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Banks fall as Congress probes Enron ties
Financial Times ^ | July 23 2002 19:26 | By Gary Silverman in New York and Lydia Adetunji and Peter Spiegel in Washington

Posted on 07/23/2002 5:18:44 PM PDT by DeaconBenjamin

Citigroup and JP Morgan Chase shares went into free fall on Tuesday as congressional investigators showed how the two biggest US banks helped Enron disguise its debts through complex deals that hid their own involvement.

Investors took fright at the potential damage to the banks from their role in the energy trader's collapse, which has already brought down its auditor Andersen. Citigroup shares fell nearly 16 per cent on Tuesday with JP Morgan down 18 per cent, a combined loss of market value of over $34bn. Citigroup has lost a quarter of its value in two days.

Congressional investigators yesterday portrayed the banks as knowing participants in Enron's efforts to make its debts appear as trades through the use of "prepaid" energy contracts.

Senior executives from both banks defended their actions, telling the congressional inquiry that "prepay" transactions were legitimate financing structures used widely on Wall Street and any improper accounting was the fault of Enron and Andersen.

"During our business relationship with Enron, we thought we we re dealing with honest managers who had a legitimate business purpose for the transactions we did with them," said David Bushnell, managing director of Citigroup's global corporate and investment banking business. "Our employees did transactions that were common throughout Wall Street, and they believed those transactions were entirely appropriate."

Senator Carl Levin, chairman of the subcommittee on investigations, said the banks "knew what Enron was doing, assisted Enron in the deceptions, and profited from their actions".

Investigators insisted Citigroup and JP Morgan employees realised the deals were inappropriate, pointing to internal documents showing bankers attempting to keep the prepays secret. The documents also show the banks helped Enron make sure the trades could be accounted for as cash flow, rather than debt, a fact investigators said made them complicit in Enron's faulty financial statements.

Mr Levin is due to send his evidence to the Justice Department, which began a criminal investigation into financial fraud at Enron seven months ago.

The controversies have been a personal embarrassment for Sandy Weill, Citigroup's chairman and chief executive, who has been calling recently for corporate governance reforms. Mr Weill told Citigroup employees yesterday that the bank's share price had "decoupled" from its performance.

Analysts said the share price declines reflected fears the banks could face heavy fines or restrictions on their business activities. Tanya Azarchs, banking analyst at Standard & Poor's rating agency, said: "There is no way to quantify what the impact will be. Investors are assuming the worst."

Additional reporting by Jenny Wiggins in New York


TOPICS: Breaking News; Business/Economy
KEYWORDS:
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Remember the mantra: Too Big To Fail, Too Big To Fail...
1 posted on 07/23/2002 5:18:44 PM PDT by DeaconBenjamin
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To: DeaconBenjamin
I may slip down to the bank tomorrow and withdraw a little cash.
2 posted on 07/23/2002 5:21:29 PM PDT by blam
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To: DeaconBenjamin
This is turning out to be one heck of a house-cleaning.
3 posted on 07/23/2002 5:22:45 PM PDT by Clara Lou
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To: All
telling the congressional inquiry that "prepay" transactions were legitimate financing structures used widely on Wall Street

Can someone tell me what a prepay transaction is? Sorry for my ignorance.

4 posted on 07/23/2002 5:26:25 PM PDT by hoosierboy
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To: DeaconBenjamin
Howdy

Jeepers mister Levin, did the FORMER TREASURY SECRETARY OF THE UNITED STATES OF AMERICA UNDER cLINTON have anything to do with abusing the trust of Citicorp to get clinton's buddy ken lay out of the jam that his corrupt dealings with the indian government landed him in?

Lets be careful which rocks we turn over, huh levin baby?

5 posted on 07/23/2002 5:32:17 PM PDT by MoscowMike
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To: hoosierboy
Howdy

You know, its when coporations run like government does. The government loots your social security fund, spends the money on butt floss, then claims its IOU is an asset. This is your government running like a top.

Similarly, Citibank floats Enron a loan to cover their exposed corrupt clinton-screwed back sides, then claims the loan is an Enron asset, not a debt. This is corporate America running a moon sized fraud.

6 posted on 07/23/2002 5:36:04 PM PDT by MoscowMike
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To: DeaconBenjamin
That would explain why Capital One's shares dropped 3.11 to 30.99 today too .... criminy.
7 posted on 07/23/2002 5:36:21 PM PDT by Centurion2000
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To: MoscowMike
Don't ask, don't tell.
8 posted on 07/23/2002 5:39:03 PM PDT by DeaconBenjamin
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To: DeaconBenjamin
Citigroup...Robert Rubin...The Clinton legacy continues!!!
9 posted on 07/23/2002 5:39:53 PM PDT by Sandmansleeper
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Comment #10 Removed by Moderator

To: Sandmansleeper
It is almost over and soon the democrats will get indicted for this giant mess. They have caused and planted thru out the Clinton years.
11 posted on 07/23/2002 5:44:22 PM PDT by TLBSHOW
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Comment #12 Removed by Moderator

To: blam
I would do that, too, but I don't think $10.48 will make much difference.
13 posted on 07/23/2002 5:46:48 PM PDT by RightWhale
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To: DeaconBenjamin
Investigators insisted Citigroup and JP Morgan employees
realised the deals were inappropriate, pointing to internal documents
showing bankers attempting to keep the prepays secret.

My god.  Are we about to go over the edge?

14 posted on 07/23/2002 5:48:46 PM PDT by gcruse
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To: TLBSHOW
One can only hope that indictments will be forthcoming soon...before the November elections would be nice!
15 posted on 07/23/2002 5:49:14 PM PDT by Sandmansleeper
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Comment #16 Removed by Moderator

To: Centurion2000
"That would explain why Capital One's shares dropped 3.11 to 30.99 today too ...."


My understanding is that Capital One's grief is that they under reserved for potential losses in their credit card business. They issue credit cards to sub-prime consumers.

They are not in corporate banking like Citicorp and Morgan/Chase with Enron et al.
17 posted on 07/23/2002 5:53:49 PM PDT by APBaer
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To: DeaconBenjamin
Who do we contact to make them get Rubin to testify?
18 posted on 07/23/2002 6:00:41 PM PDT by MonroeDNA
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To: APBaer
True...however, look for the financials to take a hit because of these latest revelations...hope I'm wrong!
19 posted on 07/23/2002 6:01:53 PM PDT by Sandmansleeper
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To: blam
The Role of the Financial Institutions In Enron’s Collapse
20 posted on 07/23/2002 6:12:25 PM PDT by USA21
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To: DeaconBenjamin
Start watching for strange accidents, deaths, suicides and disappearances.

This has the making of a bad horror movie.

21 posted on 07/23/2002 6:13:09 PM PDT by unixfox
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To: TLBSHOW
It is almost over and soon the democrats will get indicted for this giant mess. They have caused and planted thru out the Clinton years.

LOL!...You forgot to close your tag < /sarcasm >

22 posted on 07/23/2002 6:32:02 PM PDT by lewislynn
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To: unixfox
Even if Ruben were to testify, he'd adopt the tried and true: "I don't recall" crap. Dirty as they come? You bet.
23 posted on 07/23/2002 6:34:49 PM PDT by Galtoid
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To: TLBSHOW
"It is almost over and soon the democrats will get indicted for this giant mess. They have caused and planted thru out the Clinton years.

Gimme some of dat you're smokin'.
24 posted on 07/23/2002 6:38:18 PM PDT by demkicker
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To: DeaconBenjamin; rdavis84; Wallaby; aristeides; Fred Mertz; EBUCK; OKCSubmariner; Shermy; ...
Perhaps all this $$$$$$$$ stuff is part of Bin Ladens master plan?

Maybe the Islamic Fundamentalist Terrorists have some PH.D's in economics, not just the biotech area!
25 posted on 07/23/2002 6:58:09 PM PDT by Betty Jo
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To: hoosierboy
Can someone tell me what a prepay transaction is? Sorry for my ignorance

Pretty simple actually. Citibank gives Enron $500 million, and has a signed agreement that in a year Enron will give them $650 million worth of oil and natural gas. Enron then tells everyone "Look! We've sold $500 million of oil and are making lots of profit!". That's a prepay transaction.

Unfortunately for Citibank, it is not only blinding obvious that there is no oil pipline from Enron to Citibank, but there is also a memo in which an executive lets the cat out of the bag -- Enron will pay cash rather than oil. So this "Income" is actually a loan.

26 posted on 07/23/2002 7:13:05 PM PDT by TennesseeProfessor
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To: gcruse
My god. Are we about to go over the edge?

I believe much of America is about to enter into a period of judgement. There is a blessing-judgement cycle recorded in the Bible as regards to Israel, that applies to some extent to all nations. When they live moral, honest, reverent, and respectable lives, the nation is blessed. They get to feeling all proud and complacent. Respect for righteousness and God errodes. Soon the people who proclaim truth go from being respected to being ridiculed.

The bible teaches that when ridicule of the people of God turns to emnity and hostility, a "Day of the Lord" (period of judgement) comes. At that point the people go through great trials, are humbled, and repent. Only in Revelation, at the LAST Day of the Lord, are people so hardened that even when judgement falls they do not repent, but rather curse God and persecute His people all the more.

27 posted on 07/23/2002 7:20:23 PM PDT by Ahban
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To: DeaconBenjamin
A Twist on Nero ..

While Rome Burned, The Senate Fiddled ..
28 posted on 07/23/2002 7:21:41 PM PDT by NormsRevenge
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To: jimmyBEEgood
"HELP ,, I'm falling ,, & I can't get it up ,, HA Haaaaaaaaaaaa !!!!"

This thing might not be too funny in the near future. When our banks start going under, we are in trouble.

29 posted on 07/23/2002 7:26:09 PM PDT by Don Myers
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To: unixfox
"This has the making of a bad horror movie."

You ain't just whistling Dixie.

30 posted on 07/23/2002 7:26:53 PM PDT by Don Myers
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To: demkicker; TLBSHOW
"Gimme some of dat you're smokin'."

demkicker, I have to agree with you. The leftist media will make sure the blame goes to the "right people."

31 posted on 07/23/2002 7:28:26 PM PDT by Don Myers
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To: Ahban
It is amazing what means little to people means much to God. He places great store on things like morality and obedience to His ways. For both of these things, we have an a..-kicking coming our way.
32 posted on 07/23/2002 7:30:34 PM PDT by Don Myers
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To: hoosierboy
Simply, Enron was loaned money, but it wasn't called a loan, it was "prepay" for energy to be delivered in the future.

The reason this is a scam on Enrons end is that the interest payments aren't shown as an expense.

Imagine if you were a carpenter, and I gave you $10,000 for work you were going to do on my house in the future. But, both you and I know that you're not going to do any work, but instead pay it back. On your balance sheet it is shown as revenue and not an expense.

I think I got it correct ;)
33 posted on 07/23/2002 7:30:43 PM PDT by Guillermo
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To: Don Myers
Why do you think Greenspan is still in power. TO PROTECT THE BANKS.........He knew this ship was going to hit the fan......and is ready. Damn them all!
34 posted on 07/23/2002 7:36:25 PM PDT by OldFriend
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To: OldFriend
Yeah, tough times might be ahead.
35 posted on 07/23/2002 7:40:09 PM PDT by Don Myers
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To: Don Myers
He bailed out Long Term Capital....also a Goldman Sachs connection. The reason some people never learn is that NO ONE ever goes to jail. IT'S TIME!!!
36 posted on 07/23/2002 7:42:05 PM PDT by OldFriend
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To: studentintexas
That was a very clear explanation. I finally understand the Enron/Citicorp prepay scheme.

Are the figures of $500 million and $650 million the actual figures, or were you using them as an example to illustrate your point?

If those are the figures, that's a 30% interest charge for one year!

37 posted on 07/23/2002 7:46:31 PM PDT by Ken H
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To: Sandmansleeper
"look for the financials to take a hit because of these latest revelations...hope I'm wrong!"

Nothing makes a mess quite like a gravy train, brought to a sudden stop...

38 posted on 07/23/2002 7:47:02 PM PDT by okie01
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To: Centurion2000
Capital One is a sub prime consumer lender, while JPM and Citi are top of the food chain derivative players. In the end, they will all suffer badly in stock price. Going short on these guys is money in the ... hand.
JPM may too big to prevent failing. They are leveraged at 42 to 1 (I believe) in derivatives. There must be serious action behind the curtain right now to stave off disaster.
39 posted on 07/23/2002 7:52:29 PM PDT by Mike K
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To: MonroeDNA
Who do we contact to make them get Rubin to testify?

Lieberman. Good luck. He ain't calling Rubin to testify, no way, no how.

40 posted on 07/23/2002 7:55:37 PM PDT by jackbill
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To: OldFriend
Yes, it is true that we don't hold the high-flyers accountable. It is time that we start putting a few in jail. That won't bail us out of trouble, though.
41 posted on 07/23/2002 7:58:52 PM PDT by Don Myers
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To: Centurion2000; BillyJack
I'm pasting a pertinent reply from another thread. Remember there's a Federal Reserve office in Dallas if money gets tight. Thanks to BillyJack, see below:

http://www.financialsense.com/Market/daily/monday.htm

"J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business."


Danger in Derivatives
The media attention has been on the companies that have defaulted on their loans or have filed for bankruptcy protection. To a lesser extent, the attention has been on the banks. A credit bubble has two sides to the equation: the borrower (Enron, Global Crossing, Kmart WorldCom) and the lender (J.P. Morgan Chase, Citigroup, Bank America). Banks have not only been the lender and underwriters on much of this debt, they have also been the writer of derivatives that go hand-in-hand with the expansion of credit. In fact, bank derivative growth has been growing at double-digit rates over the last decade. During the first quarter of this year the notional value of derivatives in bank portfolios increased by $946 billion. Interest rate contracts increased by $972 billion to $39.3 trillion. So in addition to the debt debacle, you also have the danger of another derivative debacle such as we had with LTCM back in 1998. Many of the top banks such as J.P. Morgan Chase, Citigroup, and Bank America are also the nation's largest writers of derivatives. These three banks have derivative portfolios totaling close to $40 trillion in notional value or roughly 87 percent of the derivative portfolio of the nation's top 354 banks. This is a high concentration in just a few players in what is a very risky business.

On top of making bad loans, the banks also have exposure as the largest underwriters in the derivative business. J.P. Morgan Chase is leveraged over 700-1 when you look at the bank's exposure to derivatives. The net equity of JPM has to back those derivatives. If you look at J.P. Morgan Chase’s derivative book, the bank looks and acts more like a hedge fund then it does a pillar of stability of the financial establishment. The credit problems are only one side of the problem. No one knows what the bank's derivative risks are other than that they have $23.4 trillion in derivatives against equity of around $40 billion.

This isn’t the only problem the bank has at the moment. J.P. Morgan Chase and Citigroup made $5 billion in cash loans using complex transactions that were disguised as energy trades. This made the loans hidden from Enron’s balance sheet. Investigators found out that J.P. Morgan and Citigroup were Enron’s main source of prepay funding. The Senate Governmental Affairs subcommittee is now looking into the extent to what these banks knew and the role they may have played in aiding Enron’s accounting deceptions. J.P. Morgan promoted prepay loans to customers in the 90’s because of their “balance sheet friendly” nature. In addition to the Senate, the Manhattan’ district attorney’s office is looking into the role J.P. Morgan Chase played in making offshore loans to companies in an effort to keep the debt off the balance sheet. Insurance companies, which issued surety bonds as guarantees that Enron would repay its offshore loans, are now suing the banks because they claim the banks kept knowledge of the company’s perilous financial condition from them."


10 posted on 7/23/02 7:22 PM Central by BillyJack
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42 posted on 07/23/2002 8:01:05 PM PDT by Mike K
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To: Don Myers
There must be consequences...........or the markets are finished. Everyone is beginning to understand that small fact!
43 posted on 07/23/2002 8:07:22 PM PDT by OldFriend
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Comment #44 Removed by Moderator

To: jimmyBEEgood
Many people have their retirement funds tied up in stocks. My in-laws do.
45 posted on 07/23/2002 8:23:38 PM PDT by Don Myers
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Comment #46 Removed by Moderator

To: Clara Lou
Call in the Wolf


47 posted on 07/23/2002 9:19:23 PM PDT by My Favorite Headache
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To: Ken H
The $500 million is a real number, the $650 I made up. A different shady deal with JP Morgan had an effective intrest rate of about 7.5%, so I would guesstimate $530 in "oil".
48 posted on 07/23/2002 9:28:19 PM PDT by TennesseeProfessor
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To: Don Myers
I have trouble with your analogy doesn't line up with the scripture which says, "I will bless those who bless you". God said this to Abraham. Since we have gone out of our way to bless Israel, I don't think we have a very big a$$-kicking coming. Also ... what about: "But God, who is rich in mercy ..."
49 posted on 07/23/2002 9:44:42 PM PDT by CyberAnt
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To: My Favorite Headache
LOL!
50 posted on 07/23/2002 9:55:09 PM PDT by Tauzero
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