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The many extracts on these
pages are from copyright material. They are owned by the reference
given or its owner. They are reproduced here for educational purposes
and to stimulate public debate about the provision of health and aged
care. I consider this to be "fair use" in the common interest. They
should not be reproduced for commercial purposes. The material is
selective and I have not included denials and explanations. I am not
claiming that all of the allegations are true. The intention is to
show the general thrust of corporate practices as well as the nature
and extent of any allegations made.
Structured Finance
The Enron Debacle
This page uses the Enron fraud and
collapse to describe the nature and intent of structured finance. It
looks at the way the financial institutions used it to aid and abet
Enron's fraud. It examines the roles of Citigroup bankers and
analysts, accountants, lawyers, and also the political strategies
used by these groups.
CONTENTS
to
contents
Introduction
Fraud
Enron was the first of the great
corporate collapses of the 21st century. Like the others it blew
up in a massive scandal of fraud and greed. A close look at what
happened gives a very different picture to that revealed in the
sound grabs and headlines which penetrate our consciousness in far
off Australia.
-
- - - everyone instantly gets an epic fraud in which arrogant
high-fliers stacked the deck to fleece thousands of peons to the
tune of zillions. The
United States of Enron The New York Times January 19, 2002
The Real
Story
The real story is not about Enron. The real
story is about structured finance and the giant financial
institutions who developed it, embraced it and used it as a vehicle
for their own ends without any regard for the social consequences.
They set up and arranged the fraud.
The real story is also about the large number
of credible financial giants who participated in Enron's fraud.
Without their active participation this fraud could not have
occurred.
A Sick
System
This is not a few bad guys, but a sick and
disturbed system and we in Australia are increasingly part of that
system and embrace the beliefs which give it legitimacy. Increasingly
we think the way it thinks. It is interested in making money from our
health care system.
It is not about illegality but about the
morality and ethics of all of those involved. Some of them believed
that what they were doing was legal and much of it may well have
been. That it was totally immoral and quite unacceptable clearly did
not worry them at all.
Citigroup
Once again Citigroup was at the helm making
arrangements for the largest portion of the scam. Citigroup was less
brazen in its denials when it was prosecuted and this is why it
earned a lesser fine for its complicity than Morgan Chase and Merrill
Lynch. Those defrauded are also pursuing a long list of other banks
for compensation. They too played their part in what happened and
picked up the scraps from the trough.
The
Deceivers Deceived
To some extent the financiers also were
victims. Because they were competitors and because Enron used several
of them to assist in the fraud none of them realised how imminent the
collapse was until too late. They lost money too but much less. Enron
kept its own council and played one against the other.
Structured
Finance and
Conscience
Structured finance was the credible sounding
vehicle which the co-conspirators advising Enron used to make what
they were doing sound legitimate. Somewhere deep down they obviously
knew that what they were doing was wrong. This was never formally
objectified and recognised. It was officially seen as legitimate and
the investment banks protested angrily when they were accused of
complicity in fraud.
This deeper recognition of what they were
doing is seen in the emails and private notes made by individuals as
they interacted with one another and experienced doubts. It was the
undeleted emails that finally gave the lie to public assertions, and
led to large fraud settlements by the banks. It prompted shareholder
litigation against the banks claiming US $25 billion.
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contents
The
Enron Scandal
Enron, the
champion of energy deregulation that grew into one of the nation's
10 largest companies, collapsed yesterday, after a rival backed
out of a deal to buy it and many big trading partners stopped
doing business with it.
Enron, based in
Houston, was widely expected to seek bankruptcy protection. With
$62 billion in assets as of Sept. 30, it would be the biggest
American company ever to go bankrupt, dwarfing the filing by
Texaco in 1987
ENRON'S COLLAPSE: THE
OVERVIEW; ENRON COLLAPSES AS SUITOR CANCELS PLANS FOR MERGER
The New York Times November 29, 2001
Relevance
The first step is to look at the rather
mundane fraud and subsequent collapse at Enron. In broad pattern this
was little different to those documented at WorldCom, other DotCom
companies, and in health care on these web pages. As with the others
effort directed to competition, takeovers, and consolidating markets
led to neglect of the business and excess debt. As competition cut
into profits there was insufficient income to support this debt. This
was followed by the misuse of the customer and attempts to defraud
the system by manipulation the books to hide the problems. When these
failed financial collapse followed.
The real interest lies in the banks and
auditors who designed the fraud and set it up. They made lots of
money from it. If their behaviour elsewhere is any guide they
encouraged, even suggested the fraud claiming it was
legal.
Enron tells us more about what may well have
happened behind the scenes in all the other failed companies. It
exposes the role the financial institutions very probably played in
other frauds. They may have played a similar role in the health care
scandals in the USA. It tells us what they might do in
Australia.
Structured finance was not created for
Enron's benefit. It was a product financiers marketed to those who
needed it. In the market there are always winners and losers who need
this sort of help and will jump at it.
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contents
The Enron
Story
Enron was a power company selling electricity
and gas. It capitalised on the opportunities presented by the
privatisation of these resources in the USA and across the world. It
was one of the products of the late 20th century's embrace
of markets as the primary vehicle for social policy and human
activity. It seized the opportunities presented by
deregulation.
Superficially its story is little different
to those of the DotCom companies, the technology companies and the
health care corporations which built their empires in a competitive
market where survival depended on mergers and takeovers. To
accomplish this Enron traded on the gullibility of the investing
public whom it systematically defrauded.
The collapse
of Houston-based Enron destroyed the retirement savings of
thousands of employees and damaged outside investors and pension
funds across the nation.
Banks Pay $289M in SEC
Charges Officials say J.P. Morgan Chase, Citigroup knew Enron was
trying to mislead investors Associated Press July 29, 2003
Like others in the sector it started small
and grew rapidly by takeovers and mergers raising money from banks
and the share market. It was in the business of corporate competition
and market capitation rather than the business of supplying gas and
power. These services were manipulated, bought and sold in pursuit of
these primary marketplace goals. As in health care the actual
services supplied could not support the expensive baggage of the
marketplace and suffered from their manipulation for market outcomes
rather than customer benefit.
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contents
The
customers
Enron was at the centre of the electricity
scandals in California where companies were accused of exploiting the
state and its citizens.
A giant power station in India became the
subject of dispute with local companies. It was closed and its
rusting remnants are a fitting memorial to Enron.
These disputes give some idea of the nature
of the company. Its ultimate customers, the citizens of California
and India did not gain any benefit from the investment of their
taxes, savings and pensions in Enron.
By the time
Mr. Skilling was named chief executive, the company had become a
lightning rod for political outrage over the electric power crisis
in California, which was experiencing brownouts and price spikes.
Enron's traders bought and sold electric power, and California
utility officials were accusing it and other national power
companies of manipulating that esoteric market to reap windfall
profits at consumers' expense. Enron and other major trading
companies denied the accusation, but there were demands for a
full-scale investigation. ENRON'S
MANY STRANDS: The Company Unravels; Enron Buffed Image to a Shine
Even as It Rotted From Within The New York Times February 10,
2002
We already
know, thanks to a 1997 article in Time, that Bill Clinton nudged
Mack McLarty to lend the administration's weight to an Enron bid
on a $3 billion power-plant project in India, and that the
Democrats received $100,000 from Enron just four days before the
Indian government came through.
The United States of
Enron The New York Times January 19, 2002
Citibank has
since lent Enron large amounts for everything from working capital
to building a power plant in India
ENRON'S COLLAPSE:
LENDERS; 2 EarlyEnron Lenders Didn't See the End Coming The
New York Times January 22, 2002
Mr. Lay
(Enron founder) had several conversations last year with
Donald L. Evans (Bush government), the current commerce
secretary, about Enron's troubled Dabhol power plant project in
India.
The power plant,
which was supported by both the Overseas Private Investment
Corporation and Export-Import Bank loans, has been shut since June
by a dispute between Enron and the government of the state in
which the plant is situated. Vice President Dick Cheney raised the
issue in June with Sonia Gandhi, the leader of India's main
opposition party. Enron
Received Many Loans From U.S. For Foreign Projects During the
1990's The New York Times February 21, 2002
At $2.9
billion, the Dabhol power project on India's west coast was the
biggest foreign investment in the country's history and was
planned to be the largest gas-fired power plant in the world.
Since the collapse of the Enron Corporation, which built it,
Dabhol has become one of India's deepest financial quagmires.
-----------------------------
The Dabhol project, 150 miles south of Bombay on the Arabian Sea,
can generate 2,184 megawatts of power, enough for two million
average homes in the United States. Indian lenders supplied most
of the money to build it and are owed some $1.5 billion. They want
the plant reopened. Foreign creditors, including Citigroup, Bank
of America and ABN Amro, are owed $340 million; they want to force
the project's part-owner and only customer, the Maharashtra state
utility, to buy out its partners in the plant, with the proceeds
to repay creditors.
------------------------------
Enron shut it down in June 2001 when the utility, complaining of
high rates, refused to pay its bills. It has been idle since then,
rusting in the salt air.
Creditors Intensify Their
Fight On Enron-Built Plant in India The New York Times April
23, 2003
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contents
Enron's
wealth
Enron became a giant abstraction, a paper
exercise. Its success in takeovers, its size, and its apparent wealth
made it a powerful force on Wall Street and in the corridors of
power.
That wealth, the takeovers it funded, and its
credibility did not come from power or gas. It came from US citizens.
Private investors and institutional investors like pension funds were
all drawn to the promised profits. Investors money was brought in by
the banks who lent large sums and then hedged these with insurers and
other investors. Government gave large amounts to assist Enron in
exploiting international opportunities. It was a bottomless pit. A
lot went in and very little came out.
This money was locked into the company's
shares. Everyone with shares made money but it was only paper money
until the paper was sold on to someone else. The real money had been
squandered in the takeovers and other market activities.
to
contents
The
fraud
The problem for Enron was that those who had
invested had been promised and expected to get more money from
selling gas and electricity and this was not happening. Like the
majority of other companies in this position it sought to hide the
truth from the public and borrow more money to fill the
hole.
A blatant fraud was concocted to create the
illusion of real money, but those involved did not see it as
fraudulent. They were shielded by the legitimacy given to the
arrangements by the marketplace and by the complicity of Enron's
partners, the banks and the accountants. They designed and
implemented the fraud on Enron's behalf.
Senior staff deluded themselves that things
would improve and that those profits would eventually come. They all
knew that the value of the company lay in the price of its shares.
This is what they had borrowed against and the share price had to be
kept up at all costs.
After the
interview, as Mr. Skilling led the film crew out onto the trading
floor, he was asked what his top priority would be as chief
executive. His answer came lightning-fast: "To get the stock price
up," he said.
Few people
outside Enron knew how important that single goal was.
------------------------
What made Enron's stock price so important was the fact that some
of the company's most important deals with the partnerships run by
Mr. Fastow -- deals that had allowed Enron to keep hundreds of
millions of dollars of potential losses off its books -- were
financed, in effect, with Enron stock. Those transactions could
fall apart if the stock price fell too
far. ENRON'S MANY
STRANDS: The Company Unravels; Enron Buffed Image to a Shine Even
as It Rotted From Within The New York Times February 10, 2002
An elaborate process was set up in order to
hide the losses and the company's dept so that it would appear to be
profitable. The investment banks advising Enron did this for them
making large profits for themselves. The intention was to hide losses
and dept and to show a profit, while at the same time borrowing more
money. This money would not have been forthcoming had investors known
the true state of affairs. From their comments it appears that Enron
and the banks both believed that what they were doing was legal and
acceptable.
to
contents
Comparable
situations
In the late 1990s the imprisonment
of normal children in psychiatric
hospitals was seen by corporate staff as a legitimate and desirable
means of generating profits for psychiatric chains. A complex web of
rationalisations was used to justify this. The same thing happened on
Wall Street. Complex systems, called structured finance were
developed and used to justify deception and the exploitation of the
investing public. The forces and mechanisms were similar.
to
contents
The critical
importance of image
In the health and aged care marketplace the
illusion of success based on high quality care and putting patients
first was critical to credibility and to corporate success. This has
usually been far from the real situation in the hospitals and nursing
homes.
Enron and its staff lived in a similar
schizophrenic world. They maintained the illusion of great success
and polished it until it shone brightly. Staff all identified with
this illusion, even as the company crumbled around them.
With the
huge Raptor losses shuffled away, Enron reported $425 million in
earnings, another banner quarter.
--------------------------------
"We're all dancing here. It's pretty good stuff."
For about 15
minutes, Mr. Skilling laid out the details of Enron's performance.
Nothing was said by any of the Enron executives about the Raptors,
the single most important transaction in the quarter.
--------------------------
(Skilling In response to a question) Enron had been in the
business for 10 years, he said; it analyzed the credit quality of
every trading partner it had -- some 5,000 in total -- every day.
There was no reason for anyone to worry about credit exposures;
Enron knew everything it needed to know.
------------------------
For, unknown to almost everyone there, Enron was secretly
falling apart. Even as the celebrations (party to celebrate
Enron's success) unfolded, accountants and trading experts at
the company's Houston headquarters were desperately working to
contain a financial disaster, one that threatened -- and
ultimately would destroy -- everything Enron had become. A handful
of executives were struggling to sound the alarm, but with Enron's
confidence in its destiny, the warnings went unheeded.
------------------------
It is two completely different tales -- the public image, polished
by its most senior officers, of an innovative powerhouse on the
verge of reshaping the world, and the hidden truth of a company
plagued by secrets, whose executives were struggling to hold it
together. It was like a gleaming ocean liner seemingly powering
forward, its passengers dining in luxury, while, below the
waterline, its sweaty crew frantically bails against the force of
an in-rushing sea.
-------------------------------
And on Feb. 5, scores of special bonus checks were cut for Enron
executives, who would collect tens of millions of dollars because
of the company's strong reported profits.
The mood that
same day was far less jubilant in the nearby offices of Arthur
Andersen, Enron's outside accounting firm. There, David B. Duncan
and Thomas H. Bauer -- two of the firm's lead accountants on the
Enron account -- joined a group of six colleagues in a conference
room for a meeting. Six more Andersen executives were patched in
by speakerphone. ENRON'S
MANY STRANDS: The Company Unravels; Enron Buffed Image to a Shine
Even as It Rotted From Within The New York Times February 10,
2002
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contents
Whistle
Blowers
Attempts by people in the know to draw the
attention of senior management to the problems were ignored or
sidetracked. Jeff Skilling the new CEO got the message about what was
happening when whistle blowers started writing to him. Instead of
dealing with the issues he resigned "for personal reasons" after just
6 months in the job. Mr Lay the chairman and founder took over as CEO
again. He met a second complaint by referring it to the company's
lawyers who assured them that all was in order. The actual deals were
probably legal. Their intention was not.
After 18
years as a tax attorney, Mr. Mintz had been delighted in October
2000, when he had been moved to that floor to work as a lawyer
with Mr. Fastow's finance division. After two days of orientation,
Mr. Mintz set to work, finding files upon files of documents
detailing the transactions of the Fastow partnerships. What he saw
troubled him.
----------------------------------
Mr. Causey was blunt in his advice. "I wouldn't stick my neck
out," he said, according to Mr. Mintz's Congressional testimony.
Mr. Mintz interpreted that as a warning to avoid tangling with Mr.
Skilling over the partnerships, he said.
Eventually, the
three men agreed that Mr. Mintz should send a memo to Mr.
Skilling, diplomatically raising his concerns.
-----------------------------------
Mr. Skilling never responded, according to Mr. Mintz's
testimony.
-------------------------------
On Aug. 14, stunning the market, Jeff Skilling announced he was
resigning after just six months as chief executive, citing
undisclosed personal reasons. He left assuring investors that the
finances of Enron had never been
better.
ENRON'S MANY STRANDS: The
Company Unravels; Enron Buffed Image to a Shine Even as It Rotted
From Within The New York Times February 10, 2002
But this
letter was not some mundane complaint. The writer described in
detail problems with Enron's partnerships, problems that the
letter claimed would cause huge financial upheavals at the company
in as little as a year. "I am incredibly nervous that we will
implode in a wave of accounting scandals," the letter's author
wrote. "Skilling is resigning for 'personal reasons,' but I think
he wasn't having fun, looked down the road and knew this stuff was
unfixable and would rather abandon ship now than resign in shame
in two years."
------------------------------
Two days earlier, Ms. Watkins shared her worries with James A.
Hecker, an Andersen accountant she knew.
-------------------------------
On Oct. 15, Vinson & Elkins (lawyers) delivered its
report saying that no further investigation into the partnerships
was necessary.
ENRON'S MANY STRANDS: The
Company Unravels; Enron Buffed Image to a Shine Even as It Rotted
From Within The New York Times February 10, 2002
to
contents
The collapse
starts
Ultimately economic reality set in and
Enron's share price started to fall. The arrangements made depended
on the share price being maintained at a reasonable level. If it
dropped too far then the arrangements would unravel throwing the
losses back on to Enron's books and this is what happened. Enron was
forced to disclose a US $600 million loss. There was much more still
hidden.
But that
optimistic prospect (at the celebrations) had actually
evaporated, sometime during those weeks, when auditors from
Andersen discovered a mistake they had made, more than a year
earlier, in Enron's books. The way they accounted for the Enron
shares that had been used to finance the Raptor partnerships had
incorrectly added $1 billion to the assets on Enron's balance
sheet. Correcting the mistake would reduce those assets by $1
billion.
By this point,
Mr. Lay and his advisers had also decided to dismantle the Raptor
arrangements. That meant that the investment losses kept at bay
for so long would have to be reported to shareholders.
------------------------------
The next day, Enron announced it was deducting $1 billion from its
third-quarter earnings, producing its first quarterly loss in more
than four years.
-------------------------------
As one thread pulled away, the whole garment
unraveled. ENRON'S MANY
STRANDS: The Company Unravels; Enron Buffed Image to a Shine Even
as It Rotted From Within The New York Times February 10, 2002
to
contents
A Life
Line is offered
In desperation Enron tried to sell itself to
its largest rival Dynegy. The financial institutions who knew what
was happening jumped at this life line. Their analysts raved about
the prospects and Enron's basic soundness as a business. The banks
promised to invest more.
Wall Street
found nothing but good news in Dynegy's $9 billion takeover of the
Enron Corporation yesterday.
Three days after
Dynegy, an energy marketing and trading company based in Houston,
agreed to take over Enron, its giant crosstown rival, Dynegy
executives came to New York to assure investors that the deal
would sharply increase their company's profits. They met a
receptive audience.
--------------------------------
Enron's stock fell almost 80 percent in the weeks leading up to
the deal as Enron said it had overstated its earnings by almost
$600 million since 1997 and forced out several top executives.
--------------------------------
A $1.5 billion cash infusion from Dynegy should restore the
confidence of Enron's business partners and keep Enron stable
until the takeover is complete, he said. To bolster Enron further,
J. P. Morgan Chase and Citigroup may each invest an additional
$250 million, executives close to the deal said.
----------------------------
Mr. Lay said in an interview that Enron had been forced to sell
itself because of "the relentlessness of all the articles and the
shorts." "We realized that we needed to do something to stabilize
the ship," he said. "A good company was being badly
tarnished."
Suitor for Enron Receives
Approval From Wall St. The New York Times November 13, 2001
Enron said
it was in talks with lenders to restructure $9.15 billion in debt
that will come due by the end of 2002. "If the Dynegy deal closed,
that would be the best thing for the banks," said one analyst
following the debt. Circling
the Wagons Around Enron; Risks Too Great To Let Trader Just
Die The New York Times November 22, 2001
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contents
The
Lifeline is
Withdrawn
Enron's share price was falling so rapidly
that it had to renegotiate the sale. It did not disclose its true
situation to Dynegy. When Dynegy realised what this was it walked
away.
With Enron's
shares in free fall as more information comes out about its hidden
debts, J. P. Morgan Chase has been scrambling to maintain the
support of other banks while simultaneously keeping the merger
with Dynegy on track. Chase
and J. P. Morgan's Paper Anniversary; A Year After the Merger,
Rosy Plans Meet Reality The New York Times November 23, 2001
But traders
and Wall Street analysts said the business had steadily
deteriorated amid questions about the depths of Enron's financial
straits. Many traders have curtailed dealings with Enron, and the
executives close to the talks said Dynegy officials scouring
Enron's books were having difficulty this week figuring out how
much cash the trading operation was generating.
------------------------------
Both companies are seeking promises from Enron's bank lenders to
extend debt repayment dates until after the merger closes. And
they are also discussing adding provisions that could limit
Dynegy's ability to back out of the combination.
The two
companies are also working to arrange a cash infusion of $500
million from J. P. Morgan Chase and Citigroup that would provide
Enron with desperately needed new cash.
---------------------------
If Enron were to lose its investment-grade status, it could be
forced to repay or refinance up to $3.9 billion in debt, while
other traders would probably further curtail business. But by late
yesterday, Moody's decided not to issue a statement after
receiving assurances from Enron and Dynegy officials that a
renegotiated deal would be announced soon, the executives said. A
Moody's spokesman declined comment.
------------------------------
Though yesterday's gains halted a four-day slide in Enron shares,
the stock is down 95 percent this year after disclosures of
major losses as well as significant accounting errors that led
Enron to admit it overstated profits during the last five years by
nearly $600 million. Trying
to Restore Confidence in Enron to Salvage a Merger The New
York Times November 28, 2001
According to
the report, officials at Moody's Investors Service -- a major
credit-rating agency -- decided the night of Nov. 7, 2001, to
downgrade Enron's rating, putting it below investment grade.
Within hour
s, Enron and
officials at Citigroup and J. P. Morgan Chase -- which had also
lent the company large sums -- started an aggressive campaign to
forestall the downgrade.
Senate Report Says Rubin Acted Legally in Enron Matter The
New York Times January 3, 2003
But again,
the truth of Enron was far different than its projection of
strength. The company was hemorrhaging cash; it burned through $2
billion in just the week after it signed the merger agreement.
Worse, it could not account for where a large portion of that
money had gone. And it told Dynegy nothing about it.
---------------------------------
Enron owed $690 million, payable within days.
----------------------------------
Mr. Watson of Dynegy was soon on the phone with Mr. Lay, and sent
a follow-up letter documenting their discussion. "We have not been
consulted in a timely manner regarding developments since November
9," the letter said. "We were not briefed in advance on the issues
in your 10-Q. Our team had to make repeated phone calls to your
finance and accounting officials in an attempt to obtain
information. Some of the most significant information in the Q was
never shown to us at all."
ENRON'S MANY STRANDS: The
Company Unravels; Enron Buffed Image to a Shine Even as It Rotted
From Within The New York Times February 10, 2002
Dynegy's
decision to walk away from Enron leaves Citigroup and J. P. Morgan
Chase licking their wounds after an effort to burnish their
reputations as deal makers.
As lead advisers
and lead bankers for Enron, the banks had the chance to build
influence in the merger business. Unlike other Wall Street firms,
Citigroup and J. P. Morgan have large balance sheets and have
boasted of their ability to provide both loans and
advice.
ENRON'S COLLAPSE: THE
LENDERS; Citigroup and J.P. Morgan Are Left With Bruised Egos and
Exposure to Loans The New York Times November 29, 2001
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contents
Bankruptcy
Enron entered bankruptcy in December 2001,
and the long process of unravelling the mess and prosecuting those
responsible started. Enron was one of the first and at the time the
largest of the corporate scandals and bankruptcies. The complexity of
its fraud and the number of parties involved has meant that it has
taken longer that the others to unravel. At the end of 2003 this is
still happening. The actions grind their way through the courts.
Investors seek US $25 billion from the banks whom they are holding
responsible for the fraud.
to
contents
Many
Others Behaved
Similarly?
If the financial service groups were doing
this for Enron, who else were they doing it for. They did not create
structural financing just for Enron.
There can be little doubt that such practices
had become widespread. Even an Enron executive realised this. Dynegy,
the company that wisely backed away from its takeover of Enron was
doing the same things. It too eventually collapsed. It was helped by
Citigroup and Andersen, the same bankers and auditors in the same
way. While Dynegy was fined only US $3 million for its fraud,
Citigroup which set up the Dynegy fraud was fined US $19
million.
Citigroup was marketing its structured
finance packages to all those in need, exploiting the opportunities
presented. The reports show how rapidly successful money making ideas
spread.
"Given the
events at Enron, given the short time period in which it happened,
given the economic disaster, it fundamentally challenges
everything I think about the way companies work," said Allan
Sommer, former vice president for corporate systems at Enron.
"If Enron was able to hide this the way they did, why couldn't
other companies do it, too?"
ENRON'S MANY STRANDS:
The Company Unravels; Enron Buffed Image to a Shine Even as It
Rotted From Within The New York Times February 10, 2002
Investment
bankers at some big Wall Street firms helped create and find
investors for complex partnerships that the Enron Corporation used
to mask its true financial condition. Then they started helping
other companies in the same way.
Bankers at
Citigroup, Credit Suisse First Boston and Deutsche Banc Alex.
Brown found ways for Enron to remove lagging assets from its
balance sheet by selling bonds backed by Enron's stock.
After hatching
that idea, some of those bankers took it on the road and sold it
to other corporations that wanted to make their financial
statements look better, too. ENRON'S
MANY STRANDS: PARTNERSHIPS; Wall Street Found Others Willing to
Copy Enron's Deals The New York Times February 14, 2002
Evidence
disclosed by the committee today also showed that the two banks
engaged in deals with similar characteristics with other
companies. J. P. Morgan Chase told the panel that seven companies
entered into "commodity prepaid forward transactions," including
Columbia Natural Resources Inc. and Occidental Petroleum.
Citigroup said it did prepay deals in 1992 with the Arkla
Exploration Company and in 1993 with the Amerada Hess
Corporation.
Citigroup and Chase
Defend Their Enron Roles The New York Times July 24, 2002
In the
meantime, perhaps the S.E.C. should demand the banks name other
companies that bought Enron-type products. Many more deceptions
might be found. Bankrupt
Thinking: How the Banks Aided Enron's Deception New York Times
August 1, 2003
Dynegy, one
of the nation's largest energy traders, agreed today to pay $3
million to settle accusations that the company had used a series
of off-balance-sheet partnerships to doctor its financial
statements and mislead investors.
The Securities
and Exchange Commission, which settled the civil case, also said
that Dynegy had engaged in so-called round-trip, or phony, trades
and that the company repeatedly had sought to mislead investors
about the success of its trading operations.
----------------------------
For Dynegy, the accusations concern transactions that were
code-named Project Alpha, which the investigators said the company
used to bolster profit and cash flow statements in 2001 with the
help of Arthur Andersen, its former auditor.
----------------------------
Like its peers, Dynegy, which once sought to acquire Enron for $9
billion, has seen its fortunes vanish almost overnight. Its
longtime chairman and chief executive, Charles L. Watson, resigned
in May. Dynegy's shares, which peaked at $47.50 last November,
closed today at $1.20.
---------------------------
The deal, developed by Andersen, cost Dynegy $35.8 million,
according to the S.E.C.
Dynegy to Pay $3 Million
In Settlement With S.E.C. The New York Times September 25,
2002
Citigroup
will also pay $19 million to settle SEC charges that it helped
Dynegy Inc. manipulate its financial statements.
USA: JP Morgan Chase,
Citigroup to Pay in Enron Case Associated Press July 28, 2003
Like other fraudulent practices structured
finance has
been globalised and there is every
indication that Citigroup's advice played a critical role in the
Parmalat
fraud in Italy. That too could not
have occurred without the assistance of structured
finance.
to
contents
The
investigations
The collapse of Enron triggered a multitude
of investigations by state and federal agencies across the USA, as
well as an avalanche of court actions by investors. US senate and
congressional hearings were open to the public.
In addition the US Securities and Exchange
Commission investigated, prosecuted and fined. The department of
justice were involved but it is not clear how many directors will be
prosecuted and put in prison - if any. It is exceptional for real
corporate criminals to be imprisoned. Junior and intermediate
executives pay the costs of pleasing their boses in order to survive
in the company.
Of the conspirators Enron is bankrupt and
Arthur Andersen is gone. Only the banks have the money to pay
compensation. The civil courts are likely to extract the largest
penalties and this will come from the banks unless they can exploit
the legal system to their advantage. Investors are looking for US $25
billion.
2002
"The examiner's report (bankruptcy court) underscores
the complicity of the investment banks in Enron's collapse," said
Andrew Entwistle, a lawyer who represents some of the creditors in
the Enron bankruptcy case, said today. "The Wall Street banks used
structure finance to aid and abet Enron's fraud."
--------------------------
Over the past two years, the examiner said that Enron was
prolific in the use of special purpose entities to raise money,
and that around the time Enron filed for bankruptcy it listed
about $13 billion as debt on the balance sheet but about $25
billion in off-balance-sheet debt, largely because of transactions
like these. Enron
Examiner Raises More Questions The New York Times September
22, 2002
2004
Andrew
Fastow, former Enron Corp financial mastermind, is negotiating a
plea bargain and another former Enron executive is expected to
face charges soon, sources close to the case said yesterday.
------------------------------
Fastow has
pleaded not guilty to 98 counts of fraud. money laundering,
insider trading and falsification of accounting records.
--------------------------------
Former Enron Chairman Kenneth Lay and former chief executive
Jeffrey Skilling have not been charged in the case, although
several mid-level executives have pleaded guilty, agreed to
co-operate or face trial.
----------------------------------
If Fastow cuts a plea deal, it is unclear if he would agree to
cooperate with investigators - - -
---------------------------------
"If I were Skilling or even Lay, I would be sweating bullets over
the possibility of Fastow agreeing to talk," said a lawyer close
to the case - - - . Ex-Enron
financial whiz in plea talks Courier Mail January 9, 2004
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contents
Structured
Finance
Indeed,
structured finance deals are designed to achieve particular
outcomes -- even ones that may seem illogical or misleading -- by
building the transaction through an aggressive and rigorous
reading of the rules.
Morgan Set Up Deal for Enron To Cut Millions From Tax Bill The
New York Times December 7, 2002
The deals
demonstrate the aggressiveness in recent years of major banking
institutions in putting together structured finance deals, which
combine complex investment vehicles with efforts to evade or
maneuver around accounting, tax or other rules.
Inquiry Said To Examine
Citigroup Role In Enron Deal The New York Times December 9,
2002
Doing it
Milton Friedman's way
Structured finance was the ultimate
expression of market theorist, Milton Friedman's dictum that company
executives had a fiduciary duty to do everything they could to
maximise profits for shareholders within the limits of the law. The
banks did exactly that and of course helped themselves along the way.
I have not heard that Friedman said anything about social
responsibility and intention to defraud. The market was supposed to
be self correcting.
In many of
those transactions, the complaint says, senior bank officers
themselves secretly invested in the partnerships, receiving quick,
outsized profits for participating in deals that disguised Enron's
true financial health.
Enron Investors Say Lenders Took Part in Fraud Scheme The New
York Times April 8, 2002, Monday
With the new aggressive competitiveness in
the marketplace and a whatever it takes approach, commercial
contracts and arrangements have been progressively designed to
legally circumvent the intention of laws and regulations. The
ultimate consequences of this were never a consideration. That was
something the ambitious banker would studiously ignore - except
perhaps in cynical emails to his mates.
I have included a number of extracts about
this structured finance debate in this review because they are so
revealing of the corporate position and corporate thinking.
Structured finance has been very successful and nothing has been done
to control it. It will continue to be a problem for market stability
and for investors. It is likely to be used by health care
corporations, possibly by venture capitalists seeking to boost
profits prior to a float such as that planned for Affinity
Health.
The investment banks devised strategies
specifically for tax avoidance and in order to manipulate accounts so
that they would be opaque to investors and analysts alike. The
information, which investors needed in order to know what was
actually happening inside a company was hidden. Banks like Citigroup
would have been active in developing these strategies during the many
years they were involved
in laundering money for the dictators
who pillaged their countries, for the drug barons and for the Russian
Mafia.
Senator Carl
Levin, Democrat of Michigan, called yesterday for increased
penalties against accounting firms that design and sell abusive
tax shelters and announced Congressional hearings next week to
spotlight the firms, their executives and their sales
practices.
-------------------------------
The Congressional investigation into abusive tax shelters arose
out of scrutiny by lawmakers of the failure of Enron and the banks
and law firms that helped that company burnish its financial
results and hide its indebtedness.
---------------------------
Mr. Levin said that the creation and promotion of abusive tax
shelters had not received national attention because the products
are so complex and labyrinthine. Nevertheless, he said the sales
of these shelters are as much a scandal as the accounting frauds
and mutual fund misconduct that have dominated the news
recently.
"This is part of
a bigger picture of the financial community having to clean
house," he said in the interview. "The domination of greed in the
financial community has too often corrupted professional
standards, and people who should be our leaders in honest dealing
too often get down in the muck."
Senator Urges Action on
Tax Shelters The New York Times November 11, 2003
Investment advisers, bankers and lawyers
specialised in these areas. Provided it was legal it was considered
legitimate and even desirable. Those with plenty of money benefited
most from these services and they paid well for them. The morality of
it was never considered seriously.
Over the
past decade or so, an industry has emerged of corporate advisers
that use complex financial instruments to help companies find ways
around the types of safeguards being adopted.
Relying on
transactions involving derivatives and other complex investment
tools, this business -- part of "structured finance"-- has allowed
some corporations to transform financial reports effectively into
marketing material, masking evidence of earnings volatility and
indebtedness. It is the financiers in this business who helped
Enron create its off-the-books partnerships -- vehicles called
special-purpose entities -- which can allow corporations to
pretty up financial reports. A
Higher Standard for Corporate Advice The New York Times
December 23, 2002
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contents
History of Structured
Finance
Structured finance started gradually in the
1970's. With the new whatever it takes and provided it works
philosophy it soon broadened into the lucrative field of deception. A
strange judicial decision in 1994 set a precedent which shielded
financiers from culpability for aiding and abetting fraud. After this
it was open slather for the banks - anything which was legal was
OK.
Structured
finance began to emerge in the late 1970's and quickly became one
of the main routes corporations used to raise cash. In essence,
rather than borrowing simply based on its own credit rating, a
corporation could move an asset into a separate legal entity and
then borrow against that asset's value. Because the separate
entity, known as a special purpose vehicle, was legally distinct
from the corporation, a lender could seize the asset even if the
company sought bankruptcy protection. In other words, banks gained
extra security for their loans, allowing them to make borrowing
less expensive.
The problems
emerged when companies like Enron realized that those separate
legal entities could then be used to buy assets from the company,
allowing it to book income. In essence, an ethereal marketplace
had been created, with "sales" done for the benefit of the company
often without a real buyer on the other side of the table.
After Enron, Bankers
Weigh Clients' Motives The New York Times September 19, 2003
In a
document created at Citigroup as part of a presentation of the
stock-backed partnership structure, one benefit is described as
removing "certain items from 'plain view,' thus enhancing the
appearance of balance sheet. "Among the accounting benefits the
presentation document listed was "minimal footnote disclosure."
But a Citigroup official said the bank had chosen not to market
that structure to its clients.
--------------------------
The bankers who devised partnerships of this type are members
of a small fraternity of creative financiers whose specialty is
known on Wall Street as structured finance. They help companies
finance a variety of risky ventures, like oil pipelines and
Hollywood movies, off their balance sheets.
In certain
industries, including entertainment and energy, off-balance-sheet
partnerships are common.
ENRON'S MANY STRANDS:
PARTNERSHIPS; Wall Street Found Others Willing to Copy Enron's
Deals The New York Times February 14, 2002
Expertise in structured finance soon became a
valuable asset and those who generated large profits from it were
poached with offers they could not refuse. Soon everyone was doing it
and no one was looking at the social implications. The game was to
make loans so that the companies could go further into debt without
affecting their credit rating.
In 1998,
when Donaldson, Lufkin & Jenrette wanted to become a bigger
player in structured finance, it raided Citibank, hiring away a
team of about 10 bankers led by Laurence J. Nath and James E.
Fields. At Donaldson, which was later acquired by Credit Suisse,
Mr. Nath and Mr. Fields set to work on the Marlin Water Trust, a
partnership Enron wanted to create to hold its water utility
assets.
--------------------------------
The structure for that private placement borrowed from a deal
Citibank had done for Enron in 1997, people close to it
said. Devised by Elliott Conway, a structured finance banker at
Citibank, that deal, known as Nighthawk, was financed by banks,
not the sale of bonds. So it was not rated by the major credit
agencies, Standard & Poor's and Moody's Investor
Service. ENRON'S MANY
STRANDS: PARTNERSHIPS; Wall Street Found Others Willing to Copy
Enron's Deals The New York Times February 14, 2002
With multiple competing banks pushing up the
ante it soon became the way things were done. Because the deals were
secured using company stock the banks set trigger levels to protect
themselves. Should the share price fall below a certain level the
trigger would activate. This was big money.
That trigger
was a feature of a $1.4 billion bond sale that Donaldson managed
for the Osprey Trust, an Enron partnership, in late 1999. That
transaction effectively refinanced the smaller Nighthawk deal that
Citigroup had done for Enron the year before. Of the money raised,
$578 million went to buy out Nighthawk's equity interest in
Osprey, people close to that deal said.
In that case,
the stock-price trigger was set at $28. If Enron's stock had been
at $28 or less for three days when the company's debt was
downgraded to junk status, the company had to supplement Osprey's
assets with stock.
The stock-price
triggers were set at different levels in the two Marlin
partnerships for which Credit Suisse First Boston and the Deutsche
Bank unit underwrote bonds. All told, the banks raised almost $4
billion for those three partnerships.
ENRON'S MANY STRANDS:
PARTNERSHIPS; Wall Street Found Others Willing to Copy Enron's
Deals The New York Times February 14, 2
The companies saw nothing wrong in setting
out to deceive investors. The arrangements had all been vetted by
lawyers. They were legal and therefore acceptable.
"Enron was
following the letter of the law in nearly all of its deals," said
Frank Partnoy, a finance professor at University of San Diego Law
School and a former derivatives trader. "It is fair to say that
the most serious allegations of criminal wrongdoing at Enron had
almost nothing to do with the company's collapse. Instead, it was
the type of transaction that is still
legal." A Higher Standard
for Corporate Advice The New York Times December 23, 2002
The banks
have responded that those transactions -- which critics say
allowed Enron to disguise loans as trading liabilities -- properly
followed accounting rules, and were the workaday product of a
widely used business known as structured finance.
Citigroup Is Linked to a
Deal That Let Enron Skirt Rules The New York Times July 23,
2002
"If you
know," said Stephen Cutler, the S.E.C.'s enforcement director,
that "you are helping a company mislead its investors, then you
are in violation of securities laws."
That is not the
way financial institutions have seen it in the past. "Our view
historically," wrote Marc J. Shapiro, vice chairman of J. P.
Morgan Chase in a letter to Robert M. Morgenthau, the Manhattan
district attorney, "was that our clients and their accountants
were responsible for the clients' proper accounting and disclosure
of the transactions." Now, he said, his bank will "hold ourselves
to a higher standard."
A Warning Shot to
Banks On Role in Others' Fraud The New York Times July 29,
2003
Not long
ago, as Mr. Shapiro remarked in an interview yesterday, "All the
people who won awards as the best chief financial officers were
people who arranged transactions that removed debt from their
balance sheets." Now, he added: "That is seen as bad. A year ago
it was seen as good. It is a black and white
difference."
But Mr. Shapiro
does not think that difference will extend to court. He told
analysts that Chase had no legal liability because it believed --
and still believes -- that Enron's accounting for the transactions
was proper. Beautifying
Balance Sheets Was Routine. Is It Now a Crime? The New York
Times July 26, 2002
Deryck C.
Maughan, a vice chairman who heads Citigroup's international
operations, said they thought that the company's biggest
Enron-related problem was that the arcane financing techniques
Citigroup supplied to Enron were hard to understand and therefore
looked suspicious.
"It's hard to
reduce structured finance to a sound bite," Sir Deryck said,
referring to the specialized area of finance that is behind much
of Enron's opaque balance sheet
Gerald R. Ford,
the former president, who is a special adviser to Citigroup's
board and a friend of Mr. Weill, said: "I think it's a perception
problem. Having served 25 years in Congress, I know what Congress
does when they have a chance to exploit something that looks bad
on the surface." In Two
Days, Citigroup Chief Traded Halo For Headaches The New York
Times July 27, 2002
The banks
maintain that they engaged in no wrongdoing and that they cannot
be held responsible if a client inappropriately accounted for a
transaction.
Underwriting
Fraud The New York Times August 25, 2002
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contents
Morality
What was considered legitimate and desirable
under structured finance was a long way from what had been considered
legitimate, and had been enshrined in law and practice after the so
called New Deal in the USA in the 1930s. The changes at that time
were designed to remove conflicts of interest and to tightly control
any tendency to misrepresent or deceive.
The free market philosophy saw these as
obstructions to legitimate business and as unreasonably restricting
market activity. These restraints were removed. Conflicts of interest
were institutionalised by the creation of giant megacorps. Market
theorists, working in behind closed doors think tanks, (no doubt
aided by massive campaign donations and intense lobbying) won the day
over common sense and the community's sense of right and
wrong.
Restraints became dependant on self
regulation within companies using compliance structures, and on
bodies controlled and staffed by the marketplace - the fox guarding
the henhouse. An article in the New York Times by Martin Mayer,
author of "The Bankers" and "The Fed," addressed the issues
well.
Deception is
invited by "structured finance," in which a bank's loans are
broken into different marketable assets -- each with its own
risks, repayment schedules, accounting treatment, tax
consequences, even names. Organizing these arrangements, as
Citibank and J.P. Morgan Chase did for Enron, facilitates other
deceptions. If an institution is both a bank lending its own
resources and a broker selling its loans to the public -- and also
includes an insurance company with premium income to invest -- its
senior officers and its favorite clients are forever under the
temptation once felt by the railway conductor who took in cash
fares.
It wasn't
always this way, of course. Neither the dot-com nor the telecom
disasters could have occurred in a world where basic financing for
small and ambitious companies had to be funneled through the
lending officers of banks, who were trained to ask boring
questions about how the investment of the money they lent would
pay back the loan and to follow up at regular intervals.
-----------------------------
Faith in the mantras of financial engineering bred contempt
for the New Deal legislation, which was designed to ensure that
publicly traded companies and the financial institutions that
dealt with them would have to tell investors what and how their
businesses were doing. Legal walls were built to separate
functions -- to make commercial banks specialize in short-term
loans and investment banks in long-term ones, to insure saving
deposits and to leave equity investments at risk -- in the hopes
of enforcing clarity.
As the world
grew more complicated, these separations became increasingly
expensive. Regulators collaborated in finding ways around the law,
and eventually Congress removed major restraints that had
forbidden firms to mingle apples and oranges and to move important
activities "off the balance sheet." Over the counter and behind
closed doors, banks and investment banks "shifted their risks" by
selling complicated partnerships and derivative instruments to
mutual funds, pension funds and especially insurance
companies.
-----------------------------
Most of these scandalous activities were legal, and many still
are. (Loans to insiders are now prohibited.) The vice in each is
that only the insiders know what is happening. The guiding
principle of the New Deal legislation was that sunshine is the
best disinfectant, and that's still true. Chanting the mantra that
big boys can take care of themselves, Congress in the 1980's and
1990's made it possible for consenting adults to do financially
awful things behind closed doors. Banking's
Future Lies in its Past The New York Times August 25, 2002
to
contents
The
law
The financiers also hid behind a 1994 legal
ruling which protected them from prosecution if they had not
themselves been part of the fraud. The judges ruling invited
legislators to fix this problem, but the law makers did not do so.
Even after the Enron debacle they have done little more than tinker
with the law. This is not surprising when most of their campaign
finance comes from corporate donors.
In the
decision, handed down in Central Bank of Denver v. First
Interstate Bank of Denver, the high court virtually invited
Congress to rewrite securities laws if lawmakers did indeed intend
for such suits to be brought. Not only did Congress decline to do
so, but in 1995 it also adopted legislation making civil
securities fraud suits more difficult to bring.
As a result,
experts said, advisers have faced little risk in helping clients
achieve the accounting results they wanted through structured
finance.
"These
gatekeepers were once subject to high litigation risk, but as you
went through the 1990's, the deterrence that may have kept them
honest just started to disappear," said John C. Coffee Jr., a
professor at Columbia University Law School. "Not only had the
legal risk gone down, the benefits of acquiescing to the client
went up. And when costs go down and benefits go up, you're going
to see the output increase."
A Higher Standard for
Corporate Advice The New York Times December 23, 2002
The US Securities and Exchange Commission
(SEC) did not accept the judges 1994 ruling and fined the banks. They
may well not have won this if contested in a court of law, but the
public climate was such that the banks settled willingly.
It was a state judge who did what the
legislature had failed to do. She interpreted the 1994 high court
ruling more narrowly and allowed Enron creditors to sue the banks for
restitution because of their complicity in the fraud which caused
Enron's collapse. What will happen when this comes to trial if it is
not settled first remains to be seen.
Ultimately,
it has appeared that even with changes in the rules, corporate
advisers could be comfortable in the knowledge that their
potential liability, both criminal and civil, was limited if their
financial engineering deceived investors.
Now, with
Judge Harmon's ruling, the ground has shifted, and such business
is potentially fraught with
peril.
A Higher Standard for
Corporate Advice The New York Times December 23, 2002
In a
decision that broke new legal ground, a federal judge in Houston
ruled yesterday that banks, law firms and investment houses that
helped construct Enron's off-the-books partnerships could be sued
by investors seeking to regain billions of dollars they lost when
the company collapsed.
-----------------------------
The judge in the case, Melinda Harmon, ruled that the defendants
could be construed as having "substantial participation" in the
preparation of false statements about Enron's finances because the
evidence supported claims that they acted with an intent to
deceive. That was a critical element of the decision because the
Supreme Court has ruled that corporate advisers cannot be held
liable for "aiding and abetting" a securities fraud, only for
participation in it.
--------------------------
For the defendants, the ruling seemed a rebuke to one of their
primary lines of defense: that the financial institutions and
legal firms being accused of fraud were actually engaging in the
normal practices of their business, like selling a security or
making an investment.
But, in
unusually strong language, Judge Harmon ruled that the actions of
the defendants, when viewed in their totality, could support a
claim that they had crossed the line from normal business into
practices undertaken with the intent to defraud.
"These
transactions were not isolated, one-of-a-kind instances of
violations of the statutes," Judge Harmon wrote, "but deliberate,
repeated actions with shared characteristics that were part of an
alleged common scheme through which defendants all profited
handsomely." Ruling
Leaves Most Players Exposed to Suits on Enron The New York
Times December 21, 2002
Ultimately,
Judge Harmon ruled that corporate advisers like Citigroup, J. P.
Morgan Chase and Merrill Lynch could be deemed primary
participants in a fraud if they constructed corporate transactions
with the knowledge that such deals would mislead investors about
the company's finances. That ruling both accepted -- then
sidestepped -- the Supreme Court's 1994 holding that advisers
could not be liable for "aiding and abetting" a corporation in a
securities fraud. A
Higher Standard for Corporate Advice The New York Times
December 23, 2002
to contents
In a
Nutshell
Whatever the legal fine hairs neither the
facts nor the morality are in dispute, Citigroup and other banks
organised and implemented a number of highly complex and devious
strategies in order to allow Enron to deceive investors and defraud
them.
The banks knew what the purpose of the
transactions was and they connived in this. They were richly rewarded
for doing so. Whether the banks marketed the structured products to
Enron and others is not clear although the circumstances suggest that
they did. It is also not known whether the banks assured Enron that
the actual deals were legal but it is likely they did. Enron's own
lawyers accepted this.
It is clear
that both banks knew quite well that they were entering into
transactions with Enron that were in reality loans for hundreds of
millions, and even billions, of dollars. But they were structured
in convoluted ways to allow Enron to report them not as loans --
which would have shown the company to be deeper in debt than it
wanted to appear -- but as other kinds of liabilities related to
its trading activities. A
Warning Shot to Banks On Role in Others' Fraud The New York
Times July 29, 2003
It may well be that bankers, analysts and
Enron had all turned a convenient blind eye to the issue of
intention. They hid behind plausible business phrases like
"balance sheet management" and "special-purpose
entities". That they were deceiving others and defrauding
them was clearly not a serious consideration at a senior level. One
wonders if it even crossed their minds. Some staff expressed their
concerns in private.
In some of
the transactions at issue, it was at least arguable that Enron's
accounting was permissible under generally accepted accounting
principles, particularly if one looked at each separate
transaction rather than at the entire structure of related
transactions. The banks knew what was going on, but they comforted
themselves by saying that was not their business.
A Warning Shot to Banks
On Role in Others' Fraud The New York Times July 29,
2003
It remains to be seen whether any of the
companies will attempt to contest the issue in a court of law. The
fallout for them in terms of credibility even if they succeed may be
enough to deter them. If the banks win then the public may force the
government to legislate effectively and this is something neither
Wall Street nor the market theorists in government want to
do.
The
preliminary report suggested that Enron, with the help of its
former auditor, Arthur Andersen, violated accounting rules by
creating a series of complicated financial transactions that often
treated loans as sales that pumped up Enron's reported revenue,
profit and cash-flow.
The report also
found that Enron viewed many of these transactions as "balance
sheet management," that they were not always arms-length
transactions, and that many of the company's debts were not
disclosed to investors.
According to
legal experts and people involved in the bankruptcy case, these
findings are the latest examples of how complicated
structured-finance transactions may have allowed Enron to
obfuscate its financial condition and possibly defraud investors
of billions of dollars.
-----------------------------
"The examiner's report (bankruptcy court) underscores the
complicity of the investment banks in Enron's collapse," said
Andrew Entwistle, a lawyer who represents some of the creditors in
the Enron bankruptcy case, said today. "The Wall Street banks used
structure finance to aid and abet Enron's fraud."
------------------------------
In the report, the examiner suggested that many of the deals were
a sham. He said that Enron often set up the partnership and backed
it with Enron's credit to help it obtain financing. Enron then
sold the partnership an asset but often retained control of the
asset and essentially made interest payments back to the
partnership as part of the deal. Most of the time, the examiner
said, the assets were difficult to sell or did not have sufficient
cash flow to cover the partnership's purchase price.
Enron Examiner Raises
More Questions The New York Times September 22, 2002
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contents
Enron's
Structured Finance
Examples of structured financial deals used
to help Enron illustrate the problems and criminality inherent in
these structured arrangements and the thinking behind
them.
Some Enron
frauds were remarkably complicated, masterpieces of sophisticated
financial engineering. When investigators try to explain them,
they produce charts that would make Rube Goldberg proud.
Bankrupt Thinking: How
the Banks Aided Enron's Deception New York Times August 1,
2003
Partnership
Deals
The partnership schemes engineered for Enron
were simply a ruse to hide losses and report profits that were not
real. The partnerships were separate companies set up by senior Enron
staff and funded independently but guaranteed by Enron stock. They
commenced in 1997 when Enron suffered a major loss and was short of
cash.
The bankers
worked with Enron to arrange the partnerships, which made the
company appear more profitable than it was. Then the Wall Street
firms sold big investors several billion dollars worth of bonds
issued by the partnerships -- and earned tens of millions in
fees.
What was unusual
about these bonds is that they were backed by Enron's stock, even
though the partnerships were not owned by Enron, - - - -
.
ENRON'S MANY STRANDS:
PARTNERSHIPS; Wall Street Found Others Willing to Copy Enron's
Deals The New York Times February 14, 2002
The
allegations spelled out in the lawsuit describe an unusually close
relationship between Enron and its financial backers, which, if
true, could create enormous liability for the banks and other
financial institutions in the company's collapse.
As portrayed in
the lawsuit, the debacle at Enron began in 1997, when the company
experienced a severe financial shock because of a $400 million
loss in a British natural gas transaction and a $100 million
charge relating to deals involving a fuel additive. By autumn of
that year, Enron stock lost one-third of its value.
--------------------------------
The solution was found in the partnerships, managed by Andrew S.
Fastow, the company's chief financial officer. With them, Enron
was able to move assets and debt off its books, and engage in
rapid transactions that allowed the company to boost its reported
profitability.
-------------------------------
As a result, the complaint says, LJM2 and related partnerships
served only as vehicles to accommodate the defendants in the
manipulation, falsification and artificial inflation of Enron's
reported financial results, while enriching the LJM2 investors.
Enron Investors Say
Lenders Took Part in Fraud Scheme The New York Times April 8,
2002, Monday
In the
report to the bankruptcy court in New York which appointed him
examiner in the case, Neal Batson detailed six transactions in
which Enron created partnerships - - - .
----------------------------
Yet he said that between 1997 and 2001, Enron raised $1.4 billion
in cash through such deals.
Enron Examiner Raises
More Questions The New York Times September 22, 2002
In one
complicated set of transactions mentioned in the report, for
instance, Enron set up a partnership called Hawaii 125-0. Enron
sold the partnership some of its assets in NewPower Holdings,
including common stock. Enron agreed to pay Hawaii interest and
fees to hedge the stock so that Enron could book $370 million in
income in 2000, about 14 percent of its profits that
year. Enron Examiner
Raises More
Questions The New York Times September 22, 2002
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contents
Prepay
schemes :: Loans hidden in sales
The banks set up companies, many of them off
shore. Enron then sold them gas, oil or other products to be
delivered in the distant future but for which they paid immediately.
There was never any intention to actually deliver the gas. It was
simply a loan arranged so that Enron could declare it as a profit
instead of a debt. The company later sold the gas back to Enron so
that the loan was repaid.
In the
four years before Enron's bankruptcy, J. P. Morgan Chase engaged
in seven prepays that lent $2.6 billion to the company, while
Citigroup lent it a total of $3.8 billion over two and a half
years.
2 Banks Settle
Accusations They Aided in Enron Fraud The New York Times July
29, 2003
The key,
according to committee investigators, was to structure
transactions that appeared to be trades in which both Enron and
the banks took risks and stood to make gains. The basic trade was
one in which money was paid by the banks upfront in exchange for
the delivery of a commodity, particularly natural gas and oil, at
a future date.
But instead
investigators allege that the "trades" were conducted through
offshore entities controlled by the banks, and that the purpose
was to funnel loans to Enron that could be disguised as trading
revenues.Structural
deception' by banks in Enron case Financial Times
(London,England) July 24, 2002
The
transactions involved a web of corporations -- several of them
based in the Channel Islands -- including Mahonia and Stoneville
Aegean Ltd. that at first blush seem independent but whose records
show are linked companies with ties to Morgan.
The companies
traded gas in a circle, with Enron both being required to deliver
the commodity on a future date and being owed the same amount of
gas for delivery on the same date at the same price.
The transactions
involving Citigroup and Delta, which is based in the Cayman
Islands, functioned in a similar way, according to a lawsuit filed
by Enron shareholders. According to that suit, Citigroup used
Delta to carry out $2.4 billion of financial "swaps" with Enron
that "perfectly replicated loans and were, in fact, loans," but
were not disclosed on Enron's books. Enron
Criminal Investigation Is Said toExpand to Bankers The New
York Times June 26, 2002
Technically,
experts have said, such transactions -- known as prepays -- follow
the requirements of the accounting rules, even if ultimately they
can disguise the total debt held by a
corporation.
Citigroup Is Linked to a
Deal That Let Enron Skirt Rules The New York Times July 23,
2002
At issue are
more than $8 billion in so-called prepay deals the banks did with
Enron, in which the company received money upfront in exchange for
agreeing to deliver commodities at a later date. These deals
involved supposedly independent third parties that the money
flowed through; one entity, Mahonia, was used in deals with J. P.
Morgan Chase, while an entity called Delta Energy was used in
Citigroup deals.
---------------------------------
The banks said the dealings were commonplace and conformed with
proper accounting. "Prepaid forward contracts have been used for
many years and are widely recognized as an entirely proper tool,"
Jeffrey Dellapina, a J. P. Morgan Chase managing director, said in
comments echoed by Citigroup officials. Both banks also denied
that they controlled Mahonia or
Delta.
Citigroup and Chase
Defend Their Enron Roles The New York Times July 24, 2002
to
contents
Other
Loans became
profits
The permutations on the schemes were endless
which is why it took so long to unravel. Sometimes they kept it to a
simpler fraud.
And then
there is Project Nahanni, apparently named for a Canadian national
park known for the wolves that live there. In that relatively
simple deal, Enron borrowed money from Citigroup to buy Treasury
bills. Within days, it sold the Treasury bills and paid the money
back to Citi.
Why bother?
Citigroup told Enron that it could report the $500 million it
received from selling the bills as operating cash flow. It did
just that, reassuring investors and credit rating agencies that
its profits were genuine.
Bankrupt Thinking: How
the Banks Aided Enron's Deception New York Times August 1,
2003
to
contents
Tax
Evasion
Many of the structured deals were arranged to
minimise or avoid tax. Morgan Chase made a lot of money for Enron by
doing this.
J. P. Morgan
Chase engineered a complex transaction for Enron last year to
allow the company to obtain hundreds of millions of dollars in tax
deductions that normally would not have been permitted, people
involved in the inquiry into the company's finances said
yesterday.
The transaction
-- known internally at J. P. Morgan as Slapshot -- was put
together by the company's structured finance group. It involved
entities in Nova Scotia, Quebec City and the United States and was
intended to give Enron enormous financial benefits through a
reduction of its tax obligation in Canada, where it owned a paper
mill.
---------------------------------
In the case of Slapshot, lawyers approved of the deal before it
was executed. "The structure was reviewed with two Canadian law
firms and found to be legal and appropriate under Canadian law,"
said Kristin Lemkau, a spokeswoman for J. P. Morgan.
--------------------------------------
Throughout the transaction, obligation after obligation was
designed to cancel out. In the end, the only pieces left standing
would be the interest payments from C.P.S. to Hansen of $440
million. In other words, the $375 million in original principal
was converted into interest through a loan where ultimately very
little real money changed hands.
The benefit to
Enron was twofold. One, the $375 million in debt was moved off its
balance sheet and into C.P.S. Two, it received a share of the
economic benefit from the transaction through its ownership of
C.P.S. This entailed yet another special-purpose entity, called
Sundance, which was jointly owned by Enron and Citigroup.
Morgan Set Up Deal for
Enron To Cut Millions From Tax Bill The New York Times
December 7, 2002
to
contents
The
Banks and
Enron
Enron
lied to investors about its financial condition, but it could not
have done so without active help from its friendly bankers. And
that help constituted fraud. A
Warning Shot to Banks On Role in Others' Fraud The New York
Times July 29, 2003
Senator
Dorgan said. "But investment banks were enabling the Enron
partnerships and participating in them, and we need to understand
what happened."
Dozens of Wall
Street firms were involved in financing Enron's rapid rise,
selling its stocks and bonds, arranging acquisitions and, later,
putting together the off-the-book deals that masked Enron's true
financial condition. In doing so, these firms earned tens of
millions of dollars in fees and put billions of dollars of Enron
securities into the market.
--------------------------
They helped Enron on the way up and on the way down. As
Enron's downward spiral began, Wall Street firms -- among them
Credit Suisse First Boston, Citigroup and Deutsche Banc Alex.
Brown -- helped finance Enron's side partnerships that removed
lagging assets from the company's balance sheet. In these deals,
the banks arranged partnerships that allowed Enron to appear more
profitable than it actually was and then sold several billions of
dollars in bonds backed by Enron
stock.
Congress's Scrutiny
Shifts to Wall Street And Its Enron Role The New York Times
February 19, 2002
How Many
Banks?
J. P. Morgan Chase and Citigroup were the
main banks involved. Merrill Lynch & Co was also involved and it
was the first to reach a settlement. There were undoubtedly many
lesser players as is illustrated by the number included in investor
fraud actions.
The firms
named in the lawsuit are J. P. Morgan Chase, Citigroup, Credit
Suisse First Boston, Canadian Imperial Bank of Commerce, Merrill
Lynch, Bank of America, Barclays Bank, Deutsche Bank and Lehman
Brothers.
-------------------------
"Instead of protecting the public from the Enron fraud, the
bankers knowingly chose to become partners in deceit," said
William S. Lerach, senior partner at Milberg Weiss Bershad Hynes
& Lerach, the lead lawyer in the suit. "They were not only
willing participants but profiteers."
Enron Investors Say
Lenders Took Part in Fraud Scheme The New York Times April 8,
2002, Monday
It is interesting that in the Enron scandal
and the furore over structured finance the vast majority of articles
refer to Citigroup rather than the specific subsidiaries involved.
Citibank is hardly mentioned. When writing about the earlier
transactions they don't refer to Citicorp or to Citibank and one is
left to assume that the Citigroup referred to as so close to Enron in
the early years was John Reed's Citicorp and Citibank. In contrast
the articles on the WorldCom and other scandals all target Salomon
Smith Barney (now Citigroup Global Markets) much more
specifically.
Only an occasional article refers to Salomon
Smith Barney but they reveal that it was undoubtedly a major player
in the Enron scandal. It is the probable reason why Michael A.
Carpenter, once a possible successor to Weill was fired by
Weill.
Shares of
Citigroup, the nation's largest financial services company, fell
25 percent in two days early last week, as senators released
information and held hearings about whether bankers at Salomon and
J. P. Morgan Chase helped Enron conceal debt. Shares of Citigroup
have rebounded but remain down 36 percent so far this year.
-----------------------------------
Though no one questions the profitability of the investment bank,
competitors and former colleagues are wondering if Mr. Carpenter
did enough to track the bankers involved in the Enron and WorldCom
financings.
A Strategist and
Cost-Cutter Seeks to Steer Citigroup Through Scandals The New
York Times August 2, 2002
Having
helped transform Salomon Smith Barney into a profitable investment
bank, Michael A. Carpenter, left, has been trying to limit damage
to Salomon and its parent, Citigroup, ever since Enron's collapse.
Mr. Carpenter has faced questions about Salomon's role in
financing Enron and WorldCom.
BUSINESS DIGEST
Trying to Steer Through Scandals The New York Times August 2, 2002
The Salomon
unit is under investigation for its role in financing the failed
Enron Corporation, WorldCom and several other troubled
telecommunications companies.
Salmon Smith Barney
Chief Ousted in Citigroup Shuffle The New York Times September
9, 2002, Monday
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contents
Loyal
Supporters
Citigroup and Morgan Chase have been good
friends to and very close to Enron from its early days. They made
loans at strategic moments to protect it from takeovers, and then
helped build its empire. Note that the report uses the word Citigroup
for the company in the 1980s. It would have been Citicorp (Citibank)
or Salomon Smith Barney at that time. The report below suggest that
it was Citibank which formed the initial relationship but perhaps
Salomon Smith Barney which did the structured finace later. A report
I quoted earlier indicates that the first structured deals were made
in 1997 by Citibank before the merger to form Citigroup. Other
reports quoted later indicates these deals started in 1993 but also
that Salomon Smith Barney and Carpenter were involved in some deals.
The relative culpability of Salomon Smith Barney and Citibank in the
structured finance and Enron scandal remains unclear
Enron's
modern era dates back to the mid-1980's, and throughout that
period Citigroup and J. P. Morgan Chase have been there to
lend with both hands.
-------------------------
Both were also around in the early days of Kenneth L. Lay's tenure
as Enron's chief executive: J. P. Morgan Chase helped to finance
the merger that created Enron in 1985 and Citigroup helped
Mr. Lay pay off a corporate raider a year later.
-----------------------------
Citigroup's bond was forged in 1986, when it helped the company
fend off Irwin Jacobs, an aggressive Minnesota investor who was
accumulating a big stake in Enron stock. Another financial
company, Leucadia National, had bought a smaller stake.
Enron had been
formed in mid-1985 by the merger of Houston Natural Gas and
InterNorth. Among the banks providing financing for the deal was
one that later became part of what is now J. P. Morgan Chase.
------------------------------------
To help pay for the shares it bought, Enron borrowed more than
$100 million from Citibank, now a unit of Citigroup, and
another bank. The assistance that Citibank gave Mr. Lay
then formed the cornerstone of the complex relationship between
Enron and Citigroup in recent times. ENRON'S
COLLAPSE: LENDERS; 2 EarlyEnron Lenders Didn't See the End Coming
The New York Times January 22, 2002
The banks did many billions of dollars of
business for Enron and arranged many loans. They advised the company
on its businesses and its deals. When Enron wanted to increase its
income or remove its losses from the balance sheet the companies
advised and helped them do so, making tidy profits along the
way.
The benefits
for the banks were obvious as well. Investigators say that
Citigroup, for instance, earned about Dollars 167m between 1997
and 2001 through its work for Enron.
Structural deception' by
banks in Enron case Financial Times (London,England) July 24,
2002,
Major New
York banks, meanwhile, engaged in circular trades with Enron that
allowed the company to obtain billions of dollars in loans without
disclosing them to shareholders, according to trading records and
court documents. Enron
Criminal Investigation Is Said toExpand to Bankers The New
York Times June 26, 2002
In the six
years before Enron filed for bankruptcy protection, major banks
helped the company camouflage more than $8 billion in financing
and increase its cash flow through deals permitting Enron to raise
money without listing it as loans on financial statements, Senate
investigators have found.
---------------------------------
The panel's investigation has found that J. P. Morgan Chase, in 12
deals, did more than $3.7 billion of the questionable transactions
with Enron from 1992 to 2001, and that Citigroup did 14 deals
valued at $4.8 billion from 1993 to
2001.
Senate Hearing Set on
Enron's Bankers The New York Times July 22, 2002
Senior
credit officers of Citigroup misrepresented the full nature of a
1999 transaction with Enron in the records of the deal so that the
energy company could ignore accounting requirements and hide its
true financial condition, according to internal bank documents and
government investigators.
The records and
interviews with investigators demonstrate for the first time that
bankers intentionally manipulated the written record of their
dealings with Enron to allow the company to improperly avoid the
requirements of accounting rules and the law, thus keeping $125
million in debt off its books.
Citigroup Is Linked to a
Deal That Let Enron Skirt Rules The New York Times July 23,
2002
A summary of
the investigation released by the committee (US government) was
explicit: "Internal communications show that the financial
institutions not only understood that Enron intended to engage in
this deceptive accounting, they actively aided Enron in return for
fees and favourable considerations in other business
dealings."
Structural deception' by
banks in Enron case Financial Times (London,England) July 24,
2002,
Citigroup
and J. P. Morgan have been accused by members of Congress and a
variety of lawyers of helping Enron disguise billions of dollars
worth of debt by creating special-purpose entities offshore with
names like Mahonia, which was based in the Isle of Jersey in the
English Channel, and Delta, based in the Cayman Islands. Senator
Carl Levin, Democrat from Michigan, called the deals "phony
transactions."
Lawyer Proves a Thorn
for Enron's Partners The New York Times September 21, 2002
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contents
Settling the
Allegations
Three of the banks, Merrill Lynch, Citigroup
and JP Morgan Chase settled the fraud actions taken by the SEC but
without admitting fault. Investors have now targeted the companies.
They are looking for US $25 billion.
Merrill
Lynch & Company said yesterday that it had agreed to pay $80
million to settle a regulatory investigation into two transactions
with Enron, the failed energy trader.
------------------------
"We're happy we can put this behind us," a Merrill spokesman said.
Merrill to Pay $80
Million to Settle Enron Inquiry The New York Times February
21, 2003
JP Morgan
Chase and Citigroup agreed Monday to pay a total of nearly $300
million for their roles in Enron's manipulation of its financial
statements.
JP Morgan will
pay $135 million and Citigroup will pay $101 million as part of
the settlement, the Securities and Exchange Commission said. The
banks also agreed to pay $50 million total to the state and the
city to settle a similar charges.
-------------------------------
In addition to the federal payments, the two banks agreed to pay
$50 million total to the state and the city to settle a similar
investigation, the Manhattan district attorney's office announced
shortly after. JP
Morgan Chase, Citigroup to Pay in Enron Case Associated Press
July 28, 2003
JP Morgan
and Citigroup are among 11 banks and brokerages negotiating a
possible settlement with Enron shareholders seeking at least $25
billion in a consolidation of lawsuits in Houston.
USA: JP Morgan Chase,
Citigroup to Pay in Enron Case Associated Press July 28, 2003
Reading Mr.
Batson's voluminous report (for bankruptcy court) makes it
clear that the banks were not "looking the other way" as Enron
misled investors. They were instead dreaming up and selling
financial products to allow Enron to mislead. Some of those
products appeared to squirm within accounting rules, but even then
the banks found themselves engaging in practices that they knew
should invalidate the accounting.
It was a
profitable business. As one J. P. Morgan executive put it, Enron
was "enticed to pay a premium" over normal interest rates to
obtain money in ways that would be, in Mr. Batson's words,
"inscrutable to rating agencies, creditors and other users of
Enron's financial statements."
Bankrupt Thinking:
How the Banks Aided Enron's Deception New York Times August 1,
2003
I have examined the responses of the
marketplace, the financiers, and the international commercial
community to the Enron and other scandals on another
page dealing with these issues.
Denial and rationalisation is market wide. The response
of Australian business to similar
massive frauds is described on the main Citigroup page.
to
contents
A Long History
Together
The links between the banks and Enron go back
a long way. "Citigroup" established its close relationship early when
the company was still small making loans at critical points in order
to support its founder Kenneth L. Lay. As time went on Enron brought
in other banks to compete and even used strong arm tactics exerting
pressure on banks to do what it wanted. It played one against the
other. Until right at the end none of them had the whole picture
although Citigroup was probably more aware. It took steps to protect
itself by hedging its loans to Enron. To others Enron must have
seemed a safe bet. Those who helped spread the risks ended by losing
the money.
As it
happened, the banks that aided the fraud also lost billions. They
seem to have been surprised to learn that they were lied to by the
very company that paid them to help deceive others. But their
losses are worthy of little sympathy, considering that Enron could
never have mounted such a vast fraud without the banks' help.
Bankrupt Thinking: How
the Banks Aided Enron's Deception New York Times August 1,
2003
And there
were dangers as well from refusing such deals. "In some cases,
Enron explicitly pressured some financial institutions to
participate in particular prepay transactions, as a favour and
inducement for Enron to channel additional business their way,"
investigators said. Editorial
comment: Structural
deception' by banks in Enron case Financial Times
(London,England) July 24, 2002,
Congressional
investigators are examining a series of undisclosed deals between
Enron and Citigroup that raise questions about whether the bank
ignored its internal guidelines and sidestepped accounting
requirements in order to satisfy an important client, according to
people involved in the inquiry.
In the first
deal, involving a venture between Enron and Citigroup called
Sundance, investigators are examining why Citigroup allowed the
deal to go forward even though risk managers and others at the
bank lodged strong objections, telling Michael A.
Carpenter, the former head of Citigroup's corporate and
investment banking unit, that the transaction was too aggressive
and put the bank at risk.
----------------------------------
On Dec. 27, 2000, a Citigroup banker sent an e-mail message to
colleagues about Bacchus (another prepay deal), stating
that "we made a lot of exceptions to our standard policies, I am
sure we have gone out of our way to let them know that we are
bending over backwards for them. . . . let's remember to collect
this i.o.u. when it really counts."
Inquiry Said To
Examine Citigroup Role In Enron Deal The New York Times
December 9, 2002
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contents
Hedging
Loans
Both Citigroup and Morgan Chase must have
known that Enron was not the good investment it seemed to be. They
lent Enron money in various deals but then hedged this by
arrangements with insurers and others so that they carried the risk
and the losses when Enron went under. Although the press commented on
the arrangement critically Citigroup was not challenged in the
courts. Morgan Chase was.
To protect
itself, Citigroup created securities that functioned like an
insurance policy. If Enron stayed healthy, buyers of the
securities would receive a steady return. But if Enron ran into
trouble, Citigroup would stop paying the return, keep the
investors' principal and instead give them Enron debt. Now those
investors are left to fight for repayment in bankruptcy
proceedings.
The securities,
totaling $1.4 billion, were issued from August 2000 to May
2001.
-------------------------------
The other big lender to Enron, J. P. Morgan Chase, has put its
exposure at more than $2.6 billion. J. P. Morgan Chase relied on
surety bonds for some protection. Those bonds are now the subject
of a legal dispute, but Citigroup's special securities appear to
have provided substantial protection.
----------------------------------
Craig Woker, a financial services analyst at Morningstar, the
investment research company, said gloating would seem
inappropriate after Enron's demise. But he wondered whether
Citigroup had simply been extra cautious or had special
information at the time.
------------------------------
The type of hedge used by Citigroup has become popular among
financial institutions in the last decade to remove risk from
their balance sheets. In the Enron case, though, Citigroup sold
the securities at unusually favorable rates.
----------------------------
Whatever the reason for Citigroup's move, the terms of the
$855 million issue were unusually good for Citigroup and poor for
investors.
----------------------------------
Thomas J. McCool, the General Accounting Office's managing
director for financial markets and community investment, said
this week that the rates seemed low for credit linked to a company
whose rating never rose higher than Baa1.
ENRON'S MANY STRANDS:
A HEDGE; How Citigroup Hedged Bets On Enron The New York Times
February 8, 2002
Lawmakers
also gave particular scrutiny to Citigroup's efforts to sell
complex securities beginning in 1999 -- deals that allowed the
bank to shift some of its exposure in Enron to other
investors.
Documents
Citigroup helped prepare for these deals raise "questions
regarding Citigroup's representation of Enron's financial
condition," the Senate panel concluded. Citigroup officials said
the information was properly disclosed in the financial documents.
Citigroup and Chase
Defend Their Enron Roles The New York Times July 24, 2002
It seems that Morgan Stanley did not do this
as well as Citigroup. The insurers refused to pay claiming that they
had been misinformed and deceived. Morgan Chase sued but had to
compromise and settle the case. It illustrates the legal issues. If
Morgan Chase had lost in this case its culpability in participating
in the fraud and knowing about it would be established. Defrauded
investors were looking for US $25 billion. They may well have won
against the insurers on the legal technicalities but no one wanted to
bring this to court and perhaps force government into
legislation.
On the
anniversary of Enron's bankruptcy filing, J. P. Morgan went to
court yesterday to try to collect about $1 billion owed to it by
11 insurance companies that had guaranteed certain oil and gas
contracts the bank had arranged with Enron.
----------------------------
The payments, known as prepay forward sale contracts, were made in
return for promises by Enron to deliver oil and gas over several
years. The insurers that guaranteed the contracts have refused to
pay because, they say, the policies were obtained
fraudulently.Trial Opens
in J.P. Morgan's Effort To Collect Insurance on Enron Deal The
New York Times December 3, 2002
J. P. Morgan
Chase announced yesterday that it would receive about $580 million
from insurance companies as part of a settlement resolving one of
the most contentious disputes touched off by Enron's
collapse.
The settlement
is a partial victory for J. P. Morgan, which had sought nearly $1
billion from the insurers and will take a charge of about $400
million to cover the difference. MORGAN
RESOLVES DISPUTE ON ENRON The New York Times January 3, 2003
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contents
Market
Analysts and Enron
We see exactly the same problem that we
saw with WorldCom and other DotCom companies. Analysts employed by
the investments banks doing or wanting to do business with Enron
maintained a positive outlook and a buy recommendation right to the
end - until the company went bankrupt. Citigroup was one of them. It
was more difficult to fault them on this because the bankruptcy came
more rapidly. One analyst received one of Gretchen Morgenson's
"Better off unawarded" awards
THE OFTEN
WRONG BUT NEVER IN DOUBT AWARD -- To Ron Barone, the research
analyst at UBS Warburg who covered Enron, or perhaps more
accurately, who through it all was one of Enron's loudest
apologists. - - - - A believer until the bitter end, Mr. Barone
waited until Nov. 28, when Enron's shares had more value as
wallpaper than as stock, to replace his "strong buy" label on the
stock with a "hold."
A Roster Of Awards
Better Off Unawarded The New York Times December 30, 2001
Almost every
major investment bank was still touting Enron's stock long after
it had begun to slide toward zero. Hundreds of investment bankers
now hope that one casualty will be the relatively new concept of
the all-in-one American financial firm.
Wall Street;
Assessing the Role Of the Financiers The New York Times
December 2, 2001
Enron's
collapse has focused new attention on the Wall Street analysts,
whose judgments about stocks are widely assumed to be driven as
much by a desire to help their firms win investment banking
business from the companies they follow as to give investors sound
guidance.
-----------------------
Analysts at firms like Goldman Sachs, Lehman Brothers, Salomon
Smith Barney and UBS Warburg recommended the stock to investors
well into the fall, after Enron's problems started to become
public.
ENRON'S COLLAPSE: THE
SYSTEM; Web of Safeguards Failed as Enron Fell The New York
Times January 20, 2002
In the
months before it collapsed, the company received almost uniform
buy ratings.
----------------------------
Analysts who help their firms win banking work are more valuable
than those who do not, and Wall Street always finds a way to
reward its most valuable performers.
ENRON'S MANY STRANDS:THE
HEARINGS; Washington Wants Wall St. Changes. But How? The New
York Times February 28, 2002
The problem,
Mr. Schilit said, is that analysts who question the value of a
popular company are branded as controversial. "If you want to move
up the hierarchy of the Wall Street establishment, you don't rock
the boat," he said.
ENRON'S MANY STRANDS: THE
OVERVIEW; WALL ST. ANALYSTS FAULTED ON ENRON The New York
Times February 28, 2002
There is an interesting twist to the failure
of analysts with Enron. The investments banks were actively involved
in arranging the fraud so they had some idea how bad Enron's position
was and how close to bankruptcy. In the DotCom scam we noted how
barriers which should have kept information confidential were ignored
when it was in Citigroup's interest to pass information
around.
When the analysts reporting on Enron were
brought before government committees they claimed that they did not
have this information because the company behaved appropriately and
did not share it. Congressmen could only note how much it would have
cost the banks if analysts had reported adversely.
These
Congressional inquiries, still in their early stages, will examine
the way Wall Street firms structured and sold Enron's limited
partnerships. They also will look into the reasons Wall Street
firms were issuing recommendations to buy Enron stock while they
had detailed information about Enron's poor financial
condition.
-----------------------------
Among the questions to be explored is whether Wall Street
firms urged investors to buy Enron shares in order to protect
their relationships with Enron. Others will ask why some
investment banks had an accurate picture of Enron's poor financial
health but did not share it with their own
customers.
Congress's Scrutiny
Shifts to Wall Street And Its Enron Role The New York Times
February 19, 2002
A committee
aide said that analysts from J. P. Morgan Chase, Lehman Brothers,
Credit Suisse First Boston and Citigroup would be among those
expected to testify. Enron
Is Said to Be Negotiating With Andersen The New York Times
February 23, 2002
Another
senator, Jim Bunning, a Republican from Kentucky, said he was
incredulous that the analysts said they had not been aware of what
investments their firms owned in the companies they researched.
ENRON'S MANY STRANDS: THE
OVERVIEW; WALL ST. ANALYSTS FAULTED ON ENRON The New York
Times February 28, 2002
to
contents
The Enron
Accountants
2001
It is also all but certain to lead to charges of wrongdoing by
Enron's directors and officers, as well as its outside auditor,
lawyers said.
ENRON'S COLLAPSE: THE
LAWYERS; And the Winners in the Case Are . . The New York
Times December 4, 2001
The giant accounting firm, Arthur Andersen's
life was on the line. It had an extremely poor track record. It had
been caught up in a number of other frauds and penalised on previous
occasions. It had bitterly fought The SEC when it had tried to
regulate accounting practices. It had not fired the staff involved
after a previous fraud.
Both
companies (two previous bankruptcies) used Arthur Andersen
as their outside auditor, and in each case investors accused the
firm of helping to cover up financial fraud. Andersen paid $110
million to settle lawsuits by Sunbeam shareholders and $7 million
to settle claims brought by the S.E.C.; the firm confirmed last
week that it had received S.E.C. subpoenas in the agency's Enron
investigation.
ENRON'S COLLAPSE: THE
LAWYERS; Andthe Winners in the Case Are . . The New York Times
December 4, 2001
And
considerable ill will grew between the commission and the industry
when the Levitt S.E.C. pushed for restrictions on consulting
services that accounting firms could provide to their auditing
clients. Andersen was one of the three firms that bitterly fought
the rules, though it played a role in eventually working out a
settlement.
-------------------------
Unfortunately for Andersen, the last major auditing scandal, in
the eyes of regulators, was one that involved the same firm. When
Andersen settled charges filed by the S.E.C. in the Waste
Management case last year, it became the first large accounting
firm in decades to face a civil fraud accusation by the
S.E.C.
Andersen
appeared to survive the Waste Management case very well. But
government officials took note of the fact that even some
accountants who were penalized by the S.E.C. in that case were
allowed to keep their jobs, and that there was no sign of internal
reform by the firm. Andersen may have learned from that case that
scandals could be endured; regulators may have learned that
Andersen could not be trusted to reform itself.
It was with
those divergent views that Andersen leaders and Justice Department
officials met in this case. The result was an indictment that
Andersen could not believe would come -- and that may help put the
firm out of business.
Lessons For Andersen From
Scandal At Salomon The New York Times March 18, 2002
Andersens was very much part of the Enron
fraud as it had both helped with some accounting and also acted as
external auditor. Like HealthSouth
and Ernst & Young, Enron had
employed past Andersen staff. Andersen knew what Enron was doing and
went along with its accounting. It had signed off on these accounts
and they did not stand up to scrutiny.
Moreover,
Enron turned over to Andersen some responsibility for its internal
bookkeeping, blurring a fundamental division of responsibilities
that companies employ to assure the honesty and completeness of
their financial figures. Further obscuring the line between an
independent auditor and corporate management, many of Enron's
financial executives had moved there from
Andersen.
ENRON'S COLLAPSE: THE
SYSTEM; Web of Safeguards Failed as Enron Fell The New York
Times January 20, 2002
Worst of all when the scandal broke and
investigations started Andersen illegally set out to destroy vast
quantities of presumably incriminating documents and were caught.
Andersens had to wear a criminal plea and that put it out of
business.
Accountants make large amounts of money from
the companies they work with. Auditing the books is only one of
these. Whether Arthur Andersen's handling of their responsibilities
in this situation is representative can be debated. Other accounting
firms have also signed off on fraudulent accounts then claimed that
the fraud was undetectable. Ernst
and Young did this for
HealthSouth.
Mr. Johnson
(spokesperson for Congressional Committee) said that the
Andersen memo about Ms. Watkins's concerns suggested that the firm
was well aware that Enron's accounting was suspect long before the
company had disclosed its problems.
"It's clear now
to us that key players at both Enron and Andersen knew of the
problems months before the company imploded," Mr. Johnson
said.
ENRON'S COLLAPSE: THE
OVERVIEW; AUDITOR RECEIVED WARNING ON ENRON FIVE MONTHS AGO
The New York Times January 17, 2002
David B.
Duncan, the Arthur Andersen accountant whose destruction of
records related to Enron led to a criminal indictment of the firm,
has agreed to plead guilty to obstruction of justice and serve as
a government witness, people involved in the case said
yesterday.
---------------------------------
With Mr. Duncan's agreement to cooperate, the government now has
its highest-ranking and most knowledgeable witness to the
financial decisions that ultimately pushed Enron into filing for
bankruptcy protection.
-------------------------------
Notes from one meeting showed that Mr. Duncan specifically
mentioned the S.E.C. inquiry. In the three days that followed,
records contained in 26 trunks and 24 smaller boxes were shredded
at Andersen, a huge increase over the amount destroyed in previous
weeks. At the same time, huge numbers of e-mail messages were
deleted.
The effort at
document destruction spread beyond Houston. Calls went from that
office to London and to Portland, Ore., both of which had done
work on the Enron account. In response to the instructions from
the Houston auditors, documents were shredded and e-mail messages
were deleted.
-------------------------------
Senior Andersen executives learned of the shredding weeks
later, when lawyers for the firm discovered that laptop computers
in Houston had been virtually wiped clean of e-mail messages. The
lawyers investigated further and discovered the shredding.
Andersen alerted the government to what the lawyers had discovered
and dismissed Mr. Duncan.
For weeks, the
firm hoped that its decision to report the wrongdoing would save
it from prosecution, but government officials concluded that
Andersen -- which had been the accountant for several entities in
recent years that were undone by fraud -- had a track record that
required a criminal charge.
GUILTY PLEA SEEN IN THE SHREDDING OF ENRON RECORDS The New
York Times April 9, 2002
to
contents
The Enron
Lawyers
At various times issues were referred to
lawyers to see whether they were legal. These lawyers had ticked off
on the original transactions but not ticked off on the issue of
intention.
When people within Andersen and Enron
expressed concern about what was happening with the partnership
arrangements, the matter was referred to lawyers who did business
with the firm. They did not pick up on the fraud and accepted the
transactions as legal.
Enron was
the largest client of Vinson & Elkins, one of the largest law
firms in Houston.
The ties between
the firm and its client were close. James V. Derrick Jr., the
executive vice president and general counsel of Enron, joined the
company from the firm. As Enron grew bigger and more
sophisticated, the firm's billings rose substantially.
The firm gave
advice to Enron about the partnerships the company was setting up
as it remade itself into a trading company in the late 1990's. It
was asked by Enron to review those partnerships after Mr. Lay
received a letter from a senior Enron executive, Sherron S.
Watkins, raising questions about the company's financial
structure.
--------------------------
When the firm reported back to Enron in October, it concluded that
the issues raised by Ms. Watkins "do not, in our judgment, warrant
a further widespread investigation by independent counsel and
auditors." ENRON'S
COLLAPSE: THE SYSTEM; Web of Safeguards Failed as Enron Fell
The New York Times January 20, 2002
Something is
wrong with the corporate lawyers, too. After Enron began to fall
apart, Houston-based Vinson & Elkins accepted an assignment to
put its approval on off-the-books deals it helped set up, and,
worse, agreed not to ask questions about egregious, see-no-evil
accounting. The lawyers replaced their shingle with a doormat --
but have you heard a disapproving peep from any bar
association? '
You Wuz Robbed!' The
New York Times February 11, 2002
The expanded
lawsuit, due in Federal District Court in Houston, also names two
law firms, Vinson & Elkins and Kirkland & Ellis, accusing
them of complicity in the frauds. Vinson was Enron's chief law
firm, and was involved on behalf of the company in the partnership
dealings that ultimately played the critical role in its downfall.
Enron Investors Say
Lenders Took Part in Fraud Scheme The New York Times April 8,
2002, Monday
to
contents
Power and
Political
Influence
Whom can the
country turn to for an honest investigation? Democrats and
Republicans alike are so beholden to accounting-industry money
that they scuttled an attempt by Arthur Levitt, the former S.E.C.
head, to regulate conflicts of interest in companies like Andersen
two years ago The
United States of Enron The New York Times January 19, 2002
Controlling
Democracy
While these comments and this material
describes the US situation it is clear that Australia is steadily
moving in the same direction.
Wherever we look when examining the giant
companies we see strong political influence and political power.
Every one of the giant health and aged care companies has sought
influence at state and federal levels, usually successfully.
Political donations and lobbying are as much tools of the trade as
scalpels and bandages. They are productive enterprises. Many millions
of dollars have been spent by aged
care chains (eg Florida),
and
HMOs to block pressures from the
community (eg Patient Bill of Rights) or promote legislation they
support (eg President Bush's Medicare package).
Corporations have manipulated the perceptions
of the community, most famously in the Harry and Louis advertisements
used to defeat president Clinton's health care package. Vast sums are
spent on marketing ideas and image. The most effective corporate
strategy has been to form and fund "front" community groups that
vigorously support corporate views and so create the illusion of a
ground roots movement coming from the community. The giant
pharmaceutical companies have been particularly adept at
this.
Many believe that this corporate power is the
reason why there have been no realistic changes to the US health
system and why even a massive community revolt like that which
occurred with managed
care has resulted in only token
responses.
If we look at the campaign donations made to
politicians and the way in which money influences campaigning and
election results then it becomes obvious that no more than a minority
of those who genuinely oppose the corporate position will be
elected.
The companies involved in the Enron fraud are
good examples of the way the political process is appropriated for
corporate purposes.
Some studies indicate that the majority of
political candidates come from what some authors classify as the
"corporate class". Corpwatch
which tracks corporate conduct publishes this sort of information on
its web site. Democracy in the USA has increasingly become an
abstraction, an illusion, and a slogan, but with less and less
grounding in the real world people live in.
It (the
Grubman/Weill nursery school drama) reinforces his thesis, he
said, that Americans don't practice democracy as often as they
preach it.
--------------------------
The idea of democracy is just that, Mr. Homberger (author who
writes about America and New York) said -- a lovely but
impractical theory.
"The whole
democratic ideal, the idea that you thrive on merit alone, is part
of the American mythology, but it is not the way people conduct
themselves."
Doing Unto Others in a
Big Way The New York Times November 24, 2002
to
contents
Lobbying
Then there is the lobbying where past
politicians are paid vast sums in return for their influence in the
corridors of power. The corporate position is always put up front
while community groups vainly struggle to get their views
heard.
to
contents
Donations
Backfire for Enron
In the Enron fraud the large political
donations backfired. Large donations from Enron and Arthur Andersen
were a political millstone, paraded in the media. Politicians who had
received large donations fell over themselves in the rush to condemn
Enron, demonstrate that they were not influenced by donations and
show their determination to punish those responsible. With so much
corporate support at stake these were largely empty
promises.
The largest
Congressional recipient of Andersen donations has been
Representative Billy Tauzin, the Louisiana Republican who heads
the House Energy and Commerce Committee, one of the 10
Congressional committees examining Enron's collapse. He has
received $57,000 from Andersen in the last decade.
ENRON'S COLLAPSE: THE
LOBBYING; Auditing Firms Exercise Power In Washington The New
York Times January 19, 2002
The final punishments were a whimper, and the
legislative changes were simply to patch over the obvious cracks. The
hoped for breaking up of the giant financial services companies to
remove conflicts of interest and reduce the pressures towards
dysfunctional conduct never eventuated. The ideological model
remained unchallenged.
Enron donated generously to both political
parties but with more to the republicans. It employed lobbyists to
put its position. Arthur Andersen, other accounting firms and the
banks, particularly Citigroup were never far behind, and sometimes in
front.
Enron had close links with the Clinton
administration and was a recipient of government largesse in the form
of loans and political assistance during this period.
Enron's chairman Kenneth Lay was an associate
and friend of Bush and Cheney. He had supported Bush during the
election and was one of the privileged who got special treatment
because of the size of his donation. After the fraud was exposed Bush
was so embarrassed that he stupidly denied this relationship, a
relationship easily confirmed.
to
contents
Political
Links and Donations
Though the
Bush administration has been in office only a year, Enron's oily
fingerprints are all over its actions as well as its resumes and
stock portfolios. Mr. Lay helped hand-pick the head of the
government agency in charge of regulating his own business and
stood to gain a $254 million corporate tax rebate in the
administration-blessed stimulus bill (despite the fact that Enron
used almost 900 offshore "subsidiaries" to avoid paying any income
taxes at all in four of the last five years).
-----------------------------
The Clinton Democrats had eight years of Enron exposure, and
while never receiving remotely the sums that the Republicans did,
nonetheless had their own contacts (and presidential golf outing)
with Mr. Lay
---------------------------------
Then again, who in either party hasn't cashed an Enron check? No
fewer than 71 senators and 188 congressmen have been on the Enron
gravy train. All but 5 of the 56 members of another
investigative committee, House Energy and Commerce, got Enron or
Arthur Andersen dough. The
United States of Enron The New York Times January 19, 2002
Enron was
not shy in making its views known on Capitol Hill, at the White
House and among the regulatory agencies -- or in spreading
campaign contributions around to Republicans and Democrats alike
to ensure it would get a hearing. Since 1989, Enron has given
$5.95 million to the two parties, with 74 percent going to
Republicans, according to figures compiled by the Center for
Responsive Politics, a watchdog group. .
------------------------------
"But if you look back over the last five years, what they did
get was no oversight." ENRON'S
COLLAPSE: THE SYSTEM; Web of Safeguards Failed as Enron Fell
The New York Times January 20, 2002
Republicans
complain that Mr. Lieberman should recuse himself because his
former chief of staff, Michael Lewan, was a lobbyist for
Enron.
-------------------------------
The bipartisan criticism of Mr. Lieberman reflects how deeply
Enron, its campaign money and its deregulatory agenda have become
imbedded in Washington's money culture these last dozen
years.
---------------------------------
Enron has given more than $700,000 to Mr. Bush since 1993; no
company has given him more. In addition, Enron's chairman, Kenneth
L. Lay, was one of the "pioneers," raising more than $100,000 for
Mr. Bush's campaign, and he and his wife gave a total of $10,000
to Mr. Bush's Florida recount fund. Enron and Mr. Lay also
contributed a total of $200,000 to Mr. Bush's inaugural
festivities.
--------------------------------
The Enron dealings of Senator Phil Gramm, Republican of Texas, and
his wife, Dr. Wendy Gramm, a member of the Enron's board of
directors and former head of the Commodities Futures Trading
Commission, have also drawn scrutiny because of their involvement
in regulatory issues affecting Enron.
ENRON'S COLLAPSE: THE
POLITICIANS; Enron Spread Contributions on Both Sides of the
Aisle The New York Times January 21, 2002
Nearby, in
the exclusive "Pioneers" box on the parade route, Ken Lay watched
the festivities. He was there amidst an elite group of about 200
men and women who had each raised $100,000 for Mr. Bush's
campaign. Nearby, other Enron executives watched the parade from
the elegant Willard hotel and office complex, two blocks from the
White House, where the company's law firm, Vinson & Elkins,
has its Washington office.
It had been a
weekend to savor. Enron and its top two executives had kicked in
$300,000 for the inauguration, and the company was one of the few
to donate $50,000 for the Texas State Society's 2001 Black Tie and
Boots Inaugural Ball, where Mr. Bush and the first lady stopped by
to salute their Texan friends, including Mr. Lay.
The day after
the inauguration, Mr. Lay attended a private luncheon at the White
House, where he was able to spend a few minutes with the new
president, a luncheon guest said. That night, Enron hosted a
private dinner for several congressmen.---------.
Enron's sharp
elbows had already been noticed in Washington. Curtis L. Hebert
Jr., then chairman of the Federal Energy Regulatory Commission,
had gotten a call from Mr. Lay early in the year. As Mr. Hebert
recalled the incident, Mr. Lay said that Enron would continue to
support him in his new job if he dropped his reservations about
electricity deregulation. Mr. Hebert said he had refused.
ENRON'S MANY STRANDS:
The Company Unravels; Enron Buffed Image to a Shine Even as It
Rotted From Within The New York Times February 10, 2002
Note that Geoffrey Barbakow, the CEO who
orchestrated the 2002
debacle at Tenet Healthcare was also
one of Bush's pioneers. He too resigned in a cloud of controversy.
Enron like almost all of giant corporations
and health care groups employed lobbyists to keep its views and its
interests constantly in front of politicians.
Enron also
hired as lobbyists two influential members of Mr. DeLay's inner
circle, Ed Buckham and Karl Gallant. And Enron and Mr. Lay were
also contributors to the Republican Majority Issues Committee, a
group close to Mr. DeLay.
ENRON'S COLLAPSE: THE POLITICIANS; Enron Spread Contributions on
Both Sides of the Aisle The New York Times January 21, 2002
Enron was not
alone in its contributions. It auditor, its lawyers and its financial
partners were all making their mark on the political
process.
Critics have
also pointed out that Citigroup, Enron's largest lender, is Mr.
Lieberman's top donor, giving his campaigns $112,000 since 1997,
campaign records show. A longtime Republican strategist put it
this way, "Lieberman's problem is simple -- Enron's biggest
creditor is his campaign's biggest contributor." .
----------------------------------
Enron, Arthur Andersen and Vinson & Elkins, a Houston law
firm, are among the most generous contributors to Mr. Bush's 2000
presidential campaign.
ENRON'S COLLAPSE: THE
POLITICIANS; Enron Spread Contributions on Both Sides of the
Aisle The New York Times January 21, 2002
Yet
taking on Wall Street is not an easy matter. Not only has Wall
Street been a leading campaign contributor, but it supports a
powerful lobbying force with considerable influence.
Congress's Scrutiny
Shifts to Wall Street And Its Enron Role The New York Times
February 19, 2002
It is not surprising then that despite all
the rhetoric and the aggressive posturing very little happens at the
end of the day. Only one multiple offender is put out of business,
the others pay a fine which sounds large but is only a fraction of
their annual profit, and none of the key players goes to prison.
There is no effective legislative response.
One might
expect Congress to change the bankruptcy law to make it crystal
clear that banks with dirty hands should not prosper when a
company they aided in fraud goes under. Instead, the bankruptcy
bill now being pushed through Congress goes out of its way to help
the banks. Bankrupt
Thinking: How the Banks Aided Enron's Deception New York Times
August 1, 2003
to
contents
Arthur
Andersen and Political
Influence
The
profession has succeeded in fighting off tougher regulation over
the decades, but it reached its apex in political power only in
the last few years, a reflection of the industry's mushrooming
campaign contributions and increased
lobbying.
ENRON'S COLLAPSE: THE
LOBBYING; Auditing Firms Exercise Power In Washington The New
York Times January 19, 2002
The most revealing story about political
power and financial interests is that of the five big accounting
firms including Arthur Andersen.
Arthur
Andersen may have had reason to view Enron through a flattering
lens, - - - - . At the same time that it was acting as Enron's
auditor, it was seeking and getting lucrative consulting work from
Enron, mirroring a trend among the five big accounting
firms.
Andersen was
also successfully lobbying against the Securities and Exchange
Commission's effort two years ago to limit just that type of dual
role; some regulators felt it created a conflict of interest by
raising questions about whether an auditor would challenge the
management of a company from which it sought more business.
ENRON'S COLLAPSE: THE
SYSTEM; Web of Safeguards Failed as Enron Fell The New York
Times January 20, 2002
Over the years they have resisted attempts to
reign them in and reduce the conflicts of interest to which they were
exposed. During the Clinton administration Arthur Levitt who was
chairman of the US Securities and Exchange Commission pressed
strongly for tighter regulation of the accounting industry. He was
put under extreme pressure by politicians who had been lobbied by the
accountants. He failed in his attempt.
When Arthur
Levitt Jr., then chairman of the Securities and Exchange
Commission, tried to impose tough conflict-of-interest rules on
the accounting industry two years ago, he was hit by a barrage of
high-powered lobbying, including calls from 10 or 11 senators. The
senators, whom he did not identify, warned that if he did not
relent on the new regulations, the agency's appropriations could
be cut, he said.
------------------------
Mr. Levitt said the calls reflected the political influence of the
industry, which ultimately succeeded in weakening his proposals to
reduce the potential conflicts of interests at accounting
firms.
"I have never
been subjected to a more intensive and venal lobbying campaign,"
said Mr. Levitt, who led the S.E.C. for almost eight years, - - -
- .
---------------------------
Among other proposals, Mr. Levitt sought to prohibit an
accounting firm from performing both accounting functions and
consulting services for the same company. That proposal threatened
billions of dollars in revenues at the Big Five firms, and their
defeat of the proposals in 2000 illustrated the industry's growing
influence in Washington. Had the Levitt proposals been in place,
it would not have been possible for Andersen to bill Enron $27
million for consulting services last year while also billing $25
million for audits.
-------------------------------
The industry has contributed more than $53 million since 1990
to congressional and presidential candidates. More than $14
million of those contributions came in 2000, putting accountants
in the same category of more established big donors like telephone
companies, higher education and the building trade unions.
---------------------------
Moreover, 94 current senators and more than half the current
members of the House have received some campaign donations from
Andersen since 1989, according to a study for the Center for
Responsive Politics, a nonpartisan group that studies the
influence of money in politics.
ENRON'S COLLAPSE: THE
LOBBYING; Auditing Firms Exercise Power In Washington The New
York Times January 19, 2002
When Mr Bush became president Levitt was
replaced by Harvey Pitt, an Arthur Andersen lawyer. The response of
the SEC to the frauds over the last few years has been
under-whelming. It was Mr Spitzer, the attorney general in New York
who picked up the ball and set the pace. Mr Pitt and the SEC were
embarrassed into a game of catch up and eventually secured
settlements and a criminal plea from Andersen. The reports in the New
York Times expose the situation. Pitt has been replaced by
Donaldson.
Harvey Pitt,
the Bush administration's chief at the S.E.C., was actually an
Arthur Andersen lawyer.
The United States of Enron The New York Times January 19, 2002
L. Pitt, a
securities lawyer, once represented all five major accounting
firms as well as the American Institute of Certified Public
Accountants before he took over at the S.E.C. last summer.
On Thursday, Mr.
Pitt announced plans to create a group dominated by experts from
outside the accounting industry to discipline unethical
accountants. That role is now filled by an industry group. Unlike
Mr. Levitt, Mr. Pitt said that it was unnecessary to adopt any
rules that would restrict accounting firms from performing
multiple services for clients.
At the height of
the fight between the industry and Mr. Levitt in the second half
of 2000, all the Big Five accounting firms sharply increased their
political donations and spending on lobbying. Andersen doubled its
lobbying budget, to $1.6 million. The investment paid
off.
ENRON'S COLLAPSE: THE
LOBBYING; Auditing Firms Exercise Power In Washington The New
York Times January 19, 2002
Following the revelation about Arthur
Andersen, accountants were once again threatened by restrictions and
doubled their efforts. President Bush rose to the occasion by
appointing two more accountants to the SEC's five man committee, one
from Ernst & Young. Ernst
& Young was the accounting firm
that looked past HealthSouth's accounting fraud.
The
accounting firms, including Andersen, are hiring teams of
lobbyists -- former senior aides to lawmakers and presidents, both
Republican and Democrat -- as well as using their own formidable
staffs. While there is talk in Washington of significant oversight
and toughened enforcement, Congressional aides and some experts
say it will not happen, at least not without changes in campaign
finance rules, because of the industry's political muscle.
---------------------------
The profession's growing influence is perhaps most apparent at the
S.E.C. Last month, President Bush said he would nominate partners
from two of the Big Five accounting firms, PricewaterhouseCoopers
and Ernst & Young, to two vacancies on the five-member
commission.
----------------------------
Of the 20 largest contributors to President Bush's 2000 campaign,
three accounting firms -- including Andersen -- gave more money
than Enron. All Big Five accounting firms were among the
campaign's top 20 contributors.
-------------------------
During the last presidential election, Andersen was the
fifth-largest contributor to Mr. Bush's campaign, giving more than
$145,000 through its employees and political action committee,
according to the Center for Responsive Politics. The
fourth-largest was Ernst & Young, which gave more than
$179,000; PricewaterhouseCoopers was eighth, contributing more
than $127,000.
Enron, by
contrast, gave about $113,800. Andersen also organized a big Bush
campaign fund-raiser. ENRON'S
COLLAPSE: THE LOBBYING; Auditing Firms Exercise Power In
Washington The New York Times January 19, 2002
Those who have studied the political system
and the fate of past attempts to do something about the out of
control markets are not optimistic about progress.
"It's just
whimsical," said James D. Cox, a law professor at Duke University
who has written a textbook on accounting and legal issues. "There
will be a lot of posturing about how bad Enron and Andersen are.
But at the end of the day, if we can't get campaign finance
reform, it's hard to believe we get tighter standards. These are
two very related issues." ENRON'S
COLLAPSE: THE LOBBYING; Auditing Firms Exercise Power In
Washington The New York Times January 19, 2002
to
contents
Ideology and
the Legislative Process
Oversight
Failure
After all,
if there's one thing the Enron debacle has already taught the
nation, it's the chaos that can result from underregulation.
Making Political Sense of
the Committees Making Sense of Enron The New York Times
February 11, 2002
I have dealt with the ideological problems
and the legislative changes which predisposed
to the DotCom scandal and made it
possible. Exactly these same factors created conflicts of interest
and set the scene for the Enron debacle. There were some additional
factors.
Heavily influenced by the giant corporations,
that regulations were designed to control, law makers persuaded by
market theorists, progressively dismantled legislation. Oversight was
delegated to the industry. At the same time the belief in markets
increased competitive pressures so intensifying the tensions between
social responsibility and corporate wealth. Serious problems and
oversight failure were inevitable. As in health care the increased
costs of oversight (e.g.by the SEC) were not funded and the
regulatory system fell down.
Competitors
and critics have pointed to the roles played by Citigroup and J.
P. Morgan as evidence that legislation passed two years ago,
allowing commercial and investment banks to combine, was a bad
idea. Though the odds of any reversal are very slim, a question is
being asked anew: Can banks that are on the hook for huge sums to
a corporation provide unbiased advice?
Wall Street; Assessing
the Role Of the Financiers The New York Times December 2, 2001
Mr. Torres
added that conflicts were likely to continue growing in the
aftermath of the repeal three years ago of the Glass-Steagall Act,
a move that has allowed mergers of banks, Wall Street firms and
insurers. ENRON'S MANY
STRANDS: THE OVERVIEW; WALL ST. ANALYSTS FAULTED ON ENRON The
New York Times February 28, 2002
These
corporate scandals raise serious regulatory issues for the banking
industry. - - - - - but now the Bush administration and Congress
must determine whether remedial regulations are needed in light of
the recent scandals. Underwriting
Fraud The New York Times August 25, 2002
The system
of safeguards that was put in place over the years to protect
investors and employees from a catastrophic corporate implosion
largely failed to detect or address the problems that felled the
Enron Corporation, say regulators, investors, business executives
and scholars.
------------------------------
In Enron's case, the questions extend to the political influence
wielded by the company. But increasingly the focus has turned to
the entire framework of legislation, regulation and
self-governance in which it operated.
"This was a
massive failure in the governance system," said Robert E. Litan,
director of economic studies at the Brookings Institution, the
research organization. "You can look at the system as a series of
concentric circles, from management to directors and the audit
committee to regulators and analysts and so forth. This was like a
nuclear meltdown where the core melted through all the layers."
.
-------------------------------------
The lack of scrutiny by the energy regulatory commission was one
reason that William A. Rainier, the chairman of the Commodity
Futures Trading Commission, told Congress in 2000 that he was
"deeply concerned" about a bill that would exempt energy trading
from his commission's review because dealers in energy derivatives
had no other regulator. His objections were largely ignored, and
the exemption, heavily backed by Enron, became law.
The 2000 law
built on a 1993 ruling by the futures commission that exempted
energy trades. The chairwoman at the time was Wendy L. Gramm. Soon
after she left the commission, Ms. Gramm became a well-paid
director of Enron.
Because Enron
was publicly traded, its financial reports were subject to
scrutiny by the Securities and Exchange Commission, at least in
theory. In practice, the commission has enough staff to review
corporate reports only on a limited basis, and Enron's have not
gotten a thorough vetting by the commission at least since 1997,
people familiar with the commission's work said.
ENRON'S COLLAPSE: THE
SYSTEM; Web of Safeguards Failed as Enron Fell The New York
Times January 20, 2002
to
contents
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