Citigroup Aided Enron, Panel Says

WASHINGTON--Citigroup Inc., J.P. Morgan Chase & Co. and other Wall Street investment banks helped prop up Enron Corp. for years by arranging more than $8 billion in complex financing transactions that boosted the energy company’s stock price and hid debt, according to research by a Senate committee.

In 2000 alone, the controversial funding deals helped Enron reduce its reported debt by about 40% and inflate its operating cash flow by 50%, committee investigators found.

In some cases, the bankers not only knew about Enron’s questionable accounting practices, but also marketed the transaction concepts to other potential clients, investigators said.

The revelations, which will be the subject of a Senate hearing today, almost certainly will intensify questions about the role Wall Street played in Enron’s collapse last year.

The Securities and Exchange Commission also is investigating whether investment banks intentionally helped the fallen energy trader cover up its deteriorating financial condition.

Specifically, the congressional and SEC probes focus on whether investment banks helped structure deals so that loans to Enron would be disguised as revenue-generating energy trades. That setup had the dual effect of boosting reported revenue while minimizing apparent debt--thus luring investors who thought Enron’s financial health was far rosier than it actually was.

“Without the services of Wall Street, one wonders how far Enron could have gotten in their efforts,” said Henry Hu, a securities law expert at the University of Texas.

Sen. Carl Levin (D-Mich.), chairman of the Senate permanent subcommittee on investigations, is expected to probe the deals today at a hearing in Washington.

The committee documents reveal that Citigroup played an extensive role in designing some of the questionable Enron transactions. The documents, released Monday, helped fuel a heavy sell-off of Citigroup’s shares, which fell $3.96, or 11%, to $32.04 on the New York Stock Exchange.

Arda Nazerian, a Citigroup spokeswoman in New York, said the firm’s bankers were assured by Enron that its accounting firm had approved the deals.

“The transactions we entered into with Enron were entirely appropriate at the time, based on what we knew and what we were told by Enron,” she said. “We were assured that Enron’s auditors had approved them, and we believed they were consistent with accounting rules in place at the time.”

J.P. Morgan’s role in Enron transactions had been previously disclosed. The company has said it was mislead by Enron and did nothing wrong.

The House Energy and Commerce Committee also is looking into many of Wall Street’s dealings with Enron.

By portraying the financing arrangements as energy trades rather than as loans, Enron clearly intended to mislead investors, some experts said. However, many also say it is unclear whether investment banks broke any laws.

By their nature, the banks routinely design financial mechanisms to make their clients’ finances look as strong as possible, they said.

Because Enron was anxious to reduce the debt on its balance sheet, the banks probably came up with the uncommon financing deals as a way to keep Enron’s lucrative business, said John Coffee, a Columbia University law professor. “One bank perfects a technique involving this illusory characterization of loans and the other banks feel a competitive necessity to do likewise,” he said.

The Senate committee documents show that Citigroup boasted that the privacy involved in the deals, and minimal disclosure to investors, were benefits of the transactions. In some cases, the third-party investors that provided funds to Enron never knew exactly where their money was going, investigators concluded.

Had the transactions been properly disclosed, Enron’s financial problems would have come to light sooner, investigators said. The company’s stock price probably would have dropped, and credit agencies would have lowered their ratings on the firm’s debt, they said.

Enron, with the help of the banks, relied on a financing vehicle known as a prepay. In its simplest form, prepays are arrangements in which one party agrees to pay another for a service or product to be delivered at a later date.

But Enron used elaborate hedging techniques to essentially turn prepays into secret financing deals, documents show.

Rather than disclose the loans as debt, the company used the deals to increase its cash flow from operations, investigators found.

At the same time, Enron reported the prepay deals as debt for income tax purposes, so it could deduct the interest.

Citigroup arranged more than half of the Enron prepay deals, helping to raise $4.8 billion in 14 transactions over six years, the committee found.

J.P. Morgan Chase arranged about $3.7 billion in 12 transactions. “By design and intent, the prepays as structured by Enron and the financial institutions made it impossible for investors, analysts and other financial institutions to uncover the true level of Enron’s indebtedness,” according to congressional documents.

The documents described a transaction with an entity known as Yosemite. Citigroup helped Yosemite issue about $800 million in bonds, which were bought by private investors. Yosemite then lent the money to a Citigroup-controlled entity called Delta Energy Corp., based in Cayman Islands.

Delta and Enron then entered into a prepaid contract, based on the spot price of crude oil at a future date, and Delta paid Enron the $800 million upfront.

A series of hedging transactions effectively canceled each other out, and by the maturity date of the contract, the $800 million was cycled back to Yosemite.

Meanwhile, every six months Enron made a payment of about $29 million to Delta, which in turn paid Yosemite, representing an effective annual interest rate of 7.25% to Yosemite’s bond investors.

The net effect of the transaction was that Enron borrowed money, but it didn’t show up as debt on the firm’s books.