Autopsies of Enron have thoroughly highlighted the role that certain accountants from Arthur Andersen and the energy company’s own unscrupulous executives played in its demise. But on Monday, a new cause of death was illuminated: Wall Street.
A long-awaited report from Neil Batson, the court-appointed bankruptcy examiner, concludes there is ample evidence that Enron’s bankers led by Citigroup and JP Morgan were not only aware of the company’s wrongful conduct, but knowingly helped it along.
The latest Batson report, which runs to nearly 1,000 pages, offers intricate details of how the banks often against their own internal objections helped devise the dubious financial schemes that allowed Enron to survive.
It repeatedly knocks down banks’ contentions that such transactions must have been acceptable because accountants such as Andersen signed them off. In many cases, Mr Batson found that crucial financial information was withheld from Andersen but not the banks.
In monetary terms, the report suggests the banks could have to cough up more to fend off private lawsuits than the $300m that Citi and JP Morgan agreed to pay regulators on Monday over their involvement with Enron. The banks might also see their $5bn in claims against bankrupt company pushed far down the ladder of creditors.
In reputational terms, the Batson report represents another stinging blow to an industry still reeling from humiliating scandals over initial public offerings and tainted stock research.
Citigroup comes in for the harshest criticism. The bank generated more than $188m in revenue from Enron from 1997 to 2001, acting in a variety of roles from underwriter to investor.
Its most damaging activity may have been the pre-pay transactions that Enron used to disguise loans as commodity trades. A senior Citi accountant objected to one such transaction, according to Mr Batson.
Nonetheless, Citi engaged in more than 60 of them. In one year, 1997, they accounted for 76 per cent of Enron’s reported cash flow.
In one email dated July 2001, Paul Deards, a Citigroup derivatives executive, referred to the pre-pays as “simply manipulating cash flows”. In October, after Enron was falling apart, Mr Deards asked a colleague for a confirmation that: “(apart from the fact that we put deals together for enron which we knew confused the ratings agencies) there is no skellington [sic] in the closet.”
Citi engaged in other structured finance deals despite internal warnings. In one case, a Citi executive wrote a memo to Michael Carpenter, the former head of Salomon Smith Barney, stating that the accounting in an Enron transaction, called Project Sundance, posed “a franchise risk to us if there is publicity”.
“In participating in many of Enron’s [special purpose entity] transactions, Citigroup appears to have violated or ignored its own guidelines for appropriateness,” Mr Batson wrote.
JP Morgan did not come off much better. The bank routinely referred to Enron internally as one of its most important customers. In 2000 alone, it garnered nearly $30m in revenues from Enron. Most of its deals resembled the pre-pay transactions crafted by Citi.
While other banks did less business with Enron, they also proved crucial to the company’s dealings. Mr Batson noted that Barclays often supplied the outside equity investments that allowed them to be swept off Enron’s balance sheet. In several cases, Barclay’s shares were actually disguised loans, the report found. Merrill Lynch, CIBC and Deutsche Bank also came in for criticism.
Mr Batson’s report also reconfirmed the role that several Enron executives played in crafting Enron’s fraudulent special purpose vehicles.