August 1, 2002
The Honorable Joseph I. Lieberman
Chairman, Senate Government Oversight Committee
Washington, DC 20002
Dear Senator Liberman,
I write on behalf of nearly 300,000 members of Citizens for a Sound Economy Foundation (CSE Foundation) to encourage you to subpoena Citigroup Executive Committee Chairman Robert Rubin to appear before your committee for questioning about his role in the Enron affair. It is clear from preliminary evidence that certain transactions between Citigroup and Enron Corp. were used to hide the full extent of Enron’s leverage from the public. While it may be appropriate to allow Chairman and CEO Sanford Weill to explain these transactions as well as the complicated relationship between Travelers Insurance, JP Morgan, and Enron, Secretary Rubin must be questioned about his role in the affair given published reports (The Washington Post, August 1, 2002) about his contact with credit rating agencies and officials at the U.S. Treasury.
It is difficult to understand why credit rating agencies Standard & Poor’s and Moody’s failed to downgrade Enron’s debt rating to junk status until December of 2001. While the equity-backed special purpose entities (SPEs) Enron used to keep leverage off balance sheet were not widely known to the public until October 16, 2001, credit rating agencies knew of them since their inception, as they were responsible for issuing a rating on most, if not all of them.
Later it was discovered that many of Enron’s financial dealings contained repayment clauses to be exercised when Enron’s credit rating fell below a specified grade. Clearly, maintaining an investment grade credit rating was critical for Enron and investment banks, like Citigroup, with large exposure to Enron. With such huge sums at stake, both Enron and its creditors could be expected to use what ever means available to avert financial disaster.
Evidence suggests that Citigroup disguised loans to Enron as forward swap contracts to allow Enron to book the transaction as cash flow instead of debt. At the same time, Citigroup is suspected of having sold credit-linked securities to investors to raise capital to be transferred into the same SPEs that stood to receive delivery on the swap. This, in and of it self, could be an act of fraud if Citigroup did not expect delivery of the oil or gas and considered it a loan.
But more importantly, when did Citigroup executives know that Enron depended on an investment grade credit rating and what steps did it take – both through financial dealings and influence – to help maintain it? If Citigroup used the swap contracts to improve Enron’s appearance to bond raters with the knowledge that a downgrade would not only make Enron less able to attract new bondholders, but also trigger repayment options Enron could not cover, this could be a case of securities fraud.
To make matters worse, a Washington Post article indicates that Secretary Rubin asked Peter R. Fisher at the U.S. Treasury Department to advise bond-rating agencies to “work with,” rather than downgrade Enron. If Secretary Rubin knew of the Citigroup transactions used to hide Enron’s debt when he took steps to influence Enron’s credit rating, his actions could have been conspiratorial. If the Citigroup loans to Enron were properly accounted for, no man as well versed in financial matters as Secretary Rubin would have suggested that Enron deserved an investment grade rating.
Reaction to the possible subpoena of a former Treasury Secretary has been politically charged. Democrats accuse Republicans of forcing Secretary Rubin to testify to score political points and undermine the Democrats’ credibility. Republicans accuse Democrats of conspiring to keep Rubin off the witness list for purely political reasons. While political maneuvering on a sensitive issue is to be expected, it is clear that certain questions – particularly those concerning Secretary Rubin’s own culpability – can only be answered by the former Treasury Secretary himself.
To bring a well-respected and eminently likeable former Treasury Secretary before your committee could also lead to more dispassionate analysis and allow the issue to be fully vetted. Past hearings have been used for political grandstanding, public shaming, and irresponsible charges. This contributed to a rabid political environment where lawmakers felt pressure to support egregious new accounting and corporate reforms instead of allowing the civil and criminal justice systems to address potential illegality.
Secretary Rubin is a Democrat, but he also commands respect outside of his party for his hawkish deficit posture and general cordiality. He is uniquely positioned to explain what happened, why it happened, and what policies could best ensure more transparency. If he played a role in a high level conspiracy to defraud investors, he should be brought to justice. But even if he did not commit any criminal or unethical acts, his testimony could shed light on the complex world of corporate finance and explain the ways corporations diversify risk and raise capital through complex transactions.
Any hearing that deals with the role of underwriters in the Enron scandal that does not call Secretary Rubin as a witness will be inadequate. Investors depend on the unbiased analysis provided by independent credit rating agencies. If creditors can influence these ratings when they fear an unbiased rating would cause a debtor to default, investors should be made aware.
If your committee is to understand fully the scope of Wall Street underwriters’ involvement in the Enron scandal, you must subpoena Secretary Rubin.