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

797.12 Bankers Trust's role in Project Steele was crucial. Not only did Project Steele
originate with Bankers Trust, but it was the exclusive financial advisor to Enron on the matter and
Bankers Trust was the only unrelated counterparty to Enron in the transaction.
797.13 A 3/31/03 BusinessWeek article – building upon the findings of the Joint Committee
Report – stated with respect to Project Steele:
The participants all say that the deal, which allowed Enron and [Bankers
Trust] each to claim a deduction for the same pool of money-losing mortgage-backed
securities owned by the investment bank, was legitimate. But now that the
transaction has seen the light of day, it is being ridiculed by many tax experts. ''It is
like two families trying to claim the same child as a dependent,'' says Sheldon D.
Pollack, a professor of accounting at the University of Delaware who is an expert in
corporate tax shelters.
* * *
The key ingredient to the transaction was a pool of mortgage-backed securities
owned by Bankers Trust that had lost money -- and therefore could be cashed in for
tax deductions. BT transferred these securities, known as REMICs, to a new
partnership known as ECT Investing Partners that it jointly owned with Enron. For
its part, Enron tossed in some cash and other stray assets such as airplane leases.
When these maneuvers were complete, both BT and Enron had rights to the
deductions for the REMICs.
Neat trick. This would normally be illegal because the Internal Revenue
Code prohibits one company (Enron, in this case) from buying another outfit (ECT)
simply to acquire its deductions. To get around this rule, Enron claimed that it had
a legitimate business purpose for the deal other than tax avoidance. And what was
that? Believe it or not, to inflate earnings -- or, as Akin Gump put it in the firm's
opinion letter, to ''obtain financial income'' benefits from the deal. Both Enron
bankruptcy examiner Neal Batson and the Joint Committee on Taxation have
criticized this legal alchemy.
797.14 Through this fraudulent device, Enron generated approximately $65 million in net
earnings for financial reporting purposes from 97-01 plus approximately $112 million in net federal
income tax deductions from 97-01. 18 Not only did the idea originate with Bankers Trust, but Bankers
18 The $112 million tax savings figure differs from that provided in the chart at 797.10. The
$112 million figure is based upon a 1/31/03 letter from Skadden, Arps (Enron's legal counsel) to
Lindy L. Paull of the Joint Committee on Taxation. The $39 million number is based upon
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