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Tuesday, 23 July, 2002, 15:48 GMT 16:48 UK
Banks implicated in Enron's fall
Enron's headquarters in Houston
Investigators say Enron had $5bn in loans outstanding
Shares of Citigroup have fallen about 12% as speculation grows about the role the bank may have played in the collapse of energy giant Enron.

Senate lawmakers are beginning to hear testimony from Senate investigators about the role US investment banks may have played in backing the specious accounting at Enron.

Stock in the world's second largest bank was trading at about $28.15 in mid-morning trading on Wall Street, following testimony in which investigators described a complex scheme under which Enron booked loans as energy trades and thus as profits.

It is a practice Senate investigators referred to as "pre-pays", that allowed Enron to doctor its books to make the firm look far more profitable than it really was.

The investigators contend Enron could not have been able to show such profitability if it were not for the help of large investment banks, such as Citigroup and JP Morgan Chase.

Instead, they said, the loans issued to Enron under General Accepted Accounting Principles, or Gaap, should have been booked as debt.

Spokespersons for both Citigroup and JP Morgan have said the firms have done nothing illegal and say "pre-pay" transactions are entirely lawful.

The Senate hearings, which will last two days, will call witnesses from major financial institutions, accounting and financial experts and investigators from the Permanent Subcommittee on Investigations.

The New York state attorney general's office has also said it is looking into the loans.

Loans as profits

Senate investigators, testifying before the Senate Permanent Subcommittee on Investigations, said they uncovered $8bn in loans the investment banks lent to Enron in the nine years leading up to its bankruptcy filing last December.

They found that each bank engaged in about a dozen deals that involve questionable transactions with the failed energy trader.

Enron then hid the loans by cloaking them in transactions that were accounted for as energy trades.

The loans allowed Enron to show it was bringing in more money than it really was. This in turned boosted not only its share price but its credit rating, too, permitting it to continue its loan-getting at preferential rates.

The complex transactions involved the purchase of natural gas and other commodities over a prolonged period and thus made to look like sales - or profits.

Senate investigators also said that while Enron accounted for the transactions as profits, it did not do so on its tax statements, electing instead to log them as loans in order to deduct interest payments.

Further investigations

About $5bn of the loan amounts remained outstanding when Enron filed for Chapter 11 bankruptcy protection, which allows the company to remain a going concern in the hopes of re-establishing its business.

According to the Senate report, the transactions, which took place from 1992 to 2001, effectively hid part of Enron's mounting debt, which eventually bankrupted the doomed the energy-giant.

Contributing to Citigroup's woes are reports that Citigroup's star telecom analyst, Jack Grubman, is being investigated by the National Association of Securities Dealers (NASD).

The BBC's Mark Gregory
"The sort of deals that Citigroup were offering were off-the-shelf and the scandal may be much, much wider."

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