Begining of the end

Year 1998-99
US stock market was thriving on the dotcom boom. Everyday new internet companies were being floated as it was the "in thing". The markets loved these companies and their stock soared the day they listed on the bourses (Stock exchange) and within a few days the stock prices defied the Mt. Everest. There was no particular asset backing the mind boggling stock price and the business was based on immense growth and acquiring customers at the expense of making losses. This new business trend was christened the new economic order of the new millennium.

Traditionally, a stock rises in value as the company experiences growth and increases its cashflow and assets. But in internet domain, company had no assets and were not making profit but their stocks were being sold like hot cake as they expected to mint money later on by monetizing their customer base. However, no one had the faintest notion about how that monetizing will happen and how the internet companies will make the promised fortunes.

Companies like Enron took benefit of this situation and created new business domains. Enron started trading energy on exchanges and introduced a new concept of accounting, "Mark to Market". I will discuss the various accounting practices in a separate post but suffice it will to say that Enron planned to count its chicken even before the eggs were laid. The basic idea of this new accounting practice was to project future revenues and record them immediately. This promised immense growth to Enron even before their projects like Dabhol in India which was never even completed. Enron also created artificial demand by curbing supply of electricity in California and combined with their auditing partner, Arthur Anderson, which authorised all their practices, they kept on playing with the markets.