Posted on 16-12-2002

Enron Instructive
Wednesday, 11 December, 2002, Enron Hearing, USA

US Senator Carl Levin questions representatives of Investment Banks at the
Permanent Subcommittee on Investigations hearing, Oversight of Investment
Banks' Response to the Lessons of Enron's Deceptive Practices. Four
witnesses for J.P. Morgan Chase & Co. are sworn in before the Permanent
Subcommittee on Investigations.

One year ago, on December 2, 2001, Enron Corporation, then the seventh
largest company in the United States, declared bankruptcy. The follow up to
this financial disaster revealed a litany of Enron corporate abuses from
accounting fraud, to price manipulation, insider dealing, and tax. Yet it
is still the case today, as it was a year ago, that most top Enron
officials have walked away from the scandal they created with tens of
millions of dollars in their pockets, while Enron employees, creditors, and
shareholders have suffered substantial losses. As disturbing as Enron's own
misconduct is the growing evidence that leading U.S. financial institutions
not only took part in Enron's deceptive practices, but at times designed,
advanced, and profited from them.

This is the third in a series of hearings held by this Subcommittee
focusing on the role of financial institutions in Enron's collapse. Our
first hearing looked at more than $8 billion in deceptive transactions
referred to as "prepays." Citigroup and JPMorgan Chase repeatedly used
these deceptive prepays to issue Enron huge loans that were disguised as
energy trades, which enabled Enron to misstate the loan proceeds as cash
flow from business operations. Investors and analysts were misled, along
with the many employees who lost their life savings and jobs.

Our second hearing looked in detail at a sham asset sale from Enron to
Merrill Lynch just before the end of the year 2000, so that Enron could
book the fake sale revenue and boost both its year-end earnings and cash
flow from operations. This transaction didn't qualify as a true sale under
accounting rules, because Enron had eliminated risk from the deal by
secretly promising Merrill Lynch to arrange a resale of the barges within 6
months, while guaranteeing a 15 percent profit.

In both hearings, substantial evidence showed that the financial
institutions involved in the deals knew exactly what was going on – they
structured the transactions, signed the paperwork, and supplied the funds
knowing that Enron was using the deals to report that the company was in
better financial condition than it really was. In the case of Citigroup and
Chase, the banks not only assisted Enron, they developed the deceptive
prepays as a financial product and sold it to other companies as so-called
"balance sheet friendly" financing, earning millions in fees.

Today's hearing will look at another set of deceptive transactions that
took place over a six month period from December 2000 to June 2001,
involving Enron ventures in the pulp and paper business. These transactions
were known as Fishtail, Bacchus, Sundance, and Slapshot. The evidence shows
that Citigroup and Chase actively aided Enron in these transactions,
despite knowing they employed deceptive accounting or tax strategies and
were being used by Enron to manipulate its financial statements or
deceptively reduce its tax obligations. Citigroup and Chase received
substantial fees for their actions or favorable consideration in other
business dealings.

These four transactions required months of work by the Subcommittee staff
to untangle. The complexity of the deals made the deceptions almost
impossible for anyone to understand without a detailed roadmap. They also
show how far our financial institutions have sunk in misusing structured
finance. Instead of using structured deals to lower financing costs or
spread risk – which are legitimate uses – they used structured finance to
mislead investors, analysts and regulators about a company's true
activities and financial condition.

Look, listen and learn.