[Senate Hearing 107-871]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 107-871
 
OVERSIGHT OF INVESTMENT BANKS' RESPONSE TO THE LESSONS OF ENRON--VOL. I
=======================================================================



                                HEARING

                               before the


                PERMANENT SUBCOMMITTEE OF INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


                               __________

                           DECEMBER 11, 2002

                               __________

      Printed for the use of the Committee on Governmental Affairs









                       U. S. GOVERNMENT PRINTING OFFICE
83-485                          WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001








                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware           ROBERT F. BENNETT, Utah
JEAN CARNAHAN, Missouri              JIM BUNNING, Kentucky
MARK DAYTON, Minnesota               PETER G. FITZGERALD, Illinois
           Joyce A. Rechtschaffen, Staff Director and Counsel
              Richard A. Hertling, Minority Staff Director
                     Darla D. Cassell, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
DANIEL K. AKAKA, Hawaii,             SUSAN M. COLLINS, Maine
RICHARD J. DURBIN, Illinois          TED STEVENS, Alaska
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware           ROBERT F. BENNETT, Utah
JEAN CARNAHAN, Missouri              JIM BUNNING, Kentucky
MARK DAYTON, Minnesota               PETER G. FITZGERALD, Illinois
         Elise J. Bean, Acting Staff Director and Chief Counsel
            Robert L. Roach, Counsel and Chief Investigator
                 Kim Corthell, Minority Staff Director
                     Mary D. Robertson, Chief Clerk





                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Collins..............................................     7
    Senator Bennett..............................................    10

                               WITNESSES
                      Wednesday, December 11, 2002

Charles O. Prince III, Chairman and Chief Executive Officer, 
  Citigroup Global Corporate and Investment Bank, New York, New 
  York...........................................................    12
David C. Bushnell, Managing Director, Global Risk Management, 
  Citigroup/Salomon Smith Barney, New York, New York.............    15
Richard Caplan, Managing Director and Co-Head, Credit Derivatives 
  Group, Salomon Smith Barney North American Credit/Citigroup, 
  New York, New York.............................................    16
William T. Fox III, Managing Director, Global Power and Energy 
  Group, Citibank/Citigroup, New York, New York..................    16
Michael E. Patterson, Vice Chairman, J.P. Morgan Chase and 
  Company, New York, New York....................................    44
Robert W. Traband, Vice President, J.P. Morgan Chase and Company, 
  Houston, Texas, accompanied by Eric N. Peiffer, Vice President, 
  J.P. Morgan Chase and Company, New York, New York..............    46
Andrew T. Feldstein, Managing Director, Co-Head Structured 
  Products and Derivatives Marketing, J.P. Morgan Chase and 
  Company, New York, New York....................................    49
Muriel Siebert, President and Chair, Muriel Siebert and Company, 
  Inc., New York, New York.......................................    66
Richard Spillenkothen, Director, Division of Banking Supervision 
  and Regulation, The Federal Reserve, Washington, DC............    71
Douglas W. Roeder, Senior Deputy Comptroller for Large Bank 
  Supervision, Office of the Comptroller of the Currency, 
  Washington, DC.................................................    73
Annette Nazareth, Director, Division of Market Regulation, U.S. 
  Securities and Exchange Commission, Washington, DC.............    75
.................................................................

                     Alphabetical List of Witnesses

Bushnell, David C.:
    Testimony....................................................    15
    Prepared statement...........................................   101
Caplan, Richard:
    Testimony....................................................    16
    Prepared statement...........................................   103
Feldstein, Andrew T.:
    Testimony....................................................    49
    Joint prepared statement.....................................   107
Fox, William T. III:
    Testimony....................................................    16
    Prepared statement...........................................   104
Nazareth, Annette:
    Testimony....................................................    75
    Prepared statement...........................................   134
Patterson, Michael E.:
    Testimony....................................................    44
    Prepared statement...........................................   105
Peiffer, Eric N.:
    Testimony....................................................    46
    Joint prepared statement.....................................   107
Prince, Charles O. III:
    Testimony....................................................    12
    Prepared statement...........................................    91
Roeder, Douglas W.:
    Testimony....................................................    73
    Prepared statement...........................................   123
Siebert, Muriel:
    Testimony....................................................    66
    Prepared statement...........................................   113
Spillenkothen, Richard:
    Testimony....................................................    71
    Prepared statement...........................................   117
Traband, Robert W.:
    Testimony....................................................    46
    Joint prepared statement.....................................   107

                                APPENDIX

Permanent Subcommittee on Investigations Staff Report on 
  ``Fishtail, Bacchus, Sundance, and Slapshot: Four Enron 
  Transactions Funded and Facilitated by U.S. Financial 
  Institutions,'' December 11, 2002..............................   150

                                EXHIBITS
                                VOLUME I

301. a. GBacchus, The appearance is a sale, chart prepared by the 
  Permanent Subcommittee on Investigations.......................   185

     b. GBacchus, The reality is a loan, chart prepared by the 
      Permanent Subcommittee on Investigations...................   186

302. a. GSundance, The appearance is a joint investment, chart 
  prepared by the Permanent Subcommittee on Investigations.......   187

     b. GSundance, [The appearance is a joint investment,] The 
      reality is a sham investment by Citigroup, chart prepared 
      by the Permanent Subcommittee on Investigations............   188

     c. GSundance, The agreement included these provisions, chart 
      prepared by the Permanent Subcommittee on Investigations...   189

303. a. G$1 Billion Cash Flow, June 22, 2001, chart prepared by 
  the Permanent Subcommittee on Investigations...................   190

     b. G$1 Billion Cash Flow, June 22, 2001, chart prepared by 
      the Permanent Subcommittee on Investigations...............   191

     c. GFlagstaff-Hansen $1.4 Billion, Share Subscription/
      Assumption/Payment Set Off, chart prepared by the Permanent 
      Subcommittee on Investigations.............................   192

     d. G$1 Billion Cash Flow, June 22, 2001, chart prepared by 
      the Permanent Subcommittee on Investigations...............   193

304. GEnron Guarantees Citigroup's ``Equity'' Investment In 
  Bacchus, chart prepared by the Permanent Subcommittee on 
  Investigations.................................................   194

Project Fishtail Transaction:

305. GFishtail deal structure, dated January 21, 2002, prepared 
  by Deloitte & Touche...........................................   195

306. GLJM2 Investment Summary for Fishtail, dated December 20, 
  2000...........................................................   196

307. GInvestment Return Summary for Fishtail prepared by LJM2....   199

308. GBenefits to Enron Summary, Deal Name: Ampato (Fishtail), 
  dated December 20, 2000, prepared by LJM2......................   200

309. GEnron's LJM2 Approval Sheet for Fishtail, dated December 
  18, 2000.......................................................   201

310. GProject Fishtail/125 Structure.............................   205

311. GStructuring Summary, Project Grinch, dated December 18, 
  2000, prepared by Chase........................................   206

312. GProject Grinch LP, summary memorandum prepared by Chase, 
  December 16, 2000..............................................   208

313. GEnron Corporate Development Asset Inventory, Tentative and 
  Preliminary, EIM, updated 11/25/01.............................   211

314. GEnron Corp. email, December 2000/January 2001, re: 2000 
  Accomplishments, attaching document, Mike Patrick 2000 
  Accomplishments................................................   212

315. GChase fee letter to Enron Corp. signed by both parties, 
  December 20, 2000, re: Fishtail (. . . an advisory fee in an 
  amount equal to $500,000. . . .)...............................   214

Project Bacchus Transaction:

316. GProject Bacchus, deal structure chart prepared by Enron 
  Corp...........................................................   216

317. GTransaction Descriptions: Project Bacchus, Summary and 
  Structure Description, prepared by Enron Corp..................   217

318. GGlobal Loans Approval Memorandum, December 6, 2000, 
  prepared by Citibank, re: Project Bacchus......................   219

319. GCitibank email, April 2001, re: Enron Credit Approval 
  ($200mm--Bacchus: SPV where we have a total return swap from 
  Enron for $180 mm and verbal support for the balance . . .)....   223

320. GExecutive Summary, including Bacchus/Caymus Trust Facility, 
  prepared by Citibank...........................................   224

321. GProject Bacchus, 3% Test and Gain Calculation, prepared by 
  Enron Corp.....................................................   225

322. a. GCitibank email, November 2000, re: Enron update (Enron's 
  motivation in the deal now appears to be writing up the asset 
  in question from a basis of about $100MM to as high as $250MM, 
  thereby creating earnings.)....................................   226

     b. GCitibank email, November 2000, re: Enron update (. . . 
      but it will be major appropriateness issue as will the 
      first two).................................................   228

     c. GCitibank email, November 2000, re: Enron/Bacchus Summary 
      (They [Enron] have offered to have the CFO discuss this at 
      whatever level of our [Citibank] organization we think 
      necessary to obtain the right comfort).....................   229

     d. GCitibank email, December 2000, re: ENE/Bacchus Update 
      (It is possible, but not certain, that there will be an 
      earnings impact. . . .)....................................   232

     e. GCitibank email, December 2000, re: ENE/Bacchus (There 
      are ``technical'' issues with NetWorks which MAY make 
      Bacchus unworkable. . . .).................................   233

     f. GCitibank email, December 2000, re: Enron ([H]owever, the 
      $200 million represents 16.3% and 22.4% of operating cash 
      flow and net income . . .), attaching estimated Enron 
      figures....................................................   234

     g. GCitibank email, December 2000, re: Enron (Based on 1999 
      numbers would appear that Enron significantly dresses up 
      its balance sheet for year end; . . .).....................   237

     h. GCitibank email, December 2000, re: Enron/Bacchus (The 
      equity component has been approved on the basis of verbal 
      support verified by Enron CFO, Andy Fastow.)...............   239

     i. GCitibank email, December 2000, re: Enron/Bacchus (Sounds 
      like we made a lot of exceptions to our standard policies. 
      . . .).....................................................   242

     j. GCitibank email, May 2001, re: Bacchus Unwind (. . . 
      sufficient for the Trust to prepay the notes in full plus 
      break costs.)..............................................   243

323. GCapital Markets Approval Committee, New Project/Complex 
  Transaction Description Guidelines, Enron Corp., Project 
  Bacchus FAS 125 Transaction, 12/11/00 draft, prepared by 
  Citibank.......................................................   244

324. GArthur Andersen LLC Memorandum, December 2000, re: Fishtail 
  LLC Formation/Securitization...................................   246

325. GArthur Andersen email, November 1999, re: Total Return 
  Swaps..........................................................   250

Project Sundance Transaction:

326. GDescription of the Sundance Transaction, 10/29/01, prepared 
  by Citibank....................................................   253

327. GCapital Markets Approval Committee (CMAC), Minutes to 
  Meeting, May 16, 2001, Project Sundance (Enron Corp.), prepared 
  by Citibank....................................................   255
328. a. GChart prepared by Enron Corp., Sundance Steps, Updated 
  May 16, 2001, 5pm..............................................   257

     b. GSundance Steps, Updated May 11, 2001, 5:44 pm...........   259

     c. GSundance Steps, Updated June 1, 2001....................   260

329. GEnron Corp. Presentation, Enron Industrial Markets Finance 
  Presentation of Sundance Industrial Partners, June 1, 2001.....   261

330. GEnron Corp. Presentation, Enron Industrial Markets--
  Finance, Presentation of Sundance Industrial Partners to 
  Salomon Smith Barney, NY, August 2001..........................   264

331. GEnron Corp. Presentation, Enron Industrial Markets--
  Finance, Potential paper mill acquisition presentation to 
  Salomon Smith Barney, September 2001...........................   271

332. GFirst cut at questions re Sundance, prepared by Citibank...   280

333. a. GCitibank email, April 2001, re: sundance ([T]he argument 
  for why it is debt even if we take a partnership interest that 
  it is more debt like than equity.).............................   282

     b. GCitibank email, May 2001, re: Enron Slapshot Structure..   283

     c. GCitibank email, May 2001, re: Materials for CMAC 
      meeting, attaching copy of Capital Markets Approval 
      Committee, New Project/Complex Transaction Description 
      Guidelines, Enron Corp., Project Sundance Transaction, 
      prepared by Citibank.......................................   285

     d. GCitibank email, May 2001, re: cmac memo ([P]erwein 
      wanted to say that this is a funky deal (accounting-wise.))   290

     e. GCitibank email, May 2001, re: sundance (. . . is a 
      structure that insures, insofar as possible, that it will 
      never get drawn.)..........................................   291

     f. GCitibank email, May 2001, re: sundance (. . . I do not 
      understand why we are proposing to do this transaction.)...   292

     g. GCitibank email, May 2001, re: Sundance..................   294

     h. GCitibank email, May 2001, re: Treatment for Project 
      Sundance, includes a handwritten comment that contingent 
      capital commitment cannot be drawn since SBHC will dissolve 
      partnership if draws triggers are being approached.).......   295

     i. GCitibank email, May 2001, re: Enron/Sundance (Still an 
      equity investment of sorts (acctg and tax basis for 
      partnership) but is structured in such a way that the 670 
      bps is guaranteed or we blow the deal. Also our ``invest'' 
      is so subordinated and controlled that it is 
      ``unimaginable'' how our principal is not returned.).......   296

     j. GCitibank email, May 2001, re: Sundance/Firm Investment 
      (. . . it does appear that we will need to have approval at 
      some point from Mike Carpenter . . .)......................   297

     k. GCitibank (Eleanor Wagner) email, May 2001, re: Project 
      Sundance, including draft memo for Michael Carpenter, 
      expressing Risk Management's Concerns......................   298

     l. GCitibank email, May 2001, re: sundance (We do still need 
      Barbara Yastine and Mike Carpenter to approve before we 
      close?)....................................................   300

    m. GCitibank email, May 2001, re: Sundance (Approval sits in 
      front of Carpenter waiting for signature.).................   301

     n. GCitibank email, May 2001, re: Memo on Enron-Project 
      Sundance (We (Bill Fox and I) share Risk's view and if 
      anything, feel more strongly that suitability issues and 
      related risks when coupled with the returns, make it 
      unattractive.), attaching May 2001 Dave Bushnell Memorandum 
      to Mike Carpenter..........................................   302

     o. GCitibank email, May 2001, re: sundance ([A]ny word? am 
      getting a significant amount of pressure from enron to 
      execute.)..................................................   305

     p. GCitibank email, June 2001, re: Sundance Closing.........   306

     q. GCitibank email, June 2001, re: Sundance Approvals (No . 
      . . was given a verbal go ahead . . . Understand signed is 
      to follow.)................................................   307

     r. GCitibank email, June 2001, re: Sundance (Mike then had a 
      conversation with Dave Bushnell, who shared with us Mike's 
      feedback.).................................................   308


     s. GCitibank email, October 2001, re: Sundance Revenues.....   309

     t. GCitibank email, October 2001, re: sundance redux, 
      attaching Description of the Sundance Transaction..........   310

     u. GCitibank email, October 2001, re: Enron Exposure on NA 
      Credit Derivs (Note that these equity partnerships, are 
      designed to act as debt exposure . . .)....................   313

     v. GCitibank email, October 2001, re: ene transactions 
      (Sundance . . . allows Enron to manage its paper and pulp 
      physical assets and trading business off-balance sheet.)...   315

     w. GCitibank email, October 2001, re: sundance (According to 
      Enron, our $28.5MM is being held in bank deposits.)........   316

     x. GCitibank email, November 2001, re: Sundance Paper (ENE 
      wants to ``discuss'' I have not reiterated the imperative 
      nature of request, did NOT waive the BoD stick. . . .).....   317

     y. GCitibank email, November 2001, re: Enron Sundance--the 
      paper trading partnership (Last night we came to terms with 
      Enron for the purchase of our interest in the Sundance 
      partnership.)..............................................   318

334. GCitibank/SolomonSmithBarney Interoffice Memo, May 2001, re: 
  Enron Corp.--Project Sundance (Transactions Overview, 
  Description of the Assets, Economics)..........................   319

335. GAccounting for Investments in Limited Partnerships and 
  Other Joint Ownership Entities, prepared by Enron Corp.........   324

336. GArthur Andersen email, August 2000, re: 4 to 1 test........   334

Project Slapshot Transaction:

337. GFlagstaff Funding Flows, diagram prepared by Enron Corp....   347

338. GTransaction Summary, Flagstaff/Enron Transaction, prepared 
  by JPMorgan Chase..............................................   348

339. GSlapshot Savings, diagram prepared by Enron Corp...........   354

340. GProject Slapshot, Transaction [email protected] Closing, June 
  2001, prepared by Enron Corp...................................   355

341. GStructuring Summary, Flagstaff Capital Corporation, 
  February 2001, (partial) prepared by JPMorgan Chase............   356

342. GEnron Corp. Stadacona, JPMorgan Chase presentation.........   362

343. GProposal to Enron Industrial Markets, Structured Canadian 
  Financing Transaction (Project ``Slapshot''), January 11, 2001, 
  JPMorgan Chase presentation....................................   379

344. GStructured Canadian Financing Transaction, Organizational 
  Meeting, February 8, 2001, JPMorgan Chase presentation.........   396

345. GSlapshot Transaction Diagram...............................   416

346. GProject Slapshot, Transaction Components, June 2001, Enron 
  Corp. presentation.............................................   422

347. GJ.P. Morgan Securities Inc./Enron Corp. correspondence, 
  June 2001, re: Tax Comfort Letter--Enron Structured Financing..   426

348. GJ.P. Morgan Securities Inc./Enron Corp. correspondence, 
  June 2001, re: U.S. Tax Matters--Enron Structured Financing....   428

349. G206.(f) Agreement between Flagstaff Capital Corporation and 
  Hanson Investments Co., June 2001..............................   431

350. GCredit Agreement between Hansen Investments Co., Flagstaff 
  Capitol Corporation and The Chase Manhattan Bank, June 2001....   434

351. GProject Slapshot, Discussion Session, March 2001, 
  presentation prepared by JPMorgan Chase........................   514

352. GTax opinion letter from Blake, Cassels & Graydon LLP to 
  Enron Corp., June 2001, re: Canadian Tax Consequences of 
  Proposed Financing.............................................   525

353. GTax opinion letter from Blake, Cassels & Graydon LLP to 
  Chase Securities, Inc., November 2000, re: Canadian Tax 
  Consequences of Proposed Financing.............................   544

354. GTax opinion memorandum from Skadden, Arps, Slate, Meagher & 
  Flom LLP to Enron Wholesale Services, August 2001, re: Project 
  Slapshot.......................................................   565

355. GProject Slapshot Structured Financing Fee Letter 
  (Arranger), June 2001..........................................   593

356. GFee Agreement, between J.P. Morgan Securities Inc. and 
  Compagnie Papiers Stadacona, June 2001.........................   596

357. a. GJPMorgan Chase email, February 2001, re: Some Good News 
  (Slapshot) (Bruce and Eric run the Slapshot product.)..........   600

     b. GJPMorgan Chase email, February 2001, re: Project 
      Slapshot (The lawyers have slammed on the brakes until we 
      confirm that the net accounting for the twist we're 
      contemplating will work.)..................................   601

     c. GJPMorgan Chase email, February 2001, re: Slapshot (As 
      discussed, the lawyers (especially the tax lawyers) are 
      hesitant to state explicitly Chase's intention to set-off . 
      . . as they wish to keep the documents as ``arm's length'' 
      as possible . . .).........................................   607

     d. GJPMorgan Chase email, May 2001, re: Wed conf call--
      discussion points, attaching Enron Discussion Points (May 
      9, 2001)...................................................   608

     e. GJPMorgan Chase emails, February and May 2001, re: 
      Project Rio Grande (a.k.a. Flagstaff Capital Corporation)--
      HEADS UP MEMO (Club Bank Target Hold: $60MM . . )..........   611

     f. GJPMorgan Chase email, June 2001, re: Flagstaff I.D. #'s 
      (The $1.1 billion will be repaid same day.)................   613

     g. GCitibank email, June 2001, re: Additional Daylight 
      Overdraft Request from Enron (Enron will require additional 
      daylight overdraft protection on Friday 6/22/2001 . . .)...   614

     h. GJPMorgan Chase email, October 2001, re: Flagstaff 
      Syndication Update ([L]ets make sure we lock up Citi and 
      Boa on confidentiality agreements, for what they're worth.)   621

     i. GJPMorgan Chase email, October 2001, re: Enron Flagstaff 
      (The message from Enron to them is ``you have to do 
      this.'')...................................................   622

     j. GJPMorgan Chase email, November 2001, re: Enron--
      Flagstaff (The papers were signed with a $56.25MM target 
      hold to be achieved by 9/30.)..............................   623

     k. GEric Peiffer/JPMorgan Chase email, October 2001, re: 
      enron responsibilities (Eric did an outstanding job and 
      took on serious responsibilities.).........................   624

358. GBill W. Brown, Accomplishments for the First Half of 2001..   626

359. GDoug McDowell resume.......................................   627

360. GProject Slapshot brief, Project Slapshot Scores!, prepared 
  by Enron Corp..................................................   629

361. GSundance Transaction, Slapshot Financing, prepared by 
  Citigroup......................................................   630

362. GEnron Corp. email, December 2000, re: Canadian Financing 
  Proposal (. . . it is a similar version of an arrangement that 
  Morris and I have independently been developing with our 
  Canadian counsel . . .)........................................   632

363. GEnron Corporation Closing Funds Flows for Slapshot, Closing 
  Date: Friday, 6/22/00, Final...................................   633

364. GMemorandum prepared by Tim Edgar, Faculty of Law, The 
  University of Western Ontario, to the Permanent Subcommittee on 
  Investigations, December 9, 2002, re: Canadian Income Tax 
  Consequences of Flagstaff/Enron Transaction....................   638

365. GEnron Industrial Markets Finance Presentation of Sundance 
  and Slapshot, March 21, 2001, prepared by Enron Corp...........   646

366. GCiticorp/Citibank Credit Approval, Enron Corporation, 
  December 2000, indicating ``verbal guarantees'' of Project 
  Bacchus ``equity'' (see page Bates #CITI-SPSI 0128921).........   655

367. GAccounting Schedules for Projects Fishtail and Sundance, 
  prepared by Enron Corp.........................................   680

368. GLetter from Skadden, Arps, Slate, Meagher & Flom LLP 
  (attorneys for Enron Corp.) to the Permanent Subcommittee on 
  Investigations, December 10, 2002, regarding status of the 
  loans, assets, and entities involved in the Slapshot 
  transaction....................................................   684

369. GJPMorgan Chase email, July 1998, attaching copy of Prepay 
  pitch presentation.............................................   687

370. GJPMorgan Chase email, March-July 1999, re: Prepaid Forwards 
  and Disguised Loans............................................   701

                               VOLUME II

371. GEnron Net Works Partners: Valuation Analysis of Contributed 
  Assets, Chase Securities Inc., November 20, 2000...............     1

372. GFishtail LLC, Enron Corp. draft document summarizing 
  Project Fishtail (undated).....................................    19

373. GAmended and Restated Limited Liability Company Agreement of 
  Fishtail LLC, December 19, 2000................................    22

374. GSummary of Project Fishtail, prepared by Deloitte & Touche, 
  LLP, for the Powers Report, dated January 21, 2002.............    74

375. GData Sheet Report, Caymus Trust (c/o Wilmington Trust) as 
  of February 22, 2002...........................................   102

376. GAmended and Restated Limited Partnership Agreement of 
  Sundance Industrial Partners, L.P., June 1, 2001...............   103

377. GCitibank email, June 2001, re: Apache Opportunity (Any 
  feedback from Carpenter on Sundance; apparently the deal 
  closed.).......................................................   175

378. GSenior Bank Contacts, document prepared by Enron Corp......   176

379. GEnron status as of November 26, 2001 in terms of directors, 
  officers, stock outstanding, and direct subsidiaries...........   177

380. GEnron Corp. Memorandum, October 1, 2000, re: Accounting 
  Enron's Investment in Fishtail LLC.............................   191

381. GAdditional documents regarding Project Bacchus:

     a. GEnron Corp. Memorandum, December 31, 2000, re: Project 
      Bacchus Transaction Memorandum.............................   196

     b. GFishtail Total Costs....................................   202

     c. GCitibank email, October 2000, re: Enron/Project Bacchus 
      (Dan sees NO chance that this deal will not go ahead . . .)   203

     d. GCitibank email, December 2000, re: Bacchus Equity (As 
      you know we are looking for a balance sheet provider for 
      the new Enron trade.)......................................   204

     e. GCitibank email, December 2000, re: Enron Bacchus 
      (Citibank GRB have agreed to provide a 9-month facility for 
      the 194 M and also to take the credit risk on the equity 
      portion.)..................................................   205

     f. GCitibank fax, December 12, 2000, attaching copy with 
      comments of Global Loans Approval Memorandum, December 6, 
      2000, re: Project Bacchus (from section on page 3 entitled, 
      Enron Corporate Credit Risk: Enron Corp. will essentially 
      support the entire facility, whether through a guaranty or 
      verbal support.)...........................................   206

     g. GCitibank email, December 2000, re: Enron follow-up 
      (Having this source of liquidity during this nanosecond is 
      important in providing certain legal opinions . . .).......   211

     h. GCitibank email, December 2000, re: Enron/Bacchus (. . . 
      the RAP treatment should be that the Banking Book will view 
      the Certificates as if it made a loan in the face amount of 
      the Certificates.).........................................   212

     i. GEnron Corp. email, January 2001, re: Fishtail in EIM 
      Partners (In talking to Jeff, he does not like the way I 
      was proposing that Fishtail went into EIM Ptrs . . .)......   213

     j. GCitibank email, February 2001, re: Bacchus (I had an 
      Enron question regarding the Enron gty provided for 
      Baccus(sp?).)..............................................   214

     k. GCitibank email, May 2001, re: phone call with bill brown   215

     l. GCitibank email, November 2001, re: Enron Exposure (For 
      Bushnell), attaching Enron exposure table..................   216

382. GAdditional documents regarding Project Sundance:

     a. GSundance Earnings (Still Under Negotiation), document 
      prepared by Enron Corp.....................................   218

     b. GAdministrative Agent Fee Calculation, document prepared 
      by Enron Corp..............................................   219

     c. GAmended and Restated Sundance Limited Partnership 
      Agreement, June 1, 2001....................................   220

     d. GFinal Sundance Numbers, document prepared by Enron Corp.   293

     e. GCitibank email, May 2001, re: Sundance (Re fleet: we shd 
      approach these guys by saying we are rolling the trs they 
      have on bacchus but also adding to it.)....................   295

     f. GCitibank email, May 2001, re: Sundance (Thoughts or 
      concerns I had as I read the revised Sundance LP 
      Agreement:)................................................   296

     g. GCitibank email, May 2001, re: sundance (. . . I do not 
      understand why we are proposing to do this transaction. . . 
      .), attaching copy of First cut at questions re Sundance...   298

     h. GCitibank email, May 2001, re: Second Sundance question 
      set, attaching copy of Second Set of Sundance Questions....   301

     i. GCitibank email, May 2001, re: Sundance Partnership......   304

     j. GEnron email, May 2001, re: Updated Step by Step Sundance 
      structure Chart--03/22/01..................................   306

     k. GEnron Corp. Presentation, Enron Industrial Markets 
      Finance Presentation of Sundance Industrial Partners, June 
      1, 2001....................................................   311

383. GAdditional documents regarding Project Slapshot:

     a. GFlagstaff Capital Corporation, $375,000,000, Senior 
      Credit Facility, JPMorgan Confidential Information 
      Memorandum, May 2001.......................................   316

     b. GEnron Corp. (Morris Clark to Joseph Deffner) email, 
      undated, re: Repatriation of Cash from Enron Canada (It 
      should be noted that repaying the Preferred Shares within 
      the same year as entering into Project Slapshot puts 
      pressure on both of the above factors and, as such, puts 
      the integrity of the transaction at risk.).................   352

     c. GDaishowa Acquisition Structure Steps, charts prepared by 
      Enron Corp.................................................   353

     d. GJPMorgan Chase email, February 2000, re: Slapshot--
      Frazer Milner Tax Opinion, attaching copy of draft opinion 
      on Re: Canadian Structured Finance Proposal................   360

     e. GHandwritten notes of Enron Corp. re: Project Slapshot...   379

     f. GBlake, Cassels & Graydon LLP Memorandum to Enron Corp., 
      January 2001, re: Prepaid Forward Structure................   387

     g. GEnron Corp./Blake, Cassels & Graydon LLP email, February 
      2001, re: Rider, attaching draft recharacterization rider..   394

     h. GProject Slapshot, Canadian Tax Advantaged Financing 
      Structure for Project Crane & ECC Operations, March 20, 
      2001, Enron Corp. presentation.............................   396

     i. GEnron Corp. email, March 2001, re: Requirements for 
      Right of Offset accounting.................................   417

     j. GEnron Corp./Blake, Cassels & Graydon LLP email, March 
      2001, re: Canadian Guaranty Issue with attached Enron Corp. 
      handwritten notes re: Slapshot.............................   418

     k. GBlake, Cassels & Graydon LLP Memorandum, March 2001, re: 
      Warrant Arrangement........................................   420

     l. GJPMorgan Chase email, March 2001, re: enron.............   422

    m. GFlagstaff Capital Corporation (Delaware), Assets and 
      Liabilities, document produced by JPMorgan Chase...........   423

     n. GEnron Corp./Blake, Cassels & Graydon LLP email, April 
      2001, re: Comments on drafts of April 12/01, attaching copy 
      of April 2001 Blake, Cassels & Graydon LLP Memorandum......   424

     o. GBlake, Cassels & Graydon LLP Draft Memorandum, May 2001, 
      re: Tax Issues.............................................   428

     p. GEnron Corp./Blake, Cassels & Graydon LLP email, May 
      2001, re: Tax Benefit Analysis, attaching draft Tax Benefit 
      Analysis...................................................   432

     q. GHandwritten notes of Enron Corp., May 2001, re: Slapshot   435

     r. GEnron Corp. email, May 2001, re: Journal Entries ([H]ere 
      are accounting entries for the slapshot transaction.), 
      attaching copy of Slapshot-Initial Purchase; Slapshot--Year 
      1-5 Balance Sheet; and Slapshot-Year 5 End Unwind..........   436

     s. GEnron Corp. Memorandum, May 2001, re: Project Slapshot--
      Step-by-Step Description...................................   440

     t. GHandwritten notes of Enron Corp., June 2001, re: 
      Slapshot...................................................   443

     u. GEnron Corp./Blake, Cassels & Graydon LLP email, June 
      2001, re: Blakes Second Set-off Opinion re: Hansen-
      Flagstaff, attaching Blake, Cassels & Graydon LLP 
      correspondence concerning Project Slapshot.................   449

     v. GFlagstaff Capital Corporation, Commitment Allocations as 
      of September 24, 2001......................................   453

     w. GBlake, Cassels & Graydon LLP invoice for services 
      rendered for the period ended June 21, 2001, re: Project 
      Slapshot...................................................   454

     x. GEnron Corp. Memorandum, October 2001, re: Campagnie 
      Papiers Stadacona..........................................   456

     y. GVinson & Elkins invoice for services posted through June 
      27, 2001, re: Project Slapshot-Enron $400,000,000 
      Structured Financing.......................................   458

     z. GProject Dasher, Preliminary Tax Disposition Structures 
      To Maintain Project Slapshot, August 31, 2001, prepared by 
      Enron Corp.................................................   459

    aa. GEnron Corp. email, December 2001, re: Slapshot (. . . 
      doug, pls call me asap since you are the most 
      knowledgeable.)............................................   463

    bb. GHandwritten notes of Enron Corp., December 2001, re: 
      Slapshot/CPS restructuring with attached copy of Enron 
      Corp. Memorandum, December 2001, re: Proposed Sale of 
      Stadacona Mill--Restructuring Steps........................   464

     cc. GBlake, Cassels & Graydon LLP Memorandum, December 2001, 
      re: Slapshot Restructuring/CPS Sale........................   468

    dd. GEnron Corp. facsimile to Jeff McMahon, December 2001, 
      re: Stadacona (Project Slapshot)...........................   481

    ee. GBlake, Cassels & Graydon LLP Memorandum, January 2002, 
      re: Slapshot Structure, Current Status Issues and Proposed 
      Transactions...............................................   489

     ff. GJPMorgan Chase email, January 2002, re: Flagstaff 
      Commitment and Fee Letter (Given the sensitivity to the 
      Enron name and this transaction in particular, I would 
      suggest writing this up as an exception.)..................   494

    gg. GEnron Corp. Memorandum, November 2002, re: Project 
      Slapshot--Quarterly Payments...............................   495

    hh. GPatton Boggs LLP correspondence, on behalf of JPMorgan 
      Chase, to the Permanent Subcommittee on Investigations, 
      December 2002, re: structuring fees paid to JPMC...........   497

     ii. GCanadian Financing Strategy, A Presentation to Enron 
      Corp., September 2000, National Australia Group............   498

     jj. GAdditional Points, JPMorgan Chase document regarding 
      Project Slapshot...........................................   510

    kk. GDaishowa Acquisition Structure Steps, Enron document 
      regarding Project Slapshot.................................   511

384. GDocuments regarding Project Crane and Project Boomerang:

     a. GEnron Corp. email, December 2000, re: Project Crane--
      Status Updated and Next Steps (I would to inform everyone 
      that yesterday we had a meeting with Jeff Skilling to 
      present Project Crane . . .)...............................   514

     b. GEnron Corp. email, December 2000, re: Skilling 
      presentation on EIM Pulp and Paper Market Making Strategy..   515

     c. GEnron Risk Assessment and Control Deal Approval Sheet, 
      December 2000, re: Project Crane...........................   535

     d. GProject Crane, Steps to Acquire SAT and DFPL and Post-
      Acquisition Undertakings, draft of presentation............   542

     e. GProject Boomerang, Transaction Overview, prepared by 
      JPMorgan Chase.............................................   548

     f. GJPMorgan Chase email, November 2000, re: Project 
      Boomerang (I think what we would like to try to do is 
      define fair market value in such a way that it always turns 
      out to be equal to the value at which the SPE purchased the 
      business.).................................................   551

385. GAdditional documents relating to FAS 125/140 Transactions:

     a. GFASB Statement No. 125, Enron Corp. presentation........   553

     b. GUpdate on FASB 140, Transfers of Financial Assets & 
      Extinguishment of Liabilities, June 2001, Enron Corp. 
      presentation,..............................................   571

     c. GAndersen email, November 1999, re: Total Return Swaps...   584

     d. GEnron Corp./Andersen email, September 2001, re: 
      Background of Project Hawaii 125-O.........................   587

     e. GEnron Corp. Memorandum, December 2001, re: Hawaii 
      Structure Summary..........................................   590

     f. GEnron Corp., Pre-Tax Earnings Analysis of SFAS 140's 
      1998-2001..................................................   593

     g. GEnron Corp. email, May 2001, re: Offshore Double Lease 
      Accounting Treatment.......................................   594

386. GDocuments relating to transactions involving Canadian 
  Imperial Bank of Commerce (CIBC) and Enron Corp., November, 
  2002...........................................................   598

387. GAdditional documents regarding Enron Corp. structured 
  finance deals generally:

     a. GGlobal Finance: Funding Vehicles, May 2000, Enron Corp. 
      presentation...............................................   613

     b. GFunds Flow Vehicles, Enron Corp. document...............   621

     c. GStructured Finance Vehicle, August 24, 2001, Enron Corp. 
      presentation...............................................   629

     d. GEnron Corp., Structured Transactions Group Overview, 
      June 2001..................................................   652

     e. GEnron Structured Finance List As of 11/16/2001..........   659

388. GDocuments regarding Enron Bank Reviews:

     a. GEnron Corp. email, July 2000, re: Bank relationship 
      review.....................................................   686

     b. GDebt Investor Relationship Review, January 2001, Enron 
      Corp. presentation.........................................   689

389. GDocuments regarding Enron Asset Valuations:

     a. GWhitewing Presentation, August 14, 2001, prepared by 
      Enron Corp.................................................   741

     b. GEnron Global Assets and Services, Equity Value Schedule, 
      $(Millions), As of June 2001...............................   753

     c. GEnron Global Assets & Services, Significant Exposures 
      (InUS$MM's),...............................................   754

390. GAdditional documents regarding Enron Prepay Transactions:

     a. GCorrespondence between Citigroup and the Permanent 
      Subcommittee on Investigations, July 2002-January 2003, 
      regarding Delta Energy Corporation.........................   755

     b. GCorrespondence between JPMorgan Chase and the Permanent 
      Subcommittee on Investigations, July 2002-January 2003, 
      regarding Mahonia, Ltd.....................................   812

     c. GSummary of Proposed Transaction Approval Process (TAP) 
      Policy Revisions, undated, from the ``H'' drive of the 
      computer of Enron Corp. employee Rick Carson...............   952

     d. GProposed Gas Storage Monetization Structure, undated, 
      from the ``H'' drive of the computer of Enron Corp. 
      employee Michael Garberding................................   953

     e. GEnron Corp. email, December 2000, re: New Prepay with 
      Chase (In the prior transactions, we have received a 
      prepayment from Mahonia on a forward delivery schedule of 
      fixed volumes.)............................................   959

     f. GEnron Corp./JPMorgan Chase email, September 2001, re: 
      Rep Letter for Mahonia, attaching draft Mahonia 
      representation letter......................................   960

     g. GEnron Corp. email, June 2001, re: Sample Swap Co Letter 
      (I am still trying to track down the original ``Delta/
      Mahonia'' Letter. Everyone seems to have shredded their 
      files, which is a little disturbing.)......................   962

     h. GEnron Corp. email, November 2001, re: Steps for $250mm 
      Swap Assumption............................................   963

     i. GEnron Corp. email, September 2001, re: New Confirm......   967

     j. GEnron Corp. email, July 2001, re: Citibank/Delta Prepay 
      (. . . the auditors would like to verify that the MMBtus 
      involved in the trade are not inconsistent with normal 
      trades that run through the financial book for gas.).......   972

     k. GEnron Corp. email, September 2001, re: Revised Pre Pay 
      docs (This tracks language that is in the Guaranty and does 
      not name Chase.)...........................................   973

     l. GEnron Corp. email, October 2001, re: Comments on Prepaid 
      Swaps......................................................   975

    m. GEnron Corp. email, September 2001, re: Mahonia Confirm...   990

     n. GEnron Corp./JPMorgan Chase email, September 2001, re: 
      Mahonia Limited............................................   998

     o. GEnron Corp. email, November 2000, re: Sale treatment for 
      Prepayments with subsequent participation to an investor...  1001

     p. GEnron Corp. email, September 2001, re: Chase Prepay.....  1003

     q. GEnron Corp. email, November 2000, re: Prepay (Andy, 
      Michael asked me to forward this structure to you in 
      advance of his call.)......................................  1004

     r. GEnron Prepaid Oil Swap:.................................  1005

391. GSupplemental questions and answers for the record of 
  Citibank, regarding December 11, 2002, hearing, dated February 
  27, 2003.......................................................  1006

392. GCorrespondence from the Board of Governors of the Federal 
  Reserve System, Office of the Comptroller of the Currency, 
  Securities and Exchange Commission, to the Permanent 
  Subcommittee on Investigations, regarding followup to questions 
  posed in the Subcommittee's December 11th hearing and 
  recommendations included in the Subcommittee report entitled 
  Fishtail, Bacchus, Sundance, and Slapshot, Four Enron 
  Transactions Funded and Facilitated by U.S. Financial 
  Institutions...................................................  1008



                     OVERSIGHT OF INVESTMENT BANKS'



                    RESPONSE TO THE LESSONS OF ENRON

                              ----------                              


                      WEDNESDAY, DECEMBER 11, 2002

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 9:37 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, Collins, and Bennett.
    Staff Present: Linda J. Gustitus, Chief of Staff; Elise J. 
Bean, Staff Director and Chief Counsel; Mary D. Robertson, 
Chief Clerk; Bob Roach, Counsel; Jamie Duckman, Professional 
Staff Member; Jessica Swartz, Intern; Beth Merrilat-Bianchi, 
Detailee/IRS; Jim Elliott, Detailee/Department of State; Kim 
Corthell, Republican Staff Director; Alec Roger, Counsel to the 
Minority; Claire Barnard, Investigator to the Minority; David 
Mount, Detailee/Secret Service; Jim Pittrizzi, Detailee/General 
Accounting Office; Meghan Foley, Staff Assistant; Marianne 
Upton (Senator Durbin); Tara Andringa (Senator Levin); Bob 
Klepp (Governmental Affairs/Senator Thompson); Mike Nelson 
(Senator Bennett); Holly Schmitt (Senator Bunning); Felicia 
Knight (Senator Collins); and Brooke Brewer (Senator Cochran).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good morning, everybody. One year ago, on 
December 2, 2001, Enron Corporation, then the seventh-largest 
company in the United States, declared bankruptcy. The follow-
up to this financial disaster revealed a litany of Enron 
corporate abuses, from accounting fraud to price manipulation, 
insider dealing, and tax abuses. Yet it is still the case 
today, as it was a year ago, that most top Enron officials have 
walked away from the scandal that they created with tens of 
millions of dollars in their pockets while Enron employees, 
creditors, and shareholders have suffered substantial losses.
    As disturbing as Enron's own misconduct is the growing 
evidence that leading U.S. financial institutions not only took 
part in Enron's deceptive practices, but at times designed, 
advanced, and profited from them. This is the third in a series 
of hearings held by this Subcommittee focusing on the role of 
financial institutions in Enron's collapse.
    Our first hearing looked at the more than $8 billion in 
deceptive transactions referred to as prepays. Citigroup and 
J.P. Morgan Chase repeatedly used these deceptive prepays to 
issue Enron huge loans that were disguised as energy trades, 
which then enabled Enron to misstate the loan proceeds as cash 
flow from business operations. Investors and analysts were 
misled, along with the many employees who lost their life 
savings and jobs.
    Our second hearing looked in detail at a sham asset sale 
from Enron to Merrill Lynch just before the end of the year 
2000 so that Enron could book the fake sale revenue and boost 
both its year-end earnings and cash flow from operations. This 
transaction didn't qualify as a true sale under accounting 
rules because Enron had eliminated risk from the deal by 
secretly promising Merrill Lynch to arrange a resale of the 
barges within 6 months, while guaranteeing a 15 percent profit.
    In both hearings, substantial evidence showed that the 
financial institutions involved in the deals knew exactly what 
was going on. They structured the transactions, signed the 
paperwork, and supplied the funds, knowing that Enron was using 
the deal to report that the company was in better financial 
condition than it really was. In the case of Citigroup and 
Chase, the banks not only assisted Enron, they developed the 
deceptive prepays as a financial product and sold it to other 
companies as so-called balance sheet-friendly financing, 
earning millions of fees for themselves in the process.
    Today's hearing will look at another set of deceptive 
transactions that took place over a 6-month period, from 
December 2000 to June 2001, involving Enron ventures in the 
pulp and paper business. These transactions were known as 
Fishtail, Bacchus, Sundance, and Slapshot. The evidence shows 
that Citigroup and Chase actively aided Enron in these 
transactions despite knowing that they employed deceptive 
accounting or tax strategies and were being used by Enron to 
manipulate its financial statements or deceptively reduce its 
tax obligations. Citigroup and Chase received substantial fees 
for their actions or favorable consideration from Enron in 
other business dealings.
    These four transactions required months of work by the 
Subcommittee staff to untangle. The complexity of the deals 
made the deceptions almost impossible for anyone to understand 
without a detailed road map. They also show how far our 
financial institutions have sunk in misusing structured 
finance. Instead of using structured deals to lower financing 
costs or spread risk, which are legitimate uses, they used 
structured finance to mislead investors, analysts, and 
regulators about a company's true activities and financial 
condition.
    I will place in the record at this time the Subcommittee 
staff report that describes the four transactions in detail, as 
well as charts and exhibits showing what happened.\1\
---------------------------------------------------------------------------
    \1\ The staff report appears in the Appendix on page 150.
---------------------------------------------------------------------------
    Here are some of the highlights from that report and from 
our investigation. Enron constructed the first three 
transactions, Fishtail, Bacchus, and Sundance, as a sham asset 
sale of its new pulp and paper business venture in order to 
inflate its cash flow and earnings by hundreds of millions of 
dollars and to keep the substantial debts associated with this 
business venture off its balance sheet and out of the view of 
investors and analysts.
    The first two transactions took place in December 2000. 
Enron first pretended to move its pulp and paper trading 
business off its balance sheet to a new joint venture that it 
had set up called Fishtail. About 1 week later, in the Bacchus 
deal, Enron purportedly sold its Fishtail interest to another 
entity for $200 million. Enron then booked the $200 million as 
sale revenue and declared a profit and earnings of $112 million 
on its year-end financial statement, enabling the company to 
meet Wall Street expectations for its year 2000 earnings.
    In the Bacchus transaction, Enron allegedly sold its 
Fishtail ownership interest to a shell company that it had 
established earlier called the Caymus Trust, and Exhibit 301(a) 
\1\ shows how the transaction appeared on the surface, and that 
exhibit is on the screen.
---------------------------------------------------------------------------
    \1\ Exhibit No. 301(a) appears in the Appendix on page 185.
---------------------------------------------------------------------------
    The Caymus Trust came up with the $200 million purchase 
price by obtaining a $194 million loan from Citigroup and an 
apparent $6 million cash investment from Fleet Boston Financial 
that was also guaranteed by Citigroup. However, as Exhibit 
301(b) \2\ demonstrates, the transaction was, in reality, a 
loan. The evidence shows that in addition to openly 
guaranteeing repayment of the $194 million Citigroup loan, 
which is permissible under accounting rules, Enron's Chief 
Financial Officer, Andrew Fastow, also made an undisclosed, 
oral agreement with Citigroup to ensure that Citigroup would 
not incur any loss connected with the so-called $6 million 
investment.
---------------------------------------------------------------------------
    \2\ Exhibit No. 301(b) appears in the Appendix on page 186.
---------------------------------------------------------------------------
    These two guarantees meant that Enron, in effect, had 
ensured repayment of the entire $200 million purchase price, 
and those two guarantees also meant that under accounting 
rules, Citigroup was, in reality, providing Enron a loan and 
using the Caymus Trust as a pass-through rather than financing 
a real sale to a real company.
    Six months later, Enron and Citigroup set up another joint 
venture called Sundance to take possession of all of Enron's 
pulp and paper assets, including the asset presumably just sold 
to the Caymus Trust, and to keep the debt associated with these 
assets off Enron's balance sheet. But this joint venture was 
also a sham. Enron's auditor, Andersen, had told Enron that it 
would approve off-balance sheet treatment of the Sundance joint 
venture only if at least 20 percent of Sundance's capital came 
from an independent investor and at least 3 percent of the 
total capital was placed at risk when the venture was formed 
and stayed at risk during the joint venture's operation.
    Exhibit 302(a) \3\ shows that Sundance appeared to meet 
these accounting requirements. Enron contributed approximately 
$750 million in assets and cash. Citigroup appeared to have 
contributed $188.5 million, or 20 percent of the joint 
venture's capital. Citigroup's contribution included $28.5 
million in stock and cash, which supposedly met the requirement 
for 3 percent up-front capital at risk and $160 million in 
unfunded capital that supposedly would be provided on demand.
---------------------------------------------------------------------------
    \3\ Exhibit No. 302(a) appears in the Appendix on page 187.
---------------------------------------------------------------------------
    But as Exhibit 302(b) \1\ shows, the reality was that 
Citigroup's alleged investment was a sham because it was never 
intended to be at risk. As Exhibit 302(c) \2\ shows, the terms 
of the partnership included the following provisions. Citigroup 
could dissolve the partnership at any time. Enron needed to 
lose its entire $750 million before any of Citigroup's so-
called investment could be touched, which meant Citigroup would 
have plenty of time to dissolve the partnership, if necessary, 
before it had to produce any funds. And Sundance had to keep 
the $28.5 million liquid, segregated, and earmarked for 
Citigroup so that Citigroup could recapture that part of its 
so-called investment at will.
---------------------------------------------------------------------------
    \1\ Exhibit No. 302(b) appears in the Appendix on page 188.
    \2\ Exhibit No. 302(c) appears in the Appendix on page 189.
---------------------------------------------------------------------------
    In summary and in reality, neither Citigroup's $28.5 
million nor its unfunded $160 million were ever intended to be 
at risk.
    The Sundance joint venture was a sham and all of its assets 
should have been included in Enron's balance sheet. Indeed, 
just 2 days before the transaction closed, three senior 
Citigroup officials strongly urged the investment bank not to 
do the Sundance deal, with one warning the following: ``The 
GAAP accounting is aggressive and a franchise risk to us if 
there is publicity.'' Let me repeat that. Just before this deal 
was approved, this was the warning. It came from Citigroup 
people. ``The GAAP accounting is aggressive and a franchise 
risk to us if there is publicity.''
    But Citigroup did the deal, earning $1.8 million in fees 
and preferred dividends and presumably got some good will from 
Enron. Citigroup also obtained full payment of the $200 million 
loan that it had provided earlier in the Bacchus deal, since 
one of Enron's contributions to Sundance was the $200 million 
needed to buy the Fishtail assets from the Caymus Trust and pay 
off the Citigroup loan.
    On paper, Fishtail, Bacchus, and Sundance seemed to bring 
new investment into Enron's pulp and paper business venture. In 
reality, these complex financial deals enabled Enron to use a 
$200 million Citigroup loan and a sham asset sale to boost its 
year-end cash flow and earnings and then quietly return the 
funds via Sundance. Without Citigroup's participation in 
supplying the lion's share of the funds, Enron would not have 
been able to pull off these deceptive transactions.
    Finally, the Slapshot transaction, another highly 
disturbing example of a major U.S. financial institution 
helping Enron engage in a deceptive transaction. It is 
particularly disturbing because Chase, the financial 
institution involved here, itself designed the deceptive 
transaction. That was even more than aiding and abetting. Chase 
designed the Slapshot deal and sold it to Enron for $5 million, 
enabling Enron to claim an estimated $60 million in Canadian 
tax savings and $65 million in financial statement benefits.
    The Slapshot sleight of hand took place on June 22, 2001. 
It was designed as a tax avoidance scheme, and as we can see 
from the next exhibit,\3\ it was a spaghetti bowl of structured 
finance arrangements using loans, funding transfers, and 
transactions involving Chase and Enron affiliates in two 
countries, many of which were established specifically to 
facilitate the deal.
---------------------------------------------------------------------------
    \3\ Exhibit No. 337 appears in the Appendix on page 347.
---------------------------------------------------------------------------
    In essence, Slapshot took a valid $375 million loan issued 
by a consortium of banks to an Enron affiliate and combined it 
with a $1 billion sham loan issued by a Chase-controlled shell 
company called Flagstaff. The sham $1 billion loan created the 
appearance, but not the reality, of a loan by using a shell 
game involving two different transfers of $1 billion through a 
maze of bank accounts belonging to Chase and Enron affiliates.
    Chase provided the alleged loan by issuing a $1 billion 
momentary overdraft to its shell company, Flagstaff. But Chase 
was unwilling to allow Flagstaff to release the funds to an 
Enron shell company called Hansen until Chase was sure that the 
$1 billion was fully protected and going to be returned the 
same day, indeed, almost at the same moment. So Chase required 
Enron to deposit a separate $1 billion in an escrow account 
controlled by Chase before Chase would release its $1 billion 
to Enron. Enron obtained its own $1 billion momentary overdraft 
on an account that it held at Citibank and transferred those 
funds into an escrow account at Chase.
    And then through a series of near-instantaneous 
transactions among Chase and Enron entities, the $1 billion 
sham loan was briefly commingled with the real $375 million 
loan to create the appearance of a combined $1.4 billion loan 
to an Enron affiliate. The sham $1 billion was then separated 
back out through a series of additional transfers and moved 
within hours back to the Enron account at Citibank. In the 
meantime, the $1 billion in Enron escrow funds was released to 
Chase.
    Now, the $1 billion loan that was supposedly supplied by 
Chase was a sham. It was issued and paid back within minutes 
without any of the credit risk that is the point of a loan, 
even during the few minutes that it moved from Chase's left 
pocket to its right pocket. It had no economic rationale or 
business purpose other than to circulate through multiple bank 
accounts to create the appearance of the larger $1.4 billion 
loan. Chase got more than $5 million for doing it. Enron got 
tax deductions and better financial statements.
    Enron's tax counsel warned that this transaction clearly 
involves a degree of risk and cautioned that, ``in our opinion, 
it is very likely that Revenue Canada will become aware of the 
Slapshot transactions and upon becoming aware of them will 
challenge them.''
    Chase also knew that the Slapshot transaction was dubious. 
It worked with Enron to minimize the possibility that Canadian 
tax authorities would discover it, and they even developed 
contingency plans in the event that Canada disallowed the sham 
loan. When analyzing how to structure an interest rate swap 
that was a part of the transaction, for instance, Enron and 
Chase jointly considered three alternatives, two of which were 
described as disadvantageous, in part because they would 
produce a potential road map, in their words, of the 
transaction for Revenue Canada. So instead of following those 
two roads, Enron and Chase jointly chose the third alternative, 
which was explicitly described as providing no road map.
    In addition, Enron and Chase included in the transaction 
documents what was called a recharacterization rider, in which 
they agreed if they were caught by Revenue Canada to reclassify 
retroactively loan payments made by Enron to Chase to look like 
loans from Enron to Chase. How is that for a move? If Canada 
disallowed the Slapshot scheme and exposed Enron to additional 
taxes, Enron would try to make it look as though Enron was 
lending money to one of the world's largest banks.
    Slapshot was designed and intended to be a deceptive 
transaction. Chase set it up to pretend that a $375 million 
loan was really a $1.4 billion loan by, just for a moment, 
inserting an extra $1 billion in the transaction. The combined 
so-called loan then provided the cover for Enron's Canadian 
affiliate to claim for tax purposes that it had an outstanding 
loan obligation of $1.4 billion and claim its entire $22 
million quarterly loan repayment as tax deductible interest 
payments on the fake $1.4 billion loan, instead of deducting 
only that portion of the payments that was the true interest 
payment on the $375 million loan.
    Enron could not have completed Slapshot without a major 
bank like Chase which had the resources to use $1 billion for a 
few brief moments and quickly move that $1 billion through 
multiple bank accounts across international lines. Chase 
charged Enron $5 million for its so-called tax technology. 
Chase has also shopped that same tax technology to other 
companies.
    The four transactions at issue today, together with the 
sham transactions examined at earlier hearings, all have 
deception at their core. All misuse structured finance, which 
has a legitimate purpose when used for real economic 
objectives, such as lowering financing costs or spreading risk. 
But here, there was no such legitimate economic objective. The 
goal was deception, and none of the transactions could have 
been executed without the complicity and financial resources of 
a major financial institution.
    Now, the purpose of today's hearing is not just to expose 
another set of deceptive transactions, but also to take the 
next step and to determine, 1 year after the Enron scandal 
broke, what is being done to prevent future deception. 
Citigroup and Chase have each announced new programs designed 
to prevent their employees from participating in deals that 
produce deceptive accounting. We need to learn more about those 
programs and whether they will prevent the type of deals that 
we are going to examine today.
    But we also are going to find out what our financial 
regulators are doing, what concrete steps they have taken to 
prevent U.S. financial institutions from designing, executing, 
and profiting from illegitimate structured financial 
transactions intended to help U.S. companies engage in 
misleading accounting or tax strategies. We want to learn what 
concrete steps the bank regulators and the SEC are taking, not 
only to punish wrongdoing on a case-by-case basis, which is 
important, but also to create a deterrence program to be part 
of regular bank examinations to stop future wrongdoing.
    There is a regulatory gap now. The Securities and Exchange 
Commission does not generally regulate banks, and bank 
regulators don't regulate accounting practices or ensure 
accurate financial statements. Two steps need to be taken, 
which together could close this gap.
    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.
    Second, the bank regulators, including the Federal Reserve 
that oversees our financial holding companies, need to state 
that violation of that SEC policy that I just described would 
constitute an unsafe and unsound banking practice, thereby 
enabling bank examiners to take regulatory action during bank 
examinations.
    We also need the SEC and the bank regulators to conduct a 
comprehensive joint review of the structured finance products 
being sold by or participated in by our financial institutions 
so that we can root out the ones that corrupt financial 
statements.
    One year after Enron's collapse, we need our regulators to 
tell our banks and our security firms that the deceptions and 
the era of self-regulation are over. Enron was an eye opener 
about the extent and the nature of corporate misconduct going 
on in the United States today and the role being played by our 
financial institutions. The question now is whether we have 
learned the Enron lessons and whether, in addition to punishing 
wrongdoers on a case-by-case basis, we have taken on the 
tougher task of building a new deterrence program to prevent 
future Enrons.
    Let me call on Senator Collins, my Ranking Member for a few 
more weeks and someone who has been such a great, not only 
supporter of efforts to protect consumers and to protect our 
economy, but whose staff has been so extraordinarily helpful in 
the production of this report and these documents. I want to 
thank her. I want to congratulate her on her new assignment as 
the Chair of our full Committee, the Governmental Affairs 
Committee, starting in January. But again, it has been a real 
pleasure serving with her, both as her Ranking Member here and 
then having her as my Ranking Member in the last few months.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you, Senator Levin. I want to thank 
you for your kind comments and your extraordinary leadership in 
this very important investigation. Our staffs have worked very 
closely together during the past year in what I believe has 
been an unprecedented level of cooperation to unravel these 
very complex transactions. It would not have happened without 
your leadership.
    I particularly want to take the opportunity to salute Linda 
Gustitus, who has been the leader of your staff since, I think, 
1979, and will be retiring at the end of this year. Linda and I 
worked together on the Subcommittee many, many years ago and I 
know that her leadership will be sorely missed, as well.
    Senator Levin. Thank you. Thank you for mentioning Linda, 
who indeed has been absolutely at the forefront of over two 
decades of investigations by this Subcommittee and by a 
predecessor Subcommittee that we were also both associated 
with. Thank you very much for mentioning her. It is totally 
appropriate and, indeed, well founded.
    Senator Collins. Today's hearing represents a continuation 
of the Subcommittee's extensive investigation into the collapse 
of the Enron Corporation. It is our third hearing looking 
specifically at the role played by some of America's leading 
financial institutions in transactions that enabled Enron to 
paint a false picture of its financial health and that 
ultimately contributed to the bankruptcy of the company.
    Our earlier hearings documented that certain financial 
institutions, among them Merrill Lynch, J.P. Morgan Chase, and 
Citigroup, knowingly participated in and indeed facilitated 
transactions that Enron officials used to make the company's 
financial position appear to be more robust than it actually 
was. These complex transactions allowed Enron to deceive its 
investors, its customers, and its employees.
    Today's hearing will provide additional evidence of the 
complicity of certain financial institutions in Enron's 
deceptions. As Senator Levin indicated, we will closely examine 
four multi-million-dollar structured finance deals that enabled 
Enron to produce misleading financial statements, and in one 
case claim a highly questionable $125 million tax break. 
Citigroup funded two of the four transactions and J.P. Morgan 
Chase funded the other two.
    The first three transactions, known as Fishtail, Bacchus, 
and Sundance, involved Enron's so-called sale of certain assets 
at inflated values to special purpose entities that had been 
established by Enron, Citigroup, or Chase. In each case, the 
entities purchasing the assets were funded with equity 
commitments by Citigroup or Chase that did not truly place 
funds at risk or were supported by secret oral guarantees by 
Enron that invalidated the special purpose entity's independent 
status.
    Each of these transactions fabricated to look like an arm's 
length transaction and sale of a financial asset was, in fact, 
an artifice designed to enable Enron to obtain a Citicorp or a 
Chase loan or to sell an asset to itself. The evidence strongly 
suggests that Citigroup and Chase were not innocent pawns in 
these transactions. Warning flags were abundant. As Senator 
Levin noted, an internal memorandum from a senior Citicorp 
official strongly objected to the transactions, warning that 
the ``accounting is aggressive and a franchise risk to us if 
there is publicity.'' Citigroup's involvement in helping to 
disguise what were essentially phony loans as phony asset sales 
enabled Enron to inflate its sales revenues and produce 
misleading financial statements.
    The final transaction, known as Slapshot, involved a $1.4 
billion loan and related transactions that were designed to 
produce Canadian tax benefits for Enron. This complex web of 
transactions was designed by J.P. Morgan Chase and used Enron 
affiliates or special purpose entities in the United States, 
Canada, and the Netherlands. In simplest terms, Slapshot 
involved a legitimate $375 million loan issued by a consortium 
of banks and a phony $1 billion loan issued by a J.P. Morgan 
Chase controlled SPE. The $1 billion loan was issued and repaid 
on the same day through a complex series of structured finance 
transactions. The $375 million loan was to be repaid over 5 
years.
    Chase provided the $1 billion for the phony loan by 
approving a $1 billion daylight overdraft on an Enron account 
at Chase. The overdraft presented no risk, however, to Chase 
because the bank required Enron to deposit a separate $1 
billion in an escrow account for the duration of the so-called 
loan. Chase then circulated the $1 billion through more than a 
dozen bank accounts held by Enron and Chase affiliates and 
SPEs, returning the $1 billion overdraft to the original Chase 
account by the end of the day.
    The end result of these transactions was that Enron was 
able to treat its quarterly $22 million loan repayments, each 
of which were, in fact, a payment of principal and interest on 
the $375 million loan, as purely interest payments on the $1 
billion loan. By characterizing each $22 million loan payment 
as an interest payment on the larger loan, Enron claimed that 
it was entitled to deduct the entire $22 million from its 
Canadian taxes, for a total tax benefit of $125 million. In 
return for designing this phony loan structure and arranging 
the series of funding transfers, Chase received a fee of $5.25 
million from Enron, and again, outside experts cautioned Chase 
about this transaction.
    The transactions that we are examining today once again 
demonstrate the extraordinary lengths to which investment banks 
went to keep Enron, an important client, happy. The checks and 
balances that were supposed to ensure the integrity of 
financial transactions apparently were compromised by conflicts 
of interest and the lure of big fees.
    It undermines the integrity of our capital markets when 
some of the most prestigious financial institutions in our 
country are involved in designing, marketing, executing, and 
profiting from financial transactions intended to enable public 
companies to engage in deceptive accounting and tax strategies.
    In earlier testimony, the financial institutions have 
generally denied any responsibility, claiming that it is simply 
not their fault if their clients choose to account for these 
transactions improperly. But the troubling fact remains that 
Enron could not have gotten away with what it did for so long 
without the active participation of its financial institutions.
    Numerous documents examined by the Subcommittee clearly 
demonstrate that the financial institutions that partnered with 
Enron knew of the company's intentions. In fact, in some cases, 
the financial institutions helped to design the transactions 
specifically so that Enron could cook its books.
    For example, Chase's own documents highlight a particular 
advantage of the deal as, ``[not providing] a `road map' for 
Revenue Canada.'' That has been explained to our staff as a 
selling point so that the deal would not be easily identified 
by Canadian tax authorities and audited.
    Today, we will also hear from the watchdogs, 
representatives of the Securities and Exchange Commission, the 
Federal Reserve, and the Office of the Comptroller of the 
Currency. There are a number of questions about the role of the 
regulators. To what extent do these regulatory agencies examine 
the type of transactions engaged in by J.P. Morgan Chase and 
Citigroup that enabled Enron to misrepresent its financial 
condition? What is their view of the legitimacy of the 
transactions we are examining today? Do the regulators have 
sufficient authority and expertise to oversee these complicated 
transactions? Has the current regulatory structure kept pace 
with changes in the financial markets and innovations in 
structured finance? The answers to these questions are critical 
to strengthening our free enterprise system and to restoring 
public confidence in our capital markets.
    It is important that we 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 $60 billion. Moreover, the collapse of Enron caused 
thousands of Americans to lose jobs, to lose their savings, and 
to lose confidence in corporate America and U.S. financial 
institutions.
    When the individual investor does not have access to 
critical information to make wise investment decisions, 
information that is known only to corporate management and 
their financial partners, the playing field is far from level. 
We must ensure that our financial institutions act with 
integrity, and I want to acknowledge that the institutions 
before us today have taken several steps since our last 
hearings to put new safeguards in place. But we must ensure 
that investors, large and small, have access to complete and 
accurate information to guide their investment decisions.
    I look forward to hearing the testimony of our witnesses 
today. Thank you, Mr. Chairman.
    Senator Levin. Thank you, Senator Collins. Senator Bennett.

              OPENING STATEMENT OF SENATOR BENNETT

    Senator Bennett. Thank you very much, Mr. Chairman. I have 
not been as involved in this issue as you and Senator Collins 
have, and so I will be very brief in what opening statement I 
have and I will look forward to listening to the witnesses.
    I do sit on the Banking Committee, which has the 
legislative responsibility of coming up with changes in 
regulation and was involved in both the writing and in the 
conference report of the Sarbanes-Oxley bill that came almost 
exclusively as a result of the entire Enron experience. I think 
this hearing will be very useful, along with the other one 
which you previously held, in helping us in the Banking 
Committee's responsibility to provide oversight to both the SEC 
and to the bank regulators. The Banking Committee is the place 
where, if legislative changes have to be made, we are going to 
have to make them. This Permanent Subcommittee on 
Investigations has made a significant contribution to the 
institutional knowledge already available to the Banking 
Committee and I congratulate you for focusing on this in a way 
that, quite frankly, we on the Banking Committee could not.
    I do have one area of concern that I simply will raise for 
the record. As the previous hearing has gone forward and 
conducted investigations in a way that is very clearly within 
the purview and charge of the Permanent Subcommittee on 
Investigations, some lawyers have attempted to take statements 
made in that hearing, turn them into evidence with some kind of 
legal alchemy, and then make them part of a lawsuit that, 
unfortunate timing, is going on right now. Fortunately, the 
judge ruled them out of order and refused to allow statements 
made at the hearing to become part of evidence in a trial.
    I would hope that will not be attempted with anything that 
is said here today. This is an investigative Subcommittee. We 
are probing for information. We have not come up with a final 
report, and even when we do, I don't think our report 
constitutes evidence that can be used in a court of law to 
determine a fact. I think what it says is, here are facts. Now 
you lawyers for one side or another determine your own basis 
for these facts rather than simply quoting us.
    I wouldn't accuse any Member of this Committee of being 
given over to hyperbole in opening statements, but I do think 
there have been some members of the Senate who occasionally do 
that, and to take that hyperbole and try to turn it into 
evidence in a court of law, I think is a little bit like what 
we are finding out went on here, that is, a transaction that 
was intended for one purpose gets twisted into another purpose. 
There are some members of the trial bar who seem to be anxious 
to try to do that. They say I was glad the judge slapped them 
down and said they could not do that from previous statements 
that were made in these hearings and I would hope that no one 
in the audience would try to do that from anything that is said 
here today.
    With that, Mr. Chairman, again, I congratulate you for your 
persistence and your diligence in digging into these matters 
and I will sit back and learn as much as I can from today's 
witnesses.
    Senator Levin. Thank you so much, Senator Bennett, and 
thank you for your contributions in so many ways in the banking 
field and many other fields, including your contribution to 
that Sarbanes-Oxley bill and to this Subcommittee.
    Let me now turn to our witnesses. Our first panel of 
witnesses is from Citigroup. I thank you all for making it here 
today despite the challenging weather. We welcome Charles 
Prince, the Chairman and Chief Executive Officer of Citigroup 
Global Corporate and Investment Bank. We welcome also David 
Bushnell, Managing Director and Head of Global Risk Management 
at Citigroup/Salomon Smith Barney; Richard Caplan, the Managing 
Director and Co-Head of the Credit Derivatives Group at Salomon 
Smith Barney North America; and William Fox, who is the 
Managing Director of the Global Power and Energy Group at 
Citibank.
    Pursuant to Subcommittee Rule 6, all witnesses who testify 
before this Subcommittee are required to be sworn in, and so I 
would ask you at this time to please stand and to raise your 
right hand.
    Do you swear that the testimony that you will give before 
this Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Prince. I do.
    Mr. Bushnell. I do.
    Mr. Caplan. I do.
    Mr. Fox. I do.
    Senator Levin. Thank you very much. We will be using our 
traditional timing system today. At about 1 minute before the 
10-minute period for each of your testimony is up, the light 
will change from green to yellow, which will give you the 
opportunity to conclude your remarks. Your written testimony 
will be printed in the record in its entirety. Again, we thank 
you for your appearance here today and for your cooperation 
with this investigation.
    Mr. Prince.

   TESTIMONY OF CHARLES O. PRINCE III,\1\ CHAIRMAN AND CHIEF 
 EXECUTIVE OFFICER, CITIGROUP GLOBAL CORPORATE AND INVESTMENT 
                    BANK, NEW YORK, NEW YORK

    Mr. Prince. Thank you, Mr. Chairman, Senator Collins, and 
Senator Bennett. Good morning. My name is Chuck Prince. Since 
September of this year, I have been Chief Executive Officer of 
Citigroup's Global Corporate and Investment Bank. I appreciate 
the opportunity to appear before you to discuss these important 
issues and I commend you on your determination to understand 
how and why a Fortune 10 company like Enron could unravel so 
quickly and to such devastating effect. The collapse of that 
company has been a disaster for thousands of people--employees, 
investors, and others--and making sure that similar events do 
not happen again is a critically important objective that we 
share.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Prince appears in the Appendix on 
page 91.
---------------------------------------------------------------------------
    The last year has been a challenging one on Wall Street. 
Industry practices that were standard operating procedure for 
years have come under sharp scrutiny by Congress, regulators, 
and investors. Many of these practices have been changed and 
others are in the process of changing. For our part at 
Citigroup, we want to be at the forefront of change, setting 
the standard for integrity and professionalism in our industry. 
This has become a guiding mission for the senior management of 
our entire organization.
    Part of our process has included the recognition that we 
have engaged in certain activities that do not reflect the way 
we believe business ought to be done going forward. Let me be 
clear, I believe that the Citigroup professionals involved with 
these transactions acted in good faith and understood these 
transactions to comply with the existing law and prevailing 
standards of the time. But let me be equally clear, good faith 
and legal compliance are no longer the issue as far as I am 
concerned. 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.
    Recognizing the problems our industry faces, we have worked 
diligently to develop new practices and policies reflecting the 
lessons we have learned. When Sandy Weill asked me to take the 
helm at the Global Corporate and Investment Bank just 3 months 
ago, he gave me a mandate to accelerate the process of reform 
and change that was already underway. I have detailed a number 
of these reforms in my written statement, but in the interest 
of time, I will turn to the issue of structured transactions 
that is the focus of today's hearing and was the focus of the 
hearing you held, Mr. Chairman, on July 23 of this year. As I 
hope you will agree when I discuss the reform initiative we 
announced just 2 weeks after your hearing and a month before I 
became responsible for this business, at Citigroup, we heard 
you and we took appropriate action.
    First, though, let me say a few words about the specific 
transactions under review. While I believe our people acted in 
good faith, I think it is fair to say that we never anticipated 
that a financial intermediary like Citigroup would be 
criticized for the accuracy of the accounting treatment that a 
Fortune 10 company gave to its transactions with the express 
approval of a then-highly respected Big Five accounting firm. 
At the time we entered into these transactions, we never 
imagined that Arthur Andersen wouldn't even exist a year later 
or that a failure of ethics would have destroyed Enron, a 
company ranked in the top 20 on the list of most admired 
companies in the year 2001. But we have learned a hard and 
valuable lesson, that reliance on public accountants or a 
company's widely held excellent reputation has significant 
limits, particularly in the face of corporate malfeasance.
    To say that our professionals acted in good faith and in 
ways they believed to be appropriate is not to say that we 
consider a ``business as usual'' approach to be an acceptable 
prescription going forward. On the contrary, we concluded in 
the days and weeks following your July 23 hearing, Mr. 
Chairman, that we needed to act, even in the absence of 
industry action or regulatory action, and that the best way to 
protect both investors and our own reputation with regard to 
the kinds of transactions that appropriately concern this 
Committee was to insist on transparency.
    Accordingly, on August 7, Citigroup announced a new 
transparency policy, saying, in essence, that from that day 
forward, Citigroup would execute material financing 
transactions for companies that were not going to be recorded 
as debt on their balance sheet if, but only if, that company 
agreed to clearly disclose the net effect of the transaction on 
its financial condition.
    We announced this net effect rule for two reasons: First, 
to encourage companies to account for financing in a 
transparent manner so that investors can adequately assess the 
net effect of the transaction on the financial condition of the 
company; and second, because we simply did not wish to be a 
party to transactions that fail to meet a high standard of 
transparency.
    Under our net effect rule, the transactions at issue in 
today's hearing would not and could not have happened at 
Citigroup unless Enron had made clear detailed disclosure to 
investors. We simply would have refused, and today would 
refuse, to do those transactions without a commitment to make 
such disclosures.
    Our policy is based on a few key principles. First, it 
applies to any material structured or complex financing 
transaction of the sort this Subcommittee has been concerned 
about. In determining whether the policy applies to a given 
transaction, the economic reality, not the form of the 
transaction, is critical.
    Second, the required disclosures under our new policy 
include, among other things, management's analysis of the net 
effect of the transaction on the financial condition of their 
company, the nature and amount of the obligations, and a 
description of any events that may cause an obligation to 
arise, increase, or become accelerated.
    Third, Citigroup will obtain the client's written 
commitment that disclosure of such transactions in the client's 
relevant public filings will fairly present the transaction's 
financial impact. If we do not receive this commitment, we will 
not do the deal.
    Fourth, Citigroup will do these transactions only for 
clients that agree to provide the complete set of transaction 
documents to their chief financial officer, their chief legal 
officer, and their independent auditors. If there are any oral 
assurances from the client in connection with any transaction 
that Citigroup believes may give rise to accounting or 
disclosure issues, these will also have to be written down and 
those documents included with such transaction documents.
    Fifth, key decisions, such as whether the policy requires 
additional disclosures in a particular transaction, are made by 
senior management from our accounting, legal, and risk 
management control functions acting together. If the senior 
managers of our control functions do not approve a proposed 
transaction, then, very simply, that transaction will not go 
forward. Any concerns about accounting or similar matters must 
be fully resolved and must be written down, must be documented, 
if a transaction is to go forward.
    I am personally committed to making sure that our new 
procedures are fully observed. In order to do that, we are 
enhancing our decisionmaking process so that every step of 
decisions are documented, and importantly, our internal audit 
group will review and verify compliance with our procedures.
    Promptly after we announced this new transparency policy, 
we erected what amounted to a roadblock for each structured 
finance and related transaction to see whether it was the kind 
of transaction that would not be reflected as debt on a balance 
sheet and should, therefore, be specially disclosed to the 
company's investors. None of these transactions was permitted 
to go forward unless it was submitted to a rigorous examination 
process by a working group from our control functions. As we 
move forward, we are continually adjusting and fine tuning this 
process to allow for more efficient, but equally rigorous, 
review.
    We recognize, of course, that our execution will not be 
perfect. We are feeling our way, seeing what works, and 
discovering the challenges of applying a unilateral policy like 
this to an enormous range of complex transactions. Leaders, by 
definition, move in uncharted territory, and we will make some 
mistakes.
    But I am quite encouraged by what I have seen so far, by 
the seriousness and intensity with which Citigroup 
professionals are grappling with this new policy, from the 
transactional people on the front lines to the most senior 
managers of our company. It has already made a measurable 
difference in the kinds of deals we are doing or declining to 
do and in the nature of the disclosure that clients are making.
    Mr. Chairman, the world has changed a lot in the past year 
and is continuing to change. The collapse of Enron and the 
turmoil that followed on Wall Street has done tremendous damage 
to a great many people and businesses. We recognize that we 
must take real steps to change our ways of doing business and 
to get real results. We have done this and we are continuing to 
do more. This is not a time for half measures or foot dragging 
or public relations. We at Citigroup understand our role as a 
leader, our responsibility in that regard, and we embrace the 
mandate for change and subscribe to the goal of effective, far-
reaching reform.
    We appreciate the seriousness and the vigor with which you 
and the Subcommittee approach these issues, and we look forward 
to working with you and your colleagues on these and other 
reforms.
    I thank you, sir, and I look forward to answering your 
questions.
    Senator Levin. Thank you so much, Mr. Prince. Mr. Bushnell.

 TESTIMONY OF DAVID C. BUSHNELL,\1\ MANAGING DIRECTOR, GLOBAL 
RISK MANAGEMENT, CITIGROUP/SALOMON SMITH BARNEY, NEW YORK, NEW 
                              YORK

    Mr. Bushnell. Thank you, Mr. Chairman and Members of the 
Subcommittee, for the opportunity to speak with you today. My 
name is David Bushnell. I am a Managing Director at Citicorp's 
Global and Investment Bank, and I am the head of its Risk 
Management Division.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bushnell appears in the Appendix 
on page 101.
---------------------------------------------------------------------------
    The Global Risk Management Division functions as an 
independent control over our business units. It is the 
responsibility of my division to ensure that risks, including 
market risk, credit risk, and risk to the institution's 
reputation, are identified, measured, and evaluated. No 
extension of credit is permitted without risk management 
approval in accordance with our established policies and 
procedures. Positions that our traders take are subject to 
limits established by risk management. The firm's Risk 
Management Committee, including its Capital Markets Approval 
Committee, report to me. I am also charged with communicating 
and interpreting the risk views of senior-most management to 
our business units.
    I understand that the Subcommittee is interested in 
discussing my role in the Sundance transaction. I look forward 
to answering the Subcommittee's questions about that 
transaction. But before I do, I would like to take this 
opportunity to explain some of the very significant changes 
that Citigroup is making in the way we handle such transactions 
today.
    As you know, on August 7, Citigroup announced a new policy 
regarding transactions that raise significant accounting or 
disclosure issues. As its chief risk manager, I have been 
centrally involved in developing and implementing this policy. 
You have just heard Mr. Prince's testimony that describes the 
key elements of the policy and our implementation program.
    The message that I want to convey to you is that this new 
policy is having a real impact on the ground at Citigroup where 
transactions are done. Every material structured or complex 
financing of the sort this Subcommittee has been concerned with 
is being subject to a rigorous review process. The Capital 
Markets Approval Committee is thoroughly evaluating the 
transparency of transactions and is working with our business 
people to ensure that in any transaction we do, the client 
discloses fairly and appropriately the net effect of that 
transaction on the company's financial condition. If the client 
will not commit to these kinds of disclosures, the answer is 
simple: Citigroup will not execute the transaction.
    In the months since August 7, we have reviewed dozens of 
transactions and we are learning a great deal. This process is 
helping us to develop a uniform approach to assessing, routing, 
and where appropriate, approving and documenting transactions 
consistent with the principles of our new policy, and the 
policy has already had a real impact on the transactions we are 
declining or we are agreeing to do.
    One of the most significant objectives of the past few 
months has been to embed in our culture an understanding of the 
importance of this policy. I can tell you that our people are 
taking it seriously, from the front lines of our business units 
to our senior-most management. We are making this policy a 
living, breathing part of the way we do business.
    Thank you, and I look forward to answering your questions.
    Senator Levin. Thank you, Mr. Bushnell. Mr. Caplan.

TESTIMONY OF RICHARD CAPLAN,\1\ MANAGING DIRECTOR AND CO-HEAD, 
 CREDIT DERIVATIVES GROUP, SALOMON SMITH BARNEY NORTH AMERICAN 
              CREDIT/CITIGROUP, NEW YORK, NEW YORK

    Mr. Caplan. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Rick Caplan. I am a Managing Director 
of Citigroup's Global Corporate and Investment Bank and Co-Head 
of the North American Credit Derivatives Group. The Credit 
Derivatives Group is one of several business units at Citigroup 
that structures sophisticated financing for clients.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Caplan appears in the Appendix on 
page 103.
---------------------------------------------------------------------------
    I have worked in the derivatives business at Citigroup 
since 1997. I appreciate the opportunity to answer questions 
about Project Bacchus and Project Sundance. While I want to 
make clear that I understood these transactions to be 
appropriate under the prevailing laws and standards, I also 
want to reiterate the point that Mr. Prince made in his opening 
remarks. Under Citigroup's new structured finance policies, we 
will not do these transactions today unless the client agrees 
to provide clear, detailed disclosure to investors.
    Thank you, Mr. Chairman and Members of the Subcommittee. I 
look forward to answering your questions.
    Senator Levin. Thank you, Mr. Caplan. Mr. Fox.

 TESTIMONY OF WILLIAM T. FOX III,\2\ MANAGING DIRECTOR, GLOBAL 
POWER AND ENERGY GROUP, CITIBANK/CITI-GROUP, NEW YORK, NEW YORK

    Mr. Fox. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is William Fox. I have worked for 
Citibank since 1967. I am currently a Managing Director in the 
Global Relationship Bank and head of its Energy and Mining 
Department. I have overall responsibility for Citibank's 
relationship with clients in the energy and mining industries.
---------------------------------------------------------------------------
    \2\ The prepared statement of Mr. Fox appears in the Appendix on 
page 104.
---------------------------------------------------------------------------
    I have been invited here today to discuss two transactions 
that Citigroup executed for Enron, Project Bacchus and Project 
Sundance. While I am generally familiar with Project Bacchus, 
my familiarity with Project Sundance is more limited. I 
understand the Subcommittee has several questions about these 
transactions and Citibank's role in them. I look forward to 
helping the Subcommittee in any way that I can to answer 
questions about these transactions.
    While we believe these transactions met applicable legal 
standards, they are not transactions that Citigroup would 
undertake today without clear and detailed disclosure from our 
clients about the net effect of those transactions on a 
company's financial statements.
    Thank you, Mr. Chairman and Members of the Subcommittee. I 
look forward to answering your questions.
    Senator Levin. Thank you so much, Mr. Fox.
    Let me summarize the joint venture which we are going to 
start with called Fishtail and then ask my questions.
    At the end of the year 2000, Enron wanted to show a sale of 
the interest that it held in a joint venture called Fishtail. 
They wanted to show that sale in order to generate cash flow 
and earnings for its year-end financial statement, and Enron 
contrived a sale of its interest to an entity called the Caymus 
Trust for $200 million. The funding for Caymus was a $194 
million loan from Citibank, which Enron in turn gave Citibank a 
guarantee on. The other $6 million was listed as being an 
equity investment by Fleet Boston which Citibank had 
guaranteed.
    Now, that $6 million had to be true equity for this to be a 
real sale by Enron, and Citibank understood this. If the $6 
million was a loan instead of true equity at risk, then this 
could not be shown as a sale on Enron's books and the whole 
purpose of the transaction would have been defeated.
    But Citibank, on the other hand, wanted to reduce or 
eliminate its risk on this so-called equity investment, and so 
Citibank went to get an assurance from Enron's CFO, Andy 
Fastow, to, in the words of a memo, Exhibit 322 in these 
exhibits that are in front of you, this is Exhibit 322(c),\1\ 
Citi was looking to obtain the right comfort from Andy Fastow.
---------------------------------------------------------------------------
    \1\ Exhibit No. 322(c) appears in the Appendix on page 229.
---------------------------------------------------------------------------
    Mr. Fox, let me ask you these questions. You are the one 
who met with Mr. Fastow to obtain this comfort for your bank. 
At our staff interview, you indicated that Mr. Fastow said that 
Enron would take whatever steps were necessary to make certain 
that Citibank's equity interest in Bacchus would be bought out. 
This was an important transaction for Enron, according to that 
same Exhibit 322(c). On the second page, this transaction was 
said to be ``mission critical'' by them and ``a must'' for 
Enron, and the words that I have quoted were on page one of 
that Exhibit 322(c) when it was said that Enron has offered to 
have the CFO discuss this ``at whatever level of our 
organization we think necessary to obtain the right comfort.'' 
That is comfort now for Citibank.
    First of all, looking at that Exhibit 322--I am going to 
change the 322 now to Exhibit 322(h),\2\ if you would take a 
look at that. Exhibit 322(h) is a memo or e-mail from Lydia 
Junek to you, Mr. Fox, and it says that, ``the equity 
component,'' if you will look at page two at the top, that 
``the equity component has been approved on the basis of verbal 
support verified by Enron CFO Andy Fastow.'' So they were 
promising you verbal support.
---------------------------------------------------------------------------
    \2\ Exhibit No. 322(h) appears in the Appendix on page 239.
---------------------------------------------------------------------------
    First of all, who is Lydia Junek, the woman who sent you 
the e-mail?
    Mr. Fox. Lydia Junek is a Managing Director in our Houston 
office and she reports to me and did at that time, as well.
    Senator Levin. So is it true, Mr. Fox, that Citi would not 
have provided the equity for this transaction unless it had 
this verbal support from Enron through Mr. Fastow?
    Mr. Fox. Senator, this transaction was an interim bridge 
financing that we were engaged in. Our firm typically does not 
engage in bridge financings unless we are involved in the take-
out or providing the permanent financing. In this case, we were 
not. So for this reason, I went and visited with Mr. Fastow 
because he had control of the take-out of this transaction. He 
was working with another institution. So we wanted comfort from 
him that they were going to take all steps necessary in order 
to ensure that the take-out financing was accomplished and our 
entire transaction would be repaid within its terms.
    Senator Levin. So he gave you this assurance that your so-
called investment would be repaid within that 6-month period?
    Mr. Fox. He gave me the assurance that he would take all 
steps necessary to make certain that the take-out financing was 
accomplished and, therefore, the entire Bacchus transaction 
would be repaid.
    Senator Levin. Now, would you have reassessed your 
participation in the deal had you not obtained that support?
    Mr. Fox. I believe we would have. That assurance was 
important to us. As I said, we were not involved in the take-
out of the financing of Bacchus, and typically our firm would 
not be involved in a bridge financing that was dependent upon a 
take-out unless we were involved in the take-out, and we were 
not in this case.
    Senator Levin. Now, if you take a look at the top line of 
Exhibit 318,\1\ page three, it says the equity component that 
we provide--this was supposed to be equity, not a loan, 
supposed to be equity--will be based on verbal support 
committed by Andrew Fastow to Bill Fox. It is a commitment now. 
It says that the verbal support--and by the way, that verbal 
support was referred to a number of times in the memo--but is 
it not a fact, Mr. Fox, that the verbal support was an oral 
guarantee from Mr. Fastow and Enron that your equity interest 
would be returned to Citi one way or another?
---------------------------------------------------------------------------
    \1\ Exhibit No. 318 appears in the Appendix on page 219.
---------------------------------------------------------------------------
    Mr. Fox. Senator, no, I do not believe so. We did not view 
it as an oral guarantee. It was verbal support and assurance to 
us that he and Enron would take all steps necessary to ensure 
the take-out financing, the permanent financing was 
accomplished so that our entire transaction would, in fact, be 
repaid within its terms.
    Senator Levin. You did not consider the support, the oral 
assurance, the commitment, to be a guarantee?
    Mr. Fox. The oral assurance, we did not view that as a 
guarantee. We viewed ourselves as being at risk for that $6 
million component of the transaction.
    Senator Levin. The bottom line is, you did not consider 
that to be an oral guarantee?
    Mr. Fox. We did not consider that to be an oral guarantee.
    Senator Levin. Now take a look at Exhibit 366.\2\ This is a 
Citibank credit approval document relating to Enron. It is 
dated December 2000, the month of the Bacchus transaction. At 
the top of page one, it lists Lydia Junek as the ``responsible 
officer.'' On the second-to-the-last page, she has signed the 
document. Citi's loan and so-called equity interest in the 
Bacchus transaction is referred to, if you will look at pages 
six and seven.
---------------------------------------------------------------------------
    \2\ Exhibit No. 366 appears in the Appendix on page 655.
---------------------------------------------------------------------------
    Now, the numbers are a little different, because at the 
time the document was written, it was expected that Bacchus 
would require a $242 million loan and $7.5 million in equity, 
so that is the numbers that are in there, but these amounts are 
the amounts that we are referring to here. They were reduced to 
the $194 million loan and $6 million in equity, but this is the 
same transaction, although the numbers were slightly reduced.
    Now, on page seven of this document, under the word 
``support'' in the middle of that page, it says, ``verbal 
guarantees'' in capital letters. You said there were no verbal 
guarantees. You didn't consider them verbal guarantees. The 
lady who signed this document for the bank under your 
supervision, in fact, said in this document these were ``verbal 
guarantees'' in capital letters. Now, if they weren't 
guarantees, why did she say they were verbal guarantees?
    Mr. Fox. Senator, I would not--as I said, I was the one who 
had the conversation with Mr. Fastow. I was the one that 
understood exactly what he said. He did not give me a verbal 
guarantee. I did not seek a verbal guarantee.
    Senator Levin. Did you ever see this document that said 
there were verbal guarantees?
    Mr. Fox. I don't recall that I saw it. I may have. I 
probably did.
    Senator Levin. And Ms. Junek works under your supervision?
    Mr. Fox. Yes, she does, Senator.
    Senator Levin. But you are trying, then, to make the 
distinction--you are trying to make a distinction that what you 
got is a commitment, an assurance, that all steps necessary 
would be taken to repay that money. How is that different from 
a guarantee? All steps necessary means all steps necessary.
    Mr. Fox. Senator, as I said before, what I obtained from 
Mr. Fastow was his verbal assurance that they were going to 
take all steps necessary to make certain the take-out financing 
was done on a timely basis such that our entire transaction 
would be repaid.
    Senator Levin. How is that different from a verbal 
guarantee? ``All steps necessary'' sounds to me like a 
guarantee, and Ms. Junek was very straightforward under your 
supervision in saying it.
    Mr. Fox. Senator, this----
    Senator Levin. How is ``all steps necessary'' different 
from a guarantee?
    Mr. Fox. This was not legally enforceable. It was a 
businessman's understanding with the company. They had control 
of the take-out, they and the other financial institution they 
were involved in. We had no knowledge, not detailed knowledge 
of what that take-out financing was going to be. So I was 
relying on his verbal assurances that they were going to take 
the steps and they had the wherewithal to take those steps to 
make certain that the take-out financing was accomplished.
    Senator Levin. You don't specifically remember seeing those 
words, ``verbal guarantees,'' in that document?
    Mr. Fox. I do not, Senator.
    Senator Levin. You knew that Enron was going to book this 
transaction as a sale, is that not correct?
    Mr. Fox. That is correct.
    Senator Levin. And you also knew that if Citibank did not 
truly have a 3 percent equity at risk, that it would be 
improper for Enron to book the transaction as a sale?
    Mr. Fox. We understood that we had to be at risk for the 3 
percent of the transaction.
    Senator Levin. Well, it seems clear to me, Mr. Fox, that 
Citibank was aware that 3 percent had to be at risk. You just 
said so. You had to be assured that it would not be guaranteed 
in order for this to be booked as a sale. But to protect 
Citibank from loss, you went out and got a verbal assurance, a 
commitment, a statement that all steps necessary would be taken 
by Enron to pay you back. It was characterized properly by your 
assistant as a verbal guarantee. You are not a lawyer, are you, 
in terms of whether it is legally enforceable, or are you a 
lawyer?
    Mr. Fox. I am not a lawyer.
    Senator Levin. Did you receive an opinion that this was not 
legally enforceable?
    Mr. Fox. We did not receive an opinion with respect to this 
aspect of the transaction. As I said earlier, my view was I was 
there. What I got was assurances from Mr. Fastow that the take-
out financing would be executed, and we would be paid out of 
the entire transaction within its terms.
    Senator Levin. It was clear that in doing this, you were 
trying to protect yourself from loss, isn't that correct?
    Mr. Fox. No, we understood we were at risk, but since we 
were not involved in the take-out and this was a short-term 
bridge financing, we wanted to make certain that that bridge 
financing was going to be executed and we would be out of this 
transaction within the terms.
    Senator Levin. Isn't that the same way of saying that you 
were trying to protect yourself from loss?
    Mr. Fox. We clearly understood we were at risk.
    Senator Levin. But weren't you trying to protect yourself 
from any loss from the transaction?
    Mr. Fox. We wanted to make certain that we were out of the 
transaction on a timely basis, that is correct.
    Senator Levin. And you were aware of the fact, I take it, 
that if this assurance, commitment was a guarantee, that that 
would queer the deal, is that correct?
    Mr. Fox. If we had obtained a guarantee, we understood that 
they could not achieve their accounting objective.
    Senator Levin. And that would queer the deal? The 
transaction would not have occurred, is that correct?
    Mr. Fox. I don't know what Enron would have done at the 
time, but we certainly knew that for them to achieve their 
objective, accounting objective, we had to be at risk on the $6 
million.
    Senator Levin. Their financial statement, in showing this 
totally as a sale, with a sale of equity, not showing any 
guarantee, not showing any assurance to anybody, but just 
simply showing it as a sale, was clearly deceptive. You are not 
going to reach a judgment on the Enron books, I assume, or are 
you?
    Mr. Fox. No, Senator, I am not.
    Senator Levin. Others will and others have. It was clearly 
deceptive. By not showing on its books that oral guarantee that 
it made, in the words of Ms. Junek, it deceived the people who 
were reviewing its books, and you can split hairs and say that 
assurance, using all efforts, taking all the necessary steps, 
commitments, doesn't constitute a guarantee, but it is, one, 
hair splitting, and two, inconsistent with your own document 
which says, in fact, it was an oral guarantee.
    My final question to you is, under your current standards 
that Citibank has adopted, would this transaction occur?
    Mr. Fox. Senator, no, it would not occur under our current 
standards without complete and full disclosure of the net 
effect of the transaction on Enron's financial statements.
    Senator Levin. Well, now, would it occur knowing what you 
know?
    Mr. Fox. We would have not done the transaction unless they 
fully disclosed all aspects of the transaction and the net 
effect of it on their financial statements.
    Senator Levin. And had they done that in this case, based 
on what you know, would this transaction have taken place?
    Mr. Fox. Senator, I don't know what they would have done at 
the time, but----
    Senator Levin. What would you do, knowing what you know?
    Mr. Fox. We would have gone to Enron and asked them, under 
our new standards, to have the complete, total disclosure of 
the net effect of the transaction. We would have had to make 
certain that their chief financial officer, general counsel 
were aware of the transaction, all aspects of it, not only the 
written documents, but also any oral understandings.
    Senator Levin. What is the net effect of this transaction 
on Enron? Was it in net effect a loan or net effect a sale?
    Mr. Fox. They booked----
    Senator Levin. No, I know what they booked, but you are 
going to look at the net effect, right?
    Mr. Fox. Right.
    Senator Levin. Under your new standards.
    Mr. Fox. Yes. We would look at the net effect.
    Senator Levin. In your judgment, what was the net effect of 
this transaction on Enron, a sale or a loan?
    Mr. Fox. I think we would have required them to disclose 
the conversation with me. We would have required them to 
disclose all aspects of the transaction and the net impact on 
its financial statements. At that stage, I would assume they 
and their accountants would review the transaction with their 
legal people and determine how it would be booked. I am not in 
a position to determine how they would have booked it. I can 
only suggest and require them to have full and complete net 
effect exposure--disclosure.
    Senator Levin. I am not sure, Mr. Prince, what your new 
standards really mean if all you are going to say is if Enron 
discloses this on their books, it is OK with you, when it is so 
obvious, it seems to me, to anybody that when you give a 
guarantee, as they gave to you, that they would take all 
necessary steps to make sure that was repaid and that they gave 
assurances to that. If you can possibly then say, well, we 
would proceed the same way we did before providing they said 
that, I am not sure what your new standards really mean.
    Mr. Prince. Well, Senator, you have highlighted two key 
differences between what happened then and what would happen 
now. The first is that these oral assurances would be written 
down and would be included in the transaction documents that 
are forwarded to the chief financial officer, the chief legal 
officer, and the outside auditors, so everyone would have the 
same base of information.
    And second, the net effect rule would require that the net 
effect of the transaction, as I mentioned in my opening 
statement, on the assets, the liabilities, the balance sheet, 
the income statement, the net effect of all of the complicated 
moving around of assets would have to be disclosed.
    I think those are two very important differences between 
what happened then and what happened now.
    Senator Levin. And if they decided the net effect was a 
sale, that is OK with you?
    Mr. Prince. Well, Senator, it is not just a word, and it is 
not just a sentence. They wouldn't disclose the net effect was 
a sale.
    Senator Levin. Pardon.
    Mr. Prince. They would not, sir. They would not simply 
disclose a conclusory sentence that this was a sale or not a 
sale. As part of a sale, if it were a sale under the 
complicated accounting rules, they would have to disclose the 
net effect of that sale on their balance sheet, on their income 
statement.
    Senator Levin. And my question to you is, based on your 
study of this record and your judgment, would you conclude and 
agree that the net effect of this transaction was a sale?
    Mr. Prince. Senator----
    Senator Levin. If they concluded that, would you accept 
their conclusion?
    Mr. Prince. Senator, again, I am trying to answer your 
question. It is more than the word ``sale.'' The net effect of 
the transaction, what happens to the balance sheet, what 
happens to the income statement is what our rule calls for, not 
the word ``sale'' or not sale.
    Senator Levin. The net effect on the Enron financial 
statement was $112 million in earnings from that transaction, 
but you cannot tell us today, based on all of these documents, 
that if they concluded again that that was a sale, that you 
would not proceed with that transaction, based on what you 
know?
    Mr. Prince. Senator, I----
    Senator Levin. You know all the underlying facts. You can 
say it is not just the conclusion. I agree with you. You are 
going to look at the underlying facts and conclude whether or 
not it is a fair judgment that this is a sale. Otherwise, you 
said, it seems to me that you are not going to proceed. My 
question to you is, based on all these underlying facts which 
have been laid out in front of you, would you proceed if Enron 
again in this kind of a situation said, or Enron said in this 
kind of a situation that this was a sale? Would you proceed?
    Mr. Prince. Senator, if I understand your question 
correctly, if you are asking me, would I make the judgment that 
this was a sale or not a sale based on these various facts, I 
can't make that decision sitting here today. I would want to 
consult with my control people. I would want to have a much 
more rigorous review than the detail we have had here this 
morning.
    Senator Levin. Mr. Fox, you told the Subcommittee staff 
that Citi had a business policy that it would not engage in 
structural transactions that had a material impact on reported 
net income. That was the business policy that you had, and that 
Citi would look further at the project and assure itself that 
the project would not impact reported net income. That was your 
policy in place at the time.
    Yet, throughout the Bacchus transaction, you were notified 
that there was a possibility that Enron would use the 
transaction to report net income in its year 2000 financial 
statement. Exhibit 322(a) \1\ is an e-mail to you and it states 
the following: ``Enron's motivation in the deal now appears to 
be writing up the asset in question from a basis of about $100 
million to as high as $250 million, thereby creating 
earnings.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 322(a) appears in the Appendix on page 226.
---------------------------------------------------------------------------
    Exhibit 322(c) \2\ is a November 28 e-mail which states, 
``According to Enron, it is possible that there will be funds 
flow and/or earnings impacts. Although not certain at this 
time, we should assume that there will be funds flow from 
operations/earnings implications.'' That is what you said you 
were going to assume.
---------------------------------------------------------------------------
    \2\ Exhibit No. 322(c) appears in the Appendix on page 229.
---------------------------------------------------------------------------
    Finally, on December 6, there is an e-mail, Exhibit 322(d), 
\3\ which states, ``It is probable that the monetization will 
add to funds flow from operations as a portion of the assets 
will be from merchant pool. It is possible but not certain that 
there will be earnings impact.'' That was the last 
communication on the matter.
---------------------------------------------------------------------------
    \3\ Exhibit No. 322(d) appears in the Appendix on page 232.
---------------------------------------------------------------------------
    Now, did the Citibank policy then require further 
investigation at that time, since there was the possibility of 
an earnings impact which your policy would not permit?
    Mr. Fox. Senator, the series of e-mails you referred to, 
starting with the first one, certainly highlighted the 
potential of an earnings impact. We went back to the company. 
We went back to the treasurer of the company, who confirmed to 
us that there would not be significant material earnings 
impact.
    I was shocked when I learned from your staff, which was the 
first time I knew about it, that the impact of this transaction 
created $112 million of earnings. Quite frankly, Senator, in 
this particular case, we were lied to. We relied on Enron, who 
was the only one that could determine the impact of a 
transaction as to what the earnings impact would be.
    Senator Levin. So that you specifically contacted Enron 
after your decision that there could be an earnings impact to 
see whether there would be and they told you there would not 
be?
    Mr. Fox. I did not specifically contact them.
    Senator Levin. Who did?
    Mr. Fox. Jim Reilly, who is a Managing Director of our 
firm. If you go further into that last e-mail you made 
reference to, he reports that Enron has suggested, however, 
that because of their ongoing involvement in the business, it 
is unlikely there will be any material earnings benefit.
    Senator Levin. And you accepted that without further 
investigation?
    Mr. Fox. We relied on Enron's word. They were a highly 
respected company. They were a company we had a good 
relationship with at the time and that is something we would 
have relied on, yes, Senator.
    Senator Levin. And their word was ``unlikely''?
    Mr. Fox. Their word, it was unlikely that there will be any 
material--I don't know what their word was. That was Mr. 
Reilly's word.
    Senator Levin. But that was not enough, the fact that it 
was unlikely, still possible, investigation as your policy it 
seemed to me required you to do to assure yourself that there 
would not be an earnings impact.
    Mr. Fox. I believe that this would have sufficiently 
satisfied ourselves at the time.
    Senator Levin. You were not aware yourself of the 
conclusion?
    Mr. Fox. I was not aware. I did not have the conversations 
directly with the company, no, Senator.
    Senator Levin. You had earlier, in Exhibit 322(g),\1\ in a 
memo, you were aware of the fact that this highly reliable 
company, one of the largest in the country, significantly 
dresses up its balance sheets at year end. You were very much 
aware of Enron being someone who liked to and was willing to 
and typically did dress up their balance sheets, because you 
wrote in that memo that is at Exhibit 322(g) that, ``based on 
1999 numbers, it would appear that Enron significantly dresses 
up its balance sheet for the year end. Suspect we can expect 
the same this year.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 322(g) appears in the Appendix on page 237.
---------------------------------------------------------------------------
    So you were expecting a dressing up, disguise, costume by 
Enron at the end of the year 2000. You had received strong 
suggestions from other Citi relationship managers that it was 
possible that Citi would claim earnings from the Bacchus 
transaction. You were told only apparently--you are supposed to 
be in a position here of some decisionmaking import--you were 
told that it was--you just took Enron's word that it was 
unlikely that there would be an earnings impact. Of course, if 
there was an earnings impact, that violated your policy. But 
knowing that this company put on a show at the end of its year, 
you nonetheless, or your bank nonetheless simply accepted their 
statement that it was likely that there would not be an 
earnings impact. How can you explain that?
    Mr. Fox. Let me comment and address that, Senator. My 
reference to dressing up the balance sheet is a slang reference 
that a number of companies will take certain steps at various 
points in their financial cycle to address balance sheet 
targets. They can stretch out payables to generate cash. They 
can monetize or securitize receivables to generate cash and pay 
down debt. They can borrow under their bank facilities and pay 
down short-term commercial paper. Many steps that large 
financial--I mean, large Fortune 500 companies take to impact 
their balance sheet.
    The context here was that I was looking at their September 
1999 financial statements, reviewed them, and if I recall 
correctly, the debt-to-capital ratio appeared higher than it 
would at year end and that seemed to indicate to me that they 
would take certain steps as it impacts their balance sheet. 
That was a balance sheet comment and statement. It was not 
related to the income.
    Remember, at the time, Enron was an important relationship. 
Enron was a highly respected company. We had no reason to 
suspect or believe that we could not trust and accept their 
word.
    Senator Levin. Do you recall telling the Subcommittee staff 
that this unlikely earnings impact conclusion was an 
insufficient resolution as far as you were concerned of Citi's 
policy? Do you recall telling the staff that?
    Mr. Fox. No, I don't, Senator.
    Senator Levin. All right. Let me ask you, Mr. Prince, under 
your current policy, would this be a sufficient resolution?
    Mr. Prince. Indeed not, Senator.
    Senator Levin. This is my final question and then we will 
turn it over to Senator Collins, for this round, at least. Mr. 
Prince, let me first say that we all are hopeful that 
Citigroup's apparent willingness to change its practice will 
lead to the kind of results that you hope for and expressed in 
your opening statement, and I just want to ask you some 
questions about your new policy.
    Your new net effect rule is described as follows: Citigroup 
would execute material financing transactions for companies 
that were not going to be recorded as debt on their balance 
sheet if and only if, as you stated, the company agreed to 
disclose the net effect of the transaction on its financial 
condition.
    The first problem that I have with this policy, or 
question, is that it states that Citigroup will continue to 
provide financing in cases where it knows the company isn't 
going to record the debt on its balance sheet. Doesn't that 
mean that Citigroup still thinks it is OK to sell loans that 
aren't honestly reported as loans?
    Mr. Prince. No, Senator, it does not mean that. There are 
many things that are appropriately not recorded as debt on a 
balance sheet. The key for us is that even if they are 
appropriately not recorded as debt on a balance sheet, the 
effect of the transaction must be disclosed. It doesn't matter 
anymore whether you do just this much or just that much and you 
satisfy this little rule or that little rule and suddenly it 
shifts from one shoebox to another shoebox, or one pigeon hole 
to another pigeon hole. You are not done at that point. Even if 
you satisfy a test and it goes to the next category on the 
balance sheet, the effect of the transaction, separate from the 
accounting conclusion on the classification, has to be 
disclosed. That is the difference.
    Senator Levin. Are you going to make a judgment as to the 
fairness of the conclusion relative to net effect, or are you 
just going to accept the conclusion of the other company, of 
your client?
    Mr. Prince. Senator, I think one of the things that we have 
learned is that we have to make our own judgments in that 
regard.
    Senator Levin. Because Enron could argue, for instance, in 
those prepays that we made reference to and you are aware of 
from an earlier hearing, they did disclose the net effect of 
the transactions because it included the energy trades in its 
year 2000 financial statements. It recorded $4 billion worth of 
cash flow from operations, but no debt. Since Enron included 
the energy trades in its financial statements as cash flow from 
operations, would that meet your disclosure requirement, or 
would you look behind that and make sure that it is a fair and 
accurate disclosure?
    Mr. Prince. Senator, I think it is clearly the second. We 
would require that the effect of the transaction be disclosed. 
So we would require them to disclose it in a way where anyone 
could understand.
    One of the problems that we all face is that these matters 
are way too complex and getting to a simple decision shouldn't 
lead to opaqueness, shouldn't lead to, well, now that we have 
got the answer from an accounting standpoint, the effect of the 
transaction that goes one way or the other. Despite the 
accounting conclusion, the effect of the transaction has to be 
disclosed.
    Senator Levin. If I understand what you said a moment ago, 
not just disclosed, but that you would reach an independent 
judgment that the disclosure was a fair statement of the facts.
    Mr. Prince. Yes, sir. We would have to be comfortable 
ourselves with that disclosure.
    Senator Levin. And one last point. In Sundance, three 
senior Citigroup officials recognized the accounting problems 
with Sundance and said, don't do it. Citigroup did it anyway. 
What is the solution there? If there is no agreement among your 
top officials, will there be a requirement that whoever 
approves that at a higher level is going to have to put a stamp 
of approval on it?
    Mr. Prince. Senator, as I said in my opening statement, one 
of the key differences we have now is that every part of the 
process has to be documented. We have to be able to pull out a 
paper to put in this notebook which will say who finally and 
formally signed off and why they signed off once an issue has 
been raised.
    Senator Levin. Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. Prince, I do recognize the steps that you have taken 
since our last hearings to put additional safeguards in place 
and I don't minimize those actions. I think they do represent 
progress. But in looking at the documents involved in these 
transactions, I find it very difficult to understand how these 
transactions were approved under your old procedures. There 
were warning flags galore, and I want to read you some of the 
comments by Citigroup's own employees, who it seems to me kept 
trying to raise red flags, kept trying to bring concerns to the 
attention of senior management.
    In one e-mail, for example, an Alan McDonald says, ``We, 
Bill Fox and I, share risk's view and if anything feel more 
strongly that the suitability issues and related risks, when 
coupled with returns, make it unattractive. It would also be an 
unfortunate precedent if both GRB management relationship and 
risk's views were ignored.''
    Another e-mail describes one of these transaction as ``a 
funky deal accounting-wise,'' and characterizes another 
Citigroup employee's view as being ``amazed that they can get 
it off the balance sheet.''
    Yet another e-mail, which Senator Levin has referred to, 
``based on 1999 numbers would appear that Enron significantly 
dresses up its balance sheet for year end; suspect we can 
expect the same this year.''
    Yet another from a memo, the ``accounting is aggressive and 
a franchise risk to us if there is publicity.''
    Yet another e-mail, this one from Rick Caplan, ``Sounds 
like we've made a lot of exceptions to our standard policies. 
I'm sure we've gone out of our way to let them know that we are 
bending over backwards for them. Let's remember to collect this 
IOU when it really counts.''
    How did this happen? Why would these transactions all be 
approved when you have Citigroup employees raising so many red 
flags, describing the accounting as ``funky,'' saying that they 
don't understand how this achieves Enron's objectives of 
getting off-the-books treatment for these transactions, saying 
that a lot of exceptions were made to standard policies? How 
could this have happened under your old procedures?
    Mr. Prince. Senator, I will tell you honestly, I have done 
a lot of soul searching about that. As the new CEO of this 
business, I am responsible for it now and I am responsible for 
what happens going ahead and I have to make sure that problems 
can't arise under my leadership of the business, and so I have 
thought a lot about how this could have happened when the 
issues that you have identified were raised.
    I think, honestly, that our people did spot some of those 
issues, did raise them. You have quoted the various documents. 
And I think that in hindsight, our people were too comfortable 
with the ability to rely on the outside auditors, on the law 
firms that structured and closed these transactions, and on the 
representations from Enron themselves. I think that at that 
time we did not view ourselves as being responsible for what 
Enron did with its own books and I think we have learned a very 
painful lesson in that regard.
    Senator Collins. But it wasn't as if the representations by 
Enron or Andersen or the legal team that Enron used didn't 
raise questions.
    Mr. Prince. That is correct, Senator.
    Senator Collins. And that is the part that is troubling. 
There are some cases where there was outright deception in the 
information and data that were provided to you. But in other 
cases, the information provided to Citigroup raised red flags 
and yet the transactions went through.
    Mr. Prince. And indeed, Senator, I think some of the 
language reflects our mental state at that time. The one you 
quoted that said we are surprised they can get it off their 
balance sheet, it is obvious that we are observing their 
decision process. We didn't view ourselves as a participant in 
that decision process. We were watching it. We were relying on 
what they told us. We were relying on what Arthur Andersen said 
was OK or not from an accounting standpoint. We have learned a 
painful lesson that we can't be a bystander and just watch that 
process.
    Senator Collins. Mr. Prince, how much was this driven by 
the fact that there was the lure of big fees? I come back to 
this e-mail, and it is Exhibit 322(i),\1\ where it says, 
``Sounds like we made a lot of exceptions to our standard 
policies. I'm sure we've gone out of our way to let them know 
that we're bending over backwards for them. Let's remember to 
collect this IOU when it really counts.'' What does that mean 
to you?
---------------------------------------------------------------------------
    \1\ Exhibit No. 322(i) appears in the Appendix on page 242.
---------------------------------------------------------------------------
    Mr. Prince. Well, Senator, as you know, I was not managing 
this business and I wasn't intimately involved in these 
transactions, but in being briefed on these transactions, my 
understanding is that the exceptions to our policies involved 
things like choice of law, whether it is Texas law or New York 
law, things like that.
    But the short answer is, I can't put myself in the minds of 
the people who did these transactions. I don't believe that in 
a company like ours, an individual transaction would drive 
people to do bad things. Based on what I know, I believe that 
our people, acting under the rules as they understood them to 
be and with the clear mental state that I mentioned a moment 
ago about relying on others, that they acted in good faith. 
That is my belief. If I did not believe that, the people would 
not still be with the company. But I believe they did act in 
good faith under the rules as they understood them at the time, 
and I don't think that fees, whether on this transaction or 
others, corrupted our organization.
    Senator Collins. Mr. Fox, I want to follow up on your 
discussion with Senator Levin, which still leaves many 
questions in my mind. You traveled to Houston and met with 
Andrew Fastow, Enron's CFO at the time, because you wanted to 
discuss the verbal support or the support for Citigroup's 
investment in the Bacchus transaction, is that correct?
    Mr. Fox. Yes. I traveled to Houston to meet with Mr. Fastow 
to discuss the entire transaction and obtain his assurances 
that they were going to take the necessary steps to make 
certain that the take-out or permanent financing was put in 
place and that we would be repaid.
    Senator Collins. Yet in your testimony today in response to 
questions from Senator Levin, you indicated that it was never 
your understanding that Mr. Fastow provided you with any kind 
of guarantee, is that correct?
    Mr. Fox. That is correct. He did not provide me with any 
guarantee.
    Senator Collins. And you also testified, and this is 
obviously the critical point, that you considered Citigroup's 
investment to be at risk, is that correct?
    Mr. Fox. That is correct.
    Senator Collins. OK. Now, the reason I am having 
difficulties understanding that is a document that is the loan 
approval memorandum, which is Exhibit 318,\1\ where over and 
over again, in fact, I think four times in the document, there 
is reference to the verbal support, the verbal commitment that 
you received from Mr. Fastow.
---------------------------------------------------------------------------
    \1\ Exhibit No. 318 appears in the Appendix on page 219.
---------------------------------------------------------------------------
    For example, there is a sentence on page two of the 
memorandum in the first paragraph that says, ``From our 
perspective, the equity portion of the facility will be at risk 
and there is consequently a large element of trust and 
relationship rationale involved. However, this equity risk is 
largely mitigated by verbal support received from Enron 
Corporation as per its CFO.'' That is obviously referring to 
the conversation that you had with the CFO, is it not?
    Mr. Fox. Yes, it is.
    Senator Collins. Again in the memorandum, on page three, 
there is a statement saying, ``Enron's CFO has given his verbal 
commitment to Bill Fox that Enron Corporation will support the 
3 percent equity piece of this transaction.'' At the top of 
that page, again, ``The equity component we provide will be 
based on verbal support as committed by Andrew Fastow to Bill 
Fox.'' It says over and over again in this document, which is 
the loan approval memorandum, that you had a verbal commitment. 
So I am trying to understand how you could view the funds as 
being truly at risk given the verbal support of the investment 
that you received from Enron.
    Mr. Fox. Senator, what we are doing here, I believe, in 
this document is trying to highlight to all that were involved 
in the transaction and approving it that a portion of the 
transaction was at risk as equity based solely on verbal 
support. It did not have a legal obligation from Enron. It did 
not have the faith and full faith and credit from Enron. It was 
simply that Enron through Mr. Fastow was going to make certain 
that the take-out transaction was going to be accomplished.
    Senator Collins. What did the verbal support mean and why 
was it so important that it appears four times in the loan 
approval memorandum?
    Mr. Fox. We, I believe I would say, we were trying to 
highlight the risk for all the approvers, that this was not a 
legal obligation by any stretch of Enron to pay us back the $6 
million. It was verbal support. We were at risk, but we were 
dependent on them to make certain that the take-out financing, 
the permanent financing, was going to be accomplished.
    Senator Collins. I have to tell you that I read it exactly 
the opposite. If it was important enough for you to go and meet 
with Andrew Fastow to get that commitment, and if it appears 
four times in the approval memorandum, and when there is 
actually a statement in this memorandum saying that the equity 
risk is largely mitigated by the verbal support received from 
Enron, how can you continue to maintain that this commitment 
really had no meaning?
    Mr. Fox. I think that is just the point, Senator. It was 
mitigated, not eliminated. We had that risk, and I think that 
is what we were highlighting to everyone, so that everyone in 
our firm who was approving the transaction understood that this 
was an incremental risk we were undertaking.
    Senator Collins. On Exhibit 366,\1\ the phrase is used that 
it is a verbal guarantee and the percentage is 100 percent. 
What does that mean.
---------------------------------------------------------------------------
    \1\ Exhibit No. 366 appears in the Appendix on page 655.
---------------------------------------------------------------------------
    Mr. Fox. Senator, I am sorry. Where are you exactly in the 
exhibit?
    Senator Collins. It is Exhibit 366. It is under ``Support'' 
typed to the left. It says, ``verbal guarantees,'' ``Enron 
Corporation,'' ``percentage: 100.''
    Mr. Fox. Yes, I am sorry.
    Senator Collins. Doesn't the word ``guarantee'' mean 
something?
    Mr. Fox. Senator, I don't know who completed that form, and 
it is a form that gets completed, but that was not what I 
obtained from Mr. Fastow, and I think what I obtained from Mr. 
Fastow was generally well articulated in some of the other 
written documentation. I obtained from him his verbal assurance 
that they would take all necessary steps to make certain that 
the take-out financing was accomplished and our entire 
financing, not just the equity piece but also the debt piece, 
would be repaid.
    Senator Collins. So are you saying that the word 
``guarantee'' should not have been used on this document?
    Mr. Fox. That was not an accurate representation of my 
conversation with Mr. Fastow.
    Mr. Caplan. Senator, could I make one clarification, just 
looking at this for the first time?
    Senator Collins. Yes.
    Mr. Caplan. I am not certain that what Mr. Fox is 
inconsistent with--what he is saying is inconsistent with what 
this says, because if you note that this section of this memo 
is about the term loan, the $194 million term loan that we were 
providing as a bridge, and I think you could very easily 
conclude that the verbal guarantee is that Enron is going to 
work hard and get that take-out done at the termination of this 
loan. This doesn't actually refer to the equity at all. It 
seems just to refer to the term loan.
    Senator Collins. Let me ask one final question.
    Senator Levin. If you would yield to me on that point----
    Senator Collins. Absolutely.
    Senator Levin [continuing]. Because you are inaccurate. 
Take a look at the prior page at the bottom. That is the term 
loan.
    Mr. Caplan. Well, it says in the middle of the page, 
``Facility description, term loan,'' and then----
    Senator Levin. I understand. I know exactly what you are 
saying. I am saying that the larger loan, the $242 million, 
which was then reduced, as I indicated in my opening statement, 
is on the previous page, and that is page six. This is, without 
any doubt, referring to the equity, which was listed as $7.5 
million, but, in fact, as I indicated, was reduced to $6 
million. But there is no doubt that this is the equity portion, 
so-called equity portion, called a term loan, by the way, in 
this document. I just want to--stated to be verbal guarantees, 
not just mitigated, 100 percent--but the point here is that you 
are wrong when you----
    Mr. Caplan. I would agree.
    Senator Levin. OK.
    Mr. Caplan. But I think, though, if I might, I think this 
is the beauty of our new policy, because whether we called this 
thing--whether this thing turns out to be a sale or a loan, the 
effect of whatever the intent behind the transaction would be 
disclosed in the financials. We would require disclosure of 
that in the finances of the company. I think that is really the 
difference we are trying to articulate here today.
    Senator Collins. One final question, because my time has 
expired. Mr. Fox, had you not received the oral commitment, 
whether we are calling it a verbal guarantee or an oral 
commitment, from Enron, would you have proceeded with this 
transaction?
    Mr. Fox. Senator, today, I am not certain I can tell you 
one way or the other. If we had not received it, it would have 
certainly been a different risk, as the memo highlighted. The 
verbal support mitigated some of that risk. Without that, as I 
said earlier, it is unusual for us to engage in a bridge 
financing where we are not in control or involved in the take-
out. So I can't say for certain today whether we would or would 
not have gone forward without it, but it clearly was important 
to us.
    Senator Levin. Thank you. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Coming to this de novo, without the kind of research that 
both my Chairman and Ranking Member have done, I have a 
slightly different reaction. I think the first documents that 
refer to mitigation on the basis of verbal support pass the 
smell test. The second document clearly does not, the one that 
says verbal guarantee, 100 percent, and I think that is a 
bureaucratic slip-up that the people who had the conversation 
with Fastow--you, Mr. Fox--clearly understood you were at risk, 
and your first document makes it clear. We are at risk.
    Now, anybody on an approval basis reading that document 
says, well, what do we have to deal with the risk, and your 
answer is, I have had a conversation with Fastow and he says he 
is going to take it out. That is not legally binding, it is not 
something we can go to the bank with, but we are satisfied that 
they will make good on it and that mitigates the risk. I think 
that document passes the smell test.
    But as it got handled by the sausage machine down to the 
final drafting of the final loan document, that reference of a 
mitigation got turned into something more than a mitigation and 
it came out as a 100 percent guarantee and I think that is 
something you ought to look at in terms of the way documents 
get drafted within large bureaucracies. I am not surprised by 
it. I am not horrified by it. It happens all the time.
    But I think it is a clear message to you that when a deal 
is made at your level, Mr. Fox, it gets documented to the point 
that when it finally comes out in the final document that is 
done by an employee who is used to doing hundreds, if not 
thousands, of these in a very routine way, that the significant 
deal you made still retains its flavor when it comes out in the 
final wash. That is how I read what happened here. Now, if you 
want to challenge that and say, no, that is not where it is, 
looking at it strictly, as I say, de novo, that is what I see 
what happened here.
    So just to nail it down one last time, Mr. Fox, you were 
convinced, regardless of what the documents said, that Citibank 
really was at risk here?
    Mr. Fox. Yes, Senator, I was.
    Senator Bennett. And you were satisfied that it was a risk 
Citibank could afford to take because Andy Fastow had told you, 
``We are going to be able to meet our obligation''?
    Mr. Fox. That is correct, Senator.
    Senator Bennett. OK. If that is all the farther it went, I 
think that is a legitimate position for you to have. The 
difficulty comes from what Enron did with this, and as Senator 
Collins said, you understood what they were doing with this was 
really, to use the catch-all term, very aggressive. ``Very 
aggressive'' usually means getting close to the edge of 
something that is improper.
    Now, Mr. Prince outlines the actions that Citibank is going 
to take, and this is what I really want to focus on, rather 
than the details of this particular situation. We are talking 
about a new role for banks. In the old world, banks did not 
view as their role--I interrupt myself here. Let me lay it out 
as I see it and then you agree or disagree.
    In the old world, banks did not view their role as being 
watchdogs of investors and borrowers. Banks viewed their role 
as being watchdogs for the investors in the bank. So as long as 
the bank was satisfied that it would get its money back, it 
really didn't care what the borrowers did with the money.
    Now we are saying the bank should have been part of the 
watchdog team that would blow the whistle and say, these guys 
are borrowing the money and they are going to do squirrelly 
things with it on their balance sheet, and unless they disclose 
the real effect on their balance sheet of taking on this loan, 
we are not going to give them the loan. Is that a fair 
characterization of the switch in the role of the bank that has 
occurred as a result of the Enron collapse?
    Mr. Bushnell. Mr. Bennett, perhaps I could take that one. 
Yes, I think that is a fair characterization of the new policy 
and the switch from where we were and the policies and 
independencies that we used to have versus the procedure going 
forward.
    Senator Bennett. It does represent a fairly significant 
change in policy, because up until now, we, the Federal 
Government, have assumed that the role of gaining transparency 
in financial statements is primarily, if not exclusively, the 
SEC, and as long as the SEC does its job, the banks don't have 
to worry about it. They can just make the loan as long as they 
are sure their shareholders will be taken care of and leave it 
up to the SEC to make sure the borrowers do the right thing 
with the money. Now we are saying, no, in addition to the SEC, 
the banks must play a role in disclosure to the shareholders of 
the borrower.
    Mr. Bushnell. I think that is right, Senator. I think our 
feeling is that, as Mr. Prince discussed in his opening 
remarks, this has been such a painful process for us, even if 
our depositors weren't hurt or the bank got its money back in 
this case, which it did, it has clearly been a damage to the 
financial system, to the trust in the development and 
establishment of the smooth flowing of our capital markets, and 
that in our own self-interest, if you will, we need to make 
that trust come back and be a party to it.
    Senator Bennett. This raises a number of very interesting 
possibilities. If the bank does assume a role and, therefore, a 
responsibility for the accuracy of financial statements on the 
part of the borrower, can the bank be sued if the borrower 
misstates the use of the funds it obtains from the bank?
    Mr. Bushnell. I understand that, Senator. I don't think we 
are looking to take on the legal responsibility or the 
accounting responsibility for this. We do think that there are 
regulatory agencies and that is others' jobs. We just think 
that when there are questions like this, the best policy as a 
risk manager, transparency, shedding the light on what the 
transaction is in plain English so that everybody can 
understand what happened, is the best policy for us.
    Senator Bennett. I think that is a very important point for 
you to make because I don't think you want to expose yourselves 
to lawsuits on the basis that you did not adequately require 
transparency on the part of the borrower. I think you want to 
keep the wall there that the lawsuits can go to the accounting 
firm that didn't adequately provide disclosure or require 
disclosure. The lawsuits obviously can go to the borrower 
themselves if they lied, as Enron clearly did. But that the 
lawsuits can't go to the deep pockets of a bank who, in their 
requirements for disclosure, fell short of the kinds of 
requirements.
    You want to make it clear, I think, that in the policies 
you are adopting, you are adopting these policies to protect 
the safety and soundness of the banks and the investment in the 
banks of the banks' shareholders. I think the case can be made 
that the kind of disclosures Mr. Prince has described here do, 
in fact, reduce the risk to shareholders of the bank, and by 
making these requirements on the part of the borrower, you are 
saying that the bank will ultimately have fewer bad debts and 
fewer write-offs.
    Let me ask the question that has not been answered here. 
Did you lose the $6 million? It was at risk. Did you lose it?
    Mr. Fox. No, Senator. The permanent financing was executed 
and the entire Bacchus financing was repaid.
    Senator Bennett. OK. Are there any other of the 
transactions we will be discussing here this morning where the 
bank had money at risk which you lost?
    Mr. Fox. Not in the transactions that we are discussing 
here today.
    Senator Bennett. OK. So the changes that Mr. Prince has 
talked about, if they had been in place, would not have changed 
the losses sustained by the bank. In other words, these changes 
would not have retrospectively benefitted the shareholders of 
the bank.
    Mr. Fox. I think they may have benefitted the shareholders 
because we wouldn't have been associated with these 
transactions, but----
    Senator Bennett. That is fair, yes. They would have 
affected the shareholders in that they protect the reputation 
of the bank and the reputation of the bank is obviously 
something that is of value to the shareholders. So I will 
accept that, even if there was not a specific monetary loss.
    Mr. Fox. That is correct, but we did not lose money on 
these transactions. They were repaid within--to us.
    Senator Bennett. That is my point, Mr. Chairman, and I will 
stop there. I think the things we have heard from Mr. Prince 
are salutary and we should congratulate Citibank on its 
willingness to move forward.
    I think it should be pursued, but I think everybody should 
be a little careful about crossing the line and putting a 
liability on the bank, any bank, if they fail to do these kind 
of things, because traditionally, regulation of disclosure and 
achieving of transparency is something that should be 
accomplished by the SEC and by the independent accountants who 
are paid handsomely to make sure that there is transparency and 
that it should not be ultimately spilled over into a lender so 
that a lender could be liable for making a loan where the 
disclosure requirements of the lender were deemed to not be 
sufficient to protect the interests of the shareholders and the 
investor. That strikes me as very dangerous ground that would 
open the door for a huge number of lawsuits, to the detriment 
of everybody, if we are not very careful.
    Thank you, Mr. Chairman.
    Senator Levin. Thank you, Senator Bennett.
    What we are looking into is, in addition to the changes 
which Citibank is indicating it is making in the way its 
procedures operate, we are also looking at what it didn't do 
relative to the procedures that it had in place on these 
transactions. This is not just saying in hindsight that we have 
reached a conclusion. It is saying that the investigation 
discloses that at the time these transactions were 
inappropriate, that they aided and abetted deception, that 
there were major concerns raised internally that were 
overridden, set aside in order to please Enron or to make a 
fee.
    This isn't just a question of hindsight or under current 
rules these transactions wouldn't be approved. There were rules 
at the time about not aiding and abetting deceptive 
transactions. That is not a new rule for a bank. That is an old 
rule.
    There is an old accounting requirement that was in 
existence at the time that says there is no room for accounting 
representations that subordinate substance to form, and you 
cannot aid and abet a violation of that rule.
    So that is our major concern here, it is the way in which 
major institutions facilitated deceptive accounting and bent 
the rules or violated the rules that existed at the time. 
Senator Collins has made reference to this Exhibit 322(i),\1\ 
which says, ``it sounds like we made a lot of exceptions to our 
standard policy.'' Those are policies that existed at the time. 
Those aren't new policies. ``I am sure we have gone out of our 
way to let them know that we are bending over backwards for 
them,'' for Enron. ``Let's remember to collect this IOU when it 
really counts. Happy holidays to all.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 322(i) appears in the Appendix on page 242.
---------------------------------------------------------------------------
    Let us move to Sundance. A few months after Bacchus, Enron 
decided to create Sundance as a joint venture that would keep 
all of Enron's pulp and paper assets off its balance sheet. 
And, as I discussed in my opening statement, the joint venture 
was a sham because Citi really didn't have any investment at 
stake, and here are the facts.
    Citibank's $28.5 million that it was supposed to invest and 
have at risk, in fact, was set aside, kept segregated, 
available for Citibank. Seven-hundred-and-forty-seven million 
dollars of Enron's money would have had to have been lost 
before any of Citibank's money could be touched. Citibank could 
unilaterally dissolve this venture at any time, ensuring that 
it wouldn't lose anything on its investment.
    I want to go over this whole situation here with you, Mr. 
Caplan. Most auditors require that for a joint venture to be 
unconsolidated, the capital commitment must be split 50-50. 
Arthur Andersen was a lot weaker, a lot less conservative, and 
the second partner in the venture only had to put up 20 percent 
under Arthur Andersen's rules in order for the joint venture to 
be unconsolidated on the books of Enron, and that is, of 
course, what Enron was interested in. That was their goal.
    Now, even with the weaker approach, the 20 percent 
approach, Citi and Enron still went around it through all the 
ways that I discussed. Twenty-eight-point-five million dollars 
was segregated, couldn't be touched. Citibank could end this 
whole deal any time it wanted. Enron's $747 million had to all 
be spent before there was even any Citi money spent at all, 
whether it was the $28.5 million or the balance, which I 
believe was $160 million.
    Citibank also had a guaranteed return interest rate, and I 
would like you to look at one Citi e-mail, Exhibit 333(i),\1\ 
which appears to me to be an accurate summation of Citibank's 
so-called investment in Sundance. It is supposed to be an 
investment at risk. Principal is supposed to be at risk.
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(i) appears in the Appendix on page 296.
---------------------------------------------------------------------------
    Here is what the e-mail from Citibank says. ``Still an 
equity investment of sorts, accounting and tax basis for 
partnership, but it is structured in such a way that the 670 
basis points are guaranteed or we blow the deal. Also, our 
invest,'' I assume that means investment, ``is so subordinated 
and controlled,'' and now these are the key words, ``that it is 
unimaginable how our principal is not returned,'' Unimaginable 
how the principal could not be returned.
    This is supposed to be an investment at risk. Guaranteed 
return interest. Unimaginable, in your own words, how your 
principal would not be returned. Now, how does one 
realistically say that funds are at risk under those 
circumstances so that Enron could keep Sundance off its balance 
sheet?
    No one here is suggesting that you have got to go out and 
investigate the other guy's balance sheets, but my gosh, this 
is something that you knew. You knew that your investment was 
so subordinated, so unlikely to be reached, so much in your 
control--it was controlled by you. You could terminate that 
joint venture anytime you wanted. It was unimaginable that your 
principal was not going to be returned. Now, you tell me how 
that is an investment which is at risk.
    Mr. Caplan. Well, I would say a few things. First, I think 
it is important to note that this structure was presented to us 
by Enron in exactly this form, and our investment was 
absolutely in a preferred position. It was senior to Enron's 
investment. They absolutely had to lose $700 million. But my 
choice of words would not be ``unimaginable.'' There were many 
circumstances that we ran through----
    Senator Levin. Whose choice of words were they?
    Mr. Caplan. Tim Leroux.
    Senator Levin. And who is he?
    Mr. Caplan. He is someone who works for me.
    Senator Levin. OK. So your employee described this as 
unimaginable.
    Mr. Caplan. But we spent a fair amount of time going 
through scenarios in which we could lose our money in this 
transaction. Now, I will submit to you that they are remote 
scenarios, but nevertheless, they are real. For example, one of 
the assets in this partnership was a paper mill in Canada 
sitting on the St. Lawrence River. If that paper mill blew up 
and caused significant environmental damage, we would have--our 
return would have been subordinated to the liability caused by 
that damage, and that was something we were very concerned with 
in this transaction.
    Senator Levin. Was there insurance on the paper mill, by 
the way?
    Mr. Caplan. I believe that there was insurance on the paper 
mill.
    Senator Levin. So the risk here was that the paper mill 
would blow up. That risk was covered by insurance. Get to some 
real risk here, will you?
    Mr. Caplan. In addition, the way that this transaction was 
structured was presented to us by Enron and it was a 
combination of things. It was a combination of this preferred 
equity investment, which had the full blessing of Arthur 
Andersen, and my understanding was the more important test was 
not just that we had an equity investment, but that we had 
voting rights in the structure, and we had 50 percent of the 
voting rights. We had the ability to control the destiny of the 
entity, and if we were a creditor of the entity, that would not 
be true.
    So I will absolutely submit to you that this is a preferred 
investment. It operates much like many other preferred 
investments out there, and it was not our accounting judgment 
as to how--as to whether this worked or not. This is an area 
of--I would call this joint venture accounting, is an area of 
accounting that there isn't a lot of literature on point and 
the way that our understanding is, that joint ventures are 
accounted for, is that the Big Five accounting--or Big Four 
now--accounting firms that give guidance, and this was Arthur 
Andersen's guidance on how to account for this transaction.
    Senator Levin. If you look at Exhibit 333(d),\1\ which is 
an e-mail to you, Perwein, who is a Citi tax attorney, is 
quoted as saying that ``Sundance was a funky deal accounting-
wise, and was amazed that Enron can get it off the balance 
sheet.'' Do you remember getting this?
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(d) appears in the Appendix on page 290.
---------------------------------------------------------------------------
    Mr. Caplan. I do.
    Senator Levin. Do you have any reason to disagree with 
that?
    Mr. Caplan. With--I am sorry.
    Senator Levin. With the statement that it is amazing that 
they could get this off the balance sheet.
    Mr. Caplan. I am not an accountant. Neither is Mr. 
Perwein----
    Senator Levin. You were aware of this tax attorney's 
conclusion that it was a funky deal accounting-wise and amazing 
that Enron could get it off their balance sheet, is that right? 
You were aware of that?
    Mr. Caplan. Again, I think that is an accounting 
determination made by Arthur Andersen on how the structure 
should work. They were fully aware of all of the terms of the 
preferred investment. I think interestingly in this e-mail, you 
will see later on in it where, ``John C. called. He is most 
concerned about Garden State. I am trying to set up an 
environmental call.'' All this is indicative of our concerns 
about risks in this transaction, albeit remote risks, but real 
risk to our investment in the transaction.
    Senator Levin. And is this not your words, that in Exhibit 
333(t),\1\ that this transaction is structured to safeguard 
against the possibility that we need to contribute our 
contingent equity and to ensure that there is sufficient 
liquidity at all times to repay our $28.5 million investment? 
That was ensured, wasn't it?
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(t) appears in the Appendix on page 310.
---------------------------------------------------------------------------
    Mr. Caplan. Well, if you think about what this was, it was 
a collection of fairly illiquid assets, a couple paper mills, a 
trading business. We were trying to mitigate our risk to the 
extent possible, and to the extent we wanted to get out of the 
transaction, we didn't have creditor's rights to call in event 
of default and accelerate our debt, something like that. We 
only had the position of an equity holder who could force 
effectively a dissolution of the company, at which time the 
assets of the company would have needed to have been 
liquidated. We were concerned that the assets were extremely 
illiquid, so we put in steps to mitigate the illiquidity of the 
assets.
    Senator Levin. Well, it was way more than that, though, Mr. 
Caplan. You talk about liquidating assets. One of those assets 
was an account with $28.5 million in cash which was there to 
protect your $28 million, isn't that correct?
    Mr. Caplan. One of the assets when we closed the 
transaction was $28 million of Enron commercial paper, which is 
a liquid asset. It was absolutely designed to protect our 
ability to get out of the transaction in what I would call a 
timely and efficient manner. But again, all this was vetted 
fully with Enron's accountants, and I think this goes to the--
--
    Senator Levin. I am talking about your accounts. I am 
talking about your advice. Your advice was funky transaction. 
You don't know how they can do it. And you knew the $28 million 
is there in an account. You insisted on it, for you. That is 
money to come back to you, guaranteed. This isn't something 
where you have to liquidate an asset. You don't liquidate 
something that is liquid. It is there, set aside, isolated, 
segregated for Citibank. That is supposed to be an investment 
at risk? You call that mitigating risk? That is not mitigating 
risk, it is eliminating risk on the $28.5 million. It is in a 
segregated account. Only you can touch it. You call that 
mitigation? I call that elimination.
    Mr. Caplan. With respect, Senator, originally, the money 
was in Enron commercial paper, and if they had defaulted the 
day after the transaction, if they had gone into bankruptcy the 
day after this transaction had closed, our $28 million would 
not have been----
    Senator Levin. Was there any suggestion that Enron was 
going to go into bankruptcy at that time?
    Mr. Caplan. No, none at all.
    Senator Levin. You are talking about the possibility that 
they would go into bankruptcy the next day, and you had the $28 
million there segregated for you.
    Mr. Caplan. I am not going to argue----
    Senator Levin. Take a look at Exhibit 327,\2\ Project 
Sundance. Investment in the Sundance partnership is an equity 
investment. However--this is at the bottom of the page, number 
nine. ``However, based on the way the deal is structured, it is 
more like debt rather than equity.'' Would you agree with that?
---------------------------------------------------------------------------
    \2\ Exhibit No. 327 appears in the Appendix on page 255.
---------------------------------------------------------------------------
    Mr. Caplan. Well, I think I would agree in the context that 
Sundance as an entity had no debt, and we had a preferred 
position in effectively a liquidation scenario. So in that 
respect, it was debt-like because it was senior in the capital 
structure to Enron's interest in the transaction.
    Senator Levin. Senior doesn't make it debt.
    Mr. Caplan. Well, if the company were to liquidate and 
there were debt in the company, the debt, being senior in the 
capital structure, would be repaid first. Since there was no 
debt in the company, our interest was the most senior interest 
in the company and, therefore, any liquidation proceeds would 
go to pay off our investment prior to repaying Enron.
    Senator Levin. Whose document is this, Exhibit 327? Is that 
your document? I know it is a Citibank document.
    Mr. Caplan. It is--when we have a transaction that is 
unusual or the first of its kind, we have an approval committee 
called the Capital Markets Approval Committee at which we 
discuss the transaction. This transaction was discussed at the 
Capital Markets Approval Committee----
    Senator Levin. Was that an accurate statement, that based 
on the way the deal was structured, it was more like debt 
rather than equity? Is that accurate?
    Mr. Caplan. It is accurate to the extent that Sundance as 
an entity had no debt. Yes, it is accurate. And understood by 
Enron and their accountants as to that was the structure. I 
think the key thing is, we had risk in the transaction and we 
had voting control, and that was the test laid out by Andersen. 
It was not that our risk was pari passu with Enron's.
    Senator Levin. No one is suggesting that. Let me go back to 
this $28.5 million. Is it correct that a couple days before 
bankruptcy, that you insisted that that $28 million come back 
to Citibank?
    Mr. Caplan. We had, under the transaction documents, as a 
partner in the partnership, a contractual right to call a board 
and dissolve the structure at any point in time, and as Enron 
moved towards bankruptcy, we effectively exercised that right.
    Senator Levin. So your statement a few moments ago that 
what would happen if Enron would go bankrupt the next day, as a 
matter of fact, it did go bankrupt the next 2 days after, many 
months down the road, and you were then able to protect that 
$28 million by terminating the deal, is that correct?
    Mr. Caplan. We were able to exit the transaction prior to 
the bankruptcy.
    Senator Levin. Exit the transaction.
    Mr. Caplan. If the bankruptcy had happened prior to our 
insistence on blowing this transaction up, we would have been 
at risk on that $28 million for----
    Senator Levin. After you knew that it was on the verge of 
bankruptcy, you could get your $28 million just like that, 
couldn't you?
    Mr. Caplan. That was the structure of the transaction.
    Senator Levin. And that is what you call being at risk?
    Mr. Caplan. I will not dispute with you that this is a--
that the risk here was very contingent and remote. 
Nevertheless, it is risk and it was sufficient risk--I think 
the important point is that it was sufficient risk for Andersen 
to reach its conclusion that this joint venture would not 
consolidate on the balance sheet of Enron.
    And I think the paradigm shift that we have implemented in 
our business model now is this kind of transaction would not 
be--we would not execute this kind of transaction today unless 
we felt that there was clear, sufficient disclosure as to the 
net effect of it as to what really goes on here to investors, 
and I think that is the take-away from this. We have learned 
something from this transaction.
    Senator Levin. Well, I hope the world has learned something 
about this transaction, as well, and that is at the time, it 
was improper, not just now. At the time, it was improper.
    Exhibit 333(n),\1\ this is what you wrote. This is from Mr. 
Bushnell, he wrote to Michael Carpenter. This will be my last 
question of this panel in this round. Mr. Bushnell, you wrote 
to Michael Carpenter, who was the head of Global Corporate and 
Investment Bank at the time for Citibank, on May 30, 2001, 2 
days before this deal went through, and here is what you told 
Mr. Carpenter. This is on page two of Exhibit 333(n). ``If you 
recall, this is a complex structured transaction which I have 
refused to sign off on.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(n) appears in the Appendix on page 302.
---------------------------------------------------------------------------
    And then you later said the following. ``The risk 
management has not approved this transaction for the following 
reasons,'' and then one of your reasons, which is the one, two, 
three, fourth bullet, is that ``the GAAP accounting is 
aggressive and a franchise risk to us if there is publicity, a 
la Xerox.''
    This transaction was a franchise risk to Citibank if there 
was publicity, that is what you said in this document. Were you 
telling the truth?
    Mr. Bushnell. Yes, Senator.
    Senator Levin. And yet, you went ahead with this. This is 
what really is so troubling to me from Mr. Prince's testimony 
and otherwise and why the explanation that we have heard this 
morning is so unsatisfying. Well, this is all something in 
hindsight and we were following the rules at the time. Your own 
rules were bent. You made exceptions to them. You identified 
this transaction as one which would actually put the reputation 
of your bank at risk, and you proceeded anyway with this 
transaction. This isn't hindsight, folks. This is a lack of 
foresight on the part of Citibank as to what you were up to.
    How often do you write that a project or a transaction is a 
franchise risk? Is that a fairly common thing?
    Mr. Bushnell. Senator, perhaps I can give some context to 
this memo. First of all, I could have killed this deal and not 
let it go forward. I don't need to write a memo to kill a deal. 
If you read the entirety of the memo, most of this is an alert 
to Mike Carpenter about some process concerns and some internal 
differences between divisions about what to do with the 
transaction, and yes, I do express there are some concerns 
about what the GAAP accounting standard is.
    Senator Levin. If I could just interrupt your answer, that 
is not my question, about concerns over GAAP standards. My 
question to you was, how often do you write that a project or a 
transaction is a franchise risk to us if there is publicity? Is 
that a fairly common conclusion that you reach?
    Mr. Bushnell. I am sorry, Senator. I was trying to get to 
that point. I don't write it often. I sit about ten yards away 
from Mike Carpenter and he and I discussed lots of risk 
transactions, I would say three to five times a day. Some, and 
I will admit that it is not many, have an instance of 
reputational issues that could be there. It is not frequent. I 
normally don't write it down because I didn't--I just walked 
into Mike's room or I called him on the phone.
    In this particular instance, Mike was out of the country 
and I was trying to give him something to look at. That is the 
reason why I wrote it down. It is not frequent, but it is a 
risk issue that we talk about in some transactions.
    Senator Levin. A risk issue is a little bit different from 
saying there is a franchise risk to us if there is publicity. 
Is that something that you said about many transactions that 
have proceeded?
    Mr. Bushnell. Again, Senator, in terms of communications, 
not many, but this isn't the only one that we discussed 
reputational issues.
    Senator Levin. I am trying to go a little bit beyond 
reputational issues. This isn't quite that. This is your 
conclusion that this accounting is--it is not an issue, it is 
your conclusion that accounting is so aggressive it is a 
franchise risk to us. You concluded that----
    Mr. Bushnell. Yes, Senator.
    Senator Levin [continuing]. If it is made public, and yet, 
it proceeded. Do you often proceed with loans, or forget that 
word, this wasn't a loan, really was a loan, but putting aside 
the loan-equity question, let me get to my question. Is it 
common that you have stated or concluded that accounting is so 
aggressive that it is a franchise risk to us if there is 
publicity, and yet the transaction nonetheless was concluded? 
Has that happened frequently?
    Mr. Bushnell. It has not, no.
    Senator Levin. Senator Collins.
    Senator Collins. Mr. Bushnell, what was Mr. Carpenter's 
response to your memo and your concerns about the Sundance 
deal?
    Mr. Bushnell. Senator, I wish I could recall those 
concerns. As I said, Mike was traveling at the time. He and I 
had hundreds of conversations about various risk issues. We 
have looked back at the record. It is clear, I think, that we 
had a conversation. I can't remember the specifics of those 
conversations, or indeed, how I might have paraphrased that 
concern about franchise or reputational risk or what the 
conversations might be.
    Senator Collins. Initially, you refused to sign off on the 
transaction. Did you ultimately approve it?
    Mr. Bushnell. Yes, I did, Senator.
    Senator Collins. And what caused you to change your mind?
    Mr. Bushnell. One of the very things that caused my mind is 
I wanted to talk to Mike Carpenter. As I said, I could have--I 
didn't need to write a memo to not do this deal. The reason why 
I sent the memo to Mike and the reason why I held up on 
approving the deal or declining the deal is I wanted to talk to 
him. I wanted to alert him about several issues that I had 
about the way this transaction came up, the way it was handled, 
and what some of the concerns about it were.
    Senator Collins. Did anyone at the bank direct you to 
approve the transaction?
    Mr. Bushnell. No, Senator.
    Senator Collins. Did Mr. Carpenter provide some sort of 
approval for the transaction?
    Mr. Bushnell. I can't recall it, but I am sure he must 
have. If he didn't want the transaction to go forward, we 
wouldn't have done it.
    Senator Collins. Are you aware that the Subcommittee has 
requested the paperwork authorizing the transaction, but that 
Citigroup to date has failed to locate and provide that 
paperwork?
    Mr. Bushnell. Yes, I am, Senator, and I think that is a 
breach of our policies and procedures. We do have--for an 
equity investment like this, at this size, it required a sign-
off from both the Chief Financial Officer and Mike Carpenter. I 
believe we have provided the Subcommittee with the Chief 
Financial Officer's sign-off, but we don't have Mike 
Carpenter's sign-off in our files.
    Senator Collins. Thank you, Mr. Chairman.
    Senator Levin. You indicated that you remember today that 
you approved this deal?
    Mr. Bushnell. Yes, Senator.
    Senator Levin. Because you told our staff when you were 
interviewed by them that you did not recall approving the deal. 
Has something changed between that conversation and today?
    Mr. Bushnell. Yes, Senator. I have seen subsequently e-mail 
results that give me a conclusion--I can't recall verbally 
saying, ``I am OK with this deal,'' but there is an e-mail 
trail that says that I did talk with one of the transactors, a 
person in Mr. Caplan's division, and that we had agreed to go 
forward with the transaction.
    Senator Levin. According to this memo that I think you may 
be referring to, which you say refreshed your memory, I believe 
this is Exhibit 333(r),\1\ ``If you recall, Mike Carpenter was 
out of the country the day the transaction closed''--this is 
dated June 29, 2001. The approval memo was given to Mike's 
assistant and faxed to him. Mike then had a conversation with 
Dave Bushnell, who shared with us Mike's feedback. We proceeded 
to close the transaction that day, given the absence of 
instructions from Mike or Dave to the contrary.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(r) appears in the Appendix on page 308.
---------------------------------------------------------------------------
    Apparently, the transaction went through not because you 
approved it but because you didn't give any instructions to the 
contrary, is that true, or did you approve it actually?
    Mr. Bushnell. I can't recall verbally saying I approved it. 
I take this memo to mean that I had a conversation with the 
transactors and said that I had talked with Mike and that met 
the requirements or my criteria for going forward.
    Senator Levin. If you talked to Mike, what did he say?
    Mr. Bushnell. Senator, as I say, I wish I could recall 
that. I really do. It would make things a lot easier for all of 
us. And in our new policies, this is the type of thing that we 
want to have written down so that we can recall how we got to 
conclusions or overcame issues that are brought up about 
structured finance transactions. But I can't recall the nature 
of that conversation.
    Senator Levin. This is an unusual transaction. You just 
testified it is uncommon that there be a transaction where you 
would say there is a reputational risk serious to your bank, 
could actually risk your bank's reputation if made public. And 
yet, you went ahead and approved it. You can't remember the 
conversation with Carpenter. The approval document is missing. 
There are a number of very disturbing and unusual aspects to 
this transaction. It would seem to me that something which is 
this unusual should be remembered by you in terms of your 
conversation with Carpenter.
    Mr. Bushnell. Senator, I wish I could remember it, but as I 
said, I had three to five conversations a day on all 
significant risk transactions. This was 18 months ago, and I 
just can't recall having the conversation or, obviously, any 
specifics of the conversation if I had it.
    Senator Levin. If you look at the first page of Exhibit 
333(n),\1\ which is an e-mail that Alan MacDonald, Head of the 
Global Relationship Bank, sent to Michael Carpenter the day 
after you wrote your memo, that previous memo we talked about. 
In it, he forwards Mr. Carpenter another copy of the memo and 
writes the following. ``We, Bill Fox and I, share risk's view 
and, if anything, feel more strongly that suitability issues 
and related risks, when coupled with the returns, make it 
unattractive. It would be an unfortunate precedent if both GRB 
relationship management and risk's views are ignored.''
---------------------------------------------------------------------------
    \1\ Exhibit No. 333(n) appears in the Appendix on page 302.
---------------------------------------------------------------------------
    Mr. Fox, Mr. MacDonald writes that you shared the views of 
Mr. Bushnell. Did you have concerns about this project?
    Mr. Fox. I had some questions about the project, mostly 
surrounding the returns we were attempting to achieve. I was 
concerned that it was going to potentially disenfranchise 
another product area of ours called capital structuring. 
Initially, I had raised some issues concerning the fact that I 
didn't understand how the accounting was able to achieve 
Enron's objectives. Those were the areas of my concern.
    Senator Levin. Were you satisfied?
    Mr. Fox. With respect to the accounting question, I 
received an e-mail back from an individual that confirmed that 
Arthur Andersen had reviewed and utilized this type of 
structure elsewhere.
    Senator Levin. And what about the reference to the 
franchise risk if there is publicity?
    Mr. Fox. I had not seen Mr. Bushnell's memo until after the 
fact. My communication, though I don't recall it, must have 
been with Mr. MacDonald directly.
    Senator Levin. So here, we have got serious concerns raised 
by Mr. Bushnell and Mr. Fox about the accounting associated 
with it. You, at least, Mr. Bushnell, about the risk to the 
bank's reputation. You, Mr. Bushnell, as head of risk 
management, refused to sign off on the project because, in 
part, the aggressive accounting did create a franchise risk if 
it was made public, if it came to light. And yet, the deal went 
through, helped Enron to make its balance sheet look a lot 
better than it was entitled to look, and I am afraid that that 
story is a sad story.
    This is not just a story about should we make banks look at 
the books of clients. This is a story of how a bank with 
serious concerns, even to its reputation, was willing to 
proceed with a transaction which its own people thought was 
incredible in terms of its accounting techniques, and 
nonetheless, you went ahead and did it. You did it for a couple 
of reasons, I assume. One was there was money in it, and two, 
you wanted to keep a good client happy.
    But I do think it is important as we look at what our 
regulators are going to do about it and what your new 
procedures are to hopefully stop this from happening, that we 
recognize that these are problems that were raised at the time. 
This is not retroactive applying new standards. This is looking 
at how a bank of high reputation that should be a pillar in our 
economy stooped pretty low. We have got to learn from that 
lesson. The bank says it has. I am glad to hear you have. I 
hope you have. For the sake of our economy, I even pray you 
have, because this has got to stop.
    We are going to rely to some extent on self-regulation, but 
we cannot rely totally or even to a great degree on self-
regulation because it hasn't worked in the past. There is too 
much temptation out there, to please customers and to make 
money, and I guess those are one and the same thing. And so we 
are going to need to talk to our regulators, and we will a 
little later on today, after we talk to Chase, as to how we, as 
a government, can be sure that these kind of activities are not 
repeated.
    I want to thank our witnesses. Again, I know this was a 
difficult day for you to get here. We also want to again repeat 
that Citibank as well as Chase has cooperated in our 
investigation. You have provided us with documents, obviously, 
and you have appeared. You have come and been interviewed by 
us, and those are important pluses on the ledger. We thank you 
and you are excused.
    Mr. Bushnell. Thank you, Senator.
    Mr. Caplan. Thank you, Senator.
    Mr. Fox. Thank you, Senator.
    Senator Levin. We are going to take a 5 minute recess.
    [Recess.]
    Senator Levin. We will come back to order. I would like to 
call now our second panel of witnesses. I want to thank all of 
you, as I did our first panel, for making it here in this 
weather. It was bad enough when you got here. I think it is 
worse now. I don't know if that is good news or bad news, but 
it is the fact, apparently.
    We want to welcome Michael Patterson, who is the Vice 
President of J.P. Morgan Chase and Company; Andrew Feldstein, 
the Managing Director and Co-Head of Structured Products and 
Derivatives Marketing at J.P. Morgan Chase; Robert Traband, 
Vice President of J.P. Morgan Chase in Houston; and Eric 
Peiffer, a Vice President of J.P. Morgan Chase in New York.
    Pursuant to Rule 6, witnesses who testify before the 
Subcommittee are required to be sworn and so I would ask you 
all to please stand and raise your right hand.
    Do you swear that the testimony that you will give before 
this Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Patterson. I do.
    Mr. Feldstein. I do.
    Mr. Traband. I do.
    Mr. Peiffer. I do.
    Senator Levin. As I mentioned before, a minute before the 
red light comes on signaling that you should end your 
testimony, you will be given a green to yellow light, which 
will give you the opportunity to conclude your remarks. We will 
print testimony in its entirety in the record, so we would ask 
you to limit your oral testimony to no more than 10 minutes.
    Mr. Feldstein.
    Mr. Patterson. Mr. Chairman, with your permission, may I 
begin?
    Senator Levin. Sure. Do you want to start off?
    Mr. Patterson. Yes, sir.
    Senator Levin. Sure. Mr. Patterson.

   TESTIMONY OF MICHAEL E. PATTERSON,\1\ VICE CHAIRMAN, J.P. 
          MORGAN CHASE AND COMPANY, NEW YORK, NEW YORK

    Mr. Patterson. Mr. Chairman and Members of the 
Subcommittee, my name is Michael Patterson. I am a Vice 
Chairman of J.P. Morgan Chase and head of the firm's Policy 
Review Office since August of this year.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Patterson appears in the Appendix 
on page 105.
---------------------------------------------------------------------------
    I am joined today by my colleagues Andrew Feldstein, a 
Managing Director and Co-Head of Structured Products and 
Derivatives Marketing since March of this year; Robert Traband, 
a Vice President of J.P. Morgan Chase; and Eric Peiffer, also a 
Vice President of the bank. After my statement, Mr. Traband 
will read a joint statement for himself and Mr. Peiffer, and 
with the permission of the Subcommittee, Mr. Feldstein will 
then give a brief opening statement.
    Senator Levin. That is fine.
    Mr. Patterson. I am pleased to be here to discuss the 
firm's policies and practices regarding transactions with 
publicly traded U.S. companies. As requested in your invitation 
letter, I will address policies and practices relating most 
particularly to structured finance, accounting, and tax 
matters.
    J.P. Morgan Chase and its predecessor firms have long had 
in place policies and procedures governing transactions with 
clients. These policies and procedures address, among many 
other subjects, compliance with external legal and regulatory 
requirements, as well as the aspects of the transaction that 
could raise reputation risk for the firm. These policies and 
procedures are periodically reviewed and updated to take 
account of our experience and external developments.
    Structured finance encompasses a wide variety of 
transactions and instruments designed to help clients achieve 
their risk management, financing liquidity, and other financial 
objectives within the framework of applicable and often complex 
legal, regulatory, tax, and accounting rules and principles. 
Securitization, special purpose vehicles, and derivatives are 
among the well-recognized techniques used to allocate risks, 
capital, and cash flows to meet client objectives.
    To make sure that our structured finance transactions 
comply in all respects with that framework, the business 
transaction approval process requires adherence to applicable 
policies, as well as review and sign-off from internal legal, 
conflicts, tax, and accounting policy groups, among others, 
such as credit and market risk management. Transactions 
involving a special purpose vehicle receive special scrutiny 
and must comply with a special purpose vehicle policy 
administered by a committee to ensure that every such entity is 
properly approved, documented, and monitored.
    The primary responsibility for adherence with all policies 
and procedures, including those designed to address reputation 
risk, lies with the business units conducting the transactions 
in question. But in addition to this framework, J.P. Morgan 
Chase in August of this year put in place a new set of 
procedures designed to reinforce our focus on reputation risk 
and provide a senior level of review of transactions with 
clients.
    Business units are required to submit to regional policy 
review committees proposed transactions that may raise 
reputation risks for any reason, but specifically including 
transactions where a material objective is to achieve a 
particular accounting treatment, those designed to achieve a 
particular tax treatment, those where there may be material 
uncertainty about legal or regulatory treatment, those with 
highly complex structures or cash flow profiles, and those 
which have as a significant purpose or effect the providing of 
financing, but which take the form of derivatives.
    The members of the regional policy review committees, 
including the Americas Committee, are senior representatives of 
the business and the support units, including tax and 
accounting policies, in the region. Transactions are reviewed 
from every angle that could affect reputation risk, but 
including specifically, where applicable, the intended 
financial disclosure of the transaction by the client, and the 
committee approves, rejects, or requires further clarification 
or changes in the transaction. These committees and their 
deliberations are overseen by a Policy Review Office, which I 
lead, and transactions can be formally escalated by the 
committees to me.
    We at J.P. Morgan Chase believe that one of the tests of 
our leadership in the financial marketplace is to learn from 
our experiences and to adjust our practices in light of these 
experiences and the changing environment. The core lessons we 
have learned are, one, that we cannot rely solely on our 
clients and their experts to determine that our transactions 
with them will be properly accounted for and disclosed; two, 
that we need to make sure that our transactions with clients 
are not misused to deceive investors or others; and three, that 
even where these tests are met, we need to consider carefully 
whether transactions could be viewed adversely in a way that 
would be harmful to our reputation for integrity, fair dealing, 
and doing first-class business in a first-class way.
    I believe that the policy review process we have put in 
place and which I have just outlined, together with our 
business transaction approval policies and procedures, are well 
designed and are already serving to enable us to meet these 
standards.
    As a final note, I would add that as the biggest corporate 
lender in America and as one of the largest investment 
managers, we have as much interest as anyone in increased 
transparency and disclosure and integrity in financial markets. 
We have our money and our investment management clients' money 
at risk in our belief that those financial statements are 
accurate.
    I would, of course, be happy to respond to any questions 
the Chairman or other Members of the Subcommittee may wish to 
put to me regarding the policy review process. Thank you, 
Senator.
    Senator Levin. Thank you very much, Mr. Patterson.
    Mr. Traband, I believe you were going to proceed next.

TESTIMONY OF ROBERT W. TRABAND,\1\ VICE PRESIDENT, J.P. MORGAN 
   CHASE AND COMPANY, HOUSTON, TEXAS; ACCOMPANIED BY ERIC N. 
  PEIFFER, VICE PRESIDENT, J.P. MORGAN CHASE AND COMPANY, NEW 
                         YORK, NEW YORK

    Mr. Traband. Thank you, Mr. Chairman. My name is Robert 
Traband and I am currently a Vice President of J.P. Morgan 
Chase Bank. I am making a joint statement on behalf of myself 
and Eric Peiffer.
---------------------------------------------------------------------------
    \1\ The joint prepared statement of Mr. Traband, Mr. Peiffer, and 
Mr. Feldstein, appears in the Appendix on page 107.
---------------------------------------------------------------------------
    Let me say at the outset, Mr. Chairman, that while we 
believe that our participation in the Fishtail and Flagstaff 
transactions was perfectly legal and followed established 
rules, had we known then what we know now about Enron's 
practices, we would not have engaged in these transactions with 
Enron. We would not have accepted at face value, as we did in 
2000 and 2001, Enron's statements that its requests to 
structure Fishtail or Flagstaff in particular ways were 
designed to properly achieve Enron's desired financial 
statement treatment of the transactions in accordance with 
Generally Accepted Accounting Principles.
    In addition, we would have wanted to know more about the 
aspects of the transactions in which the firm was not involved. 
But at that time, we, like many other parties, dealt with Enron 
in the belief that it was one of the most respected companies 
in America and that it was not our role to second guess our 
counterparties' accounting or other structuring determinations.
    In the case of Enron, the firm suffered substantial injury, 
not only by the loss of hundreds of millions of dollars from 
its own transactions with Enron, but also from the injury to 
its reputation from the erroneous suggestions of some that the 
firm was involved in Enron's wrongdoing. For these and many 
other reasons, we regret that we ever dealt with Enron.
    Let me now turn to the specific transactions with respect 
to which the Subcommittee has requested information from the 
firm. The first of these transactions has been referred to by 
the Subcommittee and others as Fishtail. This transaction was a 
$41.5 million loan commitment extended by the firm in December 
2000 to a special purpose entity named Annapurna LLC, 
established by Enron. This commitment expired by its terms in 
June 2001 and was never funded.
    Enron informed the firm that in anticipation of its 
ultimate contribution of the existing pulp and paper business 
to a joint venture, Enron wanted to deconsolidate its pulp and 
paper business from the rest of its businesses. Enron also told 
us that in consultation with its accounting advisors, it had 
devised a structure to achieve this objective. Enron would 
contribute its economic interests in the present and future 
contracts of the pulp and paper business to a newly formed 
entity, Fishtail, which would be jointly owned by Enron and 
Annapurna.
    As I have said, the firm's participation in this 
transaction was limited to a 6-month commitment to make a bank 
loan to Annapurna. The firm had no other involvement in the 
transaction. The decision to make a commitment to Annapurna was 
a reasonable credit decision and it is not at all unusual, as 
banks often make loan commitments with the expectations that 
they will not be funded.
    The firm acted as a leader--a lender in this transaction 
and, consistent with industry practice, it did not make any 
determination whether completion of the transaction would 
achieve Enron's accounting objective, a deconsolidation of 
Enron's pulp and paper business. Such determinations were 
properly for Enron to make with the advice and assistance of 
its internal accountants and external auditors. In this 
connection, I note that the Subcommittee staff report states 
that Arthur Andersen actually did approve this transaction.
    In December 2000, when the Fishtail transaction was agreed 
to, the firm had no reason to believe that any such 
determinations were not being made by Enron and/or Arthur 
Andersen, which was then one of the Nation's premier accounting 
firms, in accordance with Generally Accepted Accounting 
Principles.
    There is one final point I would like to make about the 
Fishtail transaction. It appears that Fishtail included a 
broader set of transactions by Enron to effectuate not just the 
deconsolidation of Enron's pulp and paper trading business, but 
to recognize income in connection with the sale of those 
assets. The firm was not involved in these other transactions, 
and indeed was told very little about them by Enron or anyone 
else, for that matter.
    The Subcommittee has also asked for information concerning 
the firm's understanding of and participation in the Slapshot 
project, particularly with regard to the Flagstaff transaction. 
As I will explain in greater detail, Slapshot was the name 
given by the firm to a generic form of transaction intended to 
permit a loan by a U.S. lender to a Canadian borrower, to be 
structured in a manner that would provide advantageous tax 
treatment to the Canadian borrower under Canadian law.
    Flagstaff was the name under which a specific transaction 
with Enron was undertaken in June 2001 to provide long-term 
refinancing for the acquisition of a Canadian pulp and paper 
mill, Stadacona, acquired by a joint venture in which Enron was 
a equity participant. In short, Flagstaff was an actual 
transaction; Slapshot was not.
    As the Subcommittee is aware, there are substantial 
differences in tax codes of other countries that taxpayers, 
including both individuals and businesses, may lawfully and 
properly take advantage of. Such a situation existed under 
Canadian tax law, but before proposing the transaction to any 
client, the firm's structured finance group solicited and 
received a written opinion of an independent and highly 
regarded Canadian law firm setting forth the likely tax 
consequences of that structure under Canadian law. Ultimately, 
the firm obtained written opinions from two leading Canadian 
law firms that the structure and the Canadian tax benefits it 
provided were legal and valid.
    As I have indicated, the Flagstaff transaction had its 
genesis in the planned purchase of the Stadacona Canadian paper 
mill by CPS, a Canadian corporation owned by a joint venture, 
Sundance, between Enron and another party. The firm did not 
participate in the formation of the Sundance joint venture. 
Documents shown to employees by the firm by the Subcommittee 
staff during interviews in preparation for this hearing reveal 
that there were many aspects of the structure and funding of 
the joint venture that were completely unknown to us. Indeed, 
at the time of the Flagstaff transaction, the firm did not know 
the identity of Enron's partner in the joint venture.
    In January 2001, representatives of the firm met with Enron 
to present a proposal under which a group of banks would make a 
loan to finance the acquisition of the mill. During the 
meeting, the firm advised Enron that it had concluded, based on 
the opinion of counsel, that the loan transaction could be 
structured in a manner that would provide advantageous tax 
treatment to a Canadian borrower under Canadian law. Enron 
informed the firm's representatives that Enron was aware of and 
had itself already devoted substantial attention to analyzing a 
substantially similar Canadian tax structure.
    Enron ultimately selected the firm to lead the bank group, 
but opted to complete the acquisition of the Stadacona mill in 
March 2001 with a bridge loan of approximately $375 million 
provided by Enron. The Flagstaff transaction was thereafter 
completed in June 2001 in order to repay the bridge loan and 
provide the long-term debt financing. The Flagstaff loan 
transaction was structured in a manner intended to permit the 
realization of the Canadian tax benefits by the Canadian 
borrowers. To the best of the firm's knowledge, this structure 
did not provide otherwise unavailable U.S. tax benefits to any 
party. We understand that Enron obtained and relied upon its 
own written opinion from Canadian tax counsel and that the 
anticipated Canadian tax benefits could and should be realized 
under the structure.
    As the Subcommittee is aware, the Flagstaff structure is 
highly complex, and among the several transactions that 
comprise the structure was an intraday loan of approximately $1 
billion provided by the firm to Flagstaff. It also involved two 
special purpose entities created by Enron or its affiliates. 
The complexity of the Flagstaff financing and the legal 
documentation required to implement it was necessitated by 
Canadian tax considerations and were undertaken in reliance of 
the opinions of Canadian tax counsel to facilitate realization 
of the Canadian tax benefits.
    As the Subcommittee also is aware, the credit support for 
the loan was provided by Enron, principally through a total 
return swap and certain supporting transactions, rather than as 
originally contemplated, a guarantee by Enron. This change was 
specifically requested by Enron. One or more members of our 
team understood at the time that a principal reason for Enron's 
position on this respect was that Enron had concluded that a 
guarantee might require consolidation of the entire Sundance 
joint venture, the assets of which included CPS and the 
Stadacona mill.
    The firm understood that the use of a total return swap to 
facilitate the continued deconsolidation of the joint venture 
had been vetted by Enron with its external auditors, Arthur 
Andersen, and had been approved by them. The firm did not 
attempt to second guess this accounting judgment. As I have 
noted earlier, under applicable law and practice, each party is 
properly responsible to ensure that it correctly accounts for 
the transactions to which it is a party. At the time, the firm 
had no reason to believe that any such determinations were not 
being made by Enron and its external auditors in accordance 
with Generally Accepted Accounting Principles.
    Consequently, from the firm's standpoint, the issue 
presented by Enron's decision not to provide a guarantee was 
whether the total return swap provided sufficient credit 
support for Flagstaff loans, that the new arrangement could 
prudently be accepted by the banks in lieu of a direct Enron 
guarantee. Ultimately, we and the other members of the bank 
group each concluded that the total return swap provided 
adequate credit support.
    This concludes my statement, Mr. Chairman. I am happy to 
answer any questions.
    Senator Levin. Mr. Peiffer, you are not going to give a 
statement at this point?
    Mr. Peiffer. It was a joint statement on behalf of both of 
us.
    Senator Levin. Mr. Feldstein.

TESTIMONY OF ANDREW T. FELDSTEIN,\1\ MANAGING DIRECTOR, CO-HEAD 
  STRUCTURED PRODUCTS AND DERIVATIVES MARKETING, J.P. MORGAN 
             CHASE AND COMPANY, NEW YORK, NEW YORK

    Mr. Feldstein. Thank you, Mr. Chairman. My name is Andrew 
Feldstein. As Mr. Patterson said, I am a Managing Director at 
J.P. Morgan Chase, and since March of this year, I have been 
the Co-Head of our Structured Products and Derivatives Group in 
North America. In addition, I work closely with Mr. Patterson 
on the firm's Policy Review Office, designing and implementing 
the policies to guard against participation in transactions 
that don't comport with our standards for integrity and our 
commitment to transparent financial markets.
---------------------------------------------------------------------------
    \1\ The joint prepared statement of Mr. Traband, Mr. Peiffer, and 
Mr. Feldstein, appears in the Appendix on page 107.
---------------------------------------------------------------------------
    I would like to say four things. First, based on my review 
of the facts from this Subcommittee's report as well as from my 
internal inquiries, I am convinced that neither Mr. Traband nor 
Mr. Peiffer nor anyone else at J.P. Morgan Chase knowingly 
aided and abetted Enron's apparently deceptive activities.
    Second, Mr. Chairman, you mentioned earlier today the need 
to root out corruption in financial statement presentations. We 
agree with you 110 percent. We think it is incumbent upon all 
participants in our capital markets to combat that type of 
conduct at every turn. We are with you.
    Third, what has changed? The processes that our firm has 
implemented and the culture that we are endeavoring to create 
at all levels of the firm are meant to avoid our firm's 
participation in transactions contrary to the principles of 
integrity and transparency.
    One thing in particular bears noting here. We now insist 
not only everyone that works for me in structured finance, but 
everyone in the firm, to ask questions, more questions, and 
more specific questions than were commonly asked 1 year ago. We 
no longer rely on the assurances of clients or their outside 
advisors when the facts and circumstances of proposed 
transactions should give us pause.
    I like to think that senior management chose people like 
Mr. Patterson and me to play a big part in this cultural 
evolution because we have the ability to be real thought 
leaders and we can work with all professionals in the firm to 
identify the indicia of transactions that must be thoroughly 
questioned.
    Finally, let me end with this. The fact that things are 
changing, whether internally at firms like ours or with the 
accounting rules, that is evidence of what is good in the U.S. 
capital markets. Participants join together with the 
encouragement of committees like yours to help make the markets 
work even better.
    I appreciate being given the opportunity to appear before 
you today and I look forward to answering any questions. Thank 
you.
    Senator Levin. Thank you all.
    Mr. Peiffer, let me start with some questions to you. You 
worked, as I understand it, on the implementation of the 
Slapshot deal and the negotiations with Enron, is that correct?
    Mr. Peiffer. That is correct.
    Senator Levin. As I indicated in my opening statement, I 
believe the details of that structure show it to be a sham and 
I would like to go through the $1 billion so-called loan that 
Chase, through an SPE or special purpose entity that it created 
called Flagstaff, made to the Enron special purpose entity 
called Hansen.
    The $1 billion that Chase sent to Flagstaff, which again 
was under its control, was returned to it on the same day, as a 
matter of fact, within a period of a few hours or even a few 
minutes, and I want to look at some slides that show the 
general schematic of the transaction.
    First, step one. Chase provided a $1 billion so-called 
daylight overdraft loan to Flagstaff, its own special purpose 
entity. That is a loan which existed for just a few hours, if 
that long.
    This is, I believe, Exhibit 303(a),\1\ if you want to take 
a look in your book. It may be hard for you to see that far. So 
step one, at the bottom right, a $1 billion loan from Chase to 
Chase's special purpose entity, Flagstaff. That is the daylight 
overdraft loan for the few hours.
---------------------------------------------------------------------------
    \1\ Exhibit No. 303(a) appears in the Appendix on page 190.
---------------------------------------------------------------------------
    Step two, Enron gets the $1 billion daylight overdraft from 
Citibank, runs the money through a few of Enron's subsidiaries, 
and puts it in an escrow account at Chase, and that escrow 
account you will see there is called Newman and that is another 
Enron special purpose entity.
    Step three, Flagstaff at that time, and only then, releases 
the Chase $1 billion and it goes through a number of Enron 
entities to Citibank. So Citibank now has got its $1 billion 
back a few moments later. And then as soon as Flagstaff 
releases the Chase $1 billion, Newman releases the $1 billion 
from the escrow account to Flagstaff and then back to Chase. 
Now, all of these transactions occur within a matter of hours, 
some within a matter of minutes. One billion dollars this way, 
a billion dollars, that way.
    Exhibit 352 \1\ is the funds flow schedule that was 
attached to the opinion of Enron's tax counsel, who is also 
your tax counsel. Notations next to the funding steps show that 
certain steps will be completed by certain times, and it shows 
that the $1 billion would be returned to Chase between 10 a.m. 
and 12 noon the same day that it left Chase.
---------------------------------------------------------------------------
    \1\ Exhibit No. 352 appears in the Appendix on page 525.
---------------------------------------------------------------------------
    Chase released over $1 billion from its left hand, took the 
money back with its right hand, and you designed the structure 
so that even though $1 billion was returned almost 
instantaneously, at least on the same day, there would be an 
appearance to Canadian tax authorities that there was an 
outstanding loan of $1.4 billion.
    Now, Mr. Peiffer, isn't it the case that the amount of the 
$1 billion, $1.039 billion to be precise, was mathematically 
derived to ensure that interest payments made on the $1.4 
billion apparent loan would equal the principal and interest 
payments on the $375 million loan?
    Mr. Peiffer. That is correct.
    Senator Levin. So the $1.03 billion amount wasn't derived 
from some independent business need, it was simply the number 
required to make the tax transaction work, is that correct?
    Mr. Peiffer. It was the number required to make the tax 
transaction work as it was intended.
    Senator Levin. Now, the company receiving the loan, the so-
called loan, was Hansen, a Nova Scotia unlimited liability 
corporation which had been established by Enron. Do you know 
when Hansen was incorporated?
    Mr. Peiffer. Where it was incorporated? I am sorry.
    Senator Levin. When Hansen was incorporated.
    Mr. Peiffer. Nova Scotia, I believe.
    Senator Levin. No, when, not where.
    Mr. Peiffer. I don't know when it was incorporated.
    Senator Levin. Well, I will tell you when it was formed, 
less than 2 weeks before this transaction took place. That was 
also the same day that Newman, the company that formed the 
escrow account, was created.
    Given how new Hansen was, do you believe that it was a 
company with an identified business purpose that warranted a $1 
billion loan?
    Mr. Peiffer. I think here, it depends on what context you 
are defining business purpose.
    Senator Levin. The normal.
    Mr. Peiffer. In my understanding----
    Senator Levin. Just normal understanding.
    Mr. Peiffer. My understanding is that Enron set up both 
Hansen and Newman to help effect this transaction and that for 
Canadian tax purposes, based on advice we and they received 
from our Canadian tax counsel, that the contracts they entered 
into constituted a business purpose.
    Senator Levin. So these were set up for this transaction, 
these companies?
    Mr. Peiffer. That is my recollection, yes.
    Senator Levin. What was the commercial business purpose 
that was associated with this $1 billion loan to Hansen?
    Mr. Peiffer. The loan to Hansen was actually $1.4 billion, 
and as you----
    Senator Levin. I want to talk about the $1 billion portion 
of it. What was the commercial business purpose associated with 
that $1 billion, which was the majority of the $1.4 billion?
    Mr. Peiffer. I think it is hard to talk about, with all due 
respect, just the $1 billion portion, since it was one $1.4 
billion loan. I will acknowledge that, of course, as you did, 
that $1 billion came from J.P. Morgan into Flagstaff and that 
J.P. Morgan was repaid that same day, and so at the end of the 
day, there was $375 million remaining in this joint venture.
    Senator Levin. Which was the real loan, correct?
    Mr. Peiffer. Yes, the real loan, the economic loan is what 
I would prefer to call it. However, if you look at the actual 
contracts, there actually was a $1.4 billion loan. Those were 
actual contracts that continue to be respected from a legal 
perspective to this day, and in addition to that, from a 
Canadian tax perspective, which follows much more form over 
substance type of regime, my understanding, not being a 
Canadian tax lawyer, but given the advice that we are given, 
that the Canadian tax advisers would respect that as a $1.4 
billion loan.
    To answer specifically your question as to what the 
business purpose is, the business purpose of this transaction 
as a whole was to provide financing to Enron in a tax 
advantageous way, and the $1 billion----
    Senator Levin. Tax advantageous way----
    Mr. Peiffer [continuing]. And the $1 billion helped with 
that.
    Senator Levin. That was the tax advantageous part of the 
$1.4 billion?
    Mr. Peiffer. I think the right way to say it is that it did 
help with the making, of course, of the $1.4 billion loan, and 
that, taken together with the other contracts, given the advice 
that we were given from Canadian tax counsel, helped to 
generate the Canadian tax benefits that were intended.
    Senator Levin. But the $1 billion was the tax advantage 
portion, was it not, of the $1.4 billion? That is what created 
the tax advantage.
    Mr. Peiffer. The $1 billion helped to create the tax 
advantage.
    Senator Levin. Was there any other tax advantage, other 
than what was created by the $1 billion?
    Mr. Peiffer. There were only Canadian tax advantages 
generated with respect to the full $1.4 billion loan 
interacting with the other contracts.
    Senator Levin. But I am saying, if it had just been the 
economic loan, as you put it, the business loan of $375 
million, there would not have been any tax advantage from that, 
would there?
    Mr. Peiffer. Right. I think it is fair to say that if it 
were only a $375 million loan, that Enron would have received 
tax deductions on that $375 million loan and that is it.
    Senator Levin. The interest on it?
    Mr. Peiffer. Yes.
    Mr. Feldstein. May I add something, Mr. Chairman?
    Senator Levin. I would rather not. I want to just keep 
going with Mr. Peiffer and then you can come in a little later, 
if you like.
    Mr. Peiffer, would Chase have approved the $1 billion loan, 
that portion of the $1.4 billion loan to Hansen, if it had not 
been assured that it would receive the money back immediately 
from an escrow account held by Enron?
    Mr. Peiffer. I think it is fair to say it would not. From a 
credit perspective, Chase obviously would be concerned about 
getting paid back that amount of money, and so felt more 
comfortable if Enron was either paying to us $1 billion first 
via a separate transaction, and preferably through an escrow 
account, which I recall is what--where Newman had the money 
prior to paying to Chase under the subscription assumption 
agreement.
    Senator Levin. So is it fair to say, then, that the $1 
billion portion of that loan to Hansen would not have been made 
by Chase unless you knew that there was money in escrow to 
immediately pay that money back to you, is that fair?
    Mr. Peiffer. That is fair.
    Senator Levin. Now, Mr. Peiffer, you are listed on the 
incorporation papers of Chase's special purpose entity 
Flagstaff as Flagstaff's Vice President, and Mr. Traband, you 
are listed as the Treasurer of Flagstaff. So as corporate 
officers of Flagstaff, both of you, with fiduciary duty to the 
company, I take it that you would not have felt comfortable 
loaning $1 billion to Hansen if you didn't know that the same 
amount of money was already in an established escrow physically 
located at Chase and that Chase would immediately receive the 
money back from Enron, is that a fair statement? You wouldn't 
possibly be handing $1 billion out to this new company without 
being darn sure that that $1 billion was coming right back to 
you, is that fair to say?
    Mr. Peiffer. I think it is fair to say we would go to 
measures to make sure that $1 billion was repaid.
    Senator Levin. Mr. Traband, do you agree with that?
    Mr. Traband. Yes. We understood the full scope of the 
transaction.
    Senator Levin. Now, even though the $1 billion, then, of 
the so-called $1.4 billion was already returned, you have 
asserted that the--Mr. Feldstein, did you want to interrupt at 
this point?
    Mr. Feldstein. No, I think I will wait.
    Senator Levin. OK. Even though the $1 billion was already 
returned, you nonetheless have asserted in your testimony that 
the tax deduction for interest on the entire $1.4 billion was 
allowed in Canada, and Chase has put a great deal of emphasis 
on that assertion in its statements. I am aware that a Canadian 
law firm informed Chase that Slapshot would be acceptable. 
However, that same law firm had provided services to Enron and 
told their client that Slapshot was likely to attract scrutiny 
by Revenue Canada.
    Were you aware of the fact that advice was given, by the 
same lawyer who advised you, to Enron that this transaction 
would attract scrutiny by Revenue Canada, Mr. Peiffer?
    Mr. Peiffer. At the time of this transaction, I was not 
aware. I have since become aware. But to comment on that, I 
don't think it necessarily would be surprising to say that this 
transaction or any necessarily complex transaction with tax 
advantages would--might invite some scrutiny.
    Senator Levin. But you designed the structure to be hidden 
from authorities, Canadian authorities. For example, Flagstaff, 
which is your special purpose entity, was concerned because the 
$375 million that it received from the bank consortium had a 
different interest rate than the so-called $1.4 billion loan, 
so Chase could lose money.
    And so Enron and Chase considered alternatives to avoid 
that risk, and Exhibit 344,\1\ if you will turn to that, 
contains a chart depicting various alternative strategies to 
alleviate Chase's interest rate risk. The chart on page 12 of 
that Exhibit 344 addresses alternative one under this section, 
entitled ``Advantages.'' Advantages--there were three 
alternatives you were looking at to address your interest rate 
risk, three alternatives.
---------------------------------------------------------------------------
    \1\ Exhibit No. 344 appears in the Appendix on page 396.
---------------------------------------------------------------------------
    Alternative one had the advantage of not having a road map 
for Revenue Canada, and to read the exact words there, ``No 
road map for Revenue Canada. No swap by Enron on economic 
interest.''
    Now, a few pages later in Exhibit 344 is a chart that 
summarizes all three alternatives. One of the advantages of 
alternative two--excuse me, one of the disadvantages of 
alternative two is that it leaves a potential road map. Do you 
see that on page 15, under alternative two, disadvantages?
    Mr. Peiffer. Yes, I do.
    Senator Levin. Potential road map. Who does it leave a 
potential road map for? That same Revenue Canada.
    And then looking at the disadvantages listed for 
alternative three, it lists under disadvantages, possible road 
map for Revenue Canada with respect to these alternatives. So 
it clearly was your design and your joint decision with Enron, 
is it not correct, that you wanted to avoid providing a road 
map to Revenue Canada, is that a fair statement?
    Mr. Peiffer. Well, what I think is unfair is to say that 
the transaction was designed to avoid scrutiny. I think with 
any tax advantaged transaction that any company would do, there 
is an inherent desire to avoid highlighting the transaction. 
This, in particular, the interest rate swap, I don't think had 
on the margin very significant ability to highlight or not 
highlight the transaction.
    As you can see, there are a number of boxes and arrows, so 
to speak, with the transaction. I think that if the transaction 
was to be audited or not audited based on that, and to isolate 
it to the interest rate swap, I don't believe was the case.
    I mean, it was one of many advantages or disadvantages 
under each alternative that we considered and Enron ultimately 
ended up choosing the alternative based on whether it felt it 
could get comfortable with taking on additional fixed-rate 
interest rate exposure. There was very little discussion as to 
the road map, and when Enron actually chose that alternative, 
my recollection of the conversation was that it was based 
entirely on its ability to absorb additional fixed interest 
rate exposure and that there was no concern or discussion about 
this potential road map issue that we are looking at here.
    Senator Levin. Whether there was discussion of it or not, 
this is a document that you used to pitch this particular 
approach, did you not? Didn't you design this? Wasn't this a 
Chase design?
    Mr. Peiffer. I was not heavily involved at all in designing 
the structure, as I am not a tax expert.
    Senator Levin. Was it Chase's design, though?
    Mr. Peiffer. It was Chase's design, using a good deal of 
existing technology, tax technology, let us call it, that 
existed and other tax regimes where form took a great deal of 
place over substance.
    Senator Levin. So in the Chase design, or its tax 
technology, as you call it, you listed the advantages and 
disadvantages of each of three approaches, and Chase listed an 
advantage of there not being a road map to a potential 
customer, and listing alternatives two and three having 
disadvantages of having potential road map or possible road 
map. That is what you were pitching to a client here, is that 
not correct?
    Mr. Peiffer. Well, at this point----
    Senator Levin. Whether there was discussion of it or not, 
this is your document, isn't it?
    Mr. Peiffer. Right. This was an organizational meeting. It 
was discussing the transaction, assuming that the transaction 
would go forward. It is our document, but, again, it naturally 
would have been this company's preference to not highlight a 
transaction.
    Senator Levin. Which company, yours or Enron's, when you 
say----
    Mr. Peiffer. Enron's.
    Senator Levin. Why would you want to not have a transaction 
be apparent, or be transparent? Why would you want to try to 
sell an advantage of an option as not being transparent to the 
tax folks and to avoid giving them a road map? Why did you want 
to avoid that? Why did you think Enron wanted to avoid that?
    Mr. Peiffer. I think it is customary that any company would 
rather not highlight a transaction with tax advantages, given 
that I think that the transaction itself would more or less 
highlight itself were it to be looked at by Revenue Canada, and 
they certainly would.
    Senator Levin. Well, if they were going to look at it 
anyway, then you wouldn't have to pitch the absence of a road 
map as being an advantage, would you?
    Mr. Peiffer. In the end, there ended up being very little, 
if any, discussion around this particular aspect of choosing 
the interest rate swap precisely because of that.
    Senator Levin. I am not so interested in whether there was 
a discussion. I am much more interested in why Chase would 
design a structure and make a pitch for one of the options as 
having the advantage of being less transparent to the tax 
authorities. If you have nothing to hide, it would seem to me 
that Enron would be perfectly willing to share all the 
information with the tax authorities. They would not care if 
they gave it a road map or not.
    Something was being hidden here by Enron. They didn't want 
this to come to the attention of the tax authorities. They had 
an opinion, as a matter of fact, which you say you didn't know 
about, but they had an opinion from the tax lawyer who also 
gave you tax advice on this transaction. The opinion from their 
tax lawyer and yours, but you say only to Enron, was that this 
would be challenged, or might be challenged by tax authorities 
in Canada, and then you went and pitched this deal to them on 
something that you obviously thought would be attractive to 
them, which is that it would not give a road map to the people 
that would challenge this or might challenge this.
    Mr. Peiffer. With all due respect, the opinion that Blake 
Cassels wrote to Enron took place a good number of months after 
this was put together, and so based on the opinion that we had, 
we believed, given the strength of the opinion, that even if it 
were challenged, that it was a strong transaction and that the 
tax benefits inherent in it would stand.
    Again, the interest rate swap was a very small aspect of 
this transaction, and so to say whether it was not highlighted 
or not, I think it is very difficult to extrapolate and say we 
are trying to hide or even not highlight the entire 
transaction.
    Senator Levin. That is not extrapolation. I am reading your 
document.\1\
---------------------------------------------------------------------------
    \1\ Exhibit No. 344 appears in the Appendix on page 396.
---------------------------------------------------------------------------
    Mr. Peiffer. But with all due respect, this is a very small 
part of the entire transaction, and to say----
    Senator Levin. I am not extrapolating.
    Mr. Peiffer [continuing]. And to say on the margin that 
this is what is hiding the transaction----
    Senator Levin. Advantage No. 1, no road map. Advantage No. 
2, no swap fees. Advantage No. 3, most preferable alternative, 
Canadian tax perspective.
    Mr. Peiffer. That is--I am sorry.
    Senator Levin. That is listed by you as advantage No. 1 for 
alternative No. 1. I am not reading something into this. I am 
reading your words. That is advantage No. 1.
    Mr. Feldstein. May I say something that----
    Senator Levin. Sure.
    Mr. Feldstein [continuing]. Maybe helps to make sense of 
this, and if you will give me permission, I wanted to say 
something more broadly. I will get to your questions about the 
swap transaction, at least my impressions of what went on. But, 
as well, I wanted to talk about the $1 billion which you 
mentioned previously.
    So I want to start maybe with just some general comments 
on--very brief, I promise--on transactions with big tax 
consequences like this. I want to give you my impressions of 
the Slapshot deal based, of course, on 20/20 hindsight, and I 
want to really briefly, I promise, talk about what is different 
at our institution relative to when this transaction was done.
    So first, unlike in the United States, tax principles in 
some jurisdictions elevate the importance of the form of a 
transaction. Sometimes that helps taxpayers and sometimes it 
works to their detriment. It is usually accepted in these 
jurisdictions that taxpayers are entitled to structure a 
business transaction in the most advantageous form for tax 
purposes. In fact, their shareholders might say that companies 
are obligated to do that. So that is just general observation.
    My second point, which is on this specific transaction, I, 
too, am not a Canadian tax expert, but from what I have 
gleaned, from what I have read, including the report and 
internal inquiries, I believe that the Canadian tax laws 
relevant to this transaction are very formalistic. The business 
transaction, you described correctly, was a $375 million 
borrowing. The form of the transaction, including the economic 
reality, what was an economic reality, the $1 billion flow of 
funds, if respected, including all the separate entities and 
the separate instruments that were created under some very 
formalistic Canadian tax laws, showed a $1.4 billion borrowing 
and it was tax advantageous to do that and it was very 
formalistic.
    My impressions of the swap, to get back to the questions 
you were asking, is that it was also important, being a very 
formalistic regime, to make the swap look like it was swapping 
the transactions that were trying to be respected as the form 
of the transaction, i.e., swapping the $1.4 billion 
transaction, not swapping what the underlying business 
transaction was, which was the $375 million loan.
    From the review I have done and from your report, I glean 
also that the structures on this transaction received advice 
from Canadian tax counsel that the form should be respected. 
Tax counsel didn't say it was 100 percent certain, and 
generally, that is not a condition for structuring deals with 
material tax consequences.
    We know now, after the fact, that Enron received an opinion 
from tax counsel, and you were right, it was the same tax 
counsel that had previously represented Morgan, but my 
understanding in talking with people is that it was at Enron's 
request that we stop using that counsel so they could because 
it was their regular tax counsel. They received an opinion from 
that counsel on the specific facts of this transaction that 
heavily caveated the advice. My understanding is that no one 
from J.P. Morgan Chase saw that caveated opinion.
    So that brings me to item No. three, which is what would we 
do differently now, because I think we would do things 
differently. First of all, we now insist on advice from our own 
internal corporate tax department, which is separate from the 
business unit, an independent third party tax counsel of their 
choosing to give us advice on the specific facts of any 
transaction. I presume that on the specific facts of this 
transaction, given what we learned after the fact about the 
opinion that Enron received, that we might have had new and 
different information that may have--I was not there, so I 
don't know for sure, but that may have caused us to act 
differently in this case.
    Senator Levin. Why would you have acted differently, only 
if you had access to the legal opinion?
    Mr. Feldstein. Again, let me try to maybe----
    Senator Levin. You said you might have acted differently. I 
am trying to figure out why.
    Mr. Feldstein. Maybe I wasn't----
    Senator Levin. What would you have now that you didn't have 
then?
    Mr. Feldstein. I guess I didn't explain it well enough. 
What we didn't do then, but we do now, is with respect to any 
transaction with material tax consequences or transactions 
which appear to us to have material tax consequences, we take 
that transaction and all the specific actual facts of that 
transaction to our corporate tax group, a completely separate 
group within the firm, not part of the business unit. Based on 
the facts that we provide to the corporate tax group, their 
review of them, but also the review of outside counsel selected 
by the corporate tax group reviewing the specific facts of the 
deal, we get advice on the strength of the tax consequences or 
the tax analysis of that specific transaction.
    That step was not part of our policy when this transaction 
was undertaken, so that as you pointed out, the opinion 
delivered to Enron, not seen by us, caveated the original 
advice that J.P. Morgan Chase had received about the certainty 
of the tax consequences. It caveated it heavily.
    I presume, I don't know for certain, but I presume that if 
we had engaged our corporate tax group, if the people working 
on the transaction had engaged the corporate tax group and the 
corporate tax group had engaged the outside counsel, 
independent outside counsel that they would today, that J.P. 
Morgan Chase, as well as Enron, based on the specific facts of 
the deal as it was structured, would have received very heavily 
caveated advice about it. And if that were the case, the fact 
that we received very heavily caveated advice may have caused 
us to walk away from this transaction.
    The big policy change, again, because maybe I didn't 
express myself clearly the first time, is that all transactions 
of this nature, and not just ones where we know explicitly 
there is a material tax consequence, but ones that have certain 
indicia that lead us to presume that there are material tax 
consequences, there is a rule that now everybody follows 
willingly to take that transaction, the specific facts of the 
transaction to the corporate tax group for independent advice.
    Senator Levin. You very much hedged your statement. I think 
the bottom line is, would Chase be pitching this deal today? 
This is your design. This is your structure.
    Mr. Feldstein. Let me first----
    Senator Levin. This isn't something Enron cooked up. This 
is something Chase cooked up. Would you be pitching this deal 
today?
    Mr. Feldstein. I think that is an excellent question.
    Senator Levin. I appreciate your saying that, but let me 
just have a clear answer. Would you be pitching this today?
    Mr. Feldstein. Let me answer it in two ways, first, 
specifically. We don't pitch this transaction today. Second, 
more generally----
    Senator Levin. How would you pitch it today, given what you 
know about it?
    Mr. Feldstein. We would not pitch it today, given what we 
learned are the--we would not enter into this transaction the 
way it was----
    Senator Levin. Let us get to it. You designed this 
structure. It is not entered into it.
    Mr. Feldstein. Let me----
    Senator Levin. You designed the structure. Would you design 
a structure like this today?
    Mr. Feldstein. I do not believe we would. I was not there 
at the time, so I don't know what went into designing this 
structure.
    Senator Levin. That is why I am saying today. Would you 
design this structure today?
    Mr. Feldstein. Let me talk more generally, then, about what 
we do today that is different from what we did then in the 
design of transactions and the marketing of transactions.
    I would characterize the way the firm approached the 
business last year as a product-out approach. That is, the firm 
would design products like this and they would go and market 
those products to clients. We have reoriented our approach. I 
would describe the approach today as a client-in approach.
    As opposed to designing generic transactions that we market 
to any number of clients who may or may not have the 
appropriate situation for those transactions, we start from a 
specific client situation, understand what makes the most sense 
for that client, and sometimes there are tax consequences to 
transactions where we advise clients to do things in a certain 
way to take--to create a transaction that most effectively--
with the most effective tax consequences. But that is different 
from what I think the old orientation was, which was to design 
a transaction generically and market it.
    So on your specific question, I don't think we would have 
done this transaction today given the policies we have in place 
to understand more about it, and more generally, I don't think 
we do business the way we did business then. As a business 
matter, we are much more client-in as opposed to product-out.
    Senator Levin. But putting that aside, generic change, 
client-in, client-out, this is a structure, whether you design 
it or whether it is designed by somebody else. Would you be 
using this structure today?
    Mr. Feldstein. We don't use this structure today, so it 
wouldn't----
    Senator Levin. Based on what you know about this structure, 
I know you don't, but would you use it, given its $1 billion 
fake appearance of a loan? Would you participate in this 
thing----
    Mr. Feldstein. Given the tax----
    Mr. Patterson. Can I take a crack at that, Senator Levin?
    Senator Levin. You folks helped to create the appearance of 
a $1.4 billion loan. It wasn't. It was an economic loan of less 
than $400 million. The billion you handed with this hand got it 
back with this hand. You helped them create an appearance which 
then, as you knew it, allowed that--because you sold it--
allowed that company to claim an interest payment for the full 
amount of what was really a payment of interest and principal. 
You knew you were participating in that.
    Now, you also knew that it might be recharacterized by the 
tax authorities in Canada and you even took steps to what would 
happen if the jig was up, if they caught on, if they didn't 
allow the interest payment on the $1.4 billion and they took 
that payment as being payment of interest and principal. You 
even then went to the lengths of deciding what would you do if 
Revenue Canada said, hey, wait a minute. That is not a $1.4 
billion loan. That is a $400 million loan and the repayments of 
it are payments of principal and interest, not all interest. We 
are not going to give you a tax deduction, Enron. You folks 
even worked with Enron on what you would do then.
    My question is, would you participate in this kind of a 
transaction now? I don't care whether you design it or someone 
else designs it. You know what this transaction was. You know 
the details of it. Would you participate in this transaction 
today? That is my question.
    Mr. Patterson. I think not. The result that you describe 
seems quirky, but as Mr. Feldstein explained, there are some 
tax jurisdictions where form seems to triumph over substance. 
That is why we rely on the advice of tax counsel in those 
jurisdictions before we go ahead.
    In this case, as Mr. Feldstein said, we didn't consult the 
tax counsel in the same way that we would today, and I won't 
repeat everything he described, but we would have our corporate 
tax department, which is charged with looking after the firm's 
reputation in these matters, get its own outside counsel and 
get an opinion based on all the facts.
    I do not know, because I am not a tax counsel, whether we 
would get as clean an opinion today as would be necessary for 
us to go forward. But even if we did, sir, as I mentioned in my 
opening statement, beyond assuring compliance with all external 
requirements, including tax laws, even if we thought this one 
might work, I personally, as head of the policy review 
function, would have to take into account how this would look 
to the world if, as we always have to assume, it would be 
publicly disclosed, and whether even if it met all the legal 
requirements and passed muster under Canadian tax law, it would 
be difficult to explain and might adversely affect our 
reputation. And on that basis, knowing what I know, I would not 
market this structure today.
    Senator Levin. Is this just a matter of how it looks to the 
world? Is this just a matter of that? Isn't there something 
rotten about something which looks like a $1.4 billion loan 
which is a $400 million loan? Doesn't that trouble you as a 
banker?
    Mr. Patterson. Well, the public perception of it troubles 
me. If you put the--what if we went to the Canadian tax 
authorities and got an opinion from the Canadian tax 
authorities that it worked? It would still look kind of quirky, 
but it would not be viewed in Canada as rotten.
    Senator Levin. Would you be willing to do what you did with 
Enron back then in terms of figuring out, what are we going to 
do if the Canadian tax authorities find out about this, despite 
your lack of a road map, that they track it anyway, that they 
spend as much time as this Subcommittee staff had to spend to 
figure out what was really going on here, Canadian tax 
authorities, if they did that, if they reached the same 
conclusion that this was more than quirky, this is just simply 
misleading because you are pretending that there was $1.4 
billion which was lent, when in fact it was only $375 million, 
and if they reached that conclusion, you folks worked, and if 
you will take a look here at Exhibit 351,\1\ you folks even had 
a recharacterization rider. You had a fallback. You had a 
safety net here if they caught on and if they recharacterized 
this.
---------------------------------------------------------------------------
    \1\ Exhibit No. 351 appears in the Appendix on page 514.
---------------------------------------------------------------------------
    This is your document. The rider attempts to recast any 
principal paid in excess of 25 percent of the recharacterized 
loan as instead being a loan to Chase, instead of from Chase. 
Here you have got Enron. You are cooking up a deal. This is 
something you are pitching, you pitched.
    Mr. Patterson. I actually think that was added by Enron to 
the deal we pitched.
    Senator Levin. All right. You accepted it.
    Mr. Patterson. We accepted it, yes.
    Senator Levin. You agreed to this rider, which says if they 
decide, if the Canadian authorities find out about it despite 
your lack of a road map, if they find out about it, you agreed 
with Enron that you would then retroactively recast this as a 
loan to Chase instead of from Chase. One of the biggest banks 
in the world is being lent money by a client. That is what you 
agreed to. Does that trouble you, not just the appearance if it 
is made public, does that bother you as a person, as a banker?
    Mr. Patterson. Well, the fact that we borrow money from a 
client doesn't bother me. It seems to me not surprising that 
one would try to anticipate what we would do if the initially 
intended tax results were rejected by the Canadian tax 
authorities. I assume in that context, I don't know, but I 
assume that the whole transaction would be transparent to the 
Canadian tax authorities at that time, including the 
recharacterization, and they might accept it or not accept it.
    Senator Levin. Is there any way in just common sense 
understanding that that could accurately be characterized as a 
loan to you?
    Mr. Patterson. To be honest, I am not familiar enough with 
the transaction to be able to answer that question.
    Senator Levin. Well, think about it, would you, and give us 
an answer for the record.\2\
---------------------------------------------------------------------------
    \2\ Exhibit No. 391 appears in the Appendix on page 1006.
---------------------------------------------------------------------------
    Mr. Patterson. Whether----
    Senator Levin. Would you do that? Would you give it a 
little thought and give us an answer for the record?
    Mr. Patterson. Whether it would be possible to 
characterize----
    Senator Levin. Whether you think----
    Mr. Patterson [continuing]. Recharacterize a transaction as 
a loan to us?
    Senator Levin. Whether you think that in any way could be 
fairly described as a loan from Enron to Chase.
    Mr. Patterson. Happy to.
    Senator Levin. My understanding, by the way, is that 
opinion that came to Enron from the lawyers came within a 
couple days of, what, the completion of the transaction. It 
wasn't, as you indicated, Mr. Peiffer, months later. It was 
just right around the transaction.
    Mr. Peiffer. My understanding----
    Senator Levin. It is obvious Chase knew that there was a 
question about this. We might as well cut to the chase. It is 
obvious that you knew that there could be a problem. Whether 
that same tax lawyer gave you that advice that they gave Enron 
or not, you knew it because you had worked out what would 
happen if the Canadian authorities decided that this wasn't 
right. You worked that out. So you knew that there could be a 
problem with this.
    To that extent that you had a retroactive 
recharacterization to turn something which was a loan from you 
into a loan to you, and it is that recharacterization document 
which seems to me to speak volumes.\1\ It may only be a page, 
but it speaks volumes. It speaks about what Chase really 
believed. Whether you saw that opinion that the Enron folks got 
from that same lawyer or not, you knew there could be a 
problem.
---------------------------------------------------------------------------
    \1\ Exhibit No. 351 appears in the Appendix on page 514.
---------------------------------------------------------------------------
    Mr. Peiffer. Could I make a comment on this?
    Senator Levin. Please.
    Mr. Peiffer. Again, Enron came to us with this. We are not 
sure why--actually, I can say I do know why Enron came to us 
with this. In the event that the Canadian tax authorities would 
recharacterize this, or choose----
    Senator Levin. Disallow it.
    Mr. Peiffer. Disallow, yes, choose to disallow it by 
choosing to recharacterize it as a $375 million loan, Enron was 
concerned specifically in that situation, if that was, say, a 
20, 25 percent chance of that happening, which would be 
consistent with a ``should'' level opinion, then they wanted to 
limit the specific downside with respect to withholding tax. 
They and their counsel thought that this provision would have a 
chance of success with that. It is not something we came up 
with, nor was it something we even thought made sense for Enron 
to put in that, and we voiced that opinion to them.
    Senator Levin. You agreed to it.
    Mr. Peiffer. We didn't think it was needed.
    Senator Levin. Did you agree to it?
    Mr. Peiffer. Because of our strong opinions and what we 
knew their opinion to be, or that we thought it was going to 
be, but yes, we agreed to it and it was something that Enron 
even amongst themselves was deliberating. And so I think it 
would be incorrect to mischaracterize this as saying this is a 
reflection of what everybody thought of the deal. I think this 
was a specific clause to recharacterize something specifically, 
withholding tax benefits, withholding tax that would need to be 
paid----
    Senator Levin. Sure.
    Mr. Peiffer [continuing]. If the intended tax benefits were 
not achieved, and my understanding----
    Senator Levin. You agree----
    Mr. Peiffer [continuing]. With a lot of tax transactions, 
whether in the United States, Canada, anywhere, is that there 
are provisions to address certain things like that if the 
intended tax benefits aren't achieved.
    Senator Levin. But Chase agreed to recharacterize something 
as a loan to it instead of a loan from it in order to help 
Enron avoid taxes.
    Mr. Peiffer. I think in order to, under the Canadian tax 
rules, potentially avoid withholding taxes if the transaction 
were--if the tax benefits with respect to the transaction were 
disallowed. That doesn't take away the strength of the opinions 
or what we or Enron believed to be the high probability of the 
tax benefits.
    Senator Levin. There is nothing to take away from those 
opinions, because you knew--Chase knew that this loan was not 
$1.4 billion. That much, we know you knew. You have 
acknowledged that. You knew it was an economic loan of $400 
million.
    Mr. Peiffer. It was an economic loan of $375 million----
    Senator Levin. Three-hundred-and-seventy-five million.
    Mr. Peiffer [continuing]. For legal and Canadian tax 
purposes, the advice we received is that it was, indeed, a $1.4 
billion loan.
    Senator Levin. And you also knew that it was going to be 
challenged or could be challenged, and you also then agreed 
with Enron that if it were challenged, you would retroactively 
change its nature. You would recharacterize it so that Enron 
wouldn't be hit with taxes by Canada. You helped to perpetrate 
a fiction. You helped them perpetrate a fiction, because there 
was no $1 billion loan.
    Mr. Peiffer. I am sorry, I take exception with that.
    Senator Levin. You might take exception----
    Mr. Peiffer. I don't look at this as perpetrating a 
fiction.
    Senator Levin. That is a fiction. There was no $1 billion 
lent to them.
    Mr. Peiffer. We have opinions from Canadian tax counsel----
    Senator Levin. Was $1 billion lent to them or not?
    Mr. Peiffer [continuing]. With that----
    Senator Levin. Was $1 billion lent to them? I know there 
was $375 million. I am not talking about that. Was there $1 
billion lent?
    Mr. Peiffer. There was a $1.4 billion loan made to the 
subsidiary of----
    Senator Levin. Of which $1 billion was repaid within 
minutes, is that----
    Mr. Peiffer. Under a separate contract, with money coming 
from elsewhere in Enron.
    Senator Levin. Separate contract, it was repaid within 
minutes, wasn't it?
    Mr. Peiffer. I think the distinction here again to make is 
that Canada follows a very form over substance----
    Senator Levin. I am not talking Canada. I am talking Chase, 
your reputation, transparency. We hear lectures about 
transparency, that you are going to be transparent. I am not 
talking about Canada. Canada will take care of itself. I am 
talking about Chase. You knew that the $1 billion of the $1.4 
billion came right back to you, did you not? You knew that 
much.
    Mr. Peiffer. I knew $1 billion was coming back to us, that 
is correct.
    Senator Levin. Of that $1.4 billion.
    Mr. Peiffer. Money is fungible and it was two separate 
transactions and we were advised that the transaction as a 
whole should be split up into two separate transactions, and 
yes, we did receive $1 billion back.
    Senator Levin. Did you get a legal opinion about this 
recharacterization?
    Mr. Peiffer. We did not----
    Senator Levin. When you agreed to this----
    Mr. Peiffer. There was no need for Chase to.
    Senator Levin. When you agreed to this, was there a legal 
opinion on this that Chase got?
    Mr. Peiffer. With respect to this, in the context of this, 
Chase did not need to receive a legal opinion, but my 
understanding is that Enron received advice from their Canadian 
tax counsel that it might be advantageous to put this in there 
in the event that this were audited and all the facts had 
become known and that there is the potential that this might do 
something for them.
    Senator Levin. You understood that Enron got an opinion 
from its lawyers about this?
    Mr. Peiffer. Yes, I do.
    Senator Levin. But you didn't?
    Mr. Peiffer. We had an opinion based on the generic 
transaction, the generic structure----
    Senator Levin. No, I know that----
    Mr. Peiffer [continuing]. But with respect to----
    Senator Levin. The recharacterization.
    Mr. Feldstein. My understanding is J.P. Morgan Chase did 
not get an opinion on the specific details of the transaction.
    Mr. Peiffer. Right.
    Mr. Feldstein. Today, we certainly would.
    Senator Levin. Mr. Peiffer, you helped dream up Slapshot 
and helped develop it. Were you rewarded in any way by your 
supervisors for this, any special way?
    Mr. Peiffer. I think it is fair to say?
    Senator Levin. Was there a bonus, special bonus of any 
kind? Did you get----
    Mr. Peiffer. There was no special bonus with respect to 
this. I think it is fair to say that it was one of many 
elements that, you know, played into the paying of a year-end 
bonus. We would all have been much better off, I think, also, 
if we had never made any of these loans to Enron and Enron had 
not gone bankrupt and the bank had more money to pay the 
bonuses. We all would have been better off if that were the 
case.
    Senator Levin. Let me conclude by just saying this. You 
have got some language on your website which says that banks 
were victims in fraud cases, not accomplices. All I can tell 
you is this, that this is a structure which you folks designed. 
You are not the victim here. You designed a structure. You sold 
a structure. Part of the sale was that it would not be 
providing a road map. You then agreed if, in fact, the Canadian 
tax authority would find that was not allowable, even agreed 
retroactively to recharacterize a loan from you into a loan to 
you. You folks aren't victims here.
    Mr. Feldstein. May I add something?
    Senator Levin. You folks helped a deceptive practice by 
Enron to be perpetrated, and it is--I am glad you are changing 
your approach. I can't tell you how glad I am. I will look 
forward, Mr. Patterson, to your answering the question for the 
record that you said you would think about.\1\
---------------------------------------------------------------------------
    \1\ Exhibit No. 391 appears in the Appendix on page 1006.
---------------------------------------------------------------------------
    But it is important that we all worry about how things 
look, and that is important. But what is more important is how 
things really are.
    Mr. Feldstein. Could I just address your comments about the 
victim? My interpretation of that was that financial 
institutions were the victims of deceptive accounting practices 
and disclosure practices, or apparently deceptive practices at 
Enron. This transaction, and we have gone through the certainty 
or lack thereof in terms of the tax consequences, but this had 
nothing to do with the accounting presentation that Enron 
provided, but rather was a transaction which rested upon 
whether Canadian tax law would respect the form in which it was 
structured, and the victim comment, I think, is about the 
apparent accounting deception practiced by Enron, which is a 
different subject, I believe.
    Senator Levin. Your prepay pitch book back in 1998, if you 
look at Exhibit 128, says the following. This is what you were 
pitching. Prepayment received for a forward sale of inventory, 
fixed quantity, specific delivery locations. Your third dot 
says, balance sheet-friendly. Is that still the kind of pitch 
you would make, balance sheet-friendly, or balance sheet 
accurate? Which is more important?
    Mr. Feldstein. Balance sheet accurate.
    Senator Levin. Is it fair to say, Mr. Patterson, you 
wouldn't be making a pitch quite like that anymore?
    Mr. Patterson. I don't have it and can't see it, but----
    Senator Levin. It is Exhibit 128.
    Mr. Patterson. I don't think we have No. 128 here.
    Senator Levin. I am sorry, I have got the wrong number. It 
is Exhibit 169.
    Mr. Patterson. I don't think we have that, either.
    Senator Levin. Let me try again, Exhibit 369.\2\
---------------------------------------------------------------------------
    \2\ Exhibit No. 369 appears in the Appendix on page 687.
---------------------------------------------------------------------------
    Mr. Patterson. Three-sixty-nine. No, I think that we 
probably would not use that terminology today. That doesn't 
mean that accounting considerations are not relevant to our 
clients and to the transactions they enter into. They are 
structured in a way to comply with accounting rules. So 
accounting considerations continue to be an important part of 
structured finance. The key is that the accounting treatment be 
correct and not misleading.
    Senator Levin. Thank you. Thank you all for your appearance 
here today and we wish you good luck in greeting the weather on 
your return home, and we also wish you good luck in 
implementing fully and forcefully your new approach. It is 
important that our institutions, the ones we rely so heavily 
on, such as Chase and Citibank and others that have been such 
an important part of this economy, have the confidence and 
credibility of the public. I hope your new guidance has an 
impact in that regard, both internally and externally. Thank 
you all for coming.
    Mr. Patterson. Thank you, Senator.
    Mr. Peiffer. Thank you.
    Senator Levin. Ms. Siebert, we now welcome you, President 
and Chair of Muriel Siebert and Company of New York. Ms. 
Siebert gained fame as the first woman member of the New York 
Stock Exchange and Superintendent of Banks for the State of New 
York, now an owner of a discount stock brokerage firm, one of 
our wise elders--I hope you won't mind that description--when 
it comes to finance and the securities business. I want to 
thank you for your travels here today from New York, also 
fighting the elements.
    Pursuant to Rule 6, as I have mentioned to all of our 
witnesses, our witnesses need to be sworn because of that rule 
of the Subcommittee, and so I would ask you to please stand and 
raise your right hand.
    Do you swear that the testimony that you will give before 
this Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Ms. Siebert. Yes, I do.
    Senator Levin. Ms. Siebert, I think you have a statement, 
which we would ask you now to proceed with.

  TESTIMONY OF MURIEL SIEBERT,\1\ PRESIDENT AND CHAIR, MURIEL 
         SIEBERT AND COMPANY, INC., NEW YORK, NEW YORK

    Ms. Siebert. Yes. I submitted a written statement, but I 
have an abbreviated oral statement. I would like to thank you 
for inviting me. I am sorry I was late, but I came by way of 
LaGuardia Airport and then the train because they canceled our 
flights, so I apologize for being late.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Siebert appears in the Appendix 
on page 113.
---------------------------------------------------------------------------
    Senator Levin. Actually, you are right on time, except you 
missed some testimony.
    Ms. Siebert. Terrific. I commend your Subcommittee for 
tackling this very tough, nasty job. You know, it will be 35 
years ago that I became the first woman member of the New York 
Stock Exchange, and at the time, while many people did not want 
me, I joined a group where your word was your bond and you 
would go broke before you broke your word. Things have changed 
when I look at the Enron transactions. The money became too 
vast and it was made too fast. I am sorry to say that greed 
became the creed.
    Enron, in my opinion, represents a total moral bankruptcy. 
It took more than the officers and the directors of the 
company. It required help from the accountants, the lawyers, 
and the investment and commercial banks. Many people profited 
from these transactions, except the investing public, many of 
whom will never be able to make their losses back. It has 
affected their future retirement and we have to make sure this 
does not happen again.
    My interest in Enron really began in February. I received a 
call from the man that runs our retail discount operations and 
he told me that he was seeing things that he never saw before. 
We had clients selling out their entire portfolios and 
requesting a check. We would not see that transaction if they 
sold their entire portfolios and went into a money market fund. 
That would be an automatic sweep. But when they requested a 
check, it took an action on their part and our part.
    I asked Peter, because we call every customer that leaves 
our firm, and if it is because their nephew has gone to work 
for Merrill Lynch, so be it. God bless them and good luck. If 
it is because of something we have done wrong, I want to know 
about it.
    So I started to get the reports every week, and the answer 
was, don't trust the integrity of the system. The system is 
against us. We can't let this happen. The reports have 
continued to come in that way, although very few people 
compared to what we had before.
    Our capital raising system is a national treasure. In the 
1990's, the United States created tens of millions of new jobs. 
Every new technological development was made in the United 
States, and for most of the decade, at least the early part and 
middle part of the 1990's, the market was orderly and the 
public, the small investors, started to invest. First, they 
bought mutual funds. They wanted to own a piece of America.
    After I received the same answers for a few weeks, I 
realized the seriousness of the abrupt change in our investors' 
attitudes. Many of them, when we called them, specifically 
mentioned Enron. Sure, that was probably because there was a 
lot of publicity going on at that time, but they had been hurt 
in bond funds and other products.
    I will give you an example. When I gave a speech for the 
Miami Herald at their yearly investors' conference, a man in 
his 80's during the question and answer period told me, ``I 
lost a third of my money. Will they go to jail?'' This is 
serious.
    Enron could not have happened without two new financial 
products, derivatives and structured finance. These products in 
themselves are not bad. It was the purpose that was employed 
that was terribly wrong. They were used to deceive. The 
financial engineering permitted operations by legal loophole.
    Derivatives are not new. I testified in 1988, I have it 
here, after the 1987 market break. That was portfolio 
insurance. The regulators passed some laws and portfolio 
insurance is finished.
    I testified in 1998, 10 years later, after long-term 
capital market. Our country, frankly, lucked out in Long-Term 
Capital Management. Bob Rubin was our Secretary of Treasury and 
he was the only Secretary of Treasury that has ever come from 
the trading desks. He had helped invent derivatives. He knew 
what to do. Long-Term Capital Management had an equity, it is 
reported, of $4 to $5 billion and they were carrying, using 
derivatives, the notional value was over $1 trillion. When they 
made the wrong bet, major margin calls were threatened. The 
Federal Reserve called in the firms downtown. They called in 
the banks and they put together money and they took over the 
operations of Long-Term Capital Management and we liquidated it 
in a way that the public was not hurt.
    When I continued to see the attitude of our individual 
investors, in late spring, I said, well, I had better go down 
to Washington and tell some people what I am seeing, because I 
had never seen this before. So I had lunch with Larry Lindsey. 
I had a telephone appointment with Secretary O'Neill and I 
spent time with Mr. Pitt and his deputies. I recommended three 
things.
    Under Sarbanes-Oxley, officers of corporations must certify 
the authenticity of the earnings reports. I recommend that we 
add a statement to those reports that these figures represent 
economic reality. That would eliminate the sham transactions. 
That would have eliminated the phony energy trades. No officer 
would sign a statement that the transactions that your 
Subcommittee is examining represented economic reality.
    Enron was the leader in energy trading when it became 
deregulated. They used legal loopholes to create an illusion of 
activity. The trading practices of buying and selling on the 
same day, the same amount, at the same price, are illegal. They 
are considered to be wash sales in the listed markets. In the 
over-the-counter markets, they were legal. Other formerly solid 
conservative utilities participated in these trades, which are 
still being unraveled. As a result, some of these utilities 
have had to reduce or suspend their dividends. Most of these 
stocks are owned by individuals who count on the dividends for 
their livelihood.
    In some cases, the price of some of these utility stocks 
have been cut in half very fast, literally overnight.
    Now, when companies issue debt, they have an indenture 
which spell out the terms that these bonds are being issued 
under. It is their covenants, for example, the ratio of 
interest coverage, the ratio of asset coverage, the rating of 
bonds by rating agencies. If these covenants are violated, they 
have debt triggers in there whereby certain things are 
triggered. They can force a company to repay the bonds 
immediately. It is very difficult for individuals or 
institutional investors to get the terms of these bonds. They 
would not have owned a lot of these securities had these terms 
been readily available.
    I recommend that the debt triggers and terms of indentures 
on bonds, as well as covenants or terms in the preferred 
stocks, be made available easily and be listed on the 
corporation's website so that anyone who takes the effort, who 
wants to invest money, I do not care if it is 100 share of a 
Duke preferred stock or a Dominion preferred stock, can see the 
terms and see under what circumstances their income might be 
stopped or they will lose their protection.
    Finance is now global. It is almost impossible for 
regulators to keep up with the fast-moving technology. The SEC 
and Federal and State regulators, bank regulators, together 
could identify these transactions if the information was 
furnished. Otherwise, it is very hard for them to get into 
this. The SEC could have identified it. The Federal bank and 
the State bank regulators could have identified some of these 
transactions. It is difficult for U.S. regulators to act 
unilaterally. It will have the effect of driving the business 
offshore, but will not stop the business.
    We know we are going to have global bank regulations. We 
have some now. We will have global accounting standards. I 
suggest that our country be the leader to establish global 
securities regulations, that we include derivatives and margin 
requirements and other things that are used to get around the 
purpose of the laws.
    Certain laws and regulations have been passed which will 
stop the same practices from occurring again, but we must make 
sure that our focus is on the individual investor also, and 
that it is geared towards reinstating their faith in the 
system.
    Thank you for inviting me and allowing me to participate.
    Senator Levin. Thank you very much, Ms. Siebert, for your 
very thoughtful testimony.
    I don't know how much of the testimony this morning you 
were here to hear. I know you had to take a train when you 
expected to fly, but I think you have had an opportunity to 
look at the transactions which we were discussing here this 
morning in the report of our staff. What is your reaction to 
those transactions that you read about in our report?
    Ms. Siebert. They were designed to deceive. They were 
designed to create the illusion of certain economic events. I 
do not see the economic reality for it.
    Senator Levin. I think your testimony probably answered 
this question, but I will ask it, in effect, again. Are these 
the types of transactions that we want our major banks not only 
participating in, but designing and selling to public companies 
and to other clients?
    Ms. Siebert. No, they are not the kind of transactions, and 
I would also say that if they do participate in those kind of 
transactions, they should not have the benefit of FDIC 
insurance.
    Senator Levin. We are going to be hearing from our 
regulators in our next panel and we want to find out what is 
being done to stop this kind of deceptive practice, and I am 
wondering whether you would agree that our regulators need to 
not only take enforcement actions on a case-by-case basis to 
punish wrongdoers, but also to construct a regulatory 
deterrence program to deter future wrongdoing.
    Ms. Siebert. I believe they can do it. Our regulators are 
really a top quality group. The Federal Reserve and Federal 
bank regulators, the State bank regulators, the SEC, they have 
dedicated staff there. I mean, it is wonderful to see them. But 
I also believe that the information must be furnished them so 
they don't have to go hunting for it.
    Senator Levin. And if that information is furnished for 
them, or to them, excuse me, would it be useful if they can 
design, as you put it in your testimony, acting together with 
the SEC and the bank regulators acting together to regulate the 
kind of transactions which we have heard about and talked about 
here at this Subcommittee.
    Ms. Siebert. I believe it is. For a long time, I have said 
that we need regulation by function, because investment banks 
are doing the job previously done by banks and banks are doing 
the job previously done by investment firms. So they will have 
to work together. Normally, I don't like to see Uncle Sam and 
the regulators get too big, but it is probably the only way 
where we can effectively put our arms around this problem.
    Senator Levin. And in terms of the information that you say 
is so important for them to have so that they can act, would 
you feel it would be helpful if the SEC and the bank regulators 
conducted a comprehensive joint review of these structured 
finance products which are being sold by or used by our 
financial institutions so that they could identify the ones 
that are designed to deceive?
    Ms. Siebert. Yes, I believe that would be very welcome and 
necessary.
    Senator Levin. Our thanks again. You are a frequent visitor 
to committees of the Congress, to be providing the kind of 
testimony which comes from your experience and we are very 
grateful for that testimony and for your experience, for what 
you bring to the world in which you spend a great deal of your 
time.
    Ms. Siebert. I believe in the system. It has been very good 
to a lot of us.
    Senator Levin. It has, and we are going to do everything we 
can to make sure that system is strengthened and that 
credibility in it is restored, and it is going to take, I 
believe, at least, a combination of the entities, the 
institutions, the financial folks acting on their own to clean 
house, but it also is going to take a stronger regulatory arm, 
and we are going to talk to our regulators right now and see 
whether they are in agreement with that. Thank you again.
    Ms. Siebert. That is great. Thank you.
    Senator Levin. Let me now introduce our final panel of 
witnesses who represent one of the most important pieces to 
this puzzle and that is our regulators. We not only thank you 
for making it--I don't think you came quite as far as our other 
witnesses, but you have waited longer. I hope that it was 
worthwhile to you in terms of the testimony that you heard 
here. It is a very complicated subject that you live with and 
we are dealing with and we have spent a lot of time attempting 
to understand it and our staff has spent a huge amount of their 
time putting together a staff report, which I think has been 
made available to you.
    We have at our witness table today Richard Spillenkothen, 
Director of the Division of Banking Supervision and Regulation 
at the Federal Reserve. I think Ms. Annette Nazareth is on her 
way. She is the Director of the Division of Market Regulation 
at the Securities and Exchange Commission. And Douglas Roeder, 
Senior Deputy Comptroller for Large Bank Supervision at the 
Office of the Comptroller of the Currency.
    This is a very distinguished panel. We know that they are 
involved in a lot of things and had to sort out their schedule 
to make it possible to be here today. We look forward to 
hearing your views.
    As I have indicated, pursuant to Rule 6 of this 
Subcommittee, all witnesses who testify before us are required 
to be sworn, and at this time, then, I would ask you to stand 
and raise your right hand.
    Do you swear that the testimony that you will give before 
this Subcommittee today will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Spillenkothen. I do.
    Mr. Roeder. I do.
    Senator Levin. I think, Mr. Spillenkothen, we are going to 
call on you first.

 TESTIMONY OF RICHARD SPILLENKOTHEN,\1\ DIRECTOR, DIVISION OF 
   BANKING SUPERVISION AND REGULATION, THE FEDERAL RESERVE, 
                         WASHINGTON, DC

    Mr. Spillenkothen. Thank you, Mr. Chairman, for the 
opportunity to testify on the continuing efforts of the Federal 
Reserve Supervisors to address issues emanating from the 
excesses of the recent credit cycle, including large corporate 
defaults and accounting irregularities.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Spillenkothen appears in the 
Appendix on page 117.
---------------------------------------------------------------------------
    The focus of today's hearing, on how complex structured 
financial products provided by banks and other financial 
institutions were used by their customers to obscure financial 
statements or to engage in questionable tax strategies, is 
timely. Events of the past year, such as the bankruptcy of 
Enron, have focused attention on the need for strong risk 
management, sound accounting, improved disclosures, and more 
active corporate governance oversight to avoid the kinds of 
losses that have been costly both in very real human and 
economic terms.
    The Federal Reserve has been reviewing bank participation 
in the types of structured financial activities that have 
raised significant legal and accounting questions and I will 
discuss the status of our efforts in a moment. I will also 
briefly discuss both our supervisory expectations for banks 
involved in transactions such as those that have been the focus 
of this Subcommittee, as well as how we are considering 
amending our procedures and refocusing our supervisory reviews.
    But first, I would like to say a word about the role of 
bank supervisors. The primary focus of the Federal Reserve's 
supervision is ensuring an institution's overall safety and 
soundness, as well as compliance with banking and consumer laws 
and regulations in a way that protects the Deposit Insurance 
Fund and the consumer while promoting stability of the 
financial system. As part of this risk-based approach to 
supervision, examiners focus primarily on areas posing the 
greatest risk to the institution, primarily credit risk, market 
liquidity, legal, and reputation.
    In carrying out our responsibilities, the Federal Reserve 
coordinates its supervisory activities with other Federal and 
State banking and securities agencies, such as my colleagues 
here from the OCC and the SEC, other functional regulators, and 
the bank regulatory agencies of other nations. If in the course 
of their review examiners have reason to believe that a bank is 
engaging in questionable activities that might relate to a 
possible violation of securities laws, then supervisors would 
refer those matters to the SEC as the primary interpreter and 
enforcer of those laws.
    I would say for an example, recently, Federal Reserve 
supervisors identified transactions by a banking organization, 
not one the subject of these discussions, but by a banking 
organization that raised concerns regarding the bank's 
accounting and public disclosure. In this case, we referred 
those potential securities law violations to the SEC, and in 
coordination with the SEC and the bank's primary regulator, 
took enforcement action and remedial action in a coordinated 
fashion.
    Now, some basic principles and expectations for banking 
organizations guide our work in examining complex financial 
transactions. First and most obviously, banks must obey the 
law. In particular, they must have policies and procedures in 
place to ensure that they are in compliance with all applicable 
laws and regulations with regard to a particular activity or 
product.
    Second, banks should perform thorough due diligence on the 
transactions they are engaged in or involved in and check with 
appropriate legal, accounting, and tax authorities within their 
own organizations, as well as their outside experts when 
appropriate, and also provide appropriate and relevant 
information to their customers. However, banks ordinarily 
should not be held legally responsible for the judgments and 
actions or malfeasance of their customers. Such an expectation 
would require, inappropriately, in my judgment, banking 
organizations to assume management responsibility for their 
customers and also could place undue significant costs on 
banking organizations to audit the activities of their 
customers. However, banks must not participate in activities of 
their customers that the banks know to be illegal or improper, 
nor should banks engage in borderline transactions that are 
likely to result in significant reputational or operational 
risks to the banks.
    Third, the role of banks is to assume and manage all the 
attendant risks related to their activities as financial 
intermediaries. In light of recent events, banking 
organizations should be, and indeed are, reevaluating the risks 
related to both their traditional as well as their new 
products, recognizing that as financial markets and practices 
change, legal and reputational risks may manifest themselves in 
new ways or in new magnitudes not previously recognized.
    As part of our supervisory review of complex structured 
transactions, we are assembling and evaluating the various 
findings and observations of our examiners, as well as the 
conclusions of other primary and functional regulators we work 
with, and identifying any necessary follow-up. While I am 
unable to discuss ongoing Federal Reserve supervisory reviews, 
as you know, there are several transactions that are currently 
under investigation by the SEC and other enforcement agencies 
with whom we have strong working relationships and with whom we 
have conferred on these matters. We are continuing to 
collaborate with them and receive their views and conclusions 
on various matters on an ongoing basis. As our fact finding is 
completed and our conclusions are drawn, we will provide 
institutions with feedback on any identified weaknesses, and if 
warranted, take appropriate supervisory corrective actions, 
including referrals to other authorities.
    More generally, in light of recent events, we have already 
modified our examination plans for larger banking organizations 
to focus more fully on evaluating the largest customer 
relationships, that is, the large relationship with the 
customers that they have and also looking at the overall 
customer relationship, not just a transaction-by-transaction 
basis. These plans or examinations cover the specific areas of 
concern in the structured finance business and an evaluation of 
the steps banks are taking to manage the credit, legal, and 
reputational risks in response to events of the past year. We 
will also be looking at the new product review process and how 
they manage the real and reputational risks in the new product 
review process.
    We have already begun the process of modifying our 
examination guidance and are considering additional supervisory 
guidance or regulatory changes, especially in the area of 
structured finance, and if we do this, we will obviously work 
with our colleagues from the other banking agencies and, as 
appropriate, the SEC.
    In this connection, we will also evaluate the range of 
reforms banking organizations are adopting, and once we are 
able to observe their performance and practice, consider 
whether there are some sound practices that should be adopted 
more widely within the industry.
    In closing, the fallout from the recent round of excesses 
and large corporate defaults appears to be resulting in some 
positive steps by corporations, banks, and capital markets. 
Supervisors should play a positive leadership role and work to 
ensure that these corrective actions, that their ongoing 
supervisory activities reinforce these corrective steps and 
help them to endure over the longer term. If banking 
organizations, corporations, and supervisors are attentive to 
the lessons learned over the past year and adopt appropriate 
policies and controls, the risk of repeating similar excesses 
in the coming years should be substantially reduced. Thank you.
    Senator Levin. Thank you very much, Mr. Spillenkothen. Mr. 
Roeder.

 TESTIMONY OF DOUGLAS W. ROEDER,\1\ SENIOR DEPUTY COMPTROLLER 
 FOR LARGE BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE 
                   CURRENCY, WASHINGTON, DC.

    Mr. Roeder. Thank you. Chairman Levin, thank you for 
inviting the OCC to participate in these important hearings. I 
am Douglas Roeder, Senior Deputy Comptroller for Large Bank 
Supervision.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Roeder appears in the Appendix on 
page 123.
---------------------------------------------------------------------------
    Let me begin by commending the Subcommittee for holding 
these hearings. Enron's failure has been nothing short of a 
national tragedy, especially for the thousands of Enron 
employees who lost their jobs and retirement savings. At its 
height, Enron was a multi-billion-dollar corporation whose 
influence was wide ranging and far reaching. Inevitably, some 
of its business involved national banks which operate under OCC 
supervision. In my statement, I would like to focus on the 
steps that national banks and the OCC as their supervisor are 
taking to help prevent Enrons from occurring, future Enrons.
    The OCC is responsible for supervising over 2,000 banks, 
some of which are the largest in the world. Resident examiners 
working in these large banks use a risk-based approach to 
supervision, an approach that takes into account the various 
sources of risk to a bank. Because credit risk has 
traditionally posed the greatest threat to safety and soundness 
of banks, much of our supervisory attention has traditionally 
focused on credit issues. However, the Enron situation 
demonstrates just how significant other types of risk can be. 
As a result, we have asked ourselves how our current approach 
could be enhanced.
    First, we intend to focus more intently on banks' 
procedures for authorizing new products. Our examiners will 
evaluate the bank's system to ensure that a comprehensive 
process exists for senior managers to review and approve new 
product offerings. Also, we believe it is important that the 
new product approval process is sufficiently robust to capture 
even seemingly small changes that could transform an existing 
product into one that poses an entirely different degree or 
type of risk. When in doubt as to whether a product requires 
vetting through the new product approval process, we encourage 
bank management to take a conservative approach and to apply 
the process to the proposed product or activity.
    Going forward, we will sample more extensively transactions 
going through the banks' new product approval process. In 
particular, we will check to see whether banks are complying 
with their own processes and whether proper review and 
authorization are received prior to engaging in complex 
structured transactions.
    In addition, we are in the midst of discussions with the 
other banking agencies to determine whether interagency 
guidelines should be revised to more specifically address board 
and senior management responsibilities for the approval and 
oversight of new products, such as complex structured products.
    Second, while banks' board and senior management may place 
their stamp of approval on a new product, the bank must also 
carefully consider the appropriateness of complex structured 
transactions from the standpoint of the bank's client. This 
represents a shift in our approach into supervising such 
transactions. In the past, our focus has been on how well the 
bank assesses the sophistication of the customer and that 
customer's ability to perform under the terms of the contract. 
We will now ask our examiners, in addition, to determine 
whether bank management understands the customer's disclosure 
and accounting intent.
    While it is not realistic for banks to be held responsible 
for how customers account for transactions on their own 
financial statements, it is incumbent on bank management to 
carefully consider the potential impact of their actions on the 
bank and to decline to participate in transactions that do not 
meet the standards of integrity that the bank has established.
    Third, we plan to review large relationships, even if 
credit risk is low, and flag structured products during our 
credit work for potential further review. We think it is 
important that bank management establishes controls that 
encompass the bank's total relationship with its large 
customers. Competitive pressures are a natural part of any 
business environment, but care must be taken to ensure that 
line managers eager to retain or expand business with important 
customers don't cross the line and jeopardize the trust and 
credibility that forms the foundation of a bank.
    It is encouraging to report that banks are studying and 
learning from the Enron experience, whether or not that 
experience was firsthand. Banks that offer complex structured 
transactions have come to realize that they stand to suffer 
great harm if they are implicated in questionable activities 
conducted by their customers. As a result, banks have taken 
steps to improve their internal controls of complex structured 
transactions and special purpose entities.
    Some banks have made changes to management, establishing 
new oversight committees, developing new policies and 
procedures, tightening controls, upgrading internal reporting 
to management and the board, and improving the quality and 
quantity of disclosures. Banks have also strengthened their 
review and approval processes for complex structured 
transactions. This includes expanding the definition of 
products to be approved and enhancing the approval process to 
provide for a broader range of senior-level management review. 
Also, banks are putting a greater focus on assessing customer 
motivation and appropriateness, including securing 
representations from customers regarding disclosures and 
accounting treatment.
    We believe that these are all positive steps toward 
strengthening internal processes. We are currently evaluating 
the responses of national banks and will assess these reforms 
as they are implemented.
    I also want to highlight another important facet of the 
supervisory process. That is the interaction among the Federal 
regulatory agencies. The ability to make and receive referrals 
ensures that the agency with the appropriate authority and 
expertise is involved. We are coordinating our reviews of 
national banks' previous involvement with Enron with the 
Federal Reserve and the SEC. Because this is an open matter, I 
am unable to comment institution specific details that pertain 
to the current reviews underway.
    Thank you once again for inviting OCC to testify at this 
important hearing.
    Senator Levin. Thank you very much, Mr. Roeder.
    Let me welcome Ms. Nazareth. We know that you were late, 
tied up somewhere, but we are going to need now to swear you in 
as we do all of our witnesses, so I would ask you to stand and 
raise your right hand.
    Do you solemnly swear that the testimony that you will give 
before this Subcommittee will be the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Ms. Nazareth. I do.
    Senator Levin. Thank you. Ms. Nazareth, thank you.

TESTIMONY OF ANNETTE NAZARETH,\1\ DIRECTOR, DIVISION OF MARKET 
     REGULATION, U.S. SECURITIES AND EXCHANGE COMMISSION, 
                         WASHINGTON, DC

    Ms. Nazareth. Thank you, and I apologize for being late, 
Mr. Chairman. My name is Annette Nazareth and I am the Director 
of the Division of Market Regulation at the Securities and 
Exchange Commission. I would like to submit my written 
testimony for the record and briefly summarize, if I may.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Nazareth appears int he Appendix 
on page 134.
---------------------------------------------------------------------------
    Senator Levin. Thank you, and it will be made part of the 
record.
    Ms. Nazareth. Thank you. I will take just a few minutes to 
highlight a couple of key points. First, the SEC has 
significant powers to investigate possible violations of the 
Federal securities laws and to enforce those laws through civil 
and administrative actions. The Commission to date has charged 
two former Enron officers with fraud based on their 
participation in transactions designed to mislead investors 
about Enron's financial results. The Commission's investigation 
is ongoing and the Commission's Division of Enforcement 
continues to work diligently and vigorously with the Justice 
Department's Enron Task Force to ensure that all those 
responsible answer for their misdeeds.
    While I cannot speak publicly regarding the specifics of 
any ongoing investigation, several aspects of the Commission's 
general enforcement authority are particularly relevant to the 
issues of disclosure and transparency that are at the root of 
the problems you are examining today.
    The Commission has clear authority to proceed against 
public companies that file false information as part of their 
financial statements. Such conduct is potentially subject to 
various provisions of the Federal securities laws, including 
the requirement that companies' filings with the SEC be 
materially complete and accurate and the SEC's general anti-
fraud authority.
    The Commission brings numerous actions, 163 this past 
fiscal year, based on false and fraudulent financial reporting 
and disclosures. Among these was an action the Commission 
recently brought against a public company for, among other 
things, using an undisclosed off-balance-sheet special purpose 
entity to dramatically overstate the company's cash flow from 
operations. Cases like this make clear that public companies 
using off-balance-sheet special purpose entities must ensure 
not only that their accounting treatment compiles with 
Generally Accepted Accounting Principles, known as GAAP, but 
also that they have accurately portrayed the economic realities 
of the transaction.
    The Commission also has explicit statutory authority not 
only to proceed against primary violators of the Federal 
securities laws, but also against aiders and abetters of those 
violations. The Commission aggressively employs this authority. 
In addition, the Commission may order any person who is or was 
a cause of a violation of any provision of the Exchange Act due 
to an act or omission the person knew or should have known 
would contribute to the violation, to cease and desist from 
causing such violations.
    Aggressive enforcement not only punishes wrongdoers, but 
also helps deter future illegal behavior, and in fulfilling 
this mission, the Commission cooperates with the Federal bank 
regulators, among others. The SEC obtains evidence of possible 
violations of the securities laws from many sources, including 
from other regulatory authorities, such as the Federal bank 
regulators. In addition, when appropriate, the Commission 
coordinates its investigations with Federal banking regulators, 
which can result in coordinated regulatory settlements.
    For example, in a recent case, the SEC took action with 
respect to accounting improprieties of the PNC Financial 
Services Group, Inc., a bank holding company. The Commission's 
order found, among other things, that PNC materially overstated 
its earnings by failing to consolidate into its financial 
statements three special purpose entities to which it 
transferred approximately $762 million of volatile, troubled, 
or under-performing loans and venture capital assets. Based in 
part on this conduct, the Commission found that PNC had 
violated the anti-fraud record keeping and reporting provisions 
of the securities laws.
    At the same time the Commission's order was issued, the 
Federal Reserve announced that PNC had entered into a written 
agreement to address bank supervisory matters. The Commission 
acknowledged the substantial cooperation provided by the board 
in this matter.
    The Commission has long recognized the need to consult and 
coordinate with the Federal banking agencies on matters 
involving financial institutions that are public companies. For 
example, the chief accountants of the Commission and the 
Federal Deposit Insurance Corporation, the Federal Reserve 
Board, the Office of the Comptroller of the Currency, and the 
Office of Thrift Supervision meet periodically to discuss 
matters of mutual interest. Similarly, key decision makers meet 
regularly to implement supervisory programs, work on 
international agreements, and guard against money laundering.
    While our enforcement activities are ongoing, there are 
numerous other efforts underway at the Commission to improve 
the quality of reported financial information, the reliability 
of that information, and the timeliness of that information. 
The fall of Enron, along with other corporate scandals, has 
crystallized the importance of efforts to strengthen the 
accountability of public company officers as well as other so-
called gatekeepers of our financial markets, the lawyers, the 
accountants, the auditors who work with public companies as 
part of the financial reporting process. Enactment of the 
Sarbanes-Oxley law also will help ensure that regulation with 
regard to these parties is stronger.
    Some of these regulations are already final. For example, 
as of August of this year, the CEOs and CFOs are now required 
to certify the financial and other information in issuers' 
quarterly and annual reports. Other rules to implement the Act 
are proposed and are on track to be finalized in January. For 
example, in November, the Commission proposed rules regarding 
standards of professional conduct for attorneys, and in 
October, the Commission proposed rules that would significantly 
tighten the requirements for companies to disclose non-GAAP 
financial measures and for corporate management to disclose 
material off-balance-sheet arrangements. Individually and in 
their totality, these rules should have a significant effect on 
the quality and reliability of financial reporting and, thus, 
should serve to enhance investor confidence.
    At the same time that we are working to strengthen our own 
rules and regulations, we are also diligently exercising our 
oversight role through our Office of Chief Accountant to make 
sure that the private sector's standard-setting bodies, 
including the FASB and the AICPA, are making improvements in 
their auditing and accounting standards. You will find the 
details of these improvements outlined in my written testimony.
    To conclude, Mr. Chairman, there is no question that as we 
continue to unravel the improprieties of the Enron scandal and 
others, we will take away many more important lessons, and in 
response to these lessons, we will continue to refine our 
internal procedures, cooperate with other regulatory bodies, 
and hone our rules and regulations so that Enron-type disasters 
are less likely to occur in the future. Thank you.
    Senator Levin. Thank you, Ms. Nazareth.
    We have seen in a number of transactions financial 
institutions participating, aiding and abetting, contributing 
to deceptive prepays which were constructed to look like energy 
trades instead of debt, deceptive asset sales that are backed 
by secret guarantees, ensuring that the buyer will get its 
money back when the asset is sold a second time, deceptive 
joint ventures that are formed to move assets off balance 
sheets but ensure that the second investor never has any funds 
at risk, and deceptive tax products that include fake business 
transactions.
    I know that each of you, because you are leaders in your 
field, are troubled by those kinds of deceptive transactions 
and, indeed, spend your professional life in trying to see if 
we can't remove deceptive transactions or deceptive accounting 
from our financial world.
    It seems to me what we are facing is the following, that we 
have both our banking regulators and our SEC doing case-by-case 
enforcement, that when it comes to banks, we have a gap. We 
have a gap because, on the one hand, the SEC does not generally 
regulate banks, and we, on the other hand, don't have our 
banking regulators that do the work relative to banks that the 
SEC would do if it did regulate banks.
    I know you all work together, and that is really essential, 
that you do work together if we are going to overcome and to 
end some of the deceptive practices that we have both heard 
about and we have written about, our investigation has 
uncovered, and so forth, and I am not going to ask you to 
comment on any specific practice of any specific institution 
for obvious reasons.
    Is it possible that you could, working together, end that, 
or fill that gap in our regulatory regime, in the oversight 
that you carry out, because the SEC doesn't generally regulate 
banks and the bank regulators don't generally regulate 
accounting practices or ensure accounting financial statements, 
we have got that gap. Unless we have our regulators working 
together, we are not going to be able to deter. We may be able 
to, on a case-by-case basis, get to a problem in terms of 
punishment after the fact, but in terms of examining the books 
of financial institutions, we are not going to be able to do 
the deterrent work which is usually available in most 
regulatory bodies. We need a deterrence program.
    I would like you to react to the following approach. First, 
that the SEC issue a clear policy statement, that the SEC would 
take enforcement action against financial institutions which 
aid or abet a client's dishonest accounting, or, of course, if 
they participate in a deceptive structured transaction. We know 
the SEC has the authority to go after aiders and abetters, but 
what I am suggesting here is not just a case-by-case going 
after an aider or abetter, but issuing a clear policy statement 
that the SEC would take enforcement action against financial 
institutions if they aid or abet a client's dishonest 
accounting or participate in a deceptive structured 
transaction. Now, that would be the SEC side of the two-step 
action which I am suggesting.
    The second step would be by the bank regulators, here, 
informing the banks that violation of that SEC policy which I 
have just described would constitute an unsafe and unsound 
practice. That would enable bank examiners to take appropriate 
action during regular bank examinations.
    If the SEC issues a clear policy statement relative to 
aiding and abetting by the financial institutions and if then 
the banking regulators as part of their regular bank 
examination let the financial institutions understand that a 
violation of that SEC policy, in turn, would constitute an 
unsound and unsafe practice, we then will have addressed this 
gap which exists, which I think most people would agree should 
somehow or other be filled.
    So I am wondering whether or not I could get a reaction 
from our three witnesses today to that, and if that is 
something which needs to be looked at, fine. If there is a 
different approach where you can join together to fill this 
regulatory gap, then we would welcome your comments on it. Let 
me take you in the same order that I called on you before. Mr. 
Spillenkothen.
    Mr. Spillenkothen. Mr. Chairman, I think if the SEC had a 
requirement that said a certain activity was a violation of 
securities laws or a violation of the law or securities 
regulation, then I think it would be the responsibility of bank 
regulators, if they found a situation that was a violation of 
an SEC rule, to take action, to deal with that, take 
enforcement action or refer to the SEC.
    So I would, again, without having had a chance to work this 
through entirely--I am not a lawyer--but if an activity is 
clearly stated, if an activity is a violation of a securities 
law or regulation that the SEC has established or that is 
established, then I would think banking regulators would have 
no difficulty in taking steps when they found a violation. 
Obviously, you still have to make a judgment as to whether the 
organization is violating the law. But if the clear established 
rule is that a certain activity is a violation of the law, then 
the bank regulators would take an action it would be unsafe and 
unsound to violate securities law.
    Senator Levin. This would be part of their bank 
examination, or it could be part of their routine, regular bank 
examination?
    Mr. Spillenkothen. If we found a violation of a securities 
law, we should take action or refer to the SEC in the course of 
our ongoing supervisory process, yes.
    Senator Levin. You say law. My reference and my question 
was to either a law, regulation, or a policy clearly stated by 
the SEC as to what action they would take if they found certain 
activities. So I tried to identify the word ``policy.'' Now, it 
can't just be general and it can't just be oral. It would have 
to be a clearly stated enforcement policy of the SEC, 
obviously, but would that do it or does it have to be a 
regulation?
    Mr. Spillenkothen. I am not a lawyer, sir.
    Senator Levin. OK. If you could just take that back to your 
lawyers, I know they are waiting for work and will welcome the 
question. [Laughter.]
    Senator Levin. Mr. Roeder.
    Mr. Roeder. If the SEC issued a policy statement as you 
indicated, I think from our standpoint, a bank that would 
violate that statement, we would consider that an unsafe and 
unsound practice, because as Mr. Spillenkothen indicated, we 
expect banks to obey and comply with law.
    If we, in our examination process, detected noncompliance 
with that statement, in addition to referring that matter to 
our colleagues at the SEC, our own current enforcement 
authorities allow us to initiate action against an institution 
ourselves for unsafe and unsound practices. So I think what you 
propose is workable.
    Senator Levin. Thank you. Ms. Nazareth.
    Ms. Nazareth. I think to a large extent, what the 
Commission does is consistent with the spirit of, I think, what 
you are looking to achieve. Our enforcement actions are all 
settled pursuant to SEC orders that are very highly negotiated 
and contain, I think, very clear articulations of what is the 
Commission's position with respect to the activity, and as you 
know, we have a--one reason why people find it particularly 
painful to have had an enforcement action with the SEC is that 
we really name and shame. We are quite public in these actions 
in terms of making public what the activity was and what the 
Commission's articulation of the issue was.
    In the cases that you are discussing, those cases would be 
brought under our general anti-fraud authority. I think that, 
in general, our position is that we want it very clear--in 
other words, we would want to make it very clear to people, as 
we have in some of our recent aider and abetter cases, that 
there is aiding and abetting liability for this type of 
activity. You can see the specific examples in those cases as 
to what resulted in aider and abetter liability.
    But we, frankly, by not putting out a specific policy 
statement, we don't limit the context or the fact patterns in 
which we could find that activity to be violative, which I 
think is important. We are careful not to find ourselves in a 
position, I think, where ultimately someone could say, well, 
what I did was technically around the edges of your policy 
statement. Rather, I think we leave ourselves sufficient room 
so that regardless of how imaginative some of these schemes can 
become, that we will be on all fours in being able to bring a 
case against the parties.
    But again, that having been said, I think the language is 
quite clear in these enforcement orders and would provide 
sufficient guidance to other regulators to ascertain what we 
had found to be a legal activity, and I suspect as a result of 
all of this, all of us at this table and other regulators, as 
well, will be thinking through our own, as we have testified, 
our own examination procedures in terms of the kinds of 
activities that we will be looking for, the kinds of internal 
procedures that we will expect these entities to have in order 
to ensure that they are not engaging in these types of 
activities.
    Senator Levin. Would you take up with the SEC the 
suggestion that you adopt a policy statement relative to types 
of special purpose entities or structured transactions which 
you would consider to be improper? The advantage of that, 
obviously, is the one that I set out, that then the banking 
regulators would have not just the case-by-case results from 
your shop, but would have a policy statement which could appear 
prospectively. They wouldn't have to just interpret from a case 
or a finding in a specific case from a different agency, but 
they would have a policy statement of that agency.
    I think if you would be willing to take that back, that 
idea back, it also could contain within it a statement that 
your enforcement actions are not limited to those particular 
examples of practices which you would feel to be deceptive or 
not reflective of good accounting practices. You could make 
that clear that those are simply examples and don't represent 
the total universe of what your enforcement actions might be.
    But if you could at least consider taking that kind of 
action, it would, I believe, be an important step to filling 
what is a real gap, and that is the gap which I have 
identified, which is that SEC generally doesn't regulate banks 
and that banking examiners generally don't do--generally don't 
look for the kind of things that you look at in public 
corporations in terms of their financial statements. So would 
you be willing to do that?
    Ms. Nazareth. Yes, of course, I will take that back.
    Senator Levin. Let me turn now to Senator Bennett for a 
time.
    Senator Bennett. Thank you, Mr. Chairman. I apologize to 
the members of the other panels that I missed. I had a 
longstanding lunch engagement that I felt I had to keep, but 
you are still going forward, so I appreciate the opportunity to 
be back here.
    One of the things that has come out of all this is a 
recognition that contrary to general impressions, accounting is 
not an exact science. Indeed, accounting can be quite 
philosophical.
    My brother, who taught philosophy at the University of 
Utah, described getting acquainted with the new head of the 
accounting department at the University of Utah and the two of 
them would go to lunch together and discuss the philosophy of 
accounting, and interestingly enough, this fellow, whose name I 
do not know, was ultimately asked to leave the University of 
Utah because his philosophy of accounting was sufficiently 
upsetting to other members of the faculty, that even though his 
recruiting had been considered a great coup by the university 
at one time because he had something of an international 
reputation, it didn't mesh culturally with the other members of 
the faculty and he was ultimately asked to teach someplace 
else.
    I think the average person on the street thinks of 
accounting in the same terms as he does balancing his own 
checkbook or filling out his tax return and doesn't realize 
that there are all kinds of different ways that you can account 
for economic activity and all kinds of justifications that can 
be raised and defended for these different approaches.
    So the challenge that you face as regulators is not just 
one to make sure that the checkbook balances and all the 
numbers add up, but that the philosophy, if I can use that 
term, that is being applied will, in fact, be the clearest 
statement of what things really are.
    In the Banking Committee, we have had long and sometimes 
acrimonious debates about accounting in mergers and 
acquisitions, of whether you do it on a pooling basis or a 
purchase basis, and those that favor pooling insist that 
philosophy of accounting is responsible for the boom of the 
1990's, and those that favor the purchase basis insist that 
pooling is a shell game that is hiding real value.
    The question that the Chairman of the Banking Committee, 
Senator Graham, raised, was is there really a depreciation of 
the value of some of the intangible assets? For example, does 
the reputation of Coca-Cola really go down to nothing over a 
40-year period? Does the value of the Coca-Cola formula 
depreciate over time that can show up as a number on the income 
statement or in the balance sheet? And we debated that with all 
of the fervor of medieval theologians discussing how many 
angels can dance on the head of a pin.
    I would like your reaction to the following that has come 
to me as I have listened through all of this and contemplated 
the true disaster that Enron represents. It was a disaster for 
its employees and a disaster for its shareholders, but as I 
have reviewed the testimony of Muriel Siebert, it was also a 
disaster for the system as a whole and shook investor 
confidence in the entire American system in a way that we are 
still living with.
    You can manage earnings. That is a phrase that has come out 
of the whole Enron experience, that executives are managing 
earnings so that they will meet the numbers that the analysts 
have projected. I have been the CEO of a company and I know 
how, very rudimentarily, how to do some things to produce that 
result, how to put a particular loss in this quarter as opposed 
to next quarter, how to set up reserves that are perfectly 
legitimate, but you set them up in such a way as to manage how 
much money shows up on the bottom line. You can't manage cash 
flow. The cash is either in the bank or it is not. You can't 
fudge that one.
    As we are debating what to do about the economy in the next 
year, one of the proposals that is on the table has to do with 
the deductibility or tax treatment of dividends, and it has 
occurred to me that if we were to make dividends tax deductible 
or tax free to the individual investor who receives them, the 
investor would, therefore, have an incentive--economics is all 
about incentives--have an incentive to purchase a stock whose 
return could rival that of municipal bonds.
    Management would have a very difficult time managing the 
dividend flow, managing the cash flow that would make it 
possible to pay dividends. It would be much more difficult to 
try to manipulate market perceptions of your company if you had 
to come up with the cash every quarter to maintain your 
dividend payment in order to maintain your stock price, and 
that would change the incentive on the part of the CEO very 
dramatically.
    Instead of going into his CFO and saying, ``Find me an 
offshore special purpose entity that I can play with and 
pretend I have created earnings,'' the CEO would go to his 
operational leaders and say, ``Find me a place where I can get 
a little more cash so I can meet my dividend so that my stock 
price won't be hurt if the dividend is cut.''
    In today's market, it is considered a sign of weakness if a 
company pays dividends. I remember speaking to a CEO of a 
company that was awash in cash and saying to him, why don't you 
pay some dividends, and he said, ``If we paid dividends, it 
would be an admission that we were not in a position to earn 
more money for our investors' dollars within the company than 
they could earn with after-tax dollars investing it themselves, 
and we don't want to admit that we are not good enough managers 
to do better with their dollars keeping them here as pre-tax 
dollars than we would be if we gave them the money and then 
they had to pay taxes on it and then they could get a still 
better rate of return.''
    Now, I know this is economic policy. I know this is part of 
the tax debate. But thinking of it in terms of a corporate 
governance issue as opposed to a tax issue, do you see any 
change in corporate behavior if dividends were tax-free to the 
recipients and, therefore, corporations had a strong incentive 
in terms of the impact on their stock price to accumulate 
enough cash, not phony accounting activities, cash, to be able 
to pay out dividends?
    I would appreciate any reaction you might have. This is a 
little bit afield from what we have been talking about, but it 
is very current in what we will be talking about in January and 
it has come to my mind as I have tried to think my way through 
Enron and what could have been done to prevent it. If the Enron 
executives had had an incentive to meet genuine cash 
responsibilities, they would probably not have engaged in some 
of the very high-risk activities that they did engage in. I 
would like your reaction.
    I have caused all three of you to look at each other and 
smile. I won't interpret that as being, this Senator is 
completely out of his mind, but a more benign interpretation, 
but whoever might want to take it.
    Mr. Spillenkothen. Well, Senator, you are right, this 
question is beyond my bailiwick as a mere bank supervisor, so I 
don't have a good insight there. I think your point about 
accounting being not science certainly is a true one and I 
think that--but we would argue as a bank supervisor that 
banking organizations and private sector firms still have an 
obligation to get the accounting right.
    Senator Bennett. There is no question about that.
    Mr. Spillenkothen [continuing]. An obligation to get it 
right, and speaking as a bank supervisor, I am very strongly 
supportive of efforts by the Financial Accounting Standards 
Board, by the Congress in establishing reforms. We think the 
progress on getting the Auditor Oversight Board set up and 
getting that process working to provide more discipline to the 
accounting profession are all very good things and they are 
very critical for bank supervision.
    So I don't have an opinion on your original point, but 
getting the accounting right, bringing discipline to the 
accounting profession, bringing to bear some of the reforms 
that this Congress has established, the oversight board for 
accountants, the Auditor Oversight Board, the reforms that the 
FASB is trying to do, the steps that the SEC has been taking to 
improve disclosure and accounting are very critical to our role 
as bank supervisors.
    Ms. Nazareth. I feel like it is a trick law school 
question.
    Senator Bennett. Not at all. I am unburdened with a legal 
education----
    Ms. Nazareth. Excellent.
    Senator Bennett [continuing]. So you can go in any 
direction you want.
    Ms. Nazareth. Well, I can assure you, a legal education 
doesn't necessarily bring you to the right answer.
    It is not clear to me as a lawyer and as a securities 
regulator what the consequences of that would be from a 
corporate governance perspective. I really haven't had time to 
think it through.
    I think what it is fair to say, though, is that I think we 
do need to continue to think creatively about ways that we can 
appropriately incent companies, incent boards of directors, to 
act in the best interests of shareholders, in the best 
interests of their corporations and their businesses, and to 
account for their activities in appropriate ways. And so, 
certainly, that is a creative idea that we could consider, as 
well as others, to get to that desired goal.
    Senator Bennett. As I say, economics is about incentives, 
and as I have gone through the Enron disaster, I realize there 
was a strong incentive in terms of the stock price to, again 
the phrase I mentioned this morning, be aggressive in reporting 
earnings, a strong incentive in terms of the stock price to 
find every possible way within the law, if you were determined 
to abide by the law, or outside the law if you were of that 
mind, to account for earnings in a way that would inflate them 
and hope that somehow the real business would catch up with 
that later on and you wouldn't get trapped.
    But I am old enough to have come from the school that says 
you manage the business properly and the earnings take care of 
themselves, and ultimately, they take care of themselves in the 
terms of money in the till. If you could share that money with 
your investors without their having to pay the double taxation 
on it, that becomes an incentive to move in the other 
direction. I won't berate that hobby horse any further. We will 
have debate about that.
    Mr. Chairman, I appreciate your indulgence. I noticed going 
through Mr. Spillenkothen's statement, his statement more 
clearly than I made it this morning on an issue that came out 
of this morning's comment, where he says banks should not be 
held legally responsible for the judgments, actions, or 
malfeasance of their customers, nor should they be required to 
second guess their customers' accountants, tax, or legal 
experts, or police their customers' activities. Such an 
expectation would require, inappropriately, banking 
organizations to assume management responsibility for their 
customers and place potential legal liability on banking 
organizations that would compromise their ability to perform 
their role as financial intermediaries or threaten their safety 
and soundness, and that is the point I was trying to make this 
morning, sir, and you have made it more eloquently.
    But you say in the next paragraph, as we all agree, that 
banks must not participate in activities of their customers 
that the banks know to be illegal or improper, and that is the 
area that the Chairman is looking into, very appropriately.
    Thank you very much for your testimony.
    Senator Levin. Thank you very much, Senator Bennett.
    We have all encountered some of the deceptive accounting 
practices since Enron in various forms and guises. In one 
instance that we discussed today, three senior officials of the 
investment bank told the head of the investment bank not to go 
forward with a transaction. They used words like it would put 
the reputation of the franchise at risk, but nonetheless, they 
proceeded because Enron had pressured the bank to go forward.
    So you have got client pressure, you have got competition 
pressure, and in the last few years, banks have begun competing 
for business on the basis of who can sell the product that 
makes the client's financial statement look the best, and that 
is the race to the bottom. So our banks and our security firms 
need accurate financial statements, but too often, instead of 
promoting honest accounting, they have been sold and are 
selling products that produce dishonest accounting.
    I just really need a good, clear statement from our 
regulators, because you are at the top of your professions, 
that this is unacceptable, that our financial institutions have 
got to stop facilitating accounting deceptions, they have got 
to stop helping clients manipulate their financial statements. 
I would ask you for a clear statement of that without 
commenting on any specific case.
    Mr. Spillenkothen. Mr. Chairman, I think in my statement I 
indicated that we do not think banks should engage in 
borderline transactions because they can pose operational and 
legal risks to the bank and they can also expose the bank to 
risks and ultimately risk to the depositors and the insurance 
funds. So we do not believe banks should engage in borderline 
transactions.
    Ms. Nazareth. I concur with that statement, as well.
    Mr. Roeder. And I take no disagreement with that.
    Senator Levin. Now, when it comes to the area of structured 
finance operations at banks and security firms, the question is 
how do you separate the legitimate from the illegitimate. There 
are obviously some legitimate purposes, as we have all 
indicated, for structured finance operations, but there are 
some clearly illegitimate uses to which they have been put, 
where there is no business purpose, where all they have been 
used for is to try to turn a loan into income or to try to 
pretend that there was an asset sale when there wasn't, there 
was a loan, where you have this kind of deceptive structure 
which is created.
    We have got to, if we are going to restore confidence in 
these financial statements, we have got to be able to identify, 
describe what separates the wheat from the chaff when it comes 
to these structured finance operations. Would you be willing to 
conduct, or take back to your agencies the suggestion that 
there be a joint review of structured finance operations at 
banks and security firms in order to identify the ones which 
are promoting deceptive accounting and to distinguish them from 
the legitimate uses of these structured finance operations? 
Would you be willing to take that suggestion back about such a 
joint review? Let me start with you, Mr. Roeder.
    Mr. Roeder. I think we have to absolutely work together, 
and, of course, do so around the ongoing matters under review 
or investigation within our agencies.
    One of the difficult things, as you mention, is separating 
good from bad, especially considering the large number of 
transactions that these banks conduct. Fortunately, the 
transactions that we have talked about today are, we believe, 
limited in banks.
    In addition, the life of some of these transactions is very 
short, so the scope and how you might go about conducting that 
review would clearly be something we would have to spend time 
talking about. We are all faced with limited resources, so I 
think you have to bear down on those things that are very 
complex and assess the reforms that the banks have adopted and 
try to determine how you could extract best practices in hopes 
that would lead us to maybe a better differentiation between 
what is appropriate and not appropriate. But I think a 
coordinated review, as long as it doesn't interfer with our 
current reviews, is sensible.
    Senator Levin. Ms. Nazareth.
    Ms. Nazareth. I think that there are a number of lessons 
that we are going to--that will ultimately emerge from this 
period and I think it would be incumbent on all the regulators 
to look back on this after we have completed all these 
enforcement investigations and see what the lessons learned 
are.
    Certainly, I think we will be much more knowledgeable about 
the types of transactions that were problematic. I think we 
could share information on that, and perhaps with assistance 
from the various auditing and accounting groups who assist us 
in these efforts, perhaps we could try to give some guidance 
for terms of what we saw that was problematic.
    Senator Levin. Thank you. Mr. Spillenkothen.
    Mr. Spillenkothen. Thank you, Mr. Chairman. As I said, the 
Federal Reserve is actually reviewing a handful of 
organizations that are engaging in these transactions, so we 
are involved now in a review of these transactions. We are 
consulting with our colleagues at the OCC and the SEC in this 
process, so we will continue that.
    As I indicated, we will, after this process is finished and 
we have had a chance to assess our results, consider the need 
for additional supervisory guidance to our examiners or to the 
industry. We will consider the need for additional sound 
practice guidance in some of these procedures that the banks 
are putting in place. I think the banking organizations 
themselves have recognized, as they have indicated to you, that 
they need to revise their internal controls and vetting 
processes.
    So we are engaged in a review and we will consider, after 
that review is done, whether we need to provide additional 
supervisory guidance or sound practice guidance in this area.
    Senator Levin. What is the time table for that review?
    Mr. Spillenkothen. Hopefully in the next weeks and months. 
I don't know exactly. We have got a lot of people doing a lot 
of things, but we are attempting to get this done.
    Senator Levin. Do you expect perhaps in a few months, it 
would be done?
    Mr. Spillenkothen. I would hope so.
    Senator Levin. Do you think it is likely that you will be 
issuing some guidance which we could, or you could label as 
being guidance that was contributed to by the other regulatory 
agencies?
    Mr. Spillenkothen. Well, we would certainly coordinate with 
the other agencies. We also need time to make our own 
assessments, and I think I should also point out that whatever 
we do, we would have to go to our oversight board and make an 
evaluation of all this. But we certainly would do this in 
coordination with the other regulators.
    Senator Levin. One of the recommendations we will be making 
in our report is that there be that kind of a joint review so 
that we can have that kind of guidance come from not just the 
Fed, but from all of our regulatory agencies working together. 
It would be, I think, a very important step in what we are 
trying to accomplish.
    Some time ago, if you could take a look, Mr. Spillenkothen, 
at the exhibits--let me see if I can find the number here--
Exhibit 370.\1\ I think we shared this with the folks at the 
Fed some time ago. This was an e-mail back in 1999 that is 
dated March 5, 1999, and it is entitled, ``Disguised Loans.'' 
It says that we are making disguised loans, usually buried in 
commodities or equities derivatives, and I am sure in other 
areas. With few exceptions, they are understood to be disguised 
loans and approved as such, but I am queasy about the process.
---------------------------------------------------------------------------
    \1\ Exhibit No. 370 appears in the Appendix on page 701.
---------------------------------------------------------------------------
    And then the employee of Chase listed a number of concerns, 
and one of which he said was he worried about loans that escape 
routine transparencies. The loan is buried in the trading 
books, and when we say we have X loans to Country Y, it is not 
included. And then he says further down, as a policy matter, I 
think we need a small task force to not eliminate disguised 
loans, but to make sure they are done right.
    I am wondering if your staff at the Fed has talked to you 
about it, are you aware of it, and whether anyone has talked to 
Chase about that.
    Mr. Spillenkothen. Mr. Chairman, I----
    Senator Levin. It does address a safety and soundness 
problem. When a bank evaluates risk, how much of its money is 
tied up in a particular country or company or currency, how 
does it take into account all the loans disguised as energy 
trades or derivatives or asset sales and so forth? How do you 
do a risk analysis when you are missing important transactions? 
Are you familiar with this particular----
    Mr. Spillenkothen. Not in detail. I think because we are 
reviewing these transactions, I really can't discuss specific 
questions.
    Senator Levin. All right, fair enough.
    Mr. Roeder, your office at the OCC oversees about 2,000 
national banks, and you stated in your prepared testimony that 
complex structured transactions such as those entered into by 
Enron are generally offered at only a small number of large 
banking companies. About how many banks are we talking about?
    Mr. Roeder. Our review would indicate fewer than ten.
    Senator Levin. So that the banks that would require extra 
scrutiny on structured finance would be a small population?
    Mr. Roeder. There are a number of institutions that offer 
very standard structured finance products and services. The 
most complex products tend to be concentrated in fewer than ten 
institutions. So, yes, it is not something that we have found 
to date to be widespread.
    Senator Levin. Therefore, I presume that makes the 
regulatory burden a little narrower in terms of the targets?
    Mr. Roeder. It helps, yes.
    Senator Levin. One last document.\2\ This was a Chase 
document, too, in which it was back in 1998 selling or pitching 
prepays and used the term ``balance sheet-friendly.'' I take it 
you would all agree that our balance sheets should be accurate, 
neither friendly nor unfriendly, but accurate. Would that be a 
fair statement, Mr. Spillenkothen?
---------------------------------------------------------------------------
    \2\ Exhibit No. 369 appears in the Appendix on page 687.
---------------------------------------------------------------------------
    Mr. Spillenkothen. That is a fair statement.
    Senator Levin. Ms. Nazareth.
    Ms. Nazareth. Yes.
    Senator Levin. And Mr. Roeder.
    Mr. Roeder. Absolutely.
    Senator Levin. OK. Let me close by thanking you all. It has 
been a long day, but we have learned a lot. A lot of practices 
which we believe are deceptive have been analyzed. Some of our 
leading financial institutions, in our judgment, helped Enron 
cook the books, and the safety and the soundness and the 
vitality of our financial system depends on honest accounting 
and accurate financial reporting. So we need these banks that 
are the guardians and promoters of honest accounting to be that 
and not willing accomplices in accounting deceptions.
    We have heard testimony today which is extremely troubling 
about the extent of financial deceptions that Enron and its 
banks engaged in. The banks say that they recognize the 
problems now. They are changing the way in which they do 
business, and they say what was acceptable a year ago is not 
acceptable today. Hopefully, they will take the actions that 
are promised.
    But we simply cannot rely upon self-regulation and 
promises. We need our regulators to step in, ratchet up efforts 
to ensure honest accounting, and put an end to banks assisting 
their clients to produce deceptive financial statements.
    The gap now in the regulatory oversight area needs to be 
closed, the gap that exists because the SEC does not generally 
regulate banks and the bank regulators don't generally look at 
accounting practices or ensure accurate financial statements. 
We need to continue the effort to get regulators working 
together, of course, punishing wrongdoers on a case-by-case 
basis, but that is not enough. We need to design a new 
deterrence program.
    It needs a lot of work. Steps need to be taken together by 
our regulators, our watchdogs. I have outlined a couple steps 
that I thought would be useful, and we welcomed our witnesses' 
willingness to take those suggestions back to their agencies. 
We will make those suggestions, as I indicated, part of a 
Subcommittee report based on our staff investigation and our 
staff report.
    It would be very helpful if the SEC would issue a clear 
policy statement, that the SEC will take enforcement action 
against financial institutions that aid or abet dishonest 
accounting by a client. At the same time, we need bank 
regulators to tell banks that violation of such an SEC policy 
would constitute an unsafe and unsound practice, which would 
then enable bank examiners to take appropriate action during 
regular bank examinations.
    A comprehensive joint review, such as apparently is being 
undertaken by the Fed, would be very helpful if it is a joint 
review of the structured finance products that are being sold 
or participated in by our financial institutions so that we can 
clearly separate the products and the structured finance 
arrangements which are deceptive from the ones that serve a 
legitimate financial and economic purpose.
    The short story is that we need to send our financial 
firms, some of which are the most renowned firms in the world, 
much less in the country, we have got to send them an 
unmistakable message, that while we welcome their self-
regulation and their growing awareness of what they 
participated in, willingly or unwillingly, wittingly or 
unwittingly, the message has got to be that touting balance 
sheet-friendly deals that allow clients to hide debt or to 
report deceptive amounts of cash flow or earnings are simply 
not going to be tolerated. Our financial institutions must be 
part of the restoration of credibility by helping us to return 
to that good old fashioned honest accounting.
    We all look forward to working with the banking industry 
and the regulators to get that message out and to establish 
that deterrence program that is needed to prevent future 
calamities, such as Enron.
    We again thank all of our witnesses here today. We thank 
our last panel for your patience, for your contributions, and 
most importantly, for the day-to-day work that you are engaged 
in and committed to, in which we place so much faith, that you 
will take aggressive actions against wrongdoers where you find 
them and that you will help us design a deterrence regime and a 
procedure so that we can deter wrongdoing in the future.
    With that, we stand in recess.
    [Whereupon, at 3:17 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              

[GRAPHIC] [TIFF OMITTE] 83485.001

[GRAPHIC] [TIFF OMITTED] 83485.002

[GRAPHIC] [TIFF OMITTED] 83485.003

[GRAPHIC] [TIFF OMITTED] 83485.004

[GRAPHIC] [TIFF OMITTED] 83485.005

[GRAPHIC] [TIFF OMITTED] 83485.006

[GRAPHIC] [TIFF OMITTED] 83485.007

[GRAPHIC] [TIFF OMITTED] 83485.008

[GRAPHIC] [TIFF OMITTED] 83485.009

[GRAPHIC] [TIFF OMITTED] 83485.010

[GRAPHIC] [TIFF OMITTED] 83485.011

[GRAPHIC] [TIFF OMITTED] 83485.012

[GRAPHIC] [TIFF OMITTED] 83485.013

[GRAPHIC] [TIFF OMITTED] 83485.014

[GRAPHIC] [TIFF OMITTED] 83485.015

[GRAPHIC] [TIFF OMITTED] 83485.016

[GRAPHIC] [TIFF OMITTED] 83485.017

[GRAPHIC] [TIFF OMITTED] 83485.018

[GRAPHIC] [TIFF OMITTED] 83485.019

[GRAPHIC] [TIFF OMITTED] 83485.020

[GRAPHIC] [TIFF OMITTED] 83485.021

[GRAPHIC] [TIFF OMITTED] 83485.022

[GRAPHIC] [TIFF OMITTED] 83485.023

[GRAPHIC] [TIFF OMITTED] 83485.024

[GRAPHIC] [TIFF OMITTED] 83485.025

[GRAPHIC] [TIFF OMITTED] 83485.026

[GRAPHIC] [TIFF OMITTED] 83485.027

[GRAPHIC] [TIFF OMITTED] 83485.028

[GRAPHIC] [TIFF OMITTED] 83485.029

[GRAPHIC] [TIFF OMITTED] 83485.030

[GRAPHIC] [TIFF OMITTED] 83485.031

[GRAPHIC] [TIFF OMITTED] 83485.032

[GRAPHIC] [TIFF OMITTED] 83485.033

[GRAPHIC] [TIFF OMITTED] 83485.034

[GRAPHIC] [TIFF OMITTED] 83485.035

[GRAPHIC] [TIFF OMITTED] 83485.036

[GRAPHIC] [TIFF OMITTED] 83485.037

[GRAPHIC] [TIFF OMITTED] 83485.038

[GRAPHIC] [TIFF OMITTED] 83485.039

[GRAPHIC] [TIFF OMITTED] 83485.040

[GRAPHIC] [TIFF OMITTED] 83485.041

[GRAPHIC] [TIFF OMITTED] 83485.042

[GRAPHIC] [TIFF OMITTED] 83485.043

[GRAPHIC] [TIFF OMITTED] 83485.044

[GRAPHIC] [TIFF OMITTED] 83485.045

[GRAPHIC] [TIFF OMITTED] 83485.046

[GRAPHIC] [TIFF OMITTED] 83485.047

[GRAPHIC] [TIFF OMITTED] 83485.048

[GRAPHIC] [TIFF OMITTED] 83485.049

[GRAPHIC] [TIFF OMITTED] 83485.050

[GRAPHIC] [TIFF OMITTED] 83485.051

[GRAPHIC] [TIFF OMITTED] 83485.052

[GRAPHIC] [TIFF OMITTED] 83485.053

[GRAPHIC] [TIFF OMITTED] 83485.054

[GRAPHIC] [TIFF OMITTED] 83485.055

[GRAPHIC] [TIFF OMITTED] 83485.056

[GRAPHIC] [TIFF OMITTED] 83485.057

[GRAPHIC] [TIFF OMITTED] 83485.058

[GRAPHIC] [TIFF OMITTED] 83485.059

[GRAPHIC] [TIFF OMITTED] 83485.060

[GRAPHIC] [TIFF OMITTED] 83485.061

[GRAPHIC] [TIFF OMITTED] 83485.062

[GRAPHIC] [TIFF OMITTED] 83485.063

[GRAPHIC] [TIFF OMITTED] 83485.064

[GRAPHIC] [TIFF OMITTED] 83485.065

[GRAPHIC] [TIFF OMITTED] 83485.066

[GRAPHIC] [TIFF OMITTED] 83485.067

[GRAPHIC] [TIFF OMITTED] 83485.068

[GRAPHIC] [TIFF OMITTED] 83485.069

[GRAPHIC] [TIFF OMITTED] 83485.070

[GRAPHIC] [TIFF OMITTED] 83485.071

[GRAPHIC] [TIFF OMITTED] 83485.072

[GRAPHIC] [TIFF OMITTED] 83485.073

[GRAPHIC] [TIFF OMITTED] 83485.074

[GRAPHIC] [TIFF OMITTED] 83485.075

[GRAPHIC] [TIFF OMITTED] 83485.076

[GRAPHIC] [TIFF OMITTED] 83485.077

[GRAPHIC] [TIFF OMITTED] 83485.078

[GRAPHIC] [TIFF OMITTED] 83485.079

[GRAPHIC] [TIFF OMITTED] 83485.080

[GRAPHIC] [TIFF OMITTED] 83485.081

[GRAPHIC] [TIFF OMITTED] 83485.082

[GRAPHIC] [TIFF OMITTED] 83485.083

[GRAPHIC] [TIFF OMITTED] 83485.084

[GRAPHIC] [TIFF OMITTED] 83485.085

[GRAPHIC] [TIFF OMITTED] 83485.086

[GRAPHIC] [TIFF OMITTED] 83485.087

[GRAPHIC] [TIFF OMITTED] 83485.088

[GRAPHIC] [TIFF OMITTED] 83485.089

[GRAPHIC] [TIFF OMITTED] 83485.090

[GRAPHIC] [TIFF OMITTED] 83485.091

[GRAPHIC] [TIFF OMITTED] 83485.092

[GRAPHIC] [TIFF OMITTED] 83485.093

[GRAPHIC] [TIFF OMITTED] 83485.094

[GRAPHIC] [TIFF OMITTED] 83485.095

[GRAPHIC] [TIFF OMITTED] 83485.096

[GRAPHIC] [TIFF OMITTED] 83485.097

[GRAPHIC] [TIFF OMITTED] 83485.098

[GRAPHIC] [TIFF OMITTED] 83485.099

[GRAPHIC] [TIFF OMITTED] 83485.100

[GRAPHIC] [TIFF OMITTED] 83485.101

[GRAPHIC] [TIFF OMITTED] 83485.102

[GRAPHIC] [TIFF OMITTED] 83485.103

[GRAPHIC] [TIFF OMITTED] 83485.104

[GRAPHIC] [TIFF OMITTED] 83485.105

[GRAPHIC] [TIFF OMITTED] 83485.106

[GRAPHIC] [TIFF OMITTED] 83485.107

[GRAPHIC] [TIFF OMITTED] 83485.108

[GRAPHIC] [TIFF OMITTED] 83485.109

[GRAPHIC] [TIFF OMITTED] 83485.110

[GRAPHIC] [TIFF OMITTED] 83485.111

[GRAPHIC] [TIFF OMITTED] 83485.112

[GRAPHIC] [TIFF OMITTED] 83485.113

[GRAPHIC] [TIFF OMITTED] 83485.114

[GRAPHIC] [TIFF OMITTED] 83485.115

[GRAPHIC] [TIFF OMITTED] 83485.116

[GRAPHIC] [TIFF OMITTED] 83485.117

[GRAPHIC] [TIFF OMITTED] 83485.118

[GRAPHIC] [TIFF OMITTED] 83485.119

[GRAPHIC] [TIFF OMITTED] 83485.120

[GRAPHIC] [TIFF OMITTED] 83485.121

[GRAPHIC] [TIFF OMITTED] 83485.122

[GRAPHIC] [TIFF OMITTED] 83485.123

[GRAPHIC] [TIFF OMITTED] 83485.124

[GRAPHIC] [TIFF OMITTED] 83485.125

[GRAPHIC] [TIFF OMITTED] 83485.126

[GRAPHIC] [TIFF OMITTED] 83485.127

[GRAPHIC] [TIFF OMITTED] 83485.128

[GRAPHIC] [TIFF OMITTED] 83485.129

[GRAPHIC] [TIFF OMITTED] 83485.130

[GRAPHIC] [TIFF OMITTED] 83485.131

[GRAPHIC] [TIFF OMITTED] 83485.132

[GRAPHIC] [TIFF OMITTED] 83485.133

[GRAPHIC] [TIFF OMITTED] 83485.134

[GRAPHIC] [TIFF OMITTED] 83485.135

[GRAPHIC] [TIFF OMITTED] 83485.136

[GRAPHIC] [TIFF OMITTED] 83485.137

[GRAPHIC] [TIFF OMITTED] 83485.138

[GRAPHIC] [TIFF OMITTED] 83485.139

[GRAPHIC] [TIFF OMITTED] 83485.140

[GRAPHIC] [TIFF OMITTED] 83485.141

[GRAPHIC] [TIFF OMITTED] 83485.142

[GRAPHIC] [TIFF OMITTED] 83485.143

[GRAPHIC] [TIFF OMITTED] 83485.144

[GRAPHIC] [TIFF OMITTED] 83485.145

[GRAPHIC] [TIFF OMITTED] 83485.146

[GRAPHIC] [TIFF OMITTED] 83485.147

[GRAPHIC] [TIFF OMITTED] 83485.148

[GRAPHIC] [TIFF OMITTED] 83485.149

[GRAPHIC] [TIFF OMITTED] 83485.150

[GRAPHIC] [TIFF OMITTED] 83485.151

[GRAPHIC] [TIFF OMITTED] 83485.152

[GRAPHIC] [TIFF OMITTED] 83485.153

[GRAPHIC] [TIFF OMITTED] 83485.154

[GRAPHIC] [TIFF OMITTED] 83485.155

[GRAPHIC] [TIFF OMITTED] 83485.156

[GRAPHIC] [TIFF OMITTED] 83485.157

[GRAPHIC] [TIFF OMITTED] 83485.158

[GRAPHIC] [TIFF OMITTED] 83485.159

[GRAPHIC] [TIFF OMITTED] 83485.160

[GRAPHIC] [TIFF OMITTED] 83485.161

[GRAPHIC] [TIFF OMITTED] 83485.162

[GRAPHIC] [TIFF OMITTED] 83485.163

[GRAPHIC] [TIFF OMITTED] 83485.164

[GRAPHIC] [TIFF OMITTED] 83485.165

[GRAPHIC] [TIFF OMITTED] 83485.166

[GRAPHIC] [TIFF OMITTED] 83485.167

[GRAPHIC] [TIFF OMITTED] 83485.168

[GRAPHIC] [TIFF OMITTED] 83485.169

[GRAPHIC] [TIFF OMITTED] 83485.170

[GRAPHIC] [TIFF OMITTED] 83485.171

[GRAPHIC] [TIFF OMITTED] 83485.172

[GRAPHIC] [TIFF OMITTED] 83485.173

[GRAPHIC] [TIFF OMITTED] 83485.174

[GRAPHIC] [TIFF OMITTED] 83485.175

[GRAPHIC] [TIFF OMITTED] 83485.176

[GRAPHIC] [TIFF OMITTED] 83485.177

[GRAPHIC] [TIFF OMITTED] 83485.178

[GRAPHIC] [TIFF OMITTED] 83485.179

[GRAPHIC] [TIFF OMITTED] 83485.180

[GRAPHIC] [TIFF OMITTED] 83485.181

[GRAPHIC] [TIFF OMITTED] 83485.182

[GRAPHIC] [TIFF OMITTED] 83485.183

[GRAPHIC] [TIFF OMITTED] 83485.184

[GRAPHIC] [TIFF OMITTED] 83485.185

[GRAPHIC] [TIFF OMITTED] 83485.186

[GRAPHIC] [TIFF OMITTED] 83485.187

[GRAPHIC] [TIFF OMITTED] 83485.188

[GRAPHIC] [TIFF OMITTED] 83485.189

[GRAPHIC] [TIFF OMITTED] 83485.190

[GRAPHIC] [TIFF OMITTED] 83485.191

[GRAPHIC] [TIFF OMITTED] 83485.192

[GRAPHIC] [TIFF OMITTED] 83485.193

[GRAPHIC] [TIFF OMITTED] 83485.194

[GRAPHIC] [TIFF OMITTED] 83485.195

[GRAPHIC] [TIFF OMITTED] 83485.196

[GRAPHIC] [TIFF OMITTED] 83485.197

[GRAPHIC] [TIFF OMITTED] 83485.198

[GRAPHIC] [TIFF OMITTED] 83485.199

[GRAPHIC] [TIFF OMITTED] 83485.200

[GRAPHIC] [TIFF OMITTED] 83485.201

[GRAPHIC] [TIFF OMITTED] 83485.202

[GRAPHIC] [TIFF OMITTED] 83485.203

[GRAPHIC] [TIFF OMITTED] 83485.204

[GRAPHIC] [TIFF OMITTED] 83485.205

[GRAPHIC] [TIFF OMITTED] 83485.206

[GRAPHIC] [TIFF OMITTED] 83485.207

[GRAPHIC] [TIFF OMITTED] 83485.208

[GRAPHIC] [TIFF OMITTED] 83485.209

[GRAPHIC] [TIFF OMITTED] 83485.210

[GRAPHIC] [TIFF OMITTED] 83485.211

[GRAPHIC] [TIFF OMITTED] 83485.212

[GRAPHIC] [TIFF OMITTED] 83485.213

[GRAPHIC] [TIFF OMITTED] 83485.214

[GRAPHIC] [TIFF OMITTED] 83485.215

[GRAPHIC] [TIFF OMITTED] 83485.216

[GRAPHIC] [TIFF OMITTED] 83485.217

[GRAPHIC] [TIFF OMITTED] 83485.218

[GRAPHIC] [TIFF OMITTED] 83485.219

[GRAPHIC] [TIFF OMITTED] 83485.220

[GRAPHIC] [TIFF OMITTED] 83485.221

[GRAPHIC] [TIFF OMITTED] 83485.222

[GRAPHIC] [TIFF OMITTED] 83485.223

[GRAPHIC] [TIFF OMITTED] 83485.224

[GRAPHIC] [TIFF OMITTED] 83485.225

[GRAPHIC] [TIFF OMITTED] 83485.226

[GRAPHIC] [TIFF OMITTED] 83485.227

[GRAPHIC] [TIFF OMITTED] 83485.228

[GRAPHIC] [TIFF OMITTED] 83485.229

[GRAPHIC] [TIFF OMITTED] 83485.230

[GRAPHIC] [TIFF OMITTED] 83485.231

[GRAPHIC] [TIFF OMITTED] 83485.232

[GRAPHIC] [TIFF OMITTED] 83485.233

[GRAPHIC] [TIFF OMITTED] 83485.234

[GRAPHIC] [TIFF OMITTED] 83485.235

[GRAPHIC] [TIFF OMITTED] 83485.236

[GRAPHIC] [TIFF OMITTED] 83485.237

[GRAPHIC] [TIFF OMITTED] 83485.238

[GRAPHIC] [TIFF OMITTED] 83485.239

[GRAPHIC] [TIFF OMITTED] 83485.240

[GRAPHIC] [TIFF OMITTED] 83485.241

[GRAPHIC] [TIFF OMITTED] 83485.242

[GRAPHIC] [TIFF OMITTED] 83485.243

[GRAPHIC] [TIFF OMITTED] 83485.244

[GRAPHIC] [TIFF OMITTED] 83485.245

[GRAPHIC] [TIFF OMITTED] 83485.246

[GRAPHIC] [TIFF OMITTED] 83485.247

[GRAPHIC] [TIFF OMITTED] 83485.249

[GRAPHIC] [TIFF OMITTED] 83485.251

[GRAPHIC] [TIFF OMITTED] 83485.253

[GRAPHIC] [TIFF OMITTED] 83485.255

[GRAPHIC] [TIFF OMITTED] 83485.257

[GRAPHIC] [TIFF OMITTED] 83485.259

[GRAPHIC] [TIFF OMITTED] 83485.261

[GRAPHIC] [TIFF OMITTED] 83485.263

[GRAPHIC] [TIFF OMITTED] 83485.265

[GRAPHIC] [TIFF OMITTED] 83485.267

[GRAPHIC] [TIFF OMITTED] 83485.268

[GRAPHIC] [TIFF OMITTED] 83485.269

[GRAPHIC] [TIFF OMITTED] 83485.270

[GRAPHIC] [TIFF OMITTED] 83485.271

[GRAPHIC] [TIFF OMITTED] 83485.272

[GRAPHIC] [TIFF OMITTED] 83485.273

[GRAPHIC] [TIFF OMITTED] 83485.274

[GRAPHIC] [TIFF OMITTED] 83485.275

[GRAPHIC] [TIFF OMITTED] 83485.276

[GRAPHIC] [TIFF OMITTED] 83485.277

[GRAPHIC] [TIFF OMITTED] 83485.278

[GRAPHIC] [TIFF OMITTED] 83485.279

[GRAPHIC] [TIFF OMITTED] 83485.280

[GRAPHIC] [TIFF OMITTED] 83485.281

[GRAPHIC] [TIFF OMITTED] 83485.282

[GRAPHIC] [TIFF OMITTED] 83485.283

[GRAPHIC] [TIFF OMITTED] 83485.284

[GRAPHIC] [TIFF OMITTED] 83485.285

[GRAPHIC] [TIFF OMITTED] 83485.286

[GRAPHIC] [TIFF OMITTED] 83485.287

[GRAPHIC] [TIFF OMITTED] 83485.288

[GRAPHIC] [TIFF OMITTED] 83485.289

[GRAPHIC] [TIFF OMITTED] 83485.290

[GRAPHIC] [TIFF OMITTED] 83485.291

[GRAPHIC] [TIFF OMITTED] 83485.292

[GRAPHIC] [TIFF OMITTED] 83485.293

[GRAPHIC] [TIFF OMITTED] 83485.294

[GRAPHIC] [TIFF OMITTED] 83485.295

[GRAPHIC] [TIFF OMITTED] 83485.296

[GRAPHIC] [TIFF OMITTED] 83485.297

[GRAPHIC] [TIFF OMITTED] 83485.298

[GRAPHIC] [TIFF OMITTED] 83485.299

[GRAPHIC] [TIFF OMITTED] 83485.300

[GRAPHIC] [TIFF OMITTED] 83485.301

[GRAPHIC] [TIFF OMITTED] 83485.302

[GRAPHIC] [TIFF OMITTED] 83485.303

[GRAPHIC] [TIFF OMITTED] 83485.304

[GRAPHIC] [TIFF OMITTED] 83485.305

[GRAPHIC] [TIFF OMITTED] 83485.306

[GRAPHIC] [TIFF OMITTED] 83485.307

[GRAPHIC] [TIFF OMITTED] 83485.308

[GRAPHIC] [TIFF OMITTED] 83485.309

[GRAPHIC] [TIFF OMITTED] 83485.310

[GRAPHIC] [TIFF OMITTED] 83485.311

[GRAPHIC] [TIFF OMITTED] 83485.312

[GRAPHIC] [TIFF OMITTED] 83485.313

[GRAPHIC] [TIFF OMITTED] 83485.314

[GRAPHIC] [TIFF OMITTED] 83485.315

[GRAPHIC] [TIFF OMITTED] 83485.316

[GRAPHIC] [TIFF OMITTED] 83485.317

[GRAPHIC] [TIFF OMITTED] 83485.318

[GRAPHIC] [TIFF OMITTED] 83485.319

[GRAPHIC] [TIFF OMITTED] 83485.320

[GRAPHIC] [TIFF OMITTED] 83485.321

[GRAPHIC] [TIFF OMITTED] 83485.322

[GRAPHIC] [TIFF OMITTED] 83485.323

[GRAPHIC] [TIFF OMITTED] 83485.324

[GRAPHIC] [TIFF OMITTED] 83485.325

[GRAPHIC] [TIFF OMITTED] 83485.326

[GRAPHIC] [TIFF OMITTED] 83485.327

[GRAPHIC] [TIFF OMITTED] 83485.328

[GRAPHIC] [TIFF OMITTED] 83485.329

[GRAPHIC] [TIFF OMITTED] 83485.330

[GRAPHIC] [TIFF OMITTED] 83485.331

[GRAPHIC] [TIFF OMITTED] 83485.332

[GRAPHIC] [TIFF OMITTED] 83485.333

[GRAPHIC] [TIFF OMITTED] 83485.334

[GRAPHIC] [TIFF OMITTED] 83485.335

[GRAPHIC] [TIFF OMITTED] 83485.336

[GRAPHIC] [TIFF OMITTED] 83485.337

[GRAPHIC] [TIFF OMITTED] 83485.338

[GRAPHIC] [TIFF OMITTED] 83485.339

[GRAPHIC] [TIFF OMITTED] 83485.340

[GRAPHIC] [TIFF OMITTED] 83485.341

[GRAPHIC] [TIFF OMITTED] 83485.342

[GRAPHIC] [TIFF OMITTED] 83485.343

[GRAPHIC] [TIFF OMITTED] 83485.344

[GRAPHIC] [TIFF OMITTED] 83485.345

[GRAPHIC] [TIFF OMITTED] 83485.346

[GRAPHIC] [TIFF OMITTED] 83485.347

[GRAPHIC] [TIFF OMITTED] 83485.348

[GRAPHIC] [TIFF OMITTED] 83485.349

[GRAPHIC] [TIFF OMITTED] 83485.350

[GRAPHIC] [TIFF OMITTED] 83485.351

[GRAPHIC] [TIFF OMITTED] 83485.352

[GRAPHIC] [TIFF OMITTED] 83485.353

[GRAPHIC] [TIFF OMITTED] 83485.354

[GRAPHIC] [TIFF OMITTED] 83485.355

[GRAPHIC] [TIFF OMITTED] 83485.356

[GRAPHIC] [TIFF OMITTED] 83485.357

[GRAPHIC] [TIFF OMITTED] 83485.358

[GRAPHIC] [TIFF OMITTED] 83485.359

[GRAPHIC] [TIFF OMITTED] 83485.360

[GRAPHIC] [TIFF OMITTED] 83485.361

[GRAPHIC] [TIFF OMITTED] 83485.362

[GRAPHIC] [TIFF OMITTED] 83485.363

[GRAPHIC] [TIFF OMITTED] 83485.364

[GRAPHIC] [TIFF OMITTED] 83485.365

[GRAPHIC] [TIFF OMITTED] 83485.366

[GRAPHIC] [TIFF OMITTED] 83485.367

[GRAPHIC] [TIFF OMITTED] 83485.368

[GRAPHIC] [TIFF OMITTED] 83485.369

[GRAPHIC] [TIFF OMITTED] 83485.370

[GRAPHIC] [TIFF OMITTED] 83485.371

[GRAPHIC] [TIFF OMITTED] 83485.372

[GRAPHIC] [TIFF OMITTED] 83485.373

[GRAPHIC] [TIFF OMITTED] 83485.374

[GRAPHIC] [TIFF OMITTED] 83485.375

[GRAPHIC] [TIFF OMITTED] 83485.376

[GRAPHIC] [TIFF OMITTED] 83485.377

[GRAPHIC] [TIFF OMITTED] 83485.378

[GRAPHIC] [TIFF OMITTED] 83485.379

[GRAPHIC] [TIFF OMITTED] 83485.380

[GRAPHIC] [TIFF OMITTED] 83485.381

[GRAPHIC] [TIFF OMITTED] 83485.382

[GRAPHIC] [TIFF OMITTED] 83485.383

[GRAPHIC] [TIFF OMITTED] 83485.384

[GRAPHIC] [TIFF OMITTED] 83485.385

[GRAPHIC] [TIFF OMITTED] 83485.386

[GRAPHIC] [TIFF OMITTED] 83485.387

[GRAPHIC] [TIFF OMITTED] 83485.388

[GRAPHIC] [TIFF OMITTED] 83485.389

[GRAPHIC] [TIFF OMITTED] 83485.390

[GRAPHIC] [TIFF OMITTED] 83485.391

[GRAPHIC] [TIFF OMITTED] 83485.392

[GRAPHIC] [TIFF OMITTED] 83485.393

[GRAPHIC] [TIFF OMITTED] 83485.394

[GRAPHIC] [TIFF OMITTED] 83485.395

[GRAPHIC] [TIFF OMITTED] 83485.396

[GRAPHIC] [TIFF OMITTED] 83485.397

[GRAPHIC] [TIFF OMITTED] 83485.398

[GRAPHIC] [TIFF OMITTED] 83485.399

[GRAPHIC] [TIFF OMITTED] 83485.400

[GRAPHIC] [TIFF OMITTED] 83485.401

[GRAPHIC] [TIFF OMITTED] 83485.402

[GRAPHIC] [TIFF OMITTED] 83485.403

[GRAPHIC] [TIFF OMITTED] 83485.404

[GRAPHIC] [TIFF OMITTED] 83485.405

[GRAPHIC] [TIFF OMITTED] 83485.406

[GRAPHIC] [TIFF OMITTED] 83485.407

[GRAPHIC] [TIFF OMITTED] 83485.408

[GRAPHIC] [TIFF OMITTED] 83485.409

[GRAPHIC] [TIFF OMITTED] 83485.410

[GRAPHIC] [TIFF OMITTED] 83485.411

[GRAPHIC] [TIFF OMITTED] 83485.412

[GRAPHIC] [TIFF OMITTED] 83485.413

[GRAPHIC] [TIFF OMITTED] 83485.414

[GRAPHIC] [TIFF OMITTED] 83485.415

[GRAPHIC] [TIFF OMITTED] 83485.416

[GRAPHIC] [TIFF OMITTED] 83485.417

[GRAPHIC] [TIFF OMITTED] 83485.418

[GRAPHIC] [TIFF OMITTED] 83485.419

[GRAPHIC] [TIFF OMITTED] 83485.420

[GRAPHIC] [TIFF OMITTED] 83485.421

[GRAPHIC] [TIFF OMITTED] 83485.422

[GRAPHIC] [TIFF OMITTED] 83485.423

[GRAPHIC] [TIFF OMITTED] 83485.424

[GRAPHIC] [TIFF OMITTED] 83485.425

[GRAPHIC] [TIFF OMITTED] 83485.426

[GRAPHIC] [TIFF OMITTED] 83485.427

[GRAPHIC] [TIFF OMITTED] 83485.428

[GRAPHIC] [TIFF OMITTED] 83485.429

[GRAPHIC] [TIFF OMITTED] 83485.430

[GRAPHIC] [TIFF OMITTED] 83485.431

[GRAPHIC] [TIFF OMITTED] 83485.432

[GRAPHIC] [TIFF OMITTED] 83485.433

[GRAPHIC] [TIFF OMITTED] 83485.434

[GRAPHIC] [TIFF OMITTED] 83485.435

[GRAPHIC] [TIFF OMITTED] 83485.436

[GRAPHIC] [TIFF OMITTED] 83485.437

[GRAPHIC] [TIFF OMITTED] 83485.438

[GRAPHIC] [TIFF OMITTED] 83485.439

[GRAPHIC] [TIFF OMITTED] 83485.440

[GRAPHIC] [TIFF OMITTED] 83485.441

[GRAPHIC] [TIFF OMITTED] 83485.442

[GRAPHIC] [TIFF OMITTED] 83485.443

[GRAPHIC] [TIFF OMITTED] 83485.444

[GRAPHIC] [TIFF OMITTED] 83485.445

[GRAPHIC] [TIFF OMITTED] 83485.446

[GRAPHIC] [TIFF OMITTED] 83485.447

[GRAPHIC] [TIFF OMITTED] 83485.448

[GRAPHIC] [TIFF OMITTED] 83485.449

[GRAPHIC] [TIFF OMITTED] 83485.450

[GRAPHIC] [TIFF OMITTED] 83485.451

[GRAPHIC] [TIFF OMITTED] 83485.452

[GRAPHIC] [TIFF OMITTED] 83485.453

[GRAPHIC] [TIFF OMITTED] 83485.454

[GRAPHIC] [TIFF OMITTED] 83485.455

[GRAPHIC] [TIFF OMITTED] 83485.456

[GRAPHIC] [TIFF OMITTED] 83485.457

[GRAPHIC] [TIFF OMITTED] 83485.458

[GRAPHIC] [TIFF OMITTED] 83485.459

[GRAPHIC] [TIFF OMITTED] 83485.460

[GRAPHIC] [TIFF OMITTED] 83485.461

[GRAPHIC] [TIFF OMITTED] 83485.462

[GRAPHIC] [TIFF OMITTED] 83485.463

[GRAPHIC] [TIFF OMITTED] 83485.464

[GRAPHIC] [TIFF OMITTED] 83485.465

[GRAPHIC] [TIFF OMITTED] 83485.466

[GRAPHIC] [TIFF OMITTED] 83485.467

[GRAPHIC] [TIFF OMITTED] 83485.468

[GRAPHIC] [TIFF OMITTED] 83485.469

[GRAPHIC] [TIFF OMITTED] 83485.470

[GRAPHIC] [TIFF OMITTED] 83485.471

[GRAPHIC] [TIFF OMITTED] 83485.472

[GRAPHIC] [TIFF OMITTED] 83485.473

[GRAPHIC] [TIFF OMITTED] 83485.474

[GRAPHIC] [TIFF OMITTED] 83485.475

[GRAPHIC] [TIFF OMITTED] 83485.476

[GRAPHIC] [TIFF OMITTED] 83485.477

[GRAPHIC] [TIFF OMITTED] 83485.478

[GRAPHIC] [TIFF OMITTED] 83485.479

[GRAPHIC] [TIFF OMITTED] 83485.480

[GRAPHIC] [TIFF OMITTED] 83485.481

[GRAPHIC] [TIFF OMITTED] 83485.482

[GRAPHIC] [TIFF OMITTED] 83485.483

[GRAPHIC] [TIFF OMITTED] 83485.484

[GRAPHIC] [TIFF OMITTED] 83485.485

[GRAPHIC] [TIFF OMITTED] 83485.486

[GRAPHIC] [TIFF OMITTED] 83485.487

[GRAPHIC] [TIFF OMITTED] 83485.488

[GRAPHIC] [TIFF OMITTED] 83485.489

[GRAPHIC] [TIFF OMITTED] 83485.490

[GRAPHIC] [TIFF OMITTED] 83485.491

[GRAPHIC] [TIFF OMITTED] 83485.492

[GRAPHIC] [TIFF OMITTED] 83485.493

[GRAPHIC] [TIFF OMITTED] 83485.494

[GRAPHIC] [TIFF OMITTED] 83485.495

[GRAPHIC] [TIFF OMITTED] 83485.496

[GRAPHIC] [TIFF OMITTED] 83485.497

[GRAPHIC] [TIFF OMITTED] 83485.498

[GRAPHIC] [TIFF OMITTED] 83485.499

[GRAPHIC] [TIFF OMITTED] 83485.500

[GRAPHIC] [TIFF OMITTED] 83485.501

[GRAPHIC] [TIFF OMITTED] 83485.502

[GRAPHIC] [TIFF OMITTED] 83485.503

[GRAPHIC] [TIFF OMITTED] 83485.504

[GRAPHIC] [TIFF OMITTED] 83485.505

[GRAPHIC] [TIFF OMITTED] 83485.506

[GRAPHIC] [TIFF OMITTED] 83485.507

[GRAPHIC] [TIFF OMITTED] 83485.508

[GRAPHIC] [TIFF OMITTED] 83485.509

[GRAPHIC] [TIFF OMITTED] 83485.510

[GRAPHIC] [TIFF OMITTED] 83485.511

[GRAPHIC] [TIFF OMITTED] 83485.512

[GRAPHIC] [TIFF OMITTED] 83485.513

[GRAPHIC] [TIFF OMITTED] 83485.514

[GRAPHIC] [TIFF OMITTED] 83485.515

[GRAPHIC] [TIFF OMITTED] 83485.516

[GRAPHIC] [TIFF OMITTED] 83485.517

[GRAPHIC] [TIFF OMITTED] 83485.518

[GRAPHIC] [TIFF OMITTED] 83485.519

[GRAPHIC] [TIFF OMITTED] 83485.520

[GRAPHIC] [TIFF OMITTED] 83485.521

[GRAPHIC] [TIFF OMITTED] 83485.522

[GRAPHIC] [TIFF OMITTED] 83485.523

[GRAPHIC] [TIFF OMITTED] 83485.524

[GRAPHIC] [TIFF OMITTED] 83485.525

[GRAPHIC] [TIFF OMITTED] 83485.526

[GRAPHIC] [TIFF OMITTED] 83485.527

[GRAPHIC] [TIFF OMITTED] 83485.528

[GRAPHIC] [TIFF OMITTED] 83485.529

[GRAPHIC] [TIFF OMITTED] 83485.530

[GRAPHIC] [TIFF OMITTED] 83485.531

[GRAPHIC] [TIFF OMITTED] 83485.532

[GRAPHIC] [TIFF OMITTED] 83485.533

[GRAPHIC] [TIFF OMITTED] 83485.534

[GRAPHIC] [TIFF OMITTED] 83485.535

[GRAPHIC] [TIFF OMITTED] 83485.536

[GRAPHIC] [TIFF OMITTED] 83485.537

[GRAPHIC] [TIFF OMITTED] 83485.538

[GRAPHIC] [TIFF OMITTED] 83485.539

[GRAPHIC] [TIFF OMITTED] 83485.540

[GRAPHIC] [TIFF OMITTED] 83485.541

[GRAPHIC] [TIFF OMITTED] 83485.542

[GRAPHIC] [TIFF OMITTED] 83485.543

[GRAPHIC] [TIFF OMITTED] 83485.544

[GRAPHIC] [TIFF OMITTED] 83485.545

[GRAPHIC] [TIFF OMITTED] 83485.546

[GRAPHIC] [TIFF OMITTED] 83485.547

[GRAPHIC] [TIFF OMITTED] 83485.548

[GRAPHIC] [TIFF OMITTED] 83485.549

[GRAPHIC] [TIFF OMITTED] 83485.550

[GRAPHIC] [TIFF OMITTED] 83485.551

[GRAPHIC] [TIFF OMITTED] 83485.552

[GRAPHIC] [TIFF OMITTED] 83485.553

[GRAPHIC] [TIFF OMITTED] 83485.554

[GRAPHIC] [TIFF OMITTED] 83485.555

[GRAPHIC] [TIFF OMITTED] 83485.556

[GRAPHIC] [TIFF OMITTED] 83485.557

[GRAPHIC] [TIFF OMITTED] 83485.558

[GRAPHIC] [TIFF OMITTED] 83485.559

[GRAPHIC] [TIFF OMITTED] 83485.560

[GRAPHIC] [TIFF OMITTED] 83485.561

[GRAPHIC] [TIFF OMITTED] 83485.562

[GRAPHIC] [TIFF OMITTED] 83485.563

[GRAPHIC] [TIFF OMITTED] 83485.564

[GRAPHIC] [TIFF OMITTED] 83485.565

[GRAPHIC] [TIFF OMITTED] 83485.566

[GRAPHIC] [TIFF OMITTED] 83485.567

[GRAPHIC] [TIFF OMITTED] 83485.568

[GRAPHIC] [TIFF OMITTED] 83485.569

[GRAPHIC] [TIFF OMITTED] 83485.570

[GRAPHIC] [TIFF OMITTED] 83485.571

[GRAPHIC] [TIFF OMITTED] 83485.572

[GRAPHIC] [TIFF OMITTED] 83485.573

[GRAPHIC] [TIFF OMITTED] 83485.574

[GRAPHIC] [TIFF OMITTED] 83485.575

[GRAPHIC] [TIFF OMITTED] 83485.576

[GRAPHIC] [TIFF OMITTED] 83485.577

[GRAPHIC] [TIFF OMITTED] 83485.578

[GRAPHIC] [TIFF OMITTED] 83485.579

[GRAPHIC] [TIFF OMITTED] 83485.580

[GRAPHIC] [TIFF OMITTED] 83485.581

[GRAPHIC] [TIFF OMITTED] 83485.582

[GRAPHIC] [TIFF OMITTED] 83485.583

[GRAPHIC] [TIFF OMITTED] 83485.584

[GRAPHIC] [TIFF OMITTED] 83485.585

[GRAPHIC] [TIFF OMITTED] 83485.586

[GRAPHIC] [TIFF OMITTED] 83485.587

[GRAPHIC] [TIFF OMITTED] 83485.588

[GRAPHIC] [TIFF OMITTED] 83485.589

[GRAPHIC] [TIFF OMITTED] 83485.590

[GRAPHIC] [TIFF OMITTED] 83485.591

[GRAPHIC] [TIFF OMITTED] 83485.592

[GRAPHIC] [TIFF OMITTED] 83485.593

[GRAPHIC] [TIFF OMITTED] 83485.594

[GRAPHIC] [TIFF OMITTED] 83485.595

[GRAPHIC] [TIFF OMITTED] 83485.596

[GRAPHIC] [TIFF OMITTED] 83485.597

[GRAPHIC] [TIFF OMITTED] 83485.598

[GRAPHIC] [TIFF OMITTED] 83485.599

[GRAPHIC] [TIFF OMITTED] 83485.600

[GRAPHIC] [TIFF OMITTED] 83485.601

[GRAPHIC] [TIFF OMITTED] 83485.602

[GRAPHIC] [TIFF OMITTED] 83485.603

[GRAPHIC] [TIFF OMITTED] 83485.604

[GRAPHIC] [TIFF OMITTED] 83485.605

[GRAPHIC] [TIFF OMITTED] 83485.606

[GRAPHIC] [TIFF OMITTED] 83485.607

[GRAPHIC] [TIFF OMITTED] 83485.608

[GRAPHIC] [TIFF OMITTED] 83485.609

[GRAPHIC] [TIFF OMITTED] 83485.610

[GRAPHIC] [TIFF OMITTED] 83485.611

[GRAPHIC] [TIFF OMITTED] 83485.612

[GRAPHIC] [TIFF OMITTED] 83485.613

[GRAPHIC] [TIFF OMITTED] 83485.614

[GRAPHIC] [TIFF OMITTED] 83485.615

[GRAPHIC] [TIFF OMITTED] 83485.616

[GRAPHIC] [TIFF OMITTED] 83485.617

[GRAPHIC] [TIFF OMITTED] 83485.618

[GRAPHIC] [TIFF OMITTED] 83485.619

[GRAPHIC] [TIFF OMITTED] 83485.620

[GRAPHIC] [TIFF OMITTED] 83485.621

[GRAPHIC] [TIFF OMITTED] 83485.622

                                   -