A technique used by brokerage companies for securities trading. It allowed Enron to count long-term contracts as immediate profit although most of the money wouldn't be coming in for several years. For example if a pipeline in Europe was projected to produce $89 million of profit it would be posted, but there was one problem the pipeline hadn't been built yet.
With the high tech boom Enron moved its gas and electricity online, hoping to cash in on the high stock prices of the dot-coms. Enron sold Wall Street and as a result the stock tripled in value from 1998 to 2000. This was not the only reason it tripled but a definite factor. Within this time Lay and Skilling cashed out around $475 million worth of stock. .
Around this time the company was involved in horrible investments. They were buying ridiculous amounts of power plants, pipelines and other ventures which were over priced and not even going to be profitable. With Jay and Skilling wanting to continue this trend of growth "Enron turned itself into a factory for financial deeds that would pump its profit, protect its credit rating and drive up its stock price." So Enron turned to its Financial Chief Officer Andrew Fastow who set up several partnerships. The very first one to note was called LJM1 which hedged risky stock investments.
Enron set up these partnerships using stock as funding which did not appear on the company's balance sheet. These partnerships were set up as an SPE or a Special Purpose Entity, which agrees to pay Enron if it investments decline in value. As the investments decline payments were made to Enron and posted as profit. But in reality Enron was paying it self with its own money.
At the end of 1999 LMJ1 gave Enron a paper profit of $300 million. With the success of LMJ1 Fastow created LMJ2 with Skilling's support. LMJ2 was started with $300 million of bank loans and investors money. This partnership was about twenty times greater than LMJ1.