House Unit to Probe Six Wall St. Firms
By Ben White
Washington Post Staff Writer
Friday, February 22, 2002
NEW YORK, Feb. 21 -- The House Energy and Commerce Committee plans to send letters to six investment banking firms as early as Friday seeking information on their work for Enron Corp. And a committee spokesman said House investigators could seek written responses from as many as six more.
The first set of letters, which were being finished today, will go to Citigroup Inc., J.P. Morgan Chase & Co., Wachovia Corp., Morgan Stanley Dean Witter & Co., Credit Suisse First Boston Corp. and Dresdner Bank AG.
Committee Chairman W.J. "Billy" Tauzin (R-La.) said in an interview that several bankers from these firms could be called to Washington to testify about their experiences with Enron, depending on how the bankers respond to the letters.
Among other things, the letters ask the banks to detail any role they may have played in helping to design and market the limited partnerships that a special committee of Enron's board concluded were used to improperly remove debt from the company's balance sheet and present an inflated financial picture to investors.
The letters also ask the bankers whether they felt pressured by Enron executives to raise investment capital for the partnerships -- as well as to invest in them personally and corporately -- in exchange for promises of underwriting and advisory business with the energy-trading giant, which is now in bankruptcy.
In congressional testimony and in papers released this week by Congress, former Enron treasurer Jeffrey McMahon, now the company's president, said he fielded complaints from bankers who felt pressured to invest in LJM2, one of Enron's off-balance-sheet partnerships.
"The letters flow out of those allegations made by McMahon indicating that there seems to have been a little sweet talking going on," Tauzin said. "Others have said there may have been some strong-arm tactics used with [the banks], forcing them to invest [in the partnerships] at peril of losing business."
Tauzin also said the letters are intended to give members of Congress a better general picture of the relationships between Enron and the Wall Street investment banks that made tens of millions of dollars over the years by underwriting the company's many stock and bond issues and advising it on mergers and acquisitions. After making millions from Enron, many big banks lost enormous sums as the company collapsed. J.P. Morgan Chase, for instance, has already written off $456 million in trading losses and loans to Enron, and it has exposure of up to $2 billion more.
"We are trying to find out how this all works," Tauzin said. "What's the relationships between these corporations, the special-purpose entities and the investment bankers?"
The letters also ask whether pressure was applied to analysts at Wall Street's brokerage and investment-banking houses to keep "buy" ratings on Enron stock, even as the company headed toward bankruptcy.
All six banks slated to receive letters from the House Energy Committee appear on official lists of investors in the LJM2 partnership, which was run by former Enron chief financial officer Andrew S. Fastow. The list includes a handful of other firms, including Merrill Lynch and Co., the nation's largest brokerage. Merrill Lynch has acknowledged raising $390 million for LJM2 as well as investing close to $20 million, both from the firm itself and from individual employees.
Merrill Lynch and other banks have said their involvement with the LJM2 partnership was proper. They have deflected criticism that they may have known more about Enron's precarious financial picture than others but failed to share that information. Merrill Lynch and other banks have also said they would cooperate with any congressional inquiries.
Stuart Kaswell, general counsel for the Securities Industry Association, said it was "entirely appropriate for Congress to search for the facts."
"I have a great deal of respect for and confidence in my industry and believe the record will show that they acquitted themselves well," he said.
Beyond the partnerships, Tauzin said he was also interested in exploring what role Wall Street banks may have played in helping Enron shield its true financial picture through the use of derivative contracts, complex financial instruments whose value is derived from one or more underlying variables, such as the price of a stock or the cost of a commodity.
"We want to find out whether these investment firms were involved in any improper way in helping Enron hide its debts," he said.
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