Simplified by Walter Sorochan, Emeritus Professor San Diego State University
Enron evolved its own form of an unregulated banking and loan system. Enron borrowed the idea of a new instrument that exchanged or swapped collateral for paper debt from JPMorgan Chase Bank in the early 1980s. The new instrument was called the Credit Default Swap [ CDS ] and was used as an insurance to secure loans; which in many instances were paper notes.
The primary benefit of the credit default swap was viewed as a new source of risk distribution. But the real motivation for Enron [ and banks ] to use CDS was to generate money to make money. Enron sold paper notes or derivatives to its own 3000 subsidiaries as a way of generating small amounts of cash. Enron ran into trouble when a speculator of the note made a call [ requested payment ] on the original paper note. Enron did not have enough cash on hand to pay for the note and had to declare bankruptcy. Enron evolved an unregulated, secretive and confusing Punzi scam for making money.
For a detailed explanation of Enron: click here