In the end of 2010, U.S. has been overwhelmed by one of the most complex and largest bankruptcies in the history. Enron was one of the largest energy trader’s in the world. A few days before the bankruptcy, Enron had an investment-grade and had been rated Baa3 by Moody’s and BBB- by S&P. In 1985, Enron was created by Kenneth Lay, who initiated the merger of two natural gas pipeline companies – Houston Natural Gas and InterNorth. Kenneth Lay proposed to begin discussions of selling the electricity at market prices. Soon, the United States Congress approved legislation which deregulated the sale of natural gas. This resulted to the situation where traders such as Enron could sell energy at higher prices. In 1992, Enron became the largest natural gas seller in North America. As this alternative investment management company grew, it purchased a variety of different assets – water plants, electricity plants, gas pipelines and etc. The value of Enron’s stock has increased by 311% from 1990s until the end of 1998. At the end of 2000, Enron’s stock price reached $83.13 with a market capitalization of $60 billion. Later, Fortune’s Most Admired Companies Survey rated Enron as the most innovative large company in the world.

Complex alternative investment management system with even more complicated financial statements was highly confusing to shareholders and analysts. Enron biggest part of its profit earned from trading and risk management. However, later they diversified their portfolio and started building and maintaining natural gas pipelines, electric power plants and other facilities. Enron’s intricate business model and unethical practices demanded the usage of accounting limitations in order to distort earnings and modify balance sheet.  As a trader, company had entered into a huge number of derivatives transactions with downgrade triggers. If the rating of the company falls below Baa3/BBB- (known as investment level) its counterparties can close all transactions and this would result to bankruptcy. This is a perfect illustration of a situation where downgrade triggers provide protections only when relative use is made of them.