- The Washington Times - Friday, July 26, 2002

If Senate Democrats were truly interested in getting to the bottom of the Enron debacle, they would invite former Treasury Secretary Robert Rubin, who is now a Citigroup director and the chairman of its executive committee, to testify under oath about what he knew of Citigroup's seemingly indispensable role in maintaining Enron's investment-grade credit rating. As Dave Boyer of The Washington Times reported yesterday, Senate Governmental Affairs Committee Chairman Joseph Lieberman succinctly replied, "I don't," when asked whether he intended to call Mr. Rubin to testify.

Why not, Mr. Lieberman? After all, in a hearing earlier this week before Governmental Affairs' Permanent Subcommittee on Investigations, Senate staffers clearly demonstrated how Citigroup played the major role in helping Enron disguise billions of dollars of debt, hiding the loans from investors to whom Citigroup sold billions of dollars of now-worthless Enron-linked bond offerings. Using secretive offshore shell corporations and creating sham trading partners, Citigroup organized so-called "commodity prepay" contracts, the primary purpose of which was to camouflage Enron's exploding debt. Since Mr. Rubin arrived at Citigroup in 1999, Enron's use of the controversial financing ballooned from less than $1 billion in December 1998 to nearly $5 billion in June 2001, five months before Enron went bankrupt.

These controversial deals, for which Citigroup earned $167 million in fees from 1997 through 2001, gave investors the misinformed perception that Enron's cash flow was much higher than it actually was. At the same time, these deals reduced Enron's reported debt levels. During 2000, when Enron's stock price peaked at $90 per share, Senate investigators estimate that Enron's actual debt level was at least 40 percent above its reported level. As a result, credit-rating agencies were duped into assigning much higher ratings than Enron deserved, encouraging investors to finance what proved to be billions of dollars in Citigroup-camouflaged loans, the value of which disintegrated after Enron imploded.

Enron knew that sustaining its solid credit rating was the key to its ability to continue to build its house of cards. And the key to an investment-grade credit rating was strong cash flow and rising profits, achieved without excessive debt levels. Citigroup also understood this connection. Specifically, in September 2000, when Enron felt particular pressure to augment its cash flow to more closely match increases in its reported paper profits, an internal Citigroup e-mail acknowledged that the "prepays" had this effect: "[Enron] gets money that gives them c[ash] flow but does not show up on the books as big D debt." With the Enron "prepays" proving to be such a cash cow for Citigroup, the financial conglomerate developed a presentation last year, according to the Wall Street Journal, showcasing how the use of such arrangements "eliminates the need for Capital Markets disclosure, keeping structure mechanics private" in other words, hidden from prospective investors. Another benefit that Citigroup stressed to prospective clients would be that "ratings agencies will not view the proceeds raised … as company debt."

An April 2001 Citigroup internal study revealed that Enron had used "prepays" to understate its debt by $2.2 billion. Applying conservative accounting standards, the study concluded these "prepays" should have been considered debt. Citigroup not only ignored that conclusion; according to the Financial Times, it also withheld such information from investors, to whom it had sold $1.5 billion in Enron-linked bond offerings.

At the recent hearing, officials from credit-rating agencies confirmed that they would have downgraded Enron's rating if the hidden debt had been revealed. Perhaps nobody understood better than Mr. Rubin how crucial Enron's credit rating was. That explains why, three weeks before Enron went bankrupt last year, he inappropriately telephoned Peter Fisher, the Treasury Department's undersecretary for domestic finance, to encourage him to improperly contact the credit-rating agencies to prevent a rating downgrade for Enron. Mr. Fisher essentially told Mr. Rubin to take a hike.

Why wouldn't Mr. Rubin's informed view of Enron's credit rating interest Mr. Lieberman?


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