WASHINGTON — Seven major investment banks have granted Enron Corp. multimillion-dollar loans that helped the now-bankrupt company conceal its financial position, and in some cases knew Enron was using misleading accounting for the loans, a Senate investigator testified yesterday.
Subcommittee investigators said Enron — struggling with a secretly crumbling balance sheet — secured $8.5 billion in nine-year funding from Citigroup Inc. and JP Morgan Chase & Co., which cashed in high fees and interest payments.
Five other investment banks had similar investment deals with Enron totaling about $1 billion.
Shares of Citigroup Inc. and JP Morgan Chase & Co. plunged yesterday, wiping out $58 billion in combined market value this week, as banks dispute the claims.
The Senate Committee on Governmental Affairs’ investigative subcommittee reviewed a million pages of documents, most of them subpoenaed, and interviewed dozens of witnesses from Enron and its investment banks. Wall Street investment.
Some banks actively aided Enron in its dodgy accounting in exchange for large fees and favors in other transactions, investigator Robert L. Roach told a subcommittee hearing.
“Evidence indicates that Enron would not have been able to engage in the magnitude of the accounting deceptions it committed, involving billions of dollars, without the active participation of major financial institutions willing to accompany and even to grow Enron’s business,” Roach testified.
Some of the banks allowed investors to rely on Enron’s financial statements that they knew were misleading, said Roach, an attorney for the subcommittee.
The banks used complex financial transactions to boost Enron’s anemic cash flow to match its growth in paper profits, lawmakers said.
The Houston energy trading firm recorded money from bank loans as prepaid transactions of natural gas and other commodities with an entity based in the Channel Islands off Britain.
Roach said Citigroup, the nation’s largest financial institution, and JP Morgan also offered the deals to other companies.
Citigroup “bought” the Enron-style deals from 14 companies, selling them to at least three, Roach said.
Enron, which filed for bankruptcy protection in December, taking with it the investments of millions, used a network of thousands of off-balance sheet partnerships to hide about $1 billion in debt from investors and federal regulators.
Without the bank deals, Enron’s debt would have been $14 billion in 2000 instead of the company’s advertised $10 billion, and its cash flow would have been half of the advertised $3.2 billion. , according to subcommittee investigators.
Had the true picture been known, it would have put downward pressure on Enron’s stock price and its ratings by agencies such as Moody’s Investors Service and Standard & Poor’s.
Officials of these agencies, testifying at yesterday’s hearing, said they were unaware of the dealings with the banks and that Enron had misled them and withheld information.
“Why didn’t the guard dogs bark? Democratic Sen. Joseph I. Lieberman of Connecticut asked credit score officials.
In a 1998 email, a JP Morgan Chase executive in Houston wrote, “Enron loves these deals.”
Enron officials “are able to hide…the debt” from Wall Street analysts, he wrote.
Jeffrey Dellapina, managing director of JP Morgan Chase at its New York headquarters, testified that the email was “inaccurate”.
Officials from both financial firms denied any wrongdoing, saying lenders should not be held responsible for how borrowers like Enron recorded their loans.
The transactions were “common practice in structured finance,” Dellapina said.
Richard Caplan, managing director and co-head of the Credit Derivatives Group of Citigroup subsidiary Salomon Smith Barney, said Enron’s financings were arranged for a large US company, using a common structure approved by an accounting firm of foreground.
Bank officials pointed out during the hearing that former Enron auditor Arthur Andersen approved the company’s accounting of the transactions.
Before hearing the testimony, the senators denounced the wave of accounting scandals which is shaking the confidence of investors and the markets.
Telecommunications giant WorldCom Inc filed the biggest bankruptcy filing in US history on Sunday, less than a month after revealing it hid nearly $4 billion in expenses through an accounting misleading.
“Clearly Enron was not alone in shady financial dealings,” Republican Sen. Jim Bunning of Kentucky said. “Americans across the country are seeing their savings and their pensions dwindle.”
Citigroup called the transactions with Enron “quite appropriate at the time based on what we knew and what Enron told us.”
Robert S. Bennett, Enron’s Washington attorney, said the company would continue to cooperate with investigations by Congress, the Justice Department and the Securities and Exchange Commission, and that people should not “rush to judge”.
Yesterday, shares of Citigroup fell $5.04, or nearly 16%, to $27, a three-year low. Shares of JP Morgan fell $4.44, or 18%, to $20.08, the lowest since January 1996.
“Any time you’re tarred with the Enron name, you’re going to get fired,” said David E. Nelson, who manages $450 million for Legg Mason American Leading Companies Trust Fund, which owns shares of Citigroup and JP Morgan.
In addition to Citigroup and JP Morgan Chase, subcommittee staff members said smaller deals totaling $1 billion 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 investors and former Enron employees have named Citigroup, JP Morgan, Credit Suisse, Barclays and other major banks as defendants, alleging they conspired with former executives of Enron to defraud tens of billions of dollars from investors.
Bloomberg News contributed to this article.
