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Last Updated: Wednesday, 9 June, 2004, 09:33 GMT 10:33 UK
The banks that robbed the world
In a Money Programme special investigation, the team investigates the rise and fall of the bosses of Enron and Worldcom and looks at the financiers who bankrolled the companies' activities.

They were once celebrated as two of the world's most successful companies.

But in 2002 Enron and WorldCom were exposed as corrupt organisations, run by fraudsters that had lined their pockets with tens of millions of dollars and destroyed $240bn worth of investor's money.

America's biggest banks helped them at every stage. The moneymen devised one trick after another to conceal the true state of the companies' finances. In return, these Wall Street firms earned hundreds of millions in fees and loan interest.

Ken Lay and Bernie Ebbers are under investigation for the two biggest financial scandals ever, but until last year they were business heroes.

How it began

In the mid 1980's they were corporate small fry, but over the next fifteen years they would build the companies that spawned the frauds that shook the world.

Ebbers and Lay's first incentive to bend the rules came out of a desire to boost the value of their share options. Bosses only had to make their companies appear more profitable for their options to soar in value. This gave Ebbers and Lay plenty of incentive to cook the books. It was Lay's Enron that started first, with the help of Citibank.

In 1993 Citibank funnelled $125m dollars into a secret offshore company that pretended to buy gas from Enron, which then logged this 'cash' as income on its accounts. No gas ever changed hands and later another fake deal was set up so that Citibank would get all its money back - plus interest. Over the years, Citibank would secretly lend almost $5bn, with other banks like JP Morgan lending another $4bn.

Scam after scam

Enron's share price rose as investors were duped, and Ken's options were rising in value. At around the same time, WorldCom's Ebbers was working with Citibank subsidiary, Salomon, on another scam.

Eager to grab lucrative work on WorldCom's aggressive strategy of takeovers, Salomon was giving Ebbers a parcel of shares in many of the new share flotations or 'initial public offerings' (IPOs) that it was organising. The shares soared giving Ebbers instant profits. And within a year, Salomon was asked to handle WorldCom's record-breaking $37bn takeover of MCI, earning $33m for this job alone.

The next big scam was for the banks to employ 'star' analysts - meant to write unbiased research to help investors decide what shares to buy - to help boost the WorldCom share price.

Salomon's star telecoms analyst, Jack Grubman was unusually close to Ebbers - he spent weekends on his yacht, went to his wedding and attended WorldCom board meetings.

Helped by his relentlessly optimistic reviews, WorldCom's share price quadrupled in three years.

The end is nigh

The banks also loved Enron, but by early 1999, its chief financial officer, Andrew Fastow, was desperate to conceal the company's debts and pump up its profits.

Merrill Lynch helped him set up a dizzyingly complex network of secret companies which would prop up Enron a while longer. Merrill's got the lucrative job of raising the finance for LJM2, one of the shell companies designed to cover up Enron's debts. Wall Street investors were offered fabulous rates of return for investing.

Because of the scam, Enron claimed profits of a $1bn in 2000. In fact it had none.

In March 2000 the stock market collapsed and things were getting bad for WorldCom, where costs were rocketing out of control. To cover it up, Scott Sullivan, the company's chief financial officer, began the world's biggest fraud.

WorldCom executives began to record the spiralling day-to-day costs as spending on assets. This meant that they could account for them over the long term and so boost short-term profits. Nine billion dollars would be mis-stated in this way.

Back at Enron, Citibank was persuading outside punters to invest in a new shell company - Yosemite, which would lend cash to Enron. This time, when Enron got the cash it paid off its previous loans from Citibank. So now if Enron collapsed, Citibank would be alright but the Yosemite investors would lose everything.

The collapse

Enron was living by the pen, and would die by the pen. Auditors Arthur Andersen discovered an accounting error that led to a huge reduction in stockholder equity. This was the first step in an avalanche that led to the investigations, the stock price collapse and finally the bankruptcy.

Enron's collapse opened the floodgates and the markets went into a tailspin as a rash of new scandals was exposed, the last of which was at WorldCom.

Executives at both WorldCom and Enron are due to be tried later this year and the Feds are still trying to build a case against Ebbers and Lay.


But what about the bankers who made it all possible? Analyst Jack Grubman was sacked, but got a payoff of over $30m. Merrill Lynch has been fined $100m and CSFB $150m. The biggest fine, $300m, was levied on Citigroup. But it can afford it, with estimated profits of $16bn this year.

The people who could least afford to lose money have collectively lost billions of dollars out of their paycheques and pensions because of the greed of corrupt executives and the Wall Street bankers who enable them.

This programme was first transmitted on Thursday 9 January 2003.


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