forensic strongfinancestrong enron and others.pdfVIP

FOURTH ANGELO COSTA LECTURE Forensic Finance: ENRON and Others Stephen A. Ross* Franco Modigliani Professor of Finance and Economics Sloan School MIT, Cambridge (MA), USA In finance, as in pathology, we can learn more from failure than from success. This lecture examines three famous financial failures, Metallgesellschaft’s oil futures business, LTCM and relat- ed hedge fund failures, and the current travails of ENRON, and performs a post mortem on each to see what can be learned. Not surprisingly, the cause of death was similar in each case, or, to put it more familiarly, history always repeats itself. [JEL Code: G30; G38] Introduction I used to tell people I was a financial engineer, until I rea- lized that that was as misleading as a coroner saying he was a doctor. After the Hunt brothers of Texas, Bunker and Herbert, had their comeuppance in the silver markets of 1979 and 1980, I was retained as an advisor to help sort out the mess. In 1987 I worked with some large real estate funds that were experiencing the con- sequences of the decline in the U.S. real estate market and the fallout from the SL crisis. In the early 90’s I analysed mortgage portfolios that had exploded in that volatile market. Later in the decade I advised Metalgesellschaft (MG) on the problems they had *The author is grateful to Ron Dembo and Ken French for helpful comments, but is solely responsible for the contents which may or may not reflect the opi- nions of these individuals. This tal