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.
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