Citi moves to prevent future Enron-style 'loan' fiascos

Citigroup has pledged not to conduct structured finance deals for companies that hide debt from investors in a move designed to improve its image post-Enron.

Sandy Weill, Citigroup’s chief executive, yesterday sent a memo to his employees stating that if a company does not agree to record financing as debt on its balance sheet, Citigroup will only execute the transaction if the company's investors are notified about the deal.

“We are committed to greater transparency in the disclosure of structured finance transactions and we are answering the call from Washington and from investors by adopting strong initiatives ourselves,” said Weill.

Citigroup is one of the world’s largest financial services companies. Last month, Citigroup and JP Morgan Chase sought to shift blame on to auditor Andersen for its role in approving 'prepay' transactions that disguised Enron’s financial problems. The banks defended their more than $8 billion of financing to Enron.

Starting immediately, Citigroup plans to only conduct transactions for clients that “agree to make prompt disclosure of the details of the transaction". This includes management’s analysis of the net effect the transaction has on the financial condition of the company, the nature and amount of the obligations, and a description of events that may cause an obligation to arise, increase or become accelerated, said Weill. “In addition, we will only do these transactions for clients that agree to provide the complete set of transaction documents to their chief financial officer, chief legal officer and independent auditors,” he added.

In a further move towards greater transparency, Weill said that from the beginning of next year Citigroup will account for all stock options granted to employees, management and board member as an expense. “Investors have made clear that they want options accounted for in this manner,” said Weill. He estimates earnings per share will fall by 3 cents in 2003 as a result. The move to account for employee share options as an expense follows similar announcements from high-profile US companies such as Coca-Cola.

JP Morgan Chase is also considering accounting for employee stock options as an expense but has yet to make any public statement on the matter.