Printer Friendly PageCitigroup's Responses to July 23 New York Times Article
The New York Times' story of July 23, 2002 ("Citigroup is Linked to a Deal That Let Enron Skirt Rules") alleges that Citigroup's investment bankers intentionally "misrepresented the full nature of a 1999 transaction with Enron" ... "so that Enron could ignore accounting requirements and hide its true financial condition." The article says there was a "secret oral agreement" that "required that the accounting for the transaction be changed."
- The New York Times story is wrong. There was no "secret deal" and there was nothing false in the accounting of this transaction. The Times improperly suggested that the Reilly emails demonstrate complicity in Enron's misrepresentations. They do nothing of the kind.
- The New York Times misses the crucial distinction between an actual binding agreement between parties, and informal discussions, expectations or intentions that do not alter the binding agreement.
- In his email, Reilly used loose language, saying "agreement" to reflect what was only an expectation. In fact, Enron and Citibank never altered the binding agreement between them.
- A good way to understand this distinction is by analogy. For example, if you take out a 7-year variable-rate mortgage from a bank and from day one, are thinking and speaking to the bank about refinancing into a long-term fixed rate mortgage some time in the future, that doesn't change the provisions of the mortgage.
- Similarly, it is absolutely commonplace for derivatives with multi-year terms to be settled early and for the parties to understand -- in an informal but non-binding way -that the contract they are entering into is intended to be settled early.
- Reilly's emails noted that the "paperwork" cannot reflect this understanding, because if it did, it would have constituted a new binding agreement between the parties. But there was no such new agreement.
- Indeed, although Reilly referred to September 1999, that date came and went without Enron making any payment. Citibank neither did nor could have taken any action against Enron because there was no binding agreement. A later email from one of Reilly's colleagues, dated September 29, 1999, confirms this point, noting that the contract still ran for several years, and that they now expected it to settle in December 1999. Enron did not pay off the balance until December 1999.
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