US banks' links to the Enron debacle came into the spotlight Tuesday as a Senate probe highlighted the role of two banking giants in helping Enron obtain billions in loans that were disguised as trading revenues.
The news rocked the share prices of the banks in question: Citigroup, whose shares fell 15.7 percent, and JP Morgan Chase, down 18 percent.
Robert Roach, chief investigator for the Senate permanent subcommittee on investigations, told a hearing into Enron finances that the probe showed these two banks provided at least US$8 billion in "sham" loans to Enron and had similar deals with other firms.
The banks "accepted and followed Enron's desire to keep the nature of these transactions confidential," Roach said, while Enron booked the revenues as loans so it could claim the interest as a business expense.
"If Enron had properly accounted for these transactions, its total debt would have increased by about 40 percent to about US$14 billion, and its funds flow from operations would have dropped by almost 50 percent to about US$1.7 billion," he said.
Subcommittee chairman Senator Carl Levin called the Enron transactions "an accounting sham" that hid loans from the company's balance sheet and claimed that Enron did this with "the help and knowing assistance of the biggest financial institutions in our country, including JP Morgan Chase and Citigroup."
"Enron is not the only company obtaining loans disguised as commodity trades, and recording cash flows from operations instead of from financing," Roach told the panel. "Major financial institutions are knowingly assisting and even promoting such transactions, which would not be possible without their willingness to provide the funds, the paperwork, and a sham offshore trading partner."
Roach said Citigroup "shopped" this type of deal to 14 companies, successfully selling it to at least three.
JP Morgan Chase "apparently entered into Enron-style prepays with seven companies apart from Enron," Roach added.
The investigation showed that over a six-year period, Enron obtained at least US$8 billion by using these sham loans from big financial services companies including Barclays, Credit Suisse First Boston, FleetBoston, Royal Bank of Scotland and Toronto Dominion.
Explaining the deals, Roach said that "when all the bells and whistles are stripped away, the basic transaction ... is a loan to Enron using a bank and an obligation on Enron's part to repay the principal plus interest."
As a result, "the proceeds of the so-called prepay transaction should have been booked as debt and cash flow from financing, not as a trading liability and cash flow from operations."
Representatives of the banking firms defended the use of the deals.
Maureen Hendricks of Citigroup unit Salomon Smith Barney said these arrangements protect companies from swings in commodity prices and have been frequently used in the energy industry.
"I believe the decision to approve these transaction was an appropriate one, based on the information that had been provided to me and my team," Hendricks said.
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