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Offshore activities gave 'lifeblood' to Enron

FT.com (Financial Times)
Thursday March 6, 2:50 pm ET
a href=http://biz.yahoo.com/ft/030306/1045511393086_1.htmlhttp://biz.yahoo.com/...

By Andrew Hill in New York

Offshore commodities transactions involving the US
banks JP Morgan Chase and Citigroup provided
quot;lifebloodquot; to Enron as the energy trader tried to
maintain its credit rating in the late 1990s.The deals
were the most effective of the accounting techniques
Enron used to improve its cash position according to
the latest report from a court-appointed investigator
into the bankrupt company's off-balance-sheet
transactions.

The report, which runs to more than 2,000 pages, was
published on Wednesday night, and estimates that
some $5 billion could be recovered by Enron creditors
from the special-purpose entities that it set up, some
officers of the company, and legal advisers.

Neal Batson, the lawyer who was appointed quot;examinerquot;
by the bankruptcy court last year, singles out the
quot;prepaysquot; -- commodities transactions conducted via
offshore vehicles -- as the most important way Enron
disguised its weak cashflow and poor quality of
earnings.

quot;Perhaps more than any of the six techniques, prepays
were the quarter-to-quarter cash flow lifeblood of Enron,quot;
Mr. Batson wrote in the introduction to the report, which
includes a nearly 200-page analysis of the transactions.

Both JP Morgan Chase and Citigroup have already
come under heavy fire for their involvement in the deals.

A group of insurers settled a court case with JP Morgan
in January over about $1 billion that the bank claimed it
was owed in the form of bonds used to guarantee the
offshore commodities deals. The bank expected to
collect about $600 million from the insurers, which had
accused it of providing quot;disguised loansquot; to help Enron
cover up holes in its balance sheet.

Mr. Batson's report says that the deals -- carried out
through offshore vehicles called Mahonia, in JP
Morgan's case, and Yosemite, in Citigroup's --
quot;accounted for virtually all of Enron's net cash flow
from operating activities in 1999 and 32 percent of its
net operating cash flow in 2000. Yet, of the $5 billion
outstanding from the prepay transactions on June 30,
2001, Enron reflected only $148.2 million as debt on
its balance sheet.quot;

The accounting method quot;significantly understated
Enron's true debt obligations and favourably affected
Enron's key financial ratios,quot; helping the group to
maintain its credit rating.

Both JP Morgan and Citigroup have pointed out that
they were not responsible for the way in which Enron
accounted for the deals.

Citigroup said in a statement on Thursday that the
report quot;shows the scope and size of the fraud perpetrated
by Enron, and condemns the techniques repeatedly
approved by Arthur Andersen [then Enron's auditor] and
Enron's other advisers.quot; Both banks have since adopted
more prudent approaches to structure finance, to improve
transparency.

Mr. Batson's report makes no judgement on the culpability
of any third-party advisers to Enron, although later reports
may focus on whether creditors can recover money from
the institutions that helped set up the offshore vehicles.