This evidence has come to light in a months-long investigation of Enron and a series of hearings undertaken by the Permanent Subcommittee on Investigations, of which I am the Ranking Member. Last January, soon after Enron's collapse, Senator Carl Levin (D-MI), who chairs the Subcommittee, and I launched our investigation into the rapid downward spiral and ultimate bankruptcy of the once high flying energy corporation.
In recent weeks, our hearings have unearthed some startling facts regarding how Enron was able to conduct its many deceptive deals. Without the help of certain financial institutions, Enron would not have been so successful in hiding its debt, creating the illusion of profit or setting up sham transactions. Enron had plenty of help. We know now, eight months after Enron filed for bankruptcy protection, that a web of conflicts of interest, accounting improprieties, high risk transactions, and appropriation of corporate assets by Enron executives contributed to the company's collapse. The Subcommittee's investigation revealed that certain financial institutions knowingly participated in, and indeed facilitated some of the transactions that Enron officials used to disguise debt and, thereby, make the company's financial position appear more robust than it actually was.
In July, the Subcommittee held two hearings in which Citigroup, JP Morgan Chase, and Merrill Lynch were called to explain their role in dubious transactions designed to obtain, as one of the banks continued to tout on its website, "financial statement friendly financing." The testimony at the hearings was, at times, disappointing and often shocking. JPMorgan Chase and Citigroup are two of the nation's most prestigious financial institutions and yet they succumbed to the desire to keep Enron, an important client, happy. They participated in crafting sham transactions that allowed Enron to conceal debt and make it look like cash flow from trading operations. Some of the banks' own employees knew what the deals were designed to do, and they communicated as much in emails including one, for example, that stated, "Enron loves these deals since they hid debt."
Merrill Lynch also went to extraordinary lengths to pacify Enron after the company complained that Merrill's financial analyst had rated Enron less favorably than it would have liked. Enron made it clear to Merrill Lynch, in no uncertain terms, that until the analyst issue was resolved, Merrill would not be receiving more business from Enron. Shortly thereafter, Merrill officials spoke to the analyst about his Enron ratings. The analyst ultimately left Merrill Lynch and his replacement immediately upgraded Enron's rating. Allowing ratings to be compromised by the prospect of obtaining business is unacceptable. Investors depend on unbiased ratings of companies when making investment decisions.
As we learned more about how prestigious financial institutions participated in transactions that allowed Enron to deceive investors, I was reminded of a congressional hearing almost a century ago with another banker. In 1912, J.P. Morgan appeared before a House subcommittee to be questioned about his firm's banking practices. He was asked whether it was true that his bank had no legal responsibility for the value of bonds it had sold clients. He responded that the banks assumed something even more important than legal responsibility - - moral responsibility. Yet, when asked at our recent Senate hearing whether it was appropriate for a financial institution to act in a manner it knew was deceptive, one Citigroup banker responded, "it depends on what the definition of a deception is." It is this sad quote that sums up the attitude of some professionals on what their duty is in today's markets.
This attitude must change. The day of the deal that serves no other purpose than to exploit an accounting loophole, and the day when the law serves as the ceiling rather than the floor on the conduct of Wall Street professionals and corporate executives, must come to an end.
It is important to remember that the Enron debacle is more than just a tale of one company's greed. As a result of Enron's downward spiral and ultimate bankruptcy, shareholders – large and small, individual and institutional – lost an estimated sixty billion dollars. The collapse of Enron caused thousands of Americans to lose jobs, to lose savings, and to lose confidence in corporate America. It is time to halt practices that are beneficial to a select few and harmful to thousands. The new accounting reform law will help to deter corporate wrongdoing with its tough new penalties and requirements for truly independent auditors. It also addresses the role of corporate management and provides new powers, resources and responsibilities for the Securities and Exchange Commission to ensure more vigorous enforcement. This law is a promising first step toward making our markets operate as efficiently, transparently and fairly as possible, and ensuring that small investors, in particular, have access to complete and accurate information to guide their investment decisions. Fundamentally, however, restoring faith in America's capital markets requires that all the players do their jobs – not just government regulators and prosecutors but lawyers, accountants, investment bankers, market analysts, corporate management and boards – in accordance with the spirit, not merely the letter, of the law.