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Enron and its Bankers

Congress investigates the connection between failed energy giant Enron and its banking partners.

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  • GWEN IFILL:

    For weeks now, Congress has been sorting through the intricate business relationships that link big corporations to their analysts, auditors, and bankers. Few relationships seem more complicated than the ones that allowed Enron to balance its books through deals worked out with financial firms like CitiGroup, J.P. Morgan Chase, and Merrill Lynch. For more on this, we turn to the chairman of the Senate Subcommittee on Investigations, Democrat Carl Levin of Michigan; and the ranking member of that panel, Republican Susan Collins of Maine.

    Senator Levin, tell us what it is that you're trying to get to the bottom of here, just in simple layman's terms.

  • SEN. CARL LEVIN:

    We're trying to show what our investigation has now discovered: That some major financial institutions in this country participated in the deceptions of Enron, helped to facilitate them, participated in them through doing them favors, helping them show, for instance, something as income coming in which was not truly income coming in.

    Today, for instance, we saw very clear documentary evidence that Merrill Lynch gave… lent $7 million in this case to Enron. They should have showed it for what it was, a loan on their books. Instead they treated it as a purchase of an asset. That purchase of an asset which was interest in barges in Nigeria was temporarily parked at Merrill Lynch for six months.

    There was a guarantee, oral guarantee and a lot of documentary evidence of that guarantee, by Enron that they would only have to hold that asset for six months and then they would find a purchaser of it.

    This, under any accounting prince principle, has got to be shown as a loan to Enron not as a sale but Merrill Lynch knew that Enron wanted the income coming in from a sale by the end of 1999. They wanted to make their books look a lot better. And the way to do that was to show something as a sale of an asset, not as money which was being borrowed. They got Merrill Lynch — a prestigious firm — to go along. There was a number of other areas, which we explored today as well which are very, very disturbing.

  • GWEN IFILL:

    Well, Senator Collins, is what your investigation showing here, the sub committee's investigation, is it showing that what these banking firms, these financial firms, may have done in cooperation with Enron is as bad as what we've been hearing Enron was up to?

  • SEN. SUSAN COLLINS:

    Well, what's disturbing is that some of the most prestigious financial institutions in our country appear to have aided and abetted Enron's deception. And thus, I do think that they bear responsibility.

    Enron obviously was the direct participant, but without the assistance of some of these financial institutions, Enron would not have been able to enter into transactions that enabled it to deceive investors, its customers, and its employees.

  • GWEN IFILL:

    Now, Senator Collins, in their defense what they have said to you and they have said in other settings is that what they have done was technically legal, that they have done nothing that's provably wrong.

  • SEN. SUSAN COLLINS:

    Well, I think it clearly was unethical and highly questionable. Whether or not it was illegal will be something for the Department of Justice to determine and the state attorney general, both of which have investigations underway into some of the transactions that Senator Levin and I have highlighted in our hearings.

  • GWEN IFILL:

    Senator Levin, are you suggesting that what you may get to the bottom of in this investigation is that what these companies are doing, what these banks are doing with these companies is… smells bad but may not necessarily be illegal?

    For instance, you talked today about the analyst who was replaced at Merrill Lynch because he had said negative things — at least Enron — perceived this about Enron. What's illegal about that?

  • SEN. CARL LEVIN:

    That may not be currently illegal, but it surely ought to be illegal because there should be a clear line between an analyst at a company who analyzes a stock is supposed to do that objectively and that company's then going out and selling a stock for that company, doing the investment work for the company because it's obvious that what Enron did here was very clear: They told Merrill Lynch that if that particular analyst continued to give them an unfavorable review, that they weren't going to be doing any investment business with Merrill Lynch anymore.

    So Merrill Lynch said, woops, we've got to do something about that. They did something about that. The analyst was gone in a few months and lo and behold the rating of the Enron stock then improved a great deal.

    We have to change that situation one way or another, but some of the things that Merrill Lynch did, I believe, are illegal or may be illegal. For instance, if they, in fact, showed something on their books as a purchase, which they knew was a loan– and there's a huge amount of documentary evidence that, in fact, it was a loan– then it seems to me they have participated, aided and abetted a fraud.

  • GWEN IFILL:

    And what Enron did, let me try to clear it up for people who aren't paying attention to this generally, is created a special purpose entity to carry out some of these businesses, for instance, like the barge business in Nigeria that you were referring to a moment ago?

  • SEN. CARL LEVIN:

    It was actually created by Merrill Lynch, even though Enron paid all the fees and the costs of it. But what Merrill Lynch knew is that Enron wanted to show on Enron's books a sale of those barges or the interest in those barges by the end of the year. They wanted their books to look better by the end of the year. In order to do that, they had to show it as a sale of an asset — not as a loan from Merrill Lynch of the $10 million but as a sale of that asset to Merrill Lynch's subsidiary, that special purpose vehicle. And that's where Merrill Lynch participated in the cooking of the books.

  • GWEN IFILL:

    Senator Collins, is there a way to add up how much Enron's debt may have been lowered by its participation in deals like these?

  • SEN. SUSAN COLLINS:

    Well, if you look at our hearings from last week where we explored the transactions of two prominent banks, plus the evidence with Merrill Lynch, it is in the billions of dollars. These transactions allowed Enron to keep billions of dollars of debt off its books, which misled investors about the true health of the corporation.

  • GWEN IFILL:

    How common are these kinds of transactions? Is this the sort of thing where a company like CitiGroup or JP Morgan Chase can then peddle the same deal to somebody else?

  • SEN. SUSAN COLLINS:

    Well, that's exactly what happened in the case of the so- called prepaid transactions, which were the sham transactions that the two banks entered into with Enron. We found that the banks actually touted these transactions to other clients.

    So that's very troubling because there may be other examples– I hope far less egregious than the examples involving Enron– where this kind of deceptive transaction took place.

  • GWEN IFILL:

    Senator Levin, it seems that in many cases at least during this big run-up for these companies in the '90s that one's creative management could be another man's deceptive practices. How do you in investigating this behavior begin to figure out one from the other?

  • SEN. CARL LEVIN:

    We look at the words that appeared on documents. Those words today for instance were promises, guarantees, assurances. What Merrill Lynch tried to turn that into is something very different, changed the meanings of the words in their own documents into something like best efforts instead of guarantees.

    There's a vast difference. A guarantee is a guarantee. Even Merrill Lynch agrees that if it were in fact a guarantee that their money would come back, they could not have shown that as a purchase. It would have had to have been shown as a loan. We look at the ordinary average meaning of words and transactions but it's going to be up, in terms of legality it's going to be up to the Securities and Exchange Commission and to the Justice Department and to local prosecutors as to whether to proceed on a criminal basis.

    Our purpose here is to help lay the groundwork for possible criminal prosecution but also for potentially additional legislative action. We took some very good steps this week and last week in getting the Sarbanes bill into law. We've taken some important strides in terms of reform but we still have a long way to go and a number of steps which still need to be taken.

  • GWEN IFILL:

    I want to ask you about that – the bill the President signed in just a moment. But first I want to ask you a more basic question for people. Who is losing money here? Is it investors or is it just paper transactions?

  • SEN. CARL LEVIN:

    Oh, no, investors — big-time; pension funds. These are lifetime savings of people that have gone down the drain. These are employees who have lost their jobs but investors who have lost their investments because of the frauds of Enron.

  • SEN. SUSAN COLLINS:

    Shareholders lost $60 billion when Enron collapsed, and we know that that was because of the deception. I don't think that investors would have put their hard-earned money into Enron stock if they had been presented with the true picture of Enron's financial position.

  • GWEN IFILL:

    Okay, well, Senator Collins, here's a question then about the bill that the President signed today. What difference would it make in cases like this? Would the bill that the President signs that the Senate passed and the House passed actually stop these kinds of transactions from happening?

  • SEN. SUSAN COLLINS:

    I think it would make a big difference. For example, in the case of the bill that the President signed into law, one of the important provisions is that the CEO and the CFO of a corporation have to personally certify the accuracy of financial results. If they're found to have falsely certified them, there are tough new penalties.

    I think another difference will come about as a result of the prohibition of an auditor being both the internal accountant and the external auditor. Those kinds of checks and balances were missing in Enron and allowed some of the accounting deception to occur. So I think those two provisions alone would make the difference.

  • GWEN IFILL:

    Senator Levin, do you see anything else in that bill that would make a big difference here.

  • SEN. CARL LEVIN:

    I do. There's an independent board now that is going to regulate auditors. There is going to be an independent stream of financing for the board which sets the accounting standards.

    It's essential that that board be independent of the people who will be affected by those accounting standards. And we've seen too many examples of where pressure has been placed on the current board that did not have an independent source of financing to do something different than what they thought was the right thing to do, including what the financial accounting standards board wanted to do relative to expensing stock options in the early '90s. By the way, stock options have an important role in all these deceptions because….

  • GWEN IFILL:

    That's not part of this bill, is it?

  • SEN. CARL LEVIN:

    Of which?

  • GWEN IFILL:

    Expensing stock options.

  • SEN. CARL LEVIN:

    It is not part of this bill. We tried to offer an amendment on that. We were thwarted by Senator Phil Gramm. But we're going to make another effort when we come back in that area. But at least we have now an independent source of funding for the board, which does the standard writing, and that is an important change.

  • GWEN IFILL:

    Senator Collins, do you expect these kinds of investigations to lead to other firms. There are some insurance companies who are now claiming there were sham deals that they were victimized by? Do you expect this to lead to other firms other than just the big names we've heard so far?

  • SEN. SUSAN COLLINS:

    It seems that every day we hear another large corporation restating its earnings. I hope that the hearings that we've held will have a salutary effect and a deterrent effect. It's difficult to predict what's going to happen but I am hopeful that Wall Street professionals and corporate executives have a new sense of their responsibility. I do want to indicate that many of them are ethical and responsible, but it has been very disturbing what we found as a result of our in-depth investigation.

  • GWEN IFILL:

    Senator Susan Collins and Senator Carl Levin thank you both for joining us.

  • SEN. SUSAN COLLINS:

    Thank you.

  • SEN. CARL LEVIN:

    It's good to be with you.