Banks fall as Congress probes Enron ties

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."

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
[ Post Reply | Private Reply | To 1 | View Replies | Report Abuse ]

Interesting you should mention cash. We JUST did that. Based on a program we watched with regard to security (It was either Dateline or 60 mins, I can't remember).

Having 45 days of cash, water and readily available food is considered wise for security reasons. In otherwords, if anything should ever happen in your area, you should have enough of the above to get through 45 days. The government will not be able to assist every citizen. Perhaps the Mormons are on to something? Not a bad idea,..and what is the harm vs the good?

Especially so, considering what is coming to light with corporate America and the banking industry. I'm not saying we don't need corporate America, WE DO!! Our entire economy relies on them being successful. But what has happened, has dire consequences. Already Foreign investors are pulling out. The new EU will be the ones who profit from this. There are warning signs everywhere.

I feel really sorry for President Bush, I said on our profile (right after he was elected) that he was inheriting a mess. I never imagined how prophetic those words would end up being. Clinton was an even bigger disaster than many of us had ever imagined. Yet they (The liberals and the liberal media) have the audacity to think we would fall for them blaming a new administration. How stupid they must think we all are.

How in the world could any administration make this kind of mess happen so fast. Governments and the World as a whole simply don't move that fast. The affects of governing take a few years to produce results. We are seeing the results of the biggest NON PRESIDENCY in the history of the US. No one was on watch.. and we are paying for it.

Sadly,.. all Americans will learn and suffer for the idiotic choices of a greedy few. (Meaning those who voted for the Clintons.. remember, we got TWO for the price of one?? Sad day for America)

Get the cash out.

We pray every night that the American public will understand what is going on.

God Bless this administration, never in our history has an administration faced such a multitude of horrendous situations. Hold on.. the ride just got wilder. Who'da thunk it?

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.