JP Morgan and Citigroup pass Enron blame to Andersen

Testifying to the US Senate Permanent Subcommittee on Investigations, the Wall Street powerhouses defended their six-year involvement in providing more than $8 billion in financing to Enron.

Prepays are legitimate arrangements in which a company is paid in advance to deliver a service or product at a later date. But they did not stay legitimate with Enron, allege the subcommittee’s investigators, with banks such as JP Morgan Chase and Citigroup constructing complex, "phoney" prepays that resulted in Enron obtaining billions of dollars that “were in reality undisclosed loans” to Enron.

“During our business relationship with Enron, we thought we were dealing with honest managers who had a legitimate business purpose for the transactions we did with them,” said David Bushnell, Citigroup’s head of global risk management. “We believed Enron was making good-faith accounting judgments that were reviewed by Andersen, which was then the world’s premier auditing firm in this sector.”

Meanwhile, Jeffrey Dellapina, managing director in the credit and rates group at JP Morgan Chase, told investigators that prepaid forward contracts have been used for years as a proper tool to enable businesses to increase their liquidity and diversify their sources of funding. “There have been allegations in the media that the prepaid forward transactions were ‘disguised debt’ or a ‘disguised loan’,” said Dellapina. “The prepaid forwards were undoubtedly financing, as are all contracts that involve prepayment features, but every financing is not a loan. “These transactions had different features, benefits and risks than loans,” Dellapina added. “It is our understanding that Enron recorded these transactions on its balance sheet; in other words, they were not ‘off-balance sheet’ transactions.”

Dellapina said the manner in which Enron accounted for such transactions on its books of account and in its financial statements was a matter for Enron, its management and auditors.

Subcommittee investigators were unanimous in their chastisement of Citigroup and JP Morgan Chase. But they also said Barclays, Credit Suisse First Boston, FleetBoston, Royal Bank of Scotland and Toronto Dominion also participated in prepaid transactions worth more than $1 billion. “Many of the so-called prepays, in fact, were not prepaid forward contracts at all: they did not transfer price risk. They did not utilise independent third parties. They were not entered into because the purchaser actually wanted oil or gas. Nor were their terms driven by anything other than a desire to achieve an accounting end,” said Maine’s Republican Senator Susan Collins. “Instead, they were elaborate circular transactions that were designed to disguise what were essentially loans totalling billions of dollars,” she added.

Robert Roach, chief investigator of the subcommittee, warned that Enron was not the only company to obtain loans disguised as commodity trades. “Major financial institutions are knowingly assisting and even promoting such transactions," he claimed.