[A-List] Enron: Wall Street connections
Michael.Keaney at mbs.fi
Tue Mar 5 02:23:31 MST 2002
Enron's alchemy turns to lead for bankers:
* ENERGY GROUP SAID TO HAVE PRESSURED INVESTMENT BANKERS:
* ANDERSEN AND LITIGANTS REMAIN Dollars 2bn APART:
* AUDITOR TO BE QUESTIONED ON DOCUMENTS:
* FRENCH WRITE-OFFS:
Wall Street's links with Enron, now the focus of Congressional
investigation, were complex, intimate, often antagonistic, but above
all, lucrative, write Joshua Chaffin and Stephen Fidler:
Financial Times; Mar 1, 2002
By JOSHUA CHAFFIN and STEPHEN FIDLER
In Enron's heyday, Wall Street's bankers would beat a path to the
company's Houston headquarters, lured by the promise of enormous fees
from acquisitions business and heavy financing needs.
Among other things, the bankers helped to engineer the controversial
partnerships that eventually led to Enron's demise. Partly as a result,
they are now the subject of growing attention from Congress and lawyers
acting for shareholders.
The House energy and commerce committee, which has made much of the
running in the Congressional investigation, is preparing letters
requesting documents from Wall Street firms that will focus in part on
the pressure Enron is said to have placed on bankers to invest in the
Lawyers acting for investors are also looking to Wall Street as a
possible target for lawsuits. "We have been looking very hard at issues
involving conflicts of interest with various Wall Street firms assisting
Enron," says Andrew Entwistle, a lawyer representing New York and
Florida pension funds.
Enron's relationships with Wall Street were managed attentively and
aggressively by Andrew Fastow, the company's former chief financial
officer who was ousted in October, and the global finance group he ran.
Wall Street's links with Enron were complex, intimate, often
antagonistic, but above all, lucrative. In 2000 alone, Enron paid more
than Dollars 250m in fees to banks, six of which - Merrill Lynch, Credit
Suisse First Boston, Donaldson Lufkin & Jenrette (before its November
2000 merger with CSFB), Citigroup, Chase and JP Morgan - received more
than Dollars 20m each.
"They were the golden goose," says one banker who called on Enron.
"Every once in a while in a heated market, there's someone who has the
magic touch and everyone wants to do business with them. They were a
Enron kept track of how much it paid each bank, and was careful to
spread the work around, especially its underwriting assignments. But not
all banks were equal. According to former Enron employees, Citigroup and
Chase, for example, used their massive balance sheets to put up big
loans. These were large numbers, but the work was regarded inside Enron
as pretty simple.
At the other end of the spectrum was a group of more specialised
bankers, which Enron relied on to engineer its complex off-balance sheet
deals. First among these was DLJ.
"Chase and Citi both underwrote a lot, but the advisory work and the
real brains behind (the partnerships) was from CSFB and DLJ," says a
former Enron employee.
As a result, they were well rewarded. CSFB and DLJ were the leading
underwriters of Enron securities, managing Dollars 7.4bn of the Dollars
25bn of stocks and bonds it issued, according to data from Bloomberg
News. This included a Dollars 700m equity offering in February 1999, on
which they served as joint bookrunners. Bloomberg data also show they
followed Salomon Brothers as the number two recipient of mandates to
advise on mergers and acquisitions.
This preference grew over time. CSFB was tapped to lead Enron's Dollars
1.8bn divestiture of Portland General, announced in August, and handled
the sale last year of some Enron power plants and Enron Wind. Late last
year, it was awarded the mandate to liquidate Enron's troubled
international asset portfolio with a value estimated at Dollars 4bn to
Dollars 7bn and the potential to generate millions of dollars in fees.
Enron employees say they came under pressure from senior executives to
use CSFB in M&A transactions. An important reason for the closeness of
the relationship was CSFB's structured products group, a team of about
10 bankers hired by DLJ from Citibank in 1998.
Led by Laurence Nath, a managing director, the group provided solutions
to Enron's biggest financial headache: the large part of its asset
portfolio that was not generating much cash.
Enron did not want to finance underperforming assets, including foreign
projects that had soured, by raising straight debt in the bond market,
because that would damage its credit rating and thereby jeopardise the
company's key trading business.
Instead, it began moving assets off-balance sheet into partnerships, of
which it eventually created some 3,500, with names such as Marlin and
The assets were often sold at prices that Enron would never have
achieved on the open market. Not only did the partnerships hide debt,
but they also made Enron appear to be generating cash from operations
rather than from its financing activities.
Within DLJ and CSFB, Mr Nath's group had a reputation for being on the
leading edge. "People heard the name 'structured products' and
immediately thought that they were doing things that no one else could
possibly understand," says one former CSFB banker.
Mr Nath, described as very bright and ethical by a former colleague,
worked very closely with Enron lawyers and accountants on their
transactions, according to Enron employees.
"Monetise. That was the buzzword. Everyone was always saying: 'We have
to monetise this.' The quick-fix solution was: 'We'll sell it to LJM, or
to Raptor, or to whatever the partnership of the month was,' " says one
person in Houston.
"They'd pick up the phone and Larry Nath would come down to Houston for
a week or two and sit down with the (Enron) accountants and come up with
He would gather with a group from the treasury and global finance
departments known inside the company as "Fastow's field marshals". This
group often included Jeffrey McMahon, Enron's former treasurer and now
its president, and Ben Glisan, who took over from Mr McMahon as
treasurer and who was dismissed in November. (As the FT reported on
February 13, the Justice Department is now seeking a deal with Mr Glisan
to secure his testimony against former colleagues.)
Together, the teams would thrash out financial structures that satisfied
the letter of the law and of accounting standards, if not its spirit.
"All they were doing was looking at GAAP and FASB documents and saying,
'Well, this is what it says,' and then finding the most byzantine way to
get around the law so that it's still legal but violating the spirit."
When a deal was fixed, Enron's internal accountants, also known as the
'transactions support group', would support it in their liaison with
Andersen, Enron's former accountancy firm.
In practice, former employees say, they often bullied Andersen into
accepting their treatments. This was sometimes done, according to two
Enron employees, at the behest of Rich Causey, Enron's former chief
accountant. "He would lean so hard on the internal people, and then they
would lean on Andersen," says one. Mr Causey's lawyer, Reid Wein garten,
Some of the vehicles that emerged from the brainstorming contained an
unusual feature pioneered by Mr Nath: they held Enron stock in order to
comfort lenders and secure an investment grade rating, and required
Enron to inject more shares into the vehicles if the share price fell to
certain "trigger points". They could also force their liquidation if
Enron was downgraded.
Some CSFB bankers say the partnerships had been "fully baked" by Enron's
finance team, and that the former DLJ bankers were merely brought in to
execute them. Indeed, Mr Fastow claimed in 1999 that Enron had been
responsible for Marlin, created to help finance its purchase of Wessex
Water, the UK utility. Several banks not involved in the transaction
"came back and marketed it to us" as their own creation, he told CFO
But to CSFB's competitors, at least, the partnerships bore the stamp of
Mr Nath and his team. "When the Marlin and Osprey deals first came to
light, they were known as a DLJ product. They dominated the market for
them," says one banker familiar with the deals.
Mr Nath and his team did similar deals for a group of other companies,
including energy groups El Paso and Williams. Other Wall Street banks
tried to re-engineer the partnerships, based on their documentation, and
sell them to other clients.
Although these structures were scattered throughout corporate America,
Enron appears to have set itself apart by the volume of such deals and
the amount of debt moved off balance sheet. While each individual deal
may have been manageable, bankers say, the sum of them posed an enormous
risk for Enron.
"What I can't believe is that anyone ever got comfortable when you put
all of this stuff together. Taken in combination, these partnerships
clearly posed a material risk for the company," says one banker.
The trigger points inside some partnerships, some of which would be
breached if Enron's stock price fell to the high Dollars 40s and again
into the low Dollars 20s, were also a time bomb. "There's no question
that senior people at CSFB knew what was going on and that it was a
house of cards," says one Enron insider.
The triggers were discussed by senior Enron executives and senior
bankers at a meeting in July 2001, when Enron's stock was in the Dollars
40s, according to one person who was present. While declining to say who
attended the meeting, this person says neither Jeffrey Skilling, Enron
president, nor anyone from the office of the chairman, Kenneth Lay, was
"They (the CSFB bankers) said: 'If this thing hits Dollars 20, you
better run for the hills.' There was no question that they knew exactly
what lay inside the structures, when the triggers went off - everything.
You could almost say they knew more about the company than people in
A CSFB spokesman said: "Enron knew and understood the partnership
structures we worked on. The credit and stock price triggers were widely
He provided copies of public documents indicating that special purpose
vehicles such as Marlin and Osprey, structured by DLJ, had been approved
and described by ratings agencies and that the equity triggers were
discussed in Enron's annual reports.
Indeed, Enron insiders say such knowledge should have been fairly
widespread elsewhere on Wall Street - at least among investors in the
partnerships, to whom these triggers were also disclosed.
Yet almost every brokerage on Wall Street rated Enron stock a "strong
buy" at the time. Among the last to change his mind was Curt Launer of
CSFB. He did not back off from his "strong buy" recommendation until
November 29, three days before Enron's bankruptcy declaration. Only two
other brokers - Sanford Bernstein and Lehman Brothers - moved later.
Mr Launer told a Senate hearing on Wednesday that he had no proprietary
knowledge of the Enron partnerships. He and other analysts highlighted
the "Chinese Walls" within banks, separating investment banking and
brokerage activities. "Without accurate and complete financial reporting
from a company, I simply do not have the proper tools to do my job," Mr
But, according to investment bankers, it was an open secret on Wall
Street that firms whose analysts had negative ratings on Enron would not
win business. "It's not coincidental that the same firms that were
recommending Enron shares were the same ones who were involved in these
transactions," says Mr Entwistle, the lawyer representing shareholders.
This was just one area where Enron, over whose financial operations
stood the formidable and irascible Mr Fastow, was able to put pressure
on its bankers.
One method, according to Enron executives, was for Mr Fastow to link
Enron business to investment in partnerships supposedly independent of
Enron, including one called LJM2 Co-Investment.
Mr McMahon, now Enron president, said two bankers - Paul Riddle of First
Union Bank and Mark DeVito of Merrill Lynch - had said they had been
promised debt underwriting business by Mr
Fastow in exchange for investing in LJM2.
Other bankers, he told company lawyers preparing an internal report last
autumn on accounting concerns at Enron, had inferred a link between
investing in LJM and other business. He said Deutsche Bank and Chase
thought a linkage existed, and that Deutsche Bank thought it improper.
Mr McMahon told the lawyers that, as far as he was concerned, there was
no such linkage, according to memos prepared by the law firm, Vinson &
Elkins, released by the House energy and commerce committee. But he said
it was Mr Fastow - who earned Dollars 30m from his position at LJM,
according to an Enron internal investigation - who had the final say on
who won Enron business. Mr Fastow's spokesman, Gordon Andrew, declined
Sherron Watkins, the Enron whistleblower who warned Kenneth Lay last
August about her concerns over the special purpose entities Mr Fastow
had created, told a House panel that friends at Chase, Credit Suisse and
Bank of America had complained that Mr Fastow had threatened the
institutions, telling them "that if you didn't invest in LJM, Enron
would not use you as a banker or an investment banker again".
Merrill Lynch handled the sales pitch for LJM2, raising Dollars 390m.
Investors included Citigroup, JP Morgan Chase, CIBC, Deutsche Bank,
First Union and Dresdner Bank. Merrill contributed Dollars 5m of its own
money, while senior Merrill bankers added Dollars 16m. Merrill bankers
who invested included Thomas Davis, vice-chairman; Daniel Bayly,
investment banking chief; and Schuyler Tilney, head of energy investment
Mr Tilney had another, intimate connection to Enron: his wife,
Elizabeth, was a senior executive on Enron's management committee and
senior vice-president for advertising, communications and organisation
Mrs Tilney received a copy of Ms Watkins' now-famous whistleblower memo
in October as Ms Watkins tried to arrange a meeting to discuss ways of
minimising the fall-out from the questionable accounting.
Full article at:
Mercuria Business School
michael.keaney at mbs.fi
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