Current Business Affairs

Assignment-1

Submitted to
Sir. Captain Munawwar Ahmad

Submitted By
Shajiah Ali (01-120091-066)
MBA-4(b)
ENRON Corporation Scandal
In 2001, United States was shocked by the collapse of Enron, a multibillion dollar
corporation that employed thousands of people. Enron came to born as a result of a 1985 merger
of two companies. Company took a huge amount of debt during its foundation and its CEO
Kenneth Lay recruited the sharpest and shrewd businesspeople in his company one of them was
Jeffrey Skilling. After that the company also got involved in the trading of commodities and
providing services and therefore its stock value increased over 50% in one year. In the year 2001
the conspiracy of Lay, Skilling and others led to the collapse of the company due to fraud, false
reporting of revenue, shoddy accounting practices and a general disregard for virtually every
tenet of business ethics. A number of people and firms were involved in this scandal which were

 Arthur Anderson involvement, the Enron’s accounting firm which created false earning
reports, thereby hiding huge amounts of debt and artificially inflating stock prices beyond the
point of no return
 Enron with the help of government resources was able to wreak a great deal of havoc in an
incredibly short period of time which was not limited to the unites states only but also
extended to other nations and continents

Enron’s stock values nearly doubled in one year through illegal and unethical activities.
This falsely valued stock was bought in huge amounts by Enron’s very own employees, who
either on purpose or through deception, did not ask any questions about how the stock was
growing so quickly in value or what would happen when the price fell. Moreover, many
employees had their entire pensions invested in Enron stock. The major event that changed
everything for Enron’s employees was the collapse of the company in a hail of legal problems,
alleged crimes, and finger pointing. When Enron crashed, employees were affected in several
ways. Most obvious is the loss of employment for thousands of highly skilled and well paid
employees, who were forced to try to find work elsewhere virtually overnight. Many of these
employees also had their life savings totally invested in Enron stock which was now worthless.
The Stock Market was also highly influenced by the Enron scandal, the crash of Enron’s
stock sent out a loud message to all stock investors that it was extremely important to take a
closer look at the stocks that one already owned, as well as any that they were considering
purchasing from that point forward. The scandal changed the lives of everyone in America, and
elsewhere, in one way or another, for better or for worse. It forced everyone to look at
themselves and fully realize the consequences of reckless greed and the breakage of laws on a
whim.
(Edward Raver, The Enron Scandal: the Crime, Scandal, Tragedy,
and Controversy of the Century (Dec 15, 2006))

WorldCom debacle
In 1998, the telecommunications industry began to slow down and WorldCom's
stock was declining. CEO Bernard Ebbers came under increasing pressure from banks to cover
margin calls on his WorldCom stock that was used to finance his other businesses endeavors.
During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans
and guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this
strategy ultimately failed. Beginning in 1999 and continuing through May 2002, WorldCom used
shady accounting methods to mask its declining financial condition by falsely professing
financial growth and profitability to increase the price of WorldCom’s stock
The fraud was accomplished in two main ways. First, WorldCom's accounting department
underreported 'line costs' (interconnection expenses with other telecommunication companies) by
capitalizing these costs on the balance sheet rather than properly expensing them. Second, the
company inflated revenues with bogus accounting entries from 'corporate unallocated revenue
accounts. The first discovery of possible illegal activity was by WorldCom's own internal audit
department who uncovered approximately $3.8 billion of the fraud in June 2002. Then SEC
launched an investigation and by the end of 2003, it was estimated that the company's total assets
had been inflated by around $11 billion. On July 21, 2002, WorldCom filed for Chapter 11
bankruptcy protection, the largest such filing in United States history. The company emerged
from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt. At last count, WorldCom
has yet to pay its creditors, many of whom have waited years for the money owed.
(JJ WorldCom Scandal: A Look Back at One of the Biggest Corporate
Scandals in U.S. History (March 8, 2007))
(http://news.bbc.co.uk/1/hi/business/4680221.stm)

TYCO International Scandal

Tyco manufactures a wide variety of products, from electronic components
to healthcare products. The conglomerate operates in over a hundred countries around the world
and employs 240,000 people. Tyco International, who saw the price of their stock decline from
$60 to single digits in the summer of 2002. The collapse of Tyco's stock was in large part caused
by a massive $9 billion loss for the 2002 fiscal year, which resulted from earnings restatements
and goodwill write-offs related to hundreds of Tyco acquisitions.
During 2002, the Securities and Exchange Commission began an investigation of
Tyco's top executives. As investigations continued it was uncovered that Dennis Kozlowski,
Tyco's former CEO; Mark Swartz, Tyco's former CFO; and Mark Belnick, the company's chief
legal officer, had taken over $170 million in loans from Tyco without receiving appropriate
approval from Tyco's compensation committee and notifying shareholders. For the most part
these loans were taken with low to no interest. Many of them were offset as bonuses without
open approval. Kozlowski and Swartz also sold seven and a half million shares of Tyco stock for
$430 million without telling investors. Formal charges were made by the SEC September 12,
2002.
Because the acts of fraud committed by former Tyco executives were concealed and,
for the most part, disguised, the majority of the Tyco's employees committed no acts of fraud
knowingly. Today Tyco continues its operations and has replaced many members of its board of
directors successfully. (PEARSON Education- Fraud at Tyco International)

American International Group (AIG)

American International Group, Inc. (AIG) is a world leader in
insurance and financial services and is the leading international insurance organization with
operations in more than 130 countries and jurisdictions. AIG companies serve commercial,
institutional and individual customers through the most extensive worldwide property-casualty
and life insurance networks of any insurer. AIG's primary activities include both General
Insurance and Life Insurance & Retirement Services operations. Other significant activities
include Financial Services and Asset Management. AIG's major product and service groupings
are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset
Management
It was one of the financial companies to receive billions of dollars in taxpayer money
to help it stay afloat in 2008 and 2009, but was criticized heavily for using some of that money to
pay out bonuses to employees. AIG has also lobbied Congress on extending free trade
agreements with numerous countries, including China, India and Chile. After the terrorism
attacks of September 11, AIG asked Congress to pass legislation that would help pay for any
insurance claims resulting from future terrorist attacks.
(The AIG Story: A Brief Introduction -by Michael S. Rozeff)
(OpenSecrets.org-AIG)

Lehman Brothers
After decades operating as a major financial services firm, Lehman Brothers went
bankrupt in 2008, one of the most notable victims of the nation's mortgage crisis and economic
downturn of the late 2000s. It was a primary dealer in the U.S. Treasury securities market. The
firm's worldwide headquarters were in New York City, with regional headquarters
in London and Tokyo, as well as offices located throughout the world.
On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the
massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by
credit rating agencies. The filing marked the largest bankruptcy in U.S. history

The bank Barclays acquired a significant portion of Lehman in late 2008. Until it went bankrupt,
Lehman, through its political action committee, routinely spent at least a quarter-million dollars
each election cycle. While favoring Republican candidates for much of the 2000s, the company's
PAC swung sharply toward Democrats during the 2008 election cycle -- ironically, a cycle in
which it spent more money through its PAC than in any previous.
(SHVOONG.com-Lehman Brothers)

Arthur Anderson
Andersen LLP was the largest Big Five public accounting firm, providing audit, tax
and consulting services in 84 countries. The firm dissolved because of legal issues arising from a
series of client financial misstatements. Arthur Andersen was 28 when he started the firm in
1913, offering accounting, auditing and tax services. The firm quickly became known for an
uncompromising adherence to accounting principles. The firm added consulting services in 1954
to help audit clients set up their computer systems, and Andersen Consulting became an industry
leader.
In 2000, Arthur Andersen split from Andersen Consulting, which renamed itself
"Andersen" and rebuilt a consulting group of 15,000 professionals. Andersen was convicted in
2002 of one count of obstruction of justice because of its role in auditing Enron. After the
conviction, the firm could no longer provide public accounting services. After the conviction, the
audit, tax and consulting practices were separated and sold to various competitors' firms. In
2005, the conviction was overturned by the Supreme Court in a unanimous vote.
 (Laurie Phillips, eHow Contributor -The History of the Arthur Andersen
Accounting Firm)

Goldman Sachs
Goldman Sachs is a leading global investment banking and securities firm with three
principal business lines:
 Investment Banking
 Trading and Principal Investments; and
 Asset Management and Securities Services.
Goldman Sachs was founded in 1869 and is headquartered in  New York City, and employs
32,500 people with additional offices in major international financial centers. Goldman Sachs,
one of Wall Street’s most prestigious investment banks, was also among the many banks in 2008
and 2009 to receive billions of dollars in taxpayer money to help it stay afloat. Like others in the
securities industry, Goldman Sachs advises and invests in nearly every industry affected by
federal legislation. The firm closely monitors issues including economic policy, trade and nearly
all legislation that governs the financial sector. It has been a major proponent of privatizing
Social Security as well as legislation that would essentially deregulate the investment
banking/securities industry. The firm tends to give most of its money to Democrats. A number of
high-ranking government officials in recent years have spent part of their careers at Goldman
Sachs.
(OpenSecrets.org-Goldman Sachs)

Infosys
Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people
with US$ 250. Today, it is a global leader in the "next generation" of IT and consulting with
revenues of US$ 5.7 billion. Infosys defines designs and delivers technology-enabled business
solutions for Global 2000 companies. Infosys also provides a complete range of services by
leveraging their domain and business expertise and strategic alliances with leading technology
providers. Their  offerings span business and technology consulting, services, systems, product
engineering, custom software development, maintenance, re-engineering, independent testing
and validation services, IT infrastructure services and business process outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive

force in the industry leading to the rise of offshore outsourcing. Infosys has a global
footprint with 65 offices and 59 development centers in India, China, Australia, the Czech
Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 127,779
employees as on December 31, 2010. Infosys takes pride in building strategic long-term client
relationships. Over 97% of our revenues come from existing customers.
(Infosys Building Tomorrow’s Enterprise)

Tata group
The Tata Group is India's largest conglomerate company, with revenues equivalent of about
3.2% of India's GDP. Tata Group comprises more than 90 companies with activities ranging
from manufacturing and chemicals to consumer products and business services. Its Tata
Steel unit is India's largest private steelmaker, while Tata Power is the nation's largest private
power utility. Tata Motors makes the world's most inexpensive car. Other units include Tata
Communications, Tata Consultancy Services and Tata Global Beverages . Tata Group is
managed through holding company Tata Sons.
Out of 98 operating companies in seven business sectors, 27 are publicly listed enterprises. The
Tata Group has operations in more than 85 countries across six continents and its companies
export products and services to 80 nations. The group takes the name of its founder, Jamsedji
Tata, a member of whose family has almost variably been the chairman of the group. The current
chairman of the Tata group is Ratan Tata, who took over from J. R. D. Tata in 1991. The
company is currently in its fifth generation of family stewardship. 65.8% of the ownership of
Tata Group is held by the charitable trust of Tata.
(Hoovers-Tata Group of companies)

Moody’s, Fitch and Standard and Poor’s

Standard & Poor's, Moody's Investor Service and Fitch Ratings are the Big Three credit rating
agencies. Each of them is explained below

 Moody’s
Moody's Investors Service is among the world’s most respected and widely utilized
sources for credit ratings, research and risk analysis. Moody’s commitment and expertise
contribute to stable, transparent and integrated financial markets, protecting the integrity of
 credit. In addition to our core ratings business, Moody’s provides research data and analytic
tools for assessing credit risk, and publishes market-leading credit opinions, deal research
and commentary, serving more than 9,300 customer accounts at some 2,400 institutions
around the globe. (Moody’s.com)

 Fitch
Fitch Group, Inc. is a rating agency which provides credit opinions, research, and
financial data. The company focuses on the development of fixed income products and
services, as well as on the credit, corporate, and structured finance programs. It offers credit
ratings, analytics, and related services; delivery methods in Internet, data feeds, Web
services, partners, and RSS areas; and tools and models in the areas of market implied
ratings, financial institutions, structured finance, sovereigns, corporates, and structured
credit. The company also provides credit and corporate finance training programs for
professionals working in fixed income, credit risk management, and origination/relationship
management. Fitch Group, Inc., through its subsidiaries, offers enterprise risk management
services in Toronto, Canada. The company serves financial institutions, investment and
commercial banks, fund management firms, brokerage firms, insurance companies,
exchanges, and regulators. Fitch Group, Inc. was formerly known as Fitch Ratings and
changed its name in January 2005. The company was founded in 1913 and is headquartered
in New York, New York with an additional office in London, the United Kingdom.
(Bloomberg Business week-Fitch Group, Ins.)

 Standard and Poor’s

Standard & Poor's (S&P) is a United States-based financial services company. It is a
global leader in credit ratings and credit risk analysis, with ratings on approximately US$32
trillion of debt issued in 100+ countries. Standard & Poor’s credit ratings, indices, investment
research and data provide financial decision-makers with the information and opinions they
need to feel confident about their decisions It is a division of The McGraw-Hill
Companies that publishes financial research and analysis on stocks and bonds. It is one of
the Big Three credit rating agencies
 (Standard & Poor’s Home page)

Global financial crisis and its effect on Pakistan

Introduction
The financial crisis that has spanned the globe has had an especially strong impact in
countries beset by political uncertainty. Analysts say weak governments saddled with poorly
performing economies are more vulnerable to social unrest and armed insurgency. The global
financial crisis is impacting the real and social sectors of developing countries through multiple
channels. According to analysts, Pakistan is one of the most prominent examples of a nation
where economic pressures are feeding unrest and threatening a wobbly government
The global financial crisis is likely to affect Pakistan in two ways, directly and indirectly. So far
the impact of global financial crisis has not been felt in Pakistan as a separate crisis as we are
already facing the same for the last year. There are however, other reasons which may work as a
bulwark for Pakistan against such odds. 

 First and foremost is that Pakistan’s economy is not fully integrated with the world’s
economy and therefore, is less likely to be affected
 Secondly, the system of mortgage banking is still in infancy in Pakistan, the banks largely
operate in loaning against business
 Thirdly, is the sharp decline in oil and agricultural produce which has helped Pakistan to
breathe a fresh.
According to some analysts this global crisis may help Pakistan in a short term to control
depletion of foreign reserves. The argument is based on the premise that due to global crisis a
trend in sharp decline in oil and food commodities prices have been witnessed and it will help
Pakistan in cutting down its import bill which in turn help boost its foreign reserves. By
analyzing the economic trends in Pakistan, we see that despite an impressive growth rate of more
than 6% over the last 6 years( 2001 to 2007), and despite of tall claims from the former Banker
turned Prime Minister, Mr. Shaukat Aziz, Pakistan’s economy could not exhibit resilience to face
the economic challenges of the last year when the oil and food prices experience a sudden
upward trend. Pakistan faced a major challenge in shape of energy shortage and food inflation.

Pakistan’s financial state has always shown mixed results- some years of good growth and some
not. Pakistan largely depends on exports of cotton and textile related items- rice, sports goods,
chemicals and manufacturing items also contribute to exports. Another big source of foreign
earnings is remittances received from the Pakistanis expatriates. Pakistan’s economic base is yet
to be broadened with a focus on value added products, diversity in exports items, finding new
markets and progress in high technology. Even though Pakistan may escape the immediate
negative implications of the global recession, there will be long-term direct and indirect
consequences. Of the directs, the foreign investments and bilateral assistance are on the top. This
financial crisis will have a significant impact on the size of remittances which Pakistan receives
from the Europe and the US. There is a strong likely hood that this single largest source of
foreign exchange may come under stress. The indirect consequence would be that Pakistan’s
exports will suffer as imports of the economies in recession will fall and possibility of slashing of
funds from ongoing foreign funded projects can not also be ruled out.
Another outcome is most likely to happen- the efforts and resources required for war against
terror would diminish. The logical consequence would be that Pakistan again will face and bear
the brunt of this volatile situation alone as it happened at the time of Soviet with drawl from
Afghanistan in 80s.

Impact of the Global Crisis on Pakistan’s Economy

The developing nature of the financial sector has been a saving grace for the Pakistani
economy. Less developed linkages with international markets have meant that the direct impact
of the financial crisis has not been felt by the Pakistani financial sector. However; effects of the
crisis have been felt, even though in a limited manner, by the real sectors of the economy. The
effects of the global slowdown have been transmitted through the trade balance; with a
slowdown in global demand and fall in commodity prices having varying effects, the capital
account; with a significant reduction in private inflows to Pakistan.

Financial Sector
The operating environment of the financial sector experienced significant deterioration
in 2007 and 2008, due to a confluence of factors emanating from both the domestic and
international economic and financial developments. While the domestic environment was
characterized by weakening macroeconomic indicators and the uncertainty caused by the
prolonged period of political transition, the global financial crisis and the commodity price hike
had a feedback impact on the financial sector through the real sector of the economy. Pakistan,
which remained largely unscathed from a direct impact of the crisis, has been more concerned
with issues relating to monetary stability due to rising inflation since before the advent of the
crisis. With a thriving banking sector, increasingly resilient to a wide variety of shocks,
increasing but still relatively less correlation of domestic financial markets with global financial
developments, a proactive and vigilant regulatory environment, and most importantly, no direct
exposure to securitized instruments, risks to financial stability were largely contained and well
managed as the crisis unfolded and impacted the financial sectors in advanced economies.

Capital Flows & Workers’ Remittances

A beleaguered international economic environment has held back Foreign Investment as
it posted a decline of 47.5 percent during the first ten months of 2008-09 compared to the
corresponding period of the previous year. Most of this decrease has come in the shape of an
outflow of private portfolio investment of US$ 1 billion. Investment from countries such as the
United States, United Kingdom, Singapore, and Hong Kong, which have been at the apex of the
international crisis, has dropped significantly. Some Asian economies have witnessed an
anticipated fall in workers’ remittances as unemployment grew in advanced host economies.
However, workers’ remittances to Pakistan remained vigorous and unaffected by the crisis,
totaling US$ 6.36 billion in July-April 2008-09 as against US$ 5.32 billion in the corresponding
period last year, thereby displaying a rise of 19.5 percent.

Commodity Prices & Trade

An unprecedented hike in international commodity prices wreaked havoc on
Pakistan’s external sector during 2007-08, with the current account widening significantly.
However, in the wake of a reduction in global demand and the resultant decrease in commodity
prices, the import bill has reduced significantly, decreasing the current account deficit. A key
loss to developing countries during the current crisis has been a decrease in exports as demand
from advanced economies contracts. Pakistan has witnessed a slowdown in exports, but this
reduction stands apart from that witnessed by other Asian economies for two reasons. Firstly, the
fall in exports is partly due to a fall in domestic productivity and it is hard to distinguish between
the impact of the crisis and internal factors on exports. Secondly, the fall in imports has outpaced
the fall in exports, having a positive effect on the trade balance.

External Financing
The global crisis has restricted Pakistan’s ability to tap international debt capital
markets to raise funds. An increasing cost of borrowing internationally, coupled with
deterioration in the country’s credit rating has ruled out issuance of government paper as a
financing mechanism. Pakistan’s presence in the international capital markets in 2008-09 was
limited to the repayment of Eurobond amounting to US$ 500 million made in February 2009
with no new issuance at the backdrop of financial crisis engulfing the global markets.

Conclusion
Pakistan faces a plethora of challenges that stem from both the domestic environment
as well as the negative outlook of the global economy. The government should now focus on
boosting economic activity and providing growth impetus. In order to achieve an increase in
production and the desired level of growth, efforts must be concentrated on increasing capacity
of industry, and removing inefficiencies which would allow productive sectors to function at
optimal levels.
The impact of the global crisis has so far been very limited, but a few credible threats still
remain. The future of workers’ remittances is uncertain given the fact that employment in host
countries is limited. The external sector still faces multiple threats in the form of a further
reduction in international demand and secondly, a recent rally in international commodity prices
as investors seek refuge could potentially reverse the gains registered in the current account
balance. With regards to external financing, if current conditions in international markets persist,
the government will have to increase reliance on funding from multilateral and bilateral agencies.
It is vital that fiscal, monetary, and external debt policies work in tandem to protect the sectors
exposed to the international crisis, while striving to re-establish domestic economic growth.

The World Bank Group-Impact of Global Financial Crisis on South

Asia (February 17, 2009)

Muhammad Saqib Aziz-Impact of Global Financial Crisis on

Pakistan (The London summit 2010)

Mohammed Mansoor Ali- Global Financial Crisis: Impact on

Pakistan and Policy Response (July 2009)