Enron Corp. - University of California | Office of The President

Enron's financial condition to make it appear much stronger than it really was, concealing some $3.9
billion in debt, which, had it been known and disclosed, would likely have resulted in Enron losing
its investment grade credit rating with all the negative consequences that would flow from that. JP
Morgan attempted to insure against default on those disguised loans by buying performance bonds
from several insurance companies. However, the insurers refused to pay, alleging that in fact the
commodity trades were fraudulent and a subterfuge to conceal the real nature of the transactions, i.e.,
done for the purpose of disguising loans. A federal district court judge has ruled that there is
significant evidence to support the insurers' claims of fraud and deception and that these
transactions were, in fact, disguised loans.
45. CitiGroup and CS First Boston also engaged in subterfuges to disguise large loans
to Enron to help Enron present a misleading picture of its liquidity, financial condition and balance
sheet. CitiGroup lent Enron $2.4 billion in a series of "pre-paid" swaps via what were called "Delta"
transactions because they were conducted through CitiGroup's Cayman Island subsidiary named
"Delta." In a true swap, neither party receives all the agreed payments up front. However, in these
transactions, CitiGroup paid an estimate of the fair value of its portion of the swaps – hundreds of
millions of dollars each time – immediately, and Enron was obliged to repay the cash over five years.
The transactions perfectly replicated loans and were, in fact, loans – but Enron never disclosed them
as such on its balance sheet. CS First Boston also engaged in making disguised loans/trades in
derivatives to Enron so that Enron's true credit situation, liquidity and debt levels were being
disguised. In 00, CS First Boston gave Enron $150 million to be repaid over two years, with Enron's
payments to vary with the price of oil. The transaction was made to appear to be a "swap." But
because CS First Boston paid Enron up front, the transaction was, in fact, a loan – a reality noted by
the bank: "It was like a floating-rate loan," said Pen Pendleton, a CS First Boston spokesman. "We
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