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To: Giordano Bruno who wrote (253589)	8/1/2003 12:50:19 PM
From: Pogeu Mahone	Respond to of 436258

August 1, 2003 Bankrupt Thinking: How the Banks Aided Enron's Deception ome Enron frauds were remarkably complicated, masterpieces of sophisticated financial engineering. When investigators try to explain them, they produce charts that would make Rube Goldberg proud. And then there is Project Nahanni, apparently named for a Canadian national park known for the wolves that live there. In that relatively simple deal, Enron borrowed money from Citigroup to buy Treasury bills. Within days, it sold the Treasury bills and paid the money back to Citi. Why bother? Citigroup told Enron that it could report the $500 million it received from selling the bills as operating cash flow. It did just that, reassuring investors and credit rating agencies that its profits were genuine. The mechanism of Nahanni was laid out this week in a report by Neal Batson, Enron's court-appointed trustee, who concluded that Citigroup knew Enron's accounting was improper. It was also cited as the Securities and Exchange Commission settled with Citigroup and J. P. Morgan Chase, which neither admitted nor denied the S.E.C.'s accusations that they were involved in Enron's frauds. Reading Mr. Batson's voluminous report makes it clear that the banks were not "looking the other way" as Enron misled investors. They were instead dreaming up and selling financial products to allow Enron to mislead. Some of those products appeared to squirm within accounting rules, but even then the banks found themselves engaging in practices that they knew should invalidate the accounting. It was a profitable business. As one J. P. Morgan executive put it, Enron was "enticed to pay a premium" over normal interest rates to obtain money in ways that would be, in Mr. Batson's words, "inscrutable to rating agencies, creditors and other users of Enron's financial statements." As it happened, the banks that aided the fraud also lost billions. They seem to have been surprised to learn that they were lied to by the very company that paid them to help deceive others. But their losses are worthy of little sympathy, considering that Enron could never have mounted such a vast fraud without the banks' help. The question now is what will happen in bankruptcy court. Mr. Batson concludes there is ample ground for "equitable subordination" of the debts owed to the banks. That would move them to the end of the line, leaving more for the creditors that were not participants in Enron's fraud. But for that to happen, some creditors would have to mount a costly legal effort. It is not clear anyone will try. One might expect Congress to change the bankruptcy law to make it crystal clear that banks with dirty hands should not prosper when a company they aided in fraud goes under. Instead, the bankruptcy bill now being pushed through Congress goes out of its way to help the banks. That bill would make it easier for banks to collect car loans and to force small businesses to liquidate, perhaps allowing the banks to be repaid while other creditors suffer. It would make it easier to collect credit card debts of people who go broke while trying to live up to their obligations. Some doubt the S.E.C. can stop deceptive financial engineering. "These guys can create fancy paper faster than Congress can change the laws, or the S.E.C. can change the rules," said Elizabeth Warren, a Harvard law professor. "The banks that financed the arrangements that caused the companies to collapse need to bear a substantial part of the risk that they injected into these companies." In the meantime, perhaps the S.E.C. should demand the banks name other companies that bought Enron-type products. Many more deceptions might be found. Copyright 2003 The New York Times Company \| Home \| Privacy Policy \| Search \| Corrections \| Help \| Back to Top