Saturday, June 11, 2005

Clinton Treasury Official Implicated in Enron Scandal

A story unlikely to get much play at former Clinton Treasury Department economist's blogs:

Wall Street giant Citigroup agreed yesterday to pay $2 billion to settle a class-action lawsuit accusing the bank of defrauding investors through its work for fallen energy trader Enron.

Though one must read through to the 17th paragraph to find out why:

In late 2001, after revelations about Enron's accounting made headlines, Citigroup and J.P. Morgan sought to arrange the company's sale to rival Dynegy so they could split a $90 million investment banking fee and stave off its likely bankruptcy. The suit said calls by Citigroup Vice Chairman and former Treasury Secretary Robert Rubin and J.P. Morgan Chairman William Harrison to credit-rating firm Moody's Investors Service were attempts to "strong-arm" the firm from downgrading Enron before a sale could be completed.

The actual wrongdoing alleged being:

The lawsuit accused financial institutions of helping Enron raise money even as it secretly was imploding. The University of California, which in February 2002 was named lead plaintiff in the consolidated class actions, claimed the banks participated in a host of schemes that violated securities law.

Citigroup, for example, allegedly disguised loans to enable Enron to present a misleading picture of its balance sheet.

Citigroup lent Enron $2.4 billion in a series of deals identified as "swaps" and nicknamed Delta transactions because they were conducted through Citigroup's Cayman Island unit, called Delta. Citigroup paid Enron hundreds of millions of dollars each time, obligating the company to repay the cash over five years.

Although the transactions were in fact loans, they never were disclosed as such on Enron's books. The plaintiffs alleged that Enron was seeking to conceal the full amount of its debt so that regulators and investors would be unaware of its precarious financial position.

Based on its investment-grade rating at the time, Enron could have received credit at much lower rates, but it paid Citigroup and J.P. Morgan 6.5 percent to 7 percent for the "disguised loans," making the deals hugely profitable for the banks, the plaintiffs said.

And Enron wasn't the largest scandal the Democrat-connected firm was involved in:

Citigroup last year agreed to pay $2.6 billion as part of the record $6.1 billion settlement by banks, auditors and former board members to resolve class-action claims resulting from the 2002 downfall of telecom giant WorldCom. Citigroup agreed in March to pay $75 million to investors in the defunct fiber-optic network Global Crossing.

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