Text of Morning Session of Hearing on Enron
The New York Times
February 7, 2002
(Page 2 of 22)
Our last panel is comprised of senior
Enron officers and directors who
approved these partnerships and
transactions, and who were
responsible for ensuring the fairness
and the appropriateness of the
transactions in question. Their role in
this, for good or ill, also needs to be
established, and we want to give them
the opportunity to speak for
themselves. We will hear much talk
today of such things as derivatives, the
practice of hedging, and why certain transactions go on the books and others
remain undisclosed. We will also learn more than any congressional committee to
date on the murkiest of dealings Enron operatives engaged in.
We have before Congress for the first time a collection of the senior Enron players
who knew why decisions were made, why the company chose to pursue this
ill-fated course, what the company knew about the risks involved, and why they
chose to act or not act the way they did. What we learn today I am confident will
help this committee continue to construct a full and accurate picture for the public
of what happened to cause this financial personal and corporate tragedy.
One final note. Like many Americans, I have tried to keep some perspective on this
whole tawdry affair, to provide some perspective as well. The truth is that this story
of financial collapse and betrayal is of epoch proportions. It is almost biblical in
scope. So perhaps we need to look beyond all the gritty details of avarice and
appetite to a larger lesson that all of us can share. In the Eleventh Chapter of the
Book of Proverbs, the authors offer these prophetic words: "He that troubleth his
own house will inherit the wind, and the fool will be a servant to the wise in heart."
Perhaps that is the true lesson of Enron's failure.
I now recognize the ranking member of this
subcommittee, Mr. Deutsch, the gentleman from Florida,
for an opening statement.
REP. PETER DEUTSCH (D-FL): Thank you, Mr. Chairman.
You know, our work here I think all of us at this point
have a sense is much more important than really the
specifics of this transaction, because we have benefited
everyone in this room, everyone in this country, everyone
in the world, of a system of transportation in capital
markets that has really gained incalculable results. And I
think what we have learned -- and we know more than we
did a week ago or two weeks ago -- is that Enron -- the
system failed, Enron failed, but the system also failed,
because stockholders, the public, did not know what was
going on in the company. And the statements did not fairly represent what the
company was doing. And it was absolutely certain that was done with intent.
We have had a number of staff -- maybe up to 20 staff people -- try to unravel
Enron, and obviously the SEC is working on this as well as the Justice
Department. And we had a members meeting with staff yesterday evening where
we were briefed. And one of the things that I asked the staff -- apparently there are
about 4,000 partnerships -- I'm sure many of the people here could know the exact
number. But there were 4,000 partnerships that Enron did. And I asked the staff
to try to explain one of them to us of the 4,000, that maybe we can understand
one, and just understand what was there. So I am going to try -- and I asked them
for a relatively easy one -- maybe the easiest one. All right, this is what they have
described as maybe the easiest one.
It's the LJM Rhythms transaction structure. And it started out as a normal
transaction. Enron made an investment, an IPO, with Rhythms Net, an initial
investment of $10 million. That investment then grew to a value of about $400
million. Enron had a lock-out provision in the IPO that they could not sell the
stock. So Enron had a reason to try to lock in the stock price. That's a legitimate
business transaction. So they were attempting to buy a put at the strike price. But
as opposed to going to Goldman Sachs, what Enron did, and, Mr. Fastow, what you
did, is you set up LJM Limited Partnership to sell the put to Enron. And what
happened was Enron capitalized LJM partnerships with a value of about $200
million of Enron stock. As soon as that occurred, Mr. Fastow, who won't testify
today, took a $30 million management fee as a general partner of LJM Partnership,
at the same time he was chief financial officer or management -- as part of the
management of Enron.
Right? Now, what happened was actually that partnership then set up a subsidiary
which sold the put to Enron. But what happened to the stock value is it kept going
down. And as it was going down, Enron kept putting stock into the general
partnership. Why we believe this is illegal is that as opposed to buying a derivative
from Goldman Sachs, where it would be an arms-length transaction, and the risk
would be borne by Goldman Sachs, and they would have a true fee between them,
there was no risk for the partnership, because it was guaranteed by Enron stock.
And so the $400 million in gain that was attempted to be locked in, that stayed on
the books of Enron, so anyone who wanted to try to understand what was going on
in Enron would look at the books and see a $400 million gain, but effectively there
was no gain. I mean, this is a scam. This is one of 4,000 scams. It's one of the
simpler scams. But, again, our understanding is it wasn't just smart, it wasn't just
around the edges -- it was in fact fraud. It was a criminal violation.
And I think what we are learning as we learn more and more -- and hopefully
Enron is the exception in America -- that the case of Enron -- and I hope someone
is going to try to defend this today, because you know I think I want to understand
maybe there's another story that we haven't heard from our staff. Maybe there's
another explanation which we don't understand. But what -- you know, hopefully
Enron is in fact the exception in corporate America, that this is -- the corporation
that is doing this is not living on the edge, looking for the gray area, but engaging
in illegal activity, is engaged in fraudulent transactions. |
