Big corporation games

Financial engineering has been praised as a powerful tool for creating value for companies and their stakeholders, but recent high-profile cases of big corporate corruption backed by governments have exposed the dark side of this practice. These cases have shown that financial engineering can be used to manipulate financial statements, deceive investors and regulators, and engage in unethical and illegal behavior.

One of the most controversial aspects of financial engineering is the use of off-balance-sheet transactions, which allow companies to move liabilities off their balance sheets and hide them from investors and regulators. These transactions can be used to inflate earnings and hide losses, creating the illusion of financial strength and stability. However, they also expose companies to significant risks and potential legal consequences if they are discovered.

The Enron scandal is a prime example of the dangers of off-balance-sheet transactions and financial engineering. Enron used special purpose entities (SPEs) to hide losses and inflate earnings, allowing them to deceive investors and regulators about the true state of the company's financial health. The scandal resulted in the collapse of Enron, the loss of billions of dollars for investors, and the criminal prosecution of several of the company's top executives.

Another controversial aspect of financial engineering is the use of derivatives, which are financial instruments that derive their value from an underlying asset or benchmark. Derivatives can be used to manage risk, but they can also be used to speculate, manipulate markets, and engage in insider trading. The use of derivatives can create significant risks for companies and their stakeholders, as they can be complex and difficult to understand, leading to potential losses and market volatility.

The 2008 financial crisis is a prime example of the risks associated with the use of derivatives and financial engineering. The crisis was caused in part by the use of complex financial instruments such as mortgage-backed securities and credit default swaps, which were used to package and sell risky mortgages to investors. The collapse of these securities led to a widespread financial meltdown, causing billions of dollars in losses for investors and taxpayers.

The crisis also exposed the role of big corporations and government regulators in creating and exacerbating the crisis. Many big banks and financial institutions engaged in unethical and illegal behavior, such as predatory lending and mortgage fraud, while government regulators turned a blind eye or actively supported these practices through deregulation and lax enforcement. The result was a catastrophic economic collapse that caused widespread unemployment, foreclosures, and economic instability.

In conclusion, the 2008 financial crisis serves as a reminder of the risks and potential consequences associated with financial engineering and big corporate corruption backed by governments.To prevent such events from occurring in the future, companies and regulators must take a more proactive approach to regulating financial engineering practices and holding companies accountable for their actions.

References

Off-Balance-Sheet Transactions and Financial Engineering:

"Off-Balance-Sheet Financing" by Investopedia (https://www.investopedia.com/terms/o/offbalance-sheetfinancing.asp)

"Off-Balance-Sheet Financing: What You Need to Know" by Harvard Business Review (https://hbr.org/2018/07/off-balance-sheet-financing-what-you-need-to-know)

"Off-Balance-Sheet Financing and Its Effects on Financial Statements" by The Balance (https://www.thebalance.com/off-balance-sheet-financing-and-its-effects-on-financial-statements-393038)

Derivatives and Financial Engineering:

"What Are Derivatives, and How Do They Work?" by The New York Times (https://www.nytimes.com/2018/02/05/business/what-are-derivatives.html)

"Derivatives and Risk Management" by The National Bureau of Economic Research (https://www.nber.org/reporter/2014number4/derivatives-and-risk-management)

"The Financial Crisis and the Role of Derivatives" by The Guardian (https://www.theguardian.com/business/2012/may/23/financial-crisis-role-derivatives)

Enron Scandal:

"Enron Scandal: A Corporate View" by Investopedia (https://www.investopedia.com/updates/enron-scandal-summary/)

"The Enron Scandal and the Neglect of Management Integrity Capacity" by The American Journal of Economics and Sociology (https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1536-7150.2004.tb02549.x)

"Enron: The Smartest Guys in the Room" (documentary film) by Alex Gibney (https://www.imdb.com/title/tt1016268/)

2008 Financial Crisis:

"Financial Crisis Inquiry Commission Report" by The National Commission on the Causes of the Financial and Economic Crisis in the United States (https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf)

"Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves" by Andrew Ross Sorkin (https://www.penguinrandomhouse.com/books/150827/too-big-to-fail-by-andrew-ross-sorkin/)

"The Big Short" (movie) by Adam McKay (https://www.imdb.com/title/tt1596363/)