WASHINGTON (REUTERS) — A senior U.S. senator grilled two major Wall Street firms Wednesday over complex deals with Enron Corp. and called for a crackdown on allegedly deceptive tax and accounting strategies sold by big banks to corporations.
Citigroup Inc. and J.P. Morgan Chase & Co. Inc. executives again came before Sen. Carl Levin to face questions about “structured finance” transactions with Enron that he charged helped the bankrupt energy trader deceive investors.
“We regret that we ever dealt with Enron,” J.P. Morgan executive Robert Traband said at a hearing chaired by Levin.
The Michigan Democrat’s Permanent Subcommittee on Investigations alleged that the banks had entered into four deals that ranking Republican member Sen. Susan Collins of Maine said showed “the complicity of financial institutions in Enron’s deceptions.”
The deals — in 2000 and 2001, before Enron’s bankruptcy filing a year ago — included three accounting transactions known as Sundance, Bacchus and Fishtail. A fourth deal, known as Slapshot, was a Canadian tax scam, the subcommittee charged.
Structured finance is a hot Wall Street growth area that targets accounting and tax loopholes to help corporate clients of banks save money and improve their bottom lines. Banks defend these strategies as legal but at the same time have been moving recently to scrutinize them more carefully.
Levin has held a series of hearings aimed at showing some of these deals, even if legal, are nonetheless deceptive. Some such deals, he has said, serve “no legitimate business purpose other than tax and accounting manipulation.”
“This has got to stop,” Levin said at the hearing.
He praised the banks for adopting more rigorous oversight of structured finance but said self-regulation was inadequate and called for government action as well.
Citigroup executive Charles Prince said the world’s largest financial-services group would not today enter into such transactions, under new policies adopted in August.
“Even assuming that these transactions were entered into in good faith and were entirely lawful, they do not reflect our standards, and they would not happen now, at Citigroup,” said Prince, chief of its global corporate and investment bank.
J.P. Morgan’s Traband said that, in hindsight, the bank would not have entered into the deals, although he defended them as “perfectly legal … Had we known then what we know now about Enron’s allegedly fraudulent practices, we would not have engaged in these transactions with Enron,” said Traband, a J.P. Morgan vice president in its Houston corporate banking group.
Levin urged the Securities and Exchange Commission and bank regulators to close a “regulatory gap” that allows structured finance deals to be abused.
“First, the SEC should issue a policy which states clearly that the SEC will take enforcement action against financial institutions which aid or abet a client’s dishonest accounting, by selling deceptive structured finance or tax products or by knowingly or recklessly participating in deceptive structured transactions,” he said.
Under present regulation, deals like those examined by the subcommittee slip between the cracks of the SEC’s oversight of financial statements and bank regulators’ focus on capital adequacy, subcommittee aides said.
After the collapse of former giant energy trader Enron and subsequent scandals at telecommunications firms WorldCom Inc. and Global Crossing Ltd. and elsewhere, Congress passed the sweeping Sarbanes-Oxley Act in July.
The biggest overhaul of U.S. securities laws since the 1930s, it launched a raft of reforms, dovetailing with a handful of separate initiatives being pursued by the SEC.
But none, aides said, specifically addresses structured finance, which was also the focus of earlier subcommittee hearings involving Enron, Citigroup and J.P. Morgan.
