Dynamics of Information Flow Before Major Crises: Lessons from the Collapse of Enron, the Subprime Mortgage Crisis and Other High Impact Disasters in the Industrial Sector

Abstract

The analysis of the two largest financial disasters in the USA so far in the first decade of this century—the collapse of Enron in 2001 and the subprime mortgage crisis of 2007–2008—suggests that the huge scale of these disasters stemmed from a lack of timely information. We present extensive evidence that regulators, investors and associates were not informed of the conditions and risks associated with the activities of Enron management in the first case, or with the assessment and underwriting of collateralized debt obligations (CDOs) in the second; and with little understanding of the “whole picture” of risks, they could not intervene decisively to prevent or minimize disaster. Moreover, we identify similar obstacles to the transmission of reliable risk information in past cases such as the Barings Bank crash, the Deepwater Horizon oil spill, the nuclear accidents at Chernobyl and Fukushima-Daiichi as well as in the current development of the US shale energy industry. Based on the careful observation of events before the moment of collapse in three financial events (Barings, Enron and subprime crisis), one mixed financial-industrial case and three industrial catastrophes, we document and discuss how the inadequate transmission or outright concealment of risk information constitutes a powerful engine of disasters.