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.
In the second deal, known as Bacchus, Citigroup agreed to invest 3 percent of the equity in an off-the-books partnership in which Enron placed its pulp and paper business after receiving a oral commitment from an Enron executive that the energy company would “support” the bank’s investment. While the meaning of that phrase is ambiguous, Senate investigators think it means that Citigroup’s investment was not really at risk which, under accounting rules, would have required Enron to put the partnership on its books.
Senate investigators say the Bacchus transaction was not a true sale but was really a loan to Enron that the energy company used to book at least $112 million in profits in 2000.
The two Enron deals with Citigroup are expected to be the subject of a hearing on Wednesday before the Senate Permanent Subcommittee on Investigations, whose ranking members are Senators Carl Levin, Democrat of Michigan, and Susan M. Collins, Republican of Maine. As previously reported, another deal expected to be examined, Slapshot, was an arrangement with J. P. Morgan Chase that allowed Enron to obtain hundreds of millions of dollars in tax deductions normally not permitted.
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. Ultimately, the deals show how banks were able to come right up to the line and, in the minds of Congressional investigators, possibly cross it when structuring a deal to give a client the outcome it wanted.
According to people involved in the Congressional inquiry, Citigroup executives are expected to tell the committee on Wednesday that the transactions with Enron were legal and followed accounting rules.
But in a statement today, the bank said: “Today, Citigroup would not approve the transactions that have been under review. Under a new policy Citigroup initiated in August, no such financing will be approved without meaningful disclosure of its impact on a company’s financial condition.”
Citigroup executives have told Congressional investigators that they were surprised to learn that Enron booked a profit from the Bacchus deal, as that was contrary to their understanding of the transaction. They have also told investigators that Enron made no guarantee that Citigroup would not lose its investment and that it was their understanding that both Arthur Andersen, Enron’s auditor, and an outside law firm had approved Bacchus as a true sale.
In December 2000, according to investigators, Enron set up a venture called Fishtail with J. P. Morgan Chase and LJM2, the investment partnership, run by Andrew S. Fastow, then Enron’s chief financial officer, into which Enron moved its pulp and paper trading business. LJM2 contributed $8 million. J. P. Morgan Chase committed to contributing $42 million but never made the investment in cash. The committee is expected to question J. P. Morgan Chase about whether that distinction should have altered the accounting treatment.
Those assets were soon moved into the Bacchus partnership, investigators said; they say Enron was eager to get the deal done so it could include it in financial results for 2000. On Nov. 24, 2000, in an e-mail message obtained by investigators, Steve Baillie, a Citigroup banker, told colleagues, “Enron’s motivation in the deal now appears to be writing up the asset in question from a basis of about $100MM to as high as $250MM, thereby creating earnings.”
But two weeks later, another banker, James F. Reilly, told colleagues in an e-mail message that Enron had suggested that “it is unlikely that there will be any material earnings benefit” from the deal. He wrote, however, that Enron intended the deal to help meet its targeted debt-to-capitalization ratio, a number watched closely by investors.
Citigroup financed the Bacchus partnership through $194 million in loans and $6 million in equity â€” money that flowed to Enron, according to people involved in the inquiry.
Ensuring that 3 percent of the Bacchus deal was equity from Citigroup was essential for the accounting treatment. But in a document obtained by investigators, Citigroup executives said that Mr. Fastow had “given his verbal commitment” to a senior Citigroup executive that Enron “will support the 3 percent equity piece of this transaction.” Investigators have seized on the description as evidence that Citigroup’s equity was not actually at risk.
Citigroup executives, however, have told investigators that they understood only that Enron would do its best to sell the pulp and paper trading assets in the near future, but that there had been no guarantee that would happen. Enron had also told executives at the bank that it was serious about pursuing a strategy to have a private equity fund purchase the Bacchus assets within months, people involved in the inquiry say.
On Dec. 27, 2000, a Citigroup banker sent an e-mail message to colleagues about Bacchus, 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.” According to people involved in the inquiry, Citigroup executives have said that the “exceptions” noted in the e-mail message did not relate to any accounting policies.
In the summer of 2001, these people say, Enron presented another deal to Citigroup, called Sundance, that repaid the $200 million Citigroup had put up in the Bacchus deal. Enron financed Sundance with more than $200 million in cash and contributed the pulp and paper assets, while Citigroup invested $28.5 million and committed to finance up to $160 million more.
But in a May 30, 2001, memorandum to Mr. Carpenter, Citigroup’s investment banking head, Dave Bushnell, the bank’s chief risk officer, wrote that he had “refused to sign off on” the Sundance deal. He said that the “accounting is aggressive and a franchise risk to us if there is publicity.”
Through a Citigroup spokeswoman, Mr. Carpenter declined to comment.
Mr. Bushnell listed a half-dozen reasons Citigroup should not do the deal, including the bank’s “extensive credit exposure to Enron,” concerns about aggressive accounting and risks to the bank, and the “sub-optimal” returns the deal would provide. He also complained that other executives within the bank were pushing too hard to get the deal done. “One side of the house,” Mr. Bushnell said, “is trying to be strict, while the other is committing capital to” Enron.
“Lastly,” Mr. Bushnell added, “our internal process on this left a lot to be desired. This is a complex transaction with a complex company and the product side was far ahead with the customer on this trade before the bankers, risk managers and others were brought into this deal.”
Mr. Bushnell was not alone in his objections. On May 31, Alan S. MacDonald, the head of Citigroup’s global relationship bank, told Mr. Carpenter in an e-mail message that he and another banker, Bill Fox, “if anything, feel more strongly that suitability issues and related risks when coupled with the returns” made the deal unattractive.
Nonetheless, the deal was approved within days, although officials at the bank have been unable to find documentation of the formal approval, according to people involved in the inquiry.