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Wednesday, 24 July, 2002, 21:09 GMT 22:09 UK
Enron-tainted bank reassures investors
Jeffrey Dellapina, managing director of JPMorgan Chase Bank, testifies before a Senate subcommittee, along with vice president Robert Traband (left).
Bankers tried to explain their role in Enron's accounting
Shares in giant US investment bank JP Morgan Chase closed 16% higher after its chief executive spoke out in defence of its role towards collapsed energy firm Enron.

Citigroup stock also recovered, rising by 10%.

JP Morgan and Citigroup have been accused by US congressional investigators of helping disgraced energy firm Enron, and at least ten other companies, hide billions in debt.

Both banks' shares had lost almost a fifth of their value after a Congressional hearing on Monday.

'Integrity throughout'

JP Morgan chief executive William Harrison said his bank did not knowingly help Enron hide debt.

"We acted properly and with integrity in all the Enron matters," he said, criticising a "political media frenzy that is quite extraordinary".

He said all his bank's dealings with Enron had been fully entered into JP Morgan's own accounts, which complied with audit rules.

Furthermore, he said, the transactions at the heart of the Congressional investigation had been a legitimate way for Enron to match its assets with its liabilities.

Bleak Tuesday

Shares in Citigroup and JP Morgan slumped on Tuesday in the wake of Congressional hearings.

Representatives of the two banks failed to convince a US Senate hearing that they had innocently entered into accounting schemes for the disgraced energy giant.

As investors ditched their shares, Citigroup closed 16% lower and JP Morgan fell 18%, an immense fall for such high-profile companies.

'Accounting sham'

The banks' troubles follow the collapse of the accountants Andersen, brought down by the accusation it had knowingly helping Enron to hide behind shady accounting practices.

Enron logo
Enron was assisted by Citicorp and Chase, said Senator Levin
Experts have now told investigators that Enron would not have been able to dupe investors without the assistance of its bankers.

"Chase and Citicorp knew what Enron was doing, assisted Enron in the deceptions, and profited from their actions," said Senator Carl Levin, chairman of the sub-committee on investigations, calling the action an "accounting sham".

During a 10-hour grilling, executives from both banks insisted their actions - which, the committee says, effectively disguised the debts that eventually brought Enron to its knees as trading revenues - were lawful and a legitimate "alternative form of financing".

And the transactions are thought to be acceptable under US accountancy rules.

But sub-committee chairman Senator Carl Levin lambasted executives for failing to recognise the transaction as problematic and potentially damaging to investors.

Disguised trading

The controversy centres on a total of $8bn of loans known as "pre-pay transactions".

Maureen Hendricks of Citigroup/Salomon Smith Barney
Senate hearings are set to continue
The loans were disguised on Enron's accounts as future energy trades.

If Enron had properly accounted for the loans, its total debt would have increased by about 40% and it would have suffered a credit downgrade, according to the chief investigator Robert Roach.

That would almost certainly have killed off the company's hopes of avoiding bankruptcy a lot earlier.

Credit ratings agencies were also defending their corner before the investigators on Tuesday, pleading ignorance.

And the report from the investigators made it clear that Enron was not the only beneficiary of the banks' assistance.

"Chase informed the subcommittee that it entered into Enron-style prepays with seven companies apart from Enron," the report said.

"Citigroup indicated that it shopped the idea to 14 companies apart from Enron, successfully selling it to at least three."

Multiple scandals

The collapse of Enron in December triggered the current crisis in investor confidence.

It admitted that it had inflated its profits, casting grave doubts over the accounting methods used by US firms.

That prompted a series of investigations into other firms, including WorldCom which has also now admitted to overstating its profits and has since filed for bankruptcy.

President George W Bush has vowed to weed out corporate wrongdoing in the US, and numerous investigations are underway.

Jeffrey Dellapina, managing director at J.P. Morgan
"Throughout the period we've been involved with Mahonia, we have always recognised it as an independent operation."
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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