Citigroup Said to Mold Deal to Help Enron Skirt Rules

New York Times ^ | 7/22/02 | RICHARD A. OPPEL Jr. and KURT EICHENWALD

[kattracks]

enior credit officers of Citigroup misrepresented the full nature of a 1999 transaction with Enron in the records of the deal so that the energy company could ignore accounting requirements and hide its true financial condition, according to internal bank documents and government investigators.

The records and interviews with investigators demonstrate for the first time that bankers intentionally manipulated the written record of their dealings with Enron to allow the company to improperly avoid the requirements of accounting rules and the law, thus keeping $125 million in debt off its books.

In the 1999 deal, the records show, the bankers knew that a secret oral agreement they had reached with Enron required that the accounting for the transaction be changed. Instead, investigators said, Citigroup left that side deal out of the written record and allowed Enron to account for the transaction in a way that the bankers knew was improper. In other words, the full terms of the deal were left out of the paperwork, with the result being that anyone reviewing it would have no idea that the accounting treatment being used by Enron was not proper.

The relationship between Enron and its bankers has been a focus of investigative efforts since the company collapsed amid an accounting scandal last December. For months, both Citigroup and J. P. Morgan Chase have been repeatedly criticized by investigators and shareholders' lawyers for structuring billions of dollars of transactions for Enron involving entities with names like Mahonia, Yosemite, Delta and Stoneville Aegean.

The banks have responded that those transactions — which critics say allowed Enron to disguise loans as trading liabilities — properly followed accounting rules, and were the workaday product of a widely used business known as structured finance.

But the latest transaction — a previously undisclosed deal called Roosevelt — is far different. In this case, the determination of the proper way to account for the deal is not coming from outside critics but from internal Citigroup e-mail messages among bankers expressing deep concern about revealing the oral agreement with Enron in the written record of the transaction.

"The paperwork cannot reflect their agreement," according to one e-mail message written by James F. Reilly, a senior Citigroup loan executive in Houston, "as it would unfavorably alter the accounting."

A spokesman for Citigroup declined to comment, but he stressed that the bank believed that its dealings with Enron were "entirely appropriate."

A lawyer for Enron, Robert S. Bennett, said tonight that he was unfamiliar with the Roosevelt transaction, but he said that he was "unaware that those financial institutions did anything wrong."

The Roosevelt transaction and other deals between Enron and the banks are expected to be examined today at a hearing before the Senate Permanent Subcommittee on Investigations. Already, some members of the committee have concluded that the Roosevelt transaction violated accounting rules.

"Citibank was a participant in this accounting deception," said Senator Carl Levin, Democrat of Michigan and the panel's chairman.

The subcommittee's ranking Republican, Susan M. Collins of Maine, said the investigation had found that Citigroup was willing to risk its reputation "to keep Enron, an important client, happy."

Such transactions between the banks and Enron — including Roosevelt, Mahonia and Delta — were structured to have all the appearance of commodity trades, but ultimately served the same purpose as a loan. Money flows from the bank to the company, cash is paid back months later along with the equivalent of interest, and actual commodities rarely change hands. Technically, experts have said, such transactions — known as prepays — follow the requirements of the accounting rules, even if ultimately they can disguise the total debt held by a corporation.

But, for such transactions to be treated as prepays, one agreement must stay in force: the company must maintain its commitment to deliver a commodity — like natural gas — at some point in the future. If, instead, the company commits itself simply to return the cash, the transaction has been transformed from a prepay into a loan, pure and simple.

That is what happened in the Roosevelt transaction, documents and interviews show. In that deal, Citigroup agreed in late 1998 to transfer to Enron $500 million for six months as part of a prepay, with the company committing itself to deliver natural gas and oil at a future date. Terms of the deal called for portions of the debt to be sold off by May 1999 in chunks to other banks, to help spread Citigroup's risk — unless the commodity was delivered or the money advanced was repaid.

As that date approached, Enron asked Citigroup to extend the time in which it was allowed to make good on its side of the transaction, according to e-mail messages between senior Citigroup loan executives. Under the company's proposal, it would repay Citigroup $310 million — roughly the amount owed under the natural gas portion of the transaction. The remaining amount of roughly $190 million — which corresponded with the value of the crude oil prepay — would be paid back by Enron sometime in the fall.

"Enron characterizes this as a `favor' — they do not wish to repay Roosevelt without full corresponding refinancing," according to an April 19, 1999, e-mail message from Mr. Reilly. In other words, Enron did not want to repay the $500 million until it could find another way to get similar financing. But, according to the e-mail message, Enron had failed to do so.

Officials in the loan department of Citigroup were "very negative" on the proposal, the internal records show. Rather than extending the time and allowing Enron to pay in the future, they suggested several alternatives under which Enron would pay the $310 million, while the rest of the debt would be sold off to other banks.

Within days, the records show, a new deal was reached, sidestepping the concerns of the loan department. Under its terms, Enron would pay $310 million in early May. At the same time, oil deliveries required to be made each month from May to September would be pushed back to begin on Oct. 1. But, under the secret oral agreement, Enron committed itself to prepay the full amount by Sept. 30 — a commitment that bankers knew transformed the potential oil deliveries into a fiction, thus changing the deal from a structured financing into a loan.

Enron has "agreed to prepay by 9/30," Mr. Reilly, the Houston banker, wrote in an April 27 e-mail message. "The papers cannot stipulate that as it would require recategorizing the prepaid as simple debt."

Ultimately, Enron paid $375 million in May, leaving $125 million of the oil transaction still outstanding. The loan approval documents for the revisions, submitted to senior banking officials, disclosed that Enron had "verbally agreed to repay the remaining $125 million by Sept. 30, 1999." However, according to people who have reviewed the paperwork for the transaction itself, there is no mention of that oral commitment.

Mr. Bennett, the Enron lawyer, said the current criticisms by Congress were a result of political pressure to crack down on the appearance of corporate wrongdoing. "What we have here is an incredible amount of revisionist history, which is motivated by the upcoming election," he said. "Most of the problems — not all of them — are things that have been legal and have been acceptable."

[TLBSHOW]

How the Clinton Treasury Caused the Current Stock Market Fall (Intermingling of Businesses)



In 1998, Travelers CEO Sandy Weill and Citicorp head John Reed announced plans to merge their two financial powerhouses. There was one problem: U.S. law prohibited the merger of commercial banks with insurance companies and securities firms. The two companies were not deterred. A loophole in the law barring such combinations gave the two companies a two-year window before the merger ban would kick in. That would be plenty of time, they figured, to change a centerpiece of U.S. banking laws that had stood in place for more than 50 years.
There already was momentum in Congress in support of the financial deregulation that proponents supported under the misleading banner of “financial modernization.” But there were also major legislative blocks and hurdles, and no assurance of passage.

Enter Citigroup. Though Citicorp has opposed the deregulation bill, the merged Citigroup became its most important advocate, with Sandy Weill pitching a tent in the halls of Congress to lobby legislators.

Still, the bill remained mired in Congress, thanks to jurisdictional disputes among federal agencies, intra-industry conflicts and consumer group opposition.

Former Clinton Treasury Secretary Robert Rubin sealed the deal. After having left his Treasury Department post, but amidst negotiating his new terms of employment as chair of the management committee at Citicorp, Rubin brokered the final compromise to ensure passage of the financial deregulation bill.

While Citi’s top priority was an after-the-fact legalization of the tainted Citicorp-Travelers merger, much more was at stake — for both the financial industry and consumers. The bill has enabled not just this particular corporate combination, but the intermingling of businesses that were formerly, properly and prudentially, kept apart.

http://multinationalmonitor.org/mm2002/02april/april02editorial.html

[cactusSharp]

now the time line.....this was discovered from actions
back in 1999.Do not be fooled,it was happening from '96
to '99 to accumulate the telling totals.

[Mike Darancette]

Citicorp --- Big DemocRAT donors, I home the DNC and other Dems give ALL their CITIGROUP donations back.

[TLBSHOW]

the key is here


There was one problem: U.S. law prohibited the merger of commercial banks with insurance companies and securities firms.

[LarryLied]

Prince Alwaleed Bin Talal, nephew of Saudi Arabia's King Fahd, owns 4%, about 10 billion dollars worth, of Citicorp. And Robert Rubin,formerly of Goldman Sachs and the U.S. Treasury is a Director, a Member of the Office of the Chairman of Citigroup Inc.,and a member of the Citigroup Management Committee.

Americans are being jerked around big time.

No wonder Democrats killed drilling in ANWR and Lieberman has called for more Palestinian immigration into the USA.

[TLBSHOW]

A person familiar with the matter says, the Justice Dept's Enron Task Force also is looking into the roles that Citigroup, J.P. Morgan, Merrill Lynch & Co. and National Westminster Bank may have played in Enron's demise. IMPACTING... http://www.drudgereport.com/

[TLBSHOW]

A person familiar with the matter says, the Justice Dept's Enron Task Force also is looking into the roles that Citigroup, J.P. Morgan, Merrill Lynch & Co. and National Westminster Bank may have played in Enron's demise. IMPACTING... http://www.drudgereport.com/

[Vidalia]

Oh yes, all of this is "alleged"...

Citi-Group (previously Citi-Banc) is as dirty as they come, and D.C. Hill folk used the banking and "other services" for at least the last 15 years.

Hello, Mr. Dirty Alphabet agent who had been fired, released from duty, or "couldn't be accounted for", etc. that would be hired to "clean up" the "loose ends".

The rogues could walk into any scene and gather all the info, including evidence, and would not be questioned, since these different offices never "talked" to one another.

Catching the drift?

Wanna guess who never turned in their badges or stash of firearms?

A "throw down" or whatever the slang is these days still means the same thing.

Or who continued to have access to the most wide-based (inclusive of international) fingerprint and personal data, and have even been caught falsifying (exchanging) prints to field officers?

And who have obtained releases for and recruited convicts for wet ops against civilians who could expose the workings of all of the above?

These expose's will favorably affect the market...Back to a modicum of initial honesty in more than just the market sector.

The larger question is how many of your "honoured" lying bastard Congressmen and Representatives is this going to take down.

The latest votes in the Senate may give you a clue....or not...

[TLBSHOW]

it is our duty to expose the democrats for what they did to this economy!

[willgetsome]

NOTE TO PRESIDENT BUSH: Declare a War on Corporate Crime. Tell the people that you will launch an investigation on corporate accounting practices from 1990 until now. It seems there is much that went on during the giddy days of Clinton/Gore that we are now paying for. Also ask Mr. Clinton and Mr. Gore to participate in this investigation so that the American people see that justice is served.

[mwl1]

Media already covering up for Rubin and the RATS. GOP had better grow some cajones.

[jackbill]

Curious. Not one mention of Robert Rubin in this article and not one mention of the phone calls that he made to the Treasury Department, trying to get them to go easy on Enron's credit rating.

I wonder why?

[MJY1288]

I find it interesting that the NYT's didn't mention Robert Rubin in this article

[aristeides]

How did they get Phil Gramm on board? Wasn't he chairman of the Senate Banking Committee?

[mwl1]

Where are our leaders??? GOP should be shouting from the rooftop that Daschle, Lieberman, et al give back every dime of donations from Rubin and Citigroup!

[aristeides]

Gerald Ford and John Deutch are also directors.

[Howlin]

FYI.

[MJY1288]

I say wait for it to brew a while, October 1st sounds like a good time to expose them all :-)