Senators Berate Enron Bankers
Lawmakers skewered bankers from J.P. Morgan Chase & Co. and Citigroup Inc. on Tuesday, saying their actions to help Enron Corp. disguise more than $8 billion in debt demonstrate why investors are losing faith in Wall Street.
“This is shameful,” said Sen. Carl Levin (D-Mich.), who chairs the Senate permanent subcommittee on investigations. At a hearing, Levin repeatedly confronted the bankers with e-mails and tape recordings he said contradicted their statements that they did nothing wrong.
Sen. Susan Collins of Maine, the ranking Republican on the committee, said it “appears as though [J.P. Morgan and Citigroup] were willing to risk their reputations to keep Enron, an important client, happy.”
The committee has been focusing on the banks’ efforts to help Enron raise more than $8 billion over six years by arranging so-called prepaid contracts with special-purpose entities based offshore.
Senate investigators say the prepaid contracts, ostensibly for future energy trades, were in fact loans. Cloaking these loans as prepaid contracts inflated Enron’s cash flow and reduced the debt on its balance sheet, presenting an inaccurate picture of the energy trader’s financial health.
“It became a merry-go-round,” said Robert L. Roach, the committee’s chief investigator, who said Enron was using money provided from new prepaid deals to repay previous ones. At the time of Enron’s bankruptcy, it had nearly $5 billion worth of the prepaid deals outstanding.
The banks vigorously defended their actions, claiming that the deals they set up were legal and widely used by other companies.
“Prepaid forward contracts have been used for many years and are widely recognized as an entirely proper tool to enable businesses to increase their liquidity and diversify their sources of funding,” said Jeffrey Dellapina, a managing director at J.P. Morgan Chase.
Both banks denied that the contracts were an attempt to disguise loans, saying the deals were ultimately reported as liabilities. And both attempted to shift the blame to Enron, which they said initiated the transactions and was responsible for selecting the proper accounting method. “While we regret our relationship with Enron, we acted in good faith at all times,” said David Bushnell, a Citigroup managing director.
But Levin, using the banks’ internal e-mails, documents and taped conference calls, attempted to blow holes in their assertions that they were unaware the deals were being abused or improperly structured. At one point, the questioning of Chase became so heated that the bank’s attorneys--which included Valerie Caproni, former director of the Securities and Exchange Commission’s West Coast region--scrambled out to the hallway to strategize.
Frequently, Chase executives seemed surprised and unfamiliar with their own internal documents. An impatient and incredulous Levin threatened to call Chase’s top executives to appear before his committee if the company failed to follow up in writing with answers to his questions.
Levin pointed to one 1998 e-mail that he said demonstrated Chase knew the deals were being used to deceive investors.
“Enron loves these deals as they are able to hide funded debt from their equity analysts because they (at the very least) book it as deferred revenue or (better yet) bury it in their trading liabilities,” wrote a Chase employee working on the deals.
“It’s exactly what happened,” Levin said. “And Chase knew it. If I were Chase, I’d be embarrassed by that e-mail.”
Chase executives said they found nothing embarrassing about the e-mail but suggested that the employee who wrote it misunderstood the deals. Levin asked Robert W. Traband, a Chase vice president who worked on the deals, whether it would be accurate to describe the prepaid contracts as “circular deals” because the money is simply transferred among the parties back to Enron.
Traband said he did not believe the term would be fair. Then Levin played a tape recording of a meeting, recorded by Chase in the normal course of business, in which Traband states, “This is a circular deal that goes right back to them.”
Later Levin spent more than an hour attacking Chase’s claim that a special-purpose entity set up to act as a go-between for Chase and Enron was an independent third party. The issue of independence is critical because if the entity were owned by Chase, the deals might not be legitimate.
Levin produced documents showing that the entity, known as Mahonia, was created by an attorney working for Chase; that its administrative and legal fees were paid by Chase; that it took instructions from Chase and did business with no other company; and that Chase employees discussed steps needed to “make sure that Mahonia seems independent.”
But Chase Managing Directors Dellapina and Donald H. McCree stood by their assertion that Mahonia was an independent entity owned by a charitable trust.
When Citigroup executives testified, Levin attacked their claim that there was no attempt to conceal the deals and that financing was adequately disclosed to investors.
“If you have nothing to hide, why do this in a secrecy jurisdiction,” Levin asked, referring to the Cayman Islands entity set up by Citigroup to handle the deals. “Why not do it in daylight?”
Richard Caplan, another Citigroup managing director, said the Cayman Islands offered certain tax advantages.
It’s unclear whether Enron’s accounting of the deals will turn out to be illegal. If it does, the banks might face liability for aiding and abetting the failed energy trader, lawmakers said. The SEC is investigating.
Lynn Turner, former chief accountant for the SEC, said it appears that the banks willfully attempted to avoid disclosing details about the contracts. He predicted that SEC investigators would be troubled by the deals.
He also criticized Citigroup for attempting to reduce its own exposure to the deals by selling stakes to outside investors.
