Securitizing assets by using SPEs, which lies at the heart of the financialization of business, enables companies to remove assets and associated risk from their balance sheets and create an income stream against which further loans for business expansion can be issued. Such ‘structured’ financial instruments, famously described by Warren Buffet as ‘financial weapons of mass destruction’, were at the heart of Enron’s turbo-driven expansion and meteoric share-price movement as well as at the centre of the financial meltdown of 2008.9,10 In effect, securitization transforms the risks of retaining assets, the value of which is volatile and ties up capital, by converting them into securities. This enables the future revenues deriving from assets to be made available immediately, thereby
releasing funds for further investment and repeated securitization. The principal appeal of securitization to executives and investors is its turbocharging of growth and boosting of the stock price. However, it also increases vulnerability to a downturn as it reduces the scope for retrenchment by selling assets or by restructuring debt. When pursuing an asset-lite strategy, day-today operations are financed either through earnings and/or by securitizing further assets, including any income streams arising from earlier securitization. This strategy is sustainable so long as the assets (e.g. contracts) that back the securities maintain their value and, relatedly, as long as the company retains its investment grade status either by minimizing its debts or, in Enron’s case, by hiding these debts by using SPEs and other dodges, such as pre-pays (discussed later). Operating difficulties arise if trading conditions deteriorate and/or there is a restatement of the value of the company’s assets, which reduces the stock price and/or downgrades its credit rating. Such a downgrade places downward pressure on the stock price which can trigger demands for debt repayment. If repayments cannot be met from earnings, from further securitization, or by obtaining loans, the company enters a vortex of decline ending in illiquidity and insolvency.