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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (10965)	1/1/2003 4:46:09 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Big Banks Must Still Reckon With Enron By Dan Ackman Forbes.com 12.23.02 NEW YORK - On Friday, the New York State attorney general along with the U.S. Securities and Exchange Commission announced an agreement--and they called it "historic." But in Houston, meanwhile, with far less fanfare, a judge may have done more to revise the rules by which investment banks operate. The New York agreement requires the nation's largest investment banks to pay a total of $900 million in fines and agree to reforms designed to bolster confidence in the integrity of equity research. There were, of course, congratulations all around--as is to be expected when something so historic is in the air. New York Attorney General Eliot Spitzer hailed the deal, as did outgoing SEC Chief Harvey Pitt. Perhaps most ecstatic was Chris Bruenn, president of the North American Securities Administrators Association, who said, "This agreement represents the dawn of a new day on Wall Street." NASAA is not to be confused with NASA, whose mission control is in Houston, home of Enron (otc: ENRNQ - news - people ). That's where U.S. District Court Judge Melinda Harmon denied motions to dismiss by bankers, accountants and lawyers who had sought to be excluded from the shareholder lawsuit over the rise and fall of Enron. If New York's eight-month investigation of Wall Street can now be closed, the case in Houston is ongoing. In a separate decision, Judge Harmon also ruled that documents provided by the banks during discovery would not be sealed from the public. In her 306-page ruling, Harmon denied completely motions by J.P. Morgan Chase (nyse: JPM - news - people ), Citigroup (nyse: C - news - people ), the Credit Suisse First Boston unit of Credit Suisse Group (nyse: CSR - news - people ), Canadian Imperial Bank of Commerce (nyse: BCM - news - people ) and Barclays Bank (nyse: BSC - news - people ) as well as those of Enron's accountants, Arthur Andersen, and its lawyers, Vinson & Elkins. "This decision confirms the validity of our legal claims against the major defendants, and leaves in the case defendants with resources to pay substantial compensation to the class," said William Lerach, a partner in the law firm of Milberg Weiss Bershad Hynes & Lerach, lead counsel in the litigation. "It also should open the way for discovery, which has been stayed pending the decision to commence." With Enron itself bankrupt, the shareholders will look to the banks to recover some of their losses, which shareholder lawyers say amount to $25 billion. The shareholders claim a variety of wrongs by the banks. These wrongs include biased research reports (the subject of the New York agreement). But the allegations also include claims that the banks did deals with Enron that they knew were designed to hide Enron's true financial state. The lawyers allegedly facilitated those deals and worked for the benefit not of the company and its shareholders, but of top executives. This morning, Citigroup announced it was establishing a reserve for the cost of the New York settlement and toward estimated costs of the private litigation related to it as well "as the regulatory inquiries and private litigation related to Enron." Citigroup says the total cost to it should be "approximately $1.3 billion or 25 cents per share (diluted). The company believes that it has substantial defenses to the pending private litigations which are at a very early stage." It drew no distinction between the Enron case in Houston and the potential cases deriving from its research practices. The problems with the research practices that are the subject of the New York agreement are easy to understand. Security analysts allegedly--and none of the brokerages are expected to admit wrongdoing--recommended the shares of companies publicly when privately they were skeptical of their prospects. The analysts were used as de facto salesmen to lure investment banking business. The retail customers (or non-customers who heard analysts on television) were sacrificed for the benefit of the wholesale customers. Putting lipstick on a pig has become the catchphrase for these practices. What happened with Enron is more complex, and it has already taken much more than eight months (the duration of Spitzer's investigation) to sort through it. Banks have become accustomed to using so-called structured finance transactions involving derivatives and other complex investment tools in ways that hide the true nature of a company's balance sheet. Judge Harmon's ruling indicates that there are sufficient allegations that the banks were direct participants in the scheme. Enron was a leader in financing techniques that allowed it to deny debt by putting some assets off their books. The company's financial exposure remained hidden. The difficulty pursuing the banks will be to prove that they somehow knew what they were doing. This will be no small task because the deals were complex enough that often no one person could put it together. There will likely be evidence that no single banker understood what his bank "knew" and that no one bank knew what the other banks were doing. Thus the debacle could be construed as the result of a flawed system with no one person or company being responsible. This is why Citigroup can now credibly say the entire cost of the mess on Wall Street will at the end of the day be just 25 cents per share. forbes.com