In the book Conspiracy of Fools written by Kurt Eichenwald published by Broadway Books, NY, 2005, the senior management of Enron changed the company from a gas distribution company to a trading company which tried to commoditize increasing parts of everyday life. In a trading company, people are paid to trade and used the firms capital and credit capacity. To gain an edge, an understanding of the regulations and where the regulations have a loop hole is important. Often times, regulators made the regulations but they left a tiny loophole which others see as being able to profit from. As private industry and the public complain about higher prices or no other option finding the loopholes is where the traders jump in. In Enron, they moved from gas distribution to many other industries – water distribution, electricity, broadband distribution, some had markets some did not. As a trader, you are looking for something to trade not to operate it. Enron people rarely said no to any ideas – it was to offer to the market to get the price of the stock higher so more credit could be used. In additionally, the CFO had an interest in using off balance sheet items which could take the bad stuff off the balance sheet for reporting time to be made good results and then put in back on to figure it out. The CFO and others would pay themselves large fees for their efforts – who were they working for themselves or the company? who knows? When was the CFO ever going to say no? If not him, who? When the CFO is more interested in the deal making than the nuts and bolts of operating a business, the wrong CFO is in the job. As Enron went down, the CFO was asked about outstanding debt – he said $34 billion, when asked about maturity scheduled, interest rate protection, daily cash flows, available cash – the answer was I have to get back to you or I do not know. The mundane things of keeping the business alive and knowing your cash flow is the job.

Linking to dividend paying stocks, the CFO is the one who pays the bills, they are where saying no to projects is important. At Enron, the wrong person was put in as CFO and predictable results happened. All companies have or should have more requests or ideas than money; similarly all companies should have more requests for donations than they have money. How does the company decided and when do they say no, is something the investor should get a feel for.

There are more questions than answers, till the next time – to raising questions