Corporate fraud Enron and tarnished reputations
Andrew Fastow -The LJM partnership and its offspring, in which Fastow held personal interests netted him at least $30 million while still chief fiduciary officer at Enron, led to the Houston energy trader's collapse into a then-record bankruptcy in December

Corporate Fraud and Tarnished Reputations (9/13/02)

I was just reading the latest Businessweek (9/16/02) and saw an interesting article about how Merrill Lynch and some of its employees were involved with Andrew Fastow in the marketing of certain investment vehicles that held assets purchased from Enron. The only problem is that Mr. Fastow used to be the CFO of Enron and the main reason why those investments were profitable was the capitalization of Mr. Fastow's "insider" status in the company. Apparently, for what I have been able to determine from the article, Enron did not provide for adequate check and balances to make sure that the CFO was not taking advantage of the company and Merrill Lynch disregarded the red flags raised by this kind of arrangement.

I have to tell you that there is nothing worst you can do than to have a conflict of interest and to not address it. I remember a few years ago when I realized that I was going to do a credit analysis on a firm that I had done business with. The amount of money that was involved was only a couple of thousand dollars and the transaction had occurred a couple of months before. However, I felt that disclosing this fact to my department head was important. I am not writing this because it is now fashionable to pick on corporate America.

The fact is that the only way that our system works is when there is a level playing field that allows for rich people and more importantly allows for people to get rich. It is also important that everyone pays their fair share that is why the latest news on Bermuda based Tyco International Ltd. makes me smile.

The idea of pulling a fast one on Uncle Sam or the general public is not limited to big business. In my position as a credit analyst, I get to see a lot of tax returns and personal financial statements from small business owners and a lot of times they contradict each other. The borrower might claim $200,000 in income from the personal financial statement, while only claiming $10,000 in the tax return. It sickens me when I see something like that. I also get upset when I see people declaring $10,000 of total joint income per year and requesting tax breaks such as the Earned Income Credit when I see a $2 million dollar house in their financials and a couple of $80,000 dollar automobiles.

The way I see it is that my analysis must reflect all of the five C's of credit. My goal is to present the person that is going to approve the loan with all of the information about the capital, capacity and character of the borrower and to make clear the conditions under which credit is to be extended and the collateral that will secure it. However, the truth is that most analysis spend 95% of the space covering the capacity and capital while spending little on the character.

I suspect that all credit analysts have been guilty of overlooking the importance of character in the assessment process. I personally have been guilty of recommending loans to companies with checkered histories such as criminal fraud convictions. In my defense, that particular borrower had very good numbers and had just settled with the government on the criminal case. Although I should admit that I did feel a bit guilty after it.


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