

Enron’s top executives cashed in on $116million in stock

Criminal charges: Guilty Pleas: 15, Convictions: 6, Acquittals: 1

Three California traders pled guilty to wire fraud.

A Major lesson in corporate ethics is to be learnt from the Enron scandal which might happen again anywhere in future.