ASHINGTON, July 23 — Officials for two of the nation's largest financial institutions, Citigroup and J. P. Morgan Chase, told Senators today that they did not improperly help Enron disguise portions of the enormous debt that contributed to the company's collapse last fall.
But the Senate panel investigating Enron's collapse produced evidence that lawmakers said seriously undermined the officials' contentions.
Using internal documents, tape recordings and e-mail messages — documents that at times appeared to surprise some bank executives who testified — the lawmakers painted a picture of how both banks set up supposedly independent entities that in reality were largely controlled by the banks and which allowed Enron to borrow billions of dollars that it did not disclose as debt to investors.
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.
But lawmakers on the Senate Permanent Subcommittee on Investigations produced what they said was evidence that Mahonia and Delta were actually controlled by the banks. Thus, they said, Enron should have been forced to count the money received as debt. That would have probably resulted in credit downgrades and more skepticism from investors long before the rapid chain of events that led to Enron's bankruptcy, they added. Moreover, documents collected by the Senate panel also suggest that the two banks knew the deals allowed Enron to burnish its financial picture.
"Enron loves these deals as they are able to hide funded debt from their equity analysts," according to an e-mail message from a Chase banker in 1998, by recording it as deferred revenue or by burying "it in their trading liabilities." A recording of a phone conversation of Chase employees discussing a prepay deal last year captured one banker explaining it as "a circular deal that goes right back to them."
At Citigroup, a September 2000 e-mail message from an employee discussing an Enron prepay transaction described such deals as allowing Enron to get "money that gives them cash flow but does not show up on books as big D Debt."
The two banks "were the biggest participants in Enron's phony prepay transactions," said Senator Carl Levin, the Michigan Democrat who is chairman of the subcommittee.
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.
As the hearing continued this evening, Mr. Levin suggested that a transaction with Enron called Roosevelt provided evidence of Citigroup's role in cloaking Enron's true financial condition. "Now we talk about the participation of the banks, oh, yeah," Mr. Levin told a panel of Citigroup bankers.
In an analysis sent out by Citigroup's investor relations department today, the bank disputed the accusations pertaining to the Roosevelt deal, which were reported in The New York Times. At issue is a five-month extension of $125 million owed by Enron that, bank documents say, Enron had agreed to repay by Sept. 30, 1999. The amount was not listed as debt on Enron's financial statements.
The analysis portrayed the oral agreement with Enron, which internal bank documents said should have changed the accounting for the transaction, as nothing more than "informal discussions, expectations or intentions" that had no effect on the written legal agreement.
The analysis said that an e-mail message written by a Citigroup banker, which described the oral discussions as an "agreement," were only referring to the bank's expectation. And indeed, an expectation would have no effect on the accounting, while an agreement would.
The banker's e-mail message said, however, that the oral discussions with Enron would change the accounting, if recorded on paper. Moreover, in the approval documents submitted to senior Citigroup credit officers — and cited in the Times article — senior officers of the bank were informed that Enron had "verbally agreed" to pay back the money. In other words, either the analysis distributed today was wrong, or Citigroup's own documents submitted to the loan approval committee were.
Mr. Levin seized on the difference today. "You lied in this memo?" Mr. Levin asked one Citigroup banker, James Reilly, about the approval documents. Mr. Reilly said that the passages were meant to be a "statement of intention" by Enron, and not a binding agreement to pay the debt back. Another Citigroup banker, Richard Caplan, described the wording on the document as "unfortunate" and said it was meant to help the bank get "comfortable in making a credit decision."
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.
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.
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