WASHINGTON - Seven major investment banks gave Enron Corp. multimillion-dollar loans that helped the now-bankrupt company disguise its financial condition, and in some cases, they knew that Enron was using deceptive accounting for the loans, a Senate investigator testified yesterday.
Subcommittee investigators said Enron - struggling with a secretly crumbling balance sheet - obtained financing of $8.5 billion over nine years from Citigroup Inc. and J.P. Morgan Chase & Co., which took in hefty fees and interest payments.
Five other investment banks had similar investment deals with Enron totaling about $1 billion.
Shares of Citigroup Inc. and J.P. Morgan Chase & Co. plunged yesterday, erasing $58 billion in combined market value this week, as the banks disputed the allegations.
The investigative subcommittee of the Senate Governmental Affairs Committee reviewed a million pages of documents, most of them subpoenaed, and interviewed dozens of witnesses from Enron and its Wall Street investment banks.
Some banks actively aided Enron in its dodgy accounting in return for big fees and favors in other deals, investigator Robert L. Roach told a subcommittee hearing.
"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deceptions it did, involving billions of dollars, were it not for the active participation of major financial institutions willing to go along with and even expand upon Enron's activities," Roach testified.
Some of the banks allowed investors to rely on Enron financial statements they knew were misleading, said Roach, a counsel for the subcommittee.
The banks used complex financial transactions to boost Enron's anemic cash flow to match its profit growth on paper, according to lawmakers.
The Houston energy-trading company recorded the money from the bank loans as prepaid trades of natural gas and other commodities with an entity based in the Channel Islands off Britain.
Roach said Citigroup , the nation's largest financial institution, and J.P. Morgan, also pitched the deals to other companies.
Citigroup "shopped" the Enron-style deals to 14 companies, selling them to at least three, Roach testified.
Enron, which filed for bankruptcy protection in December, taking the investments of millions of people with it, used a web of thousands of off-balance-sheet partnerships to hide about $1 billion in debt from investors and federal regulators.
If not for the deals with the banks, Enron's debt would have been $14 billion in 2000 rather than the $10 billion the company reported, and its cash flow would have been half of the $3.2 billion it reported, according to subcommittee investigators.
If the true picture had been known, it would have put downward pressure on Enron's stock price and on its ratings from agencies such as Moody's Investors Service and Standard & Poor's.
Officials of those agencies, testifying at yesterday's hearing, said they were unaware of the transactions with the banks and that Enron misled them and withheld information.
"Why didn't the watchdogs bark?" Democratic Sen. Joseph I. Lieberman of Connecticut asked the credit-rating officials.
In a 1998 e-mail, a J.P. Morgan Chase executive in Houston wrote, "Enron loves these deals."
Enron officials "are able to hide ... debt" from Wall Street analysts, he wrote.
Jeffrey Dellapina, a managing director of J.P. Morgan Chase at its New York headquarters, testified that the e-mail was "inaccurate."
Officials of the two financial companies denied any wrongdoing, saying lenders shouldn't be held responsible for how borrowers such as Enron recorded their loans.
The transactions were "standard practice in structured finance," said Dellapina.
Richard Caplan, managing director and co-head of the Credit Derivatives Group at Citigroup's Salomon Smith Barney subsidiary, said Enron financings were arranged for a top U.S. company, using a common structure approved by a leading accounting firm.
Bank officials stressed at the hearing that Enron's former auditor, Arthur Andersen, had approved the company's accounting of the transactions.
Before senators heard the testimony, they decried the wave of accounting scandals rocking investors' confidence and the markets.
Telecommunications giant WorldCom Inc. made the biggest bankruptcy filing in U.S. history Sunday, less than a month after disclosing that it had hidden nearly $4 billion in expenses through deceptive accounting.
"It's clear that Enron was not alone in shady financial dealings," said Republican Sen. Jim Bunning of Kentucky. "Americans across this country are watching their savings and their pensions dwindle."
Citigroup has called the transactions with Enron "entirely appropriate at the time based on what we knew and what we were told by Enron."
Robert S. Bennett, Enron's Washington attorney, has said the company will continue to cooperate with investigations by Congress, the Justice Department and the Securities and Exchange Commission, and that people should not "rush to judgment."
Yesterday Citigroup shares dropped $5.04, or nearly 16 percent, to $27, a three-year low. J.P. Morgan shares sank $4.44, or 18 percent, to $20.08, the lowest since January 1996.
"Any time you get tarred with the Enron name, you are going to get whacked," said David E. Nelson, who manages $450 million for Legg Mason American Leading Companies Trust Fund, which holds Citigroup and J.P. Morgan shares.
Besides Citigroup and J.P. Morgan Chase, subcommittee staff members said smaller deals worth $1 billion in total involved Credit Suisse Group Inc., Barclays PLC, FleetBoston Financial Corp., Royal Bank of Scotland Group PLC and Toronto-Dominion Bank.
Class action lawsuits filed this spring by Enron investors and former employees have named as defendants Citigroup, J.P. Morgan, Credit Suisse, Barclays and other leading banks, alleging that they schemed with former Enron executives to bilk investors out of tens of billions of dollars.