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Congress grills banks Original Source Link: (May no longer be active)
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Congress Grills Banks on Enron Prepay Deals
Tue Jul 23, 8:52 PM ET
By Kevin Drawbaugh
WASHINGTON (Reuters) - Two powerhouse Wall Street investment banks for years not only helped Enron hide the debt that finally crushed it, but entered into Enron-style "prepay" financing deals with at least 10 other unidentified companies, congressional investigators said on Tuesday.
In a probe that Sen. Carl Levin said would be referred to the Securities and Exchange Commission ( news - web sites) and the Department of Justice ( news - web sites), J.P. Morgan Chase & Co. Inc. and Citigroup Inc. were accused of lending now-bankrupt Enron billions of dollars via disguised commodity trades called prepays.
The Senate Permanent Subcommittee on Investigations grilled officials from both banks for 10 hours at a hearing, with subcommittee Chairman Levin concluding, "It's a pretty sad story, in my judgement, but we haven't heard the end of it."
The Michigan Democrat said J.P. Morgan and Citigroup set up and controlled offshore shell companies to do oil and gas transactions with Enron from 1992 to 2001 that brought the energy trader loans of $8.5 billion.
The structures of the deals allowed Enron to book proceeds from them as cash flow from operations, but they should have been booked proceeds from debt, committee staffers said.
Citigroup and J.P. Morgan won hefty fees and interest payments on these complex transactions, investigators said, adding that the deals were so successful that the banks packaged and marketed them to other corporations.
An investigators' report to the subcommittee said: "Chase informed the subcommittee that it entered into Enron-style prepays with seven companies apart from Enron. Citigroup indicated that it shopped the idea to 14 companies apart from Enron, successfully selling it to at least three."
As scandal again whipsawed stocks in New York on Tuesday, the Enron debacle that last fall triggered America's deep crisis of market confidence again took center stage.
Levin's subcommittee delved deeply into the role played by some of the world's largest banks in the collapse of the former Texas giant, whose December bankruptcy was the largest in U.S. history until Sunday when it was topped by long-distance telephone and Internet traffic carrier WorldCom Inc.'s.
Levin called the Enron prepay deals "an accounting sham ... Chase and Citicorp knew what Enron was doing, assisted Enron and profited from those actions."
Bankers testifying before the committee defended themselves by saying prepay financings are commonplace. The ones they did with Enron seemed legitimate at the time, based on what the banks knew then about Enron and its auditor, they said.
"The emerging facts suggest that Enron was not the company we thought it was," said David Bushnell, head of global risk management at Citigroup, the top U.S. financial services firm.
Further, the bankers argued, it was not their fault that Enron booked the proceeds as cash flow from operations.
Jeffrey Dellapina, a J.P. Morgan Chase managing director who was involved in the Enron prepay deals, said, "We do not provide accounting services to our clients."
Rick Caplan, co-head of Citigroup's North American credit derivatives group, said, "Enron assured Citibank that its accounting treatment of prepaids had been fully vetted by Arthur Andersen, which, at the time, was one of this nation's leading accounting firms."
Andersen, formerly Enron's auditor, was found guilty in June of obstruction of justice in connection with the destruction of many of its Enron audit records in the face of a federal probe. The firm has since contracted sharply.
The subcommittee said it found that in 2000, Enron's total debt would have been 40 percent higher, and its funds from operations 50 percent lower, if not for the prepay deals.
Levin challenged the Chase witnesses about the true identity of a holding company known as Mahonia Ltd., which he said was created and paid for by Chase and run by its agent to act as an intermediary in several of the Enron prepay deals.
"Don't try to sell us on the concept that they were anything other than a shell corporation created by you to assist Chase," Levin said.
But the Chase officers said Jersey-registered Mahonia was owned by a charitable trust governed by a board of directors who made independent decisions on individual transactions.
Besides Citigroup and JP Morgan Chase, subcommittee staffers said smaller deals worth $1 billion in total involved Credit Suisse Group Inc., Barclays Plc, FleetBoston Financial Corp, Royal Bank of Scotland Group Plc and Toronto-Dominion Bank .
Class-action lawsuits filed this spring by Enron investors and former employees have named as defendants Citigroup, JP Morgan, Credit Suisse, Barclays and other leading banks, alleging they schemed with former Enron executives to bilk investors out of tens of billions of dollars.
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