WASHINGTON – Wall Street analysts who continued to recommend Enron's stock as the company careened toward bankruptcy last fall told Congress on Wednesday that they formed their assessments objectively and were not pressured by their firms that invested in Enron.
It didn't become evident to them that the company was in serious trouble until just before its collapse, the analysts testified.
Although analysts' compensation may not have been linked to their stock recommendations, several senators said a conflict of interest still potentially exists because of the investment firms' profitable business with companies that their analysts follow.
"You have an appearance problem," Sen. George Voinovich, R-Ohio, told the analysts from Wall Street powerhouses J.P. Morgan, Lehman Brothers, Credit Suisse First Boston and Citigroup Salomon Smith Barney. He said lawmakers are trying to restore the public's faith in the financial markets that has been shaken by the Enron affair.
Analysts are on the defensive for their role in Enron's failure. They can have potential conflicts of interest in a system in which they are often compensated for helping their investment firms get lucrative business arranging mergers or stock offerings for the same companies the analysts cover.
"It now seems clear that too many analysts failed to ask 'why' before they said 'buy,"' Sen. Joseph Lieberman, D-Conn., chairman of the Senate Governmental Affairs Committee, said at a hearing at which four analysts from big investment firms testified.
Eleven of 16 analysts who followed Enron were still rating it as a "buy" or "strong buy" as late as Nov. 8, two weeks after the Securities and Exchange Commission announced it had opened an inquiry into the company's accounting.
"I did not own Enron stock," testified Anatol Feygin, a senior analyst at J.P. Morgan Securities Inc. "I have complete freedom with respect to the recommendations that I make concerning any (stock) and my compensation is not tied to the recommendations that I make. ... I have never received any compensation in any form from any company that I analyze, including Enron."
As Congress continued to delve into the biggest corporate bankruptcy in U.S. history, Federal Reserve Chairman Alan Greenspan said Enron's collapse underscores how fragile companies can be when their main business is production of intangible services, such as energy trading in Enron's case.
"The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation," Greenspan said. "Trust and reputation can vanish overnight. A factory cannot."
In response to questions, Greenspan said he did not believe Enron's failure would have any long-run impact on the economy but he said it did point to the need for tougher regulations to restore investors' confidence in companies' books.
He said one step would be to make changes in how companies account for huge stock options they award top executives. He also called for increased salaries for regulators at the SEC to attract top people.
A key figure in the Enron drama, former company chief executive Jeffrey Skilling, defended himself at length and combatively Tuesday as senators said they didn't believe him and former colleagues continued to contradict him.
Putting himself at potential legal risk for the second time this month, Skilling testified at a Senate hearing and dominated the scene during a five-hour appearance with an Enron vice president, Sherron Watkins, and President-Chief Operating Officer Jeffrey McMahon.
McMahon acknowledged that, with massive shredding of financial documents said to have occurred at Enron's Houston headquarters, "I don't believe we know what records are destroyed."
Watkins, separated from Skilling at the witness table by his lawyer, told the Senate Commerce Committee she had no doubt Skilling was aware of the problems posed by Enron's use of partnerships that were largely buttressed by company stock, contrary to normal accounting practices.
Sharply disputing Watkins, Skilling denied he had misled former Enron Chairman Kenneth Lay, who recently resigned.
"I never duped Ken Lay," Skilling declared, using Watkins' wording.
Skilling maintained he was unaware of improper financial transactions with a web of outside partnerships that kept more than $1 billion in debt off the energy-trading company's balance sheet and eventually brought it down.
Skilling, who cashed in $66 million of company stock, resigned abruptly in August around the time that Watkins was warning Lay of potentially serious accounting problems. The company, which was ranked the seventh-largest in the country, crumbled Dec. 2 in the biggest bankruptcy in U.S. history.
Watkins says Skilling, along with Enron's auditor, Arthur Andersen LLP, and its outside legal advisers, misled Lay and Enron's board of directors.
Lay and several other former Enron officials have invoked their Fifth Amendment right against potential self-incrimination and refused to testify to Congress.
Millions of investors nationwide lost money, and thousands of current and former Enron employees lost the bulk of their retirement savings -- in accounts loaded with Enron stock -- when the company failed.