Flash Points

Article excerpt


Just the threat of legislation cracking down on complex financing through special-purpose entities was apparently enough to prompt a preemptive move by Citigroup Inc. and J.P. Morgan Chase & Co.

After holding two hearings into the role financial institutions played in the spectacular collapse of Enron Corp., Sen. Carl Levin on July 30 said he thought Enron disguised its hefty debt load as income from offshore partnerships controlled by Citi and Morgan Chase. The Michigan Democrat said that legislation might be needed to clean up the arcane world of structured finance.

But late Wednesday afternoon Citi announced it would no longer arrange off-balance-sheet financings for customers unless they agreed to fully disclose the deals to the public. Morgan Chase quickly followed suit.

With so little time left on the congressional calendar, legislation restricting bank lending was unlikely to be enacted this year, but lawmakers often use high-profile hearings to affect industry practice.

"The hearings sent a message," said Gary Gensler, a former Treasury under secretary for domestic finance. "Congress is trying to change industry behavior by shining a bright light on it."

Merrill Lynch & Co. may be forced to follow Citi and Morgan Chase after The New York Times reported Thursday that the investment banking firm's dealings with Enron may not have been as "limited" as Merrill has asserted.

Citing former Enron executives, the story claimed that Merrill arranged a series of power trades that helped Enron puff up its profits by $60 million at the end of 1999. Merrill told the paper that it did not "knowingly assist Enron in misstating revenues."

Citi and Morgan Chase also have said that they did nothing wrong -- and they won't do it again.

In a statement Thursday, Sen. Levin called the banks' moves "a significant reform in response to the subcommittee's ongoing Enron investigation." But he isn't completely satisfied: "Citigroup and J.P. Morgan Chase also still need to address their control and use of secretive offshore shell corporations."

Republicans continued to needle Citi executive Robert E. Rubin over his Enron connections.

Rep. Mark Foley, R-Fla., on Thursday asked the Securities and Exchange Commission to investigate Citi's equity trades from November 2001 -- the month before Enron failed. That was when Mr. Rubin, the former Treasury Secretary, called Treasury Under Secretary Peter Fisher, President Bush's lone Democrat appointee at the department, to float an idea about persuading the credit reporting agencies not to downgrade Enron's debt.

"I would ask you to investigate all equity trades submitted by Citigroup and/or its subsidiaries and their clients in the two weeks preceding Mr. Rubin's call to Mr. Fisher as well as the two weeks following the call," Rep. Foley said in the letter to SEC Chairman Harvey Pitt. "It is imperative that we know what the consequences were on stock actions by Mr. Rubin's apparent attempt at interfering on behalf of Enron -- a company that Citigroup had, and has, a financial interest in."

Rep. Foley also took a shot at Sen. Joseph Lieberman for not calling Mr. Rubin to testify, as requested by Sen. Peter Fitzgerald, an Illinois Republican who sits on the Permanent Subcommittee on Investigations. Sen. Levin chairs the panel, which has been probing the role banks played in Enron's demise. That panel is under the Senate Governmental Affairs Committee, which Sen. …