Enron Traded Business for Investments With Merrill
(Update2)
By Russell Hubbard and Jeff Bliss
Washington, Feb. 7 (Bloomberg) -- Enron Corp. promised to give bond
underwriting business to Merrill Lynch & Co. and First Union Corp., now
Wachovia Corp., in return for investments in some of the off-balance sheet
partnerships set up by former Chief Financial Officer Andrew Fastow that led to
Enron's bankruptcy.
Energy and Commerce Committee Chairman Billy Tauzin, a Louisiana
Republican, said Enron offered the business to the banks in exchange for
investments because an outside investor was required by accounting rules to
keep the partnerships from being consolidated on Enron's balance sheets.
Tauzin's comments, at a hearing today, came as lawmakers are expanding their
line of inquiry to at least look at the role that Wall Street firms played in financing
Enron's rise. Enron employed more than a dozen banks and securities firms.
Over the past 17 years, the company and its predecessors sold 138 bonds and
over the past eight years were involved in 69 completed or attempted acquisitions
with an announced value of almost $40 billion.
``Enron, the seventh largest company in the nation, a darling of Wall Street, a
publicly held company, failed, taking with it the incomes, the savings, the hopes,
the aspirations, the dreams of its employees,'' said Representative John Dingell,
a Democrat from Michigan. ``This Congress has a duty to find out what
happened.''
Calls to Merrill and First Union weren't immediately returned.
Fifth Amendment
Fastow and three Enron Corp. executives who participated in secret partnerships
refused today to testify before Congress on the company's collapse, citing their
Fifth Amendment rights against self-incrimination.
In addition to Merrill and Wachovia, Enron's banks included Morgan Stanley
Dean Witter & Co., Citigroup Inc., Lehman Brothers Inc., J.P. Morgan Chase &
Co., Deutsche Bank AG, CIBC World Markets, a unit of Canadian Imperial Bank
of Commerce, and Credit Suisse First Boston.
Donaldson Lufkin & Jenrette, now a part of Credit Suisse First Boston, handled
at least one Enron partnership, Whitewing Management LLP. Jeanmarie
McFadden, a spokeswoman for Credit Suisse, declined to comment. Officials at
Lehman Brothers, J.P. Morgan Chase and Salomon Smith Barney, Citigroup's
securities unit, Deutsche Bank and CIBC also declined to comment.
$1 Billion in Losses Hidden
Judy Hitchen, a spokeswoman for Morgan Stanley, said she believed the firm
had no direct involvement with the Enron partnerships.
Enron, which had more than 3,000 subsidiaries and affiliated partnerships, hid
more than $1 billion in losses in the partnerships before it filed the largest
bankruptcy in U.S. history Dec. 2. Investors included managing directors at
Merrill, which helped sell one of the partnerships to institutional investors.
Merrill executives invested their own money in LJM2, one of Enron's limited
partnerships, after the firm helped raise $349 million for the partnership from
pension funds and other institutional investors.
In an internal e-mail, Merrill said that LJM2 was expected to return more than 30
percent a year. That's triple the average return on the Standard & Poor's 500
Index, the benchmark for U.S. stocks, over the past 75 years. Members of the
investment banking executive committee were encouraged to invest by Daniel
Bayly, then head of the group, said one investor familiar with the offer who spoke
on condition of anonymity.
Other Witnesses
In addition to Fastow, Michael Kopper, who ran a partnership, and Richard Buy,
who headed the company's risk assessment office, invoked their Fifth
Amendment right to not answer questions. Chief Accountant Richard Causey
also pleaded the Fifth, saying he recently hired new lawyers. Jeffrey Skilling, the
former chief executive officer, was scheduled to testify later today.
The executives join Kenneth Lay, who resigned as Enron's chairman this week,
and David Duncan, the Arthur Andersen LLP official who audited the
Houston-based company's finances, in declining to explain the biggest
bankruptcy in U.S. history. Enron collapsed in December with the loss of 5,500
jobs and $78 billion in market value since August 2000.
Skilling's Role
Skilling, who served as Enron's chief executive officer from February 2001 to
August 2001, quit four months before the Dec. 2 bankruptcy filing. He is the
highest ranking current or former officer to agree to appear, and he plans to
testify, Tauzin said.
Lay, a friend of George W. Bush, was the president's biggest campaign
contributor, while Enron was the biggest corporate contributor. Three of every four
dollars the company gave to politicians went to Republicans to whom executives
now are answering in congressional hearings, according to the Center for
Responsive Politics, which tracks campaign finance.
Enron, once the largest trader of natural gas and electricity, lost $78 billion in
market value since August 2000. The company formed at least 3,000 affiliated
partnerships where it hid debt and losses from shareholders, said William
Powers Jr., the University of Texas Law School dean who investigated the matter
for Enron's board.
Fastow paid himself $30 million for managing one of the partnerships, which
purported to shift investment risk from Enron to an independent outside firm,
Powers said.
Enron's collapse began when it reported third-quarter earnings in October. The
company surprised investors with $1 billion in losses from the partnerships.
Shares plunged and the company lost the credit rating it need to borrow money
needed to support the $2.8 billion in trades it did each day. |
