Citigroup Inc and JP Morgan Chase & Co helped Enron design "sham" transactions to inflate profit, hide debt and evade taxes, said Senator Carl Levin, in a hearing on the banks' role in Enron's collapse.
"You aren't the victims of Enron, you folks helped perpetrate these deceptions," said Levin, chairman of the Senate Governmental Affairs Permanent Subcommittee on Investigations, in an exchange with JP Morgan officials about a loan transaction called "Slapshot" that gave Enron US$60 million in tax benefits.
That deal cloaked a US$375 million loan inside a US$1.4 billion fake loan, of which Enron repaid US$1 billion instantly, allowing it to write off higher interest payments for tax purposes, the committee said. Levin told Citigroup officials they should have known a transaction in 2000 violated accounting rules and bank policies and was used to hide a US$194 million debt and improperly boost earnings by US$112 million.
Committee investigators said documents and interviews about the transactions show that Citigroup and JP Morgan ignored their own internal guidelines to satisfy a client, helping Enron deceive investors and tax authorities. The two firms "actively aided" Enron "in return for substantial fees and favorable consideration in other business dealings," the committee said in a 35-page report released this week.
In questioning JP Morgan officials about the Slapshot transaction, which was made as Enron was starting its pulp and paper trading business, Levin cited JP Morgan memos that promoted the deal based on the fact that it wouldn't provide a "road map" to tax collectors.
"Why would you want to use the lack of transparency as a selling point," the Michigan Democrat asked. "Is this something you would pitch today?"
JP Morgan Managing Director Andrew Feldstein replied: "We would not enter into this transaction today."
"It's not about entering into it -- this isn't something Enron cooked up," said Levin. "It's a Chase design. You folks created an appearance that there was a US$1.4 billion loan when there was only a US$375 million loan."
In addition, Levin said, Enron and JP Morgan agreed that if tax authorities disallowed the intended tax treatment, the two sides would say that part of the loan was made by Enron to the bank, which would create another tax benefit.
"The result you describe does sound quirky," said JP Morgan Vice Chairman Michael Patterson. "And we have changed our policies. Beyond ensuring compliance, we now would have to take into consideration how this would look to the world were it to become public."
Questioning Citigroup officials about another transaction, Levin cited memos citing "verbal guarantees" from Enron Chief Financial Officer Andrew Fastow that Citigroup would recoup a US$6 million investment in an Enron partnership called Bacchus. That investment, which allowed Enron to keep a US$194 million loan off its books, and ultimately book a US$112 million profit, was a sham, Levin said.
Fastow's statement "was just a businessman's understanding," said William Fox, head of Citigroup's mining and energy group, who met with Fastow, in answer to Levin's question.
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