Enron probe also implicates
Wall Street
Hearings Tuesday raise questions about Merrill Lynch.
csmonitor.com
By Gail Russell Chaddock | Staff writer of The Christian Science
Monitor
WASHINGTON - The congressional probe of Enron's collapse is
moving increasingly beyond the energy firm's Houston boardroom,
beyond memos by its accounting firm, and onto Wall Street.
The emerging picture is of an investment-house culture where being a
player in major deals may at times mean ignoring dubious or even
illegal practices.
At the heart of the investigation now is the
appearance that Wall Street firms made
concerted efforts to hide Enron's financial
woes - and to win Enron's underwriting
business - at the expense of giving sound
advice to investors.
Tuesday, lawmakers heard testimony about
how Merrill Lynch, even though only a bit
player in the Enron debacle, felt pressure to
"put its balance sheet to work" for the
Houston energy firm.
"What our investigation has uncovered ... is
that Enron did not weave its elaborate web
alone," says Carl Levin (D) of Michigan, and
chairman of the Senate Permanent
Subcommittee on Investigations. "Without
the support and assistance of major financial
institutions, Enron could not have engaged in
the extent of the deceptions that it did."
The revelations have broadened the focus from the still-central
questions of how and why Enron collapsed to matters that challenge
the credibility of Wall Street.
At the same time, they add impetus to further efforts on Capitol Hill
to crack down on corporate fraud, rather than stop with the reforms
signed by President Bush Tuesday. While the new law contains
tougher penalties and a new oversight board for the accounting
profession, some lawmakers in both parties are saying it's only a first
step.
Wall Street's involvement with Enron included fiendishly complex
transactions between the energy-trading giant and financial firms -
prominently Citigroup and J.P. Morgan Chase - that helped conceal
billions in Enron debt. That helped Enron avoid credit downgrades
that might have cued investors to bail out.
Documents and e-mails released at Tuesday's hearing suggest that
Enron was putting pressure on Merrill to raise its rating of the energy
stock from "neutral" to "accumulate." Merrill did end up changing the
advice it gave to its investor clients - after changing the analyst
responsible for the rating.
Internal e-mails suggest that as a result of the rating upgrade, Merrill
picked up $40 million to $50 million in new investment business from
Enron, according to congressional investigators.
Two of the top executives in Merrill's energy investment-banking
department, Schuyler Tilney and Robert Furst, invoked constitutional
protections and refused to answer questions on these issues at
Tuesday's hearing. Also, the former Merrill analyst responsible for the
"neutral" ratings did not testify at Tuesday's Senate hearings.
But in an appearance before a House panel in February, he offered
this assessment of how the corporate culture worked: "Enron had a
considerable investment-banking agenda every year, and attracted
bankers like roaches to honey. The common unspoken, unwritten
understanding came back thus: [Enron] would be happy to do
banking business, provided the analyst had a strong 'buy'
recommendation on the stock," said John Olson, who is now director
of research at Sanders Morris Harris, a Houston-based securities
firm.
Merrill Lynch says the firm's new analyst was, in fact, one of the first
to downgrade Enron as its problem became public last fall. "If we
knew then what we know now, we would not have conducted
business with Enron," Merrill vice president Kelly Martin said at
Tuesday's hearing.
Senate investigators also documented a deal involving the purchase
of three Nigerian barges in 1999 that helped Enron misrepresent its
losses. Internal Merrill documents refer to this as a "balance sheet
deal."
Financial experts say that such deals were not unusual in the
climate of the 1990s. "Merrill knew why the transactions were being
executed - sham transactions designed to get an accounting result
that made no economic sense whatsoever," says Lynn Turner,
director of the Center for Quality Financial Reporting at Colorado
State University and former chief accountant of the Securities and
Exchange Commission.
"That was not unusual," he adds. "The message is that unregulated,
Wall Street will put the dollars they are generating well before the
interests of investors."
Meanwhile, lawmakers are ramping up new bills to help avoid future
corporate accounting scandals. House GOP leaders say they plan
legislation to aid defrauded investors in getting back some of their
losses.
"There is a lot of sunlight being shone on what the practices of Wall
Street have become," says Mr. Turner. Resulting litigation may
change those practices.
On the Senate side, John McCain (R) of Arizona promises to attach
an amendment to remaining bills this year that would require firms to
clearly disclose stock options as an expense.
House Democrats are calling for a broader agenda they dub a
"business, investors', and employees' bill of rights," including pension
reform, curbs on golden parachutes for corrupt executives, and a new
law to penalize companies who avoid taxes by moving abroad. "The
President's decision to sign the corporate accountability reform bill
today is a good first step ... but Congress and the President need to
do much more," says House Democratic leader Richard Gephardt.
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