The Economist's "Jack Welch MBA" - Bad Use of Off Balance Sheet Financing? Pros and Cons? What does off-balance-sheet financing really mean?

The Economist in Jun 09 came out with an article called "The Jack Welch MBA" which describe how a hypothetical MBA program would be run if it was run by Jack Welch (in response to his $12m investment in Chancellor University in Ohio).

Performance Principles/Targets:
1. If a business in a given industry is not first or second, should be sold or closed.
2. Fire the worst performing managers annually (bottom 10%).

More controversial principles, to manipulate the apparent performance/liquidity/financial state etc of the company:
3. Accounting - prolific use of off-balance sheet vehicles
4. Opaque finanical arm, GE Capital, used to top up profits in bad years

Taking a closer look at GE's financing, here...

First, a "Sesame Street" definition of off-balance sheet financing. You want to keep large capital expenditures off the balance sheet, e.g. since you want a low debt/equity ratio.

A lot of Enron's problems were due to off-balance-sheet financing. Enron is worthy of further study. The scandal destroyed accounting firm Arthur Andersen (the firm founded by Arthur Andersen and Clarence DeLany in 1913).