December 12, 2001, Wednesday

HEARING OF THE CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED
ENTERPRISES SUBCOMMITTEE AND OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE OF THE
HOUSE FINANCIAL SERVICES COMMITTEE

THE ENRON COLLAPSE: IMPACT ON INVESTORS AND FINANCIAL MARKETS

CHAIRED BY REPRESENTATIVE RICHARD H. BAKER (R-LA)

2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

Opening Statements by
REP._MICHAEL_G._OXLEY
REP._JOHN_BOEHNER
REP._SUE_KELLY
REP._PAUL_E._KANJORSKI
REP._LUIS_V._GUTIERREZ

WITNESSES:
PANEL I
ROBERT_K._HERDMAN, CHIEF ACCOUNTANT, SECURITIES AND EXCHANGE COMMISSION;

PANEL II
JOSEPH_F._BERARDINO, CHIEF EXECUTIVE OFFICER, ARTHUR ANDERSEN, LLP;

CHARLES_L._HILL, DIRECTOR OF RESEARCH, THOMSON FINANCIAL/FIRST CALL;

RICHARD_TRUMKA, SECRETARY-TREASURER, AFL-CIO


REP. RICHARD H. BAKER (R-LA): I would like to call this meeting of the
Capital Markets Subcommittee to order.

To begin our proceedings this morning there are a couple of matters of
business to which -- procedural matters to which I would like to attend. The
first is that by prior agreement with Mr. LaFalce and Mr. Kanjorski, each chair
and ranking member of the subcommittees and full committee will be recognized
for opening statements of five minutes, then each side would be given an
additional 10 minutes for delegation of opening statement time for whichever
members each side so chooses. By utilizing this method we will still consume at
least 40 to 45 minutes of committee time before we begin discussion with
witnesses, so I think it very important the committee adopt, without objection,
this plan for proceeding.

Any objection?

Without objection, so ordered.

In addition, we have two members here at present, Mr. Sanders is not a
member of the subcommittee but certainly a member of the full committee, as
well as Ms. Jackson Lee from Texas, who will be recognized in regular order
pursuant to recognition of all members of the subcommittee for purposes of
questions.

Without objection, there is agreement on that matter.

We are here today to examine and begin the process of understanding the most
stunning business reversal in recent history. One moment an international
corporation with the diversified portfolio enjoying incredible run-up of stock
prices, the darling of financial press and analysts, which, by the way,
contributed to the view that Enron had indeed become the new model for business
of the future, indeed, a new paradigm. One edition of Fortune magazine called
it
the best place in America for an employee to work. Analysts gave increasingly
creative praise, while stock prices soared. The corporate mission statement
perhaps says it best. I take from page 53 of Exxon Annual Report 2000:

"We are satisfied with nothing less than the very best in everything we do.
We continue to raise the bar for everyone. The great fun here will be for all
of
us to discover just how good we really can be."

Enron even redefined fun. The sad fact: while having too much fun, it was
really all too good to be true. Not only were investors left with lawsuits as
their only asset, lifelong employees lost their jobs, retirement and their
savings, virtually left to start completely over in the midst of a national
recession. While there were apparent indicators of potential difficulty to a
few
insiders, virtually all observers were shocked by surprising re-statements of
earnings expectations and then the incredibly fast demise of the huge
enterprise.

Now in retrospect, it is clear, at least to me, that while Enron executives
were having fun, it actually became a very large hedge fund, which just
happened
to own a power company. While that in itself does not warrant criticism, it was
the extraordinary risk taking by powerful executives which rarely added value
but simply accelerated the cash burn-off rate. Executives having Enron fun are
apparently very costly and, all the while, they were aggressive in the exercise
of their own stock options, flipping acquisitions for quick sale. One executive
sold a total of $353 million in the 3-year period preceding the failure. What
did he know? When did he know it? And why didn't we?

Again, referring to the mission statement of the corporation's annual report
of 2000, on communication:

"We have an obligation to communicate. Here we take time to talk with one
another and to listen. We believe that information is meant to move and that
information moves people."

Apparently so, it moved this executive to sell $353 million worth of stock.
Then we learn of the multiple special purpose enterprises, SPEs as they are
known, in which some executives apparently set up businesses which contracted
with Enron, usually on exceptionally profitable terms. Everyone seems to have
their own place to go for self-dealing at great cost to employees and
shareholders.

Another concern. Even though I must admit, when times were good, single stock
401(k) seemed to be an advantageous thing to do when stock prices were soaring,
but have you actually ever met a financial adviser who would tell you to have
the most fun, be sure to put all your eggs in one basket? Some things are too
risky, even for the purpose of having fun. We are here today to begin to
grapple
with just how all of this could happen. A lot of smart people with no conflicts
of interest just missed it. Our task is to establish the facts, change the
rules
where needed and assist the SEC in the pursuit of those who apparently have
violated the law. This will not be fun and it won't happen as quickly as
Enron's demise. We will do this the old-fashioned way, with a lot of hard work
and a lot of time. In the end, our goal is to assure individual investors that
there is real value in the marketplace, credibility and professional conduct
and consequences for those who abuse the system.

I wish to express my appreciation to Chairman Oxley and Ranking Member
LaFalce for their significant interest in these matters, to Chairman Sue Kelly
who chairs the oversight investigation subcommittee of financial institutions,
who has graciously agreed to join with us in this hearing today and use their
committee resources to take on important aspects of this enquiry and to
announce, on our return in late January, possibly early February, the committee
will continue a series of hearings to look at a number of elements.

One, this certainly rekindles prior committee interest in the conduct of
analysts and their role in this matter, to evaluate the potential for an SRO
for
the CPA profession. A review of the 33 and 34 Securities Act to determine where
there are inadequacies. To examine Reg. FD and its failure to protect investors
in this current debacle.

And a special word to Mr. Kenneth Lay, the CEO of Enron, who, after numerous
requests by the committee, sent a letter which I do not have in my possession
at
the moment but will be entered into the record at a later time, indicating his
appearance before bankruptcy proceedings today obviated his ability to respond
to the committee request. On the record, I wish to make it clear the committee
will have additional meetings. Should Mr. Lay's social obligations preclude his
participation, the committee also has the power to subpoena. At such time as we
deem as appropriate, the committee will take action to get the appropriate
information from Mr. Lay and other executives of Enron. I do have a letter
dated
December 11, which I will enter into the record at this time without objection.

When we're done, I hope we will establish a methodology in which all
participants will understand, when a corporation is just having too much fun,
it
won't result in the loss of personal fortunes for innocent third parties,
investors, shareholders and, most importantly, the innocent employees.

This time, I'd like to recognize Mr. Kanjorski for his opening statement.

REP. PAUL E. KANJORSKI (D-PA): Thank you, Mr. Chairman.

Today's hearing will help us to understand at least some of the factors that
contributed to the downfall of Enron, a once mighty international conglomerate
that recently filed the largest corporate bankruptcy in American history. Our
hearing will also help us to discern whether Congress needs to take steps to
restore the faith and trust of investors in the American dynamic capital
markets. Although I have not yet arrived at any conclusions about the
disturbing
downfall of a corporate icon, I have already identified a number of concerns
that I expect we will address during our investigations.

First, I would like to learn more about the serious financial harm to
thousands of Enron's employees and the many others who owned Enron stock. Some
press reports suggest that company rules blocked rank-and-file employees from
selling Enron's stock in their 401(k) retirement plans in days and weeks
following the announcement that Enron had overstated its earnings by $583
million in the past four years. Those hard-working Americans had to watch
helplessly as their savings shrank without any recourse while Enron executives
could apparently sell their stock options and avoid the financial pain. That is
wrong.

Second, I have concerns about whether the accounting industry experiences any
conflicts of interest in serving its customers. In recent years, many have
noted
that accounting firms' consulting fees from one company may exceed its auditing
receipts from the same company. This practice calls into question whether
shareholders can rely on earnings reports and other indicators of the company's
health and its future stock price. In order to provide transparency for
investors, auditors should actively work to limit potential conflicts.

Third, we will return today to the issue of analysts' independence, a topic
we have closely studied this last year. From our past hearings, we have learned
that an analyst, working for a firm that handles investment banking for a
company the analyst covers, could receive a more favorable rating to attract
new
business. I am therefore interested in learning why of the 15 analysts covering
Enron on the day following the failed merger with Dynergy, only one had a sale
rating on the company stock. These ratings misled investors.

Finally, in hindsight, it appears the Enron board of directors failed to
serve Enron's shareholders. Several news stories have detailed how gifts,
contributions and other activities may have compromised some members of
Enron's board. I expect that, as time goes on, we will learn that Enron is not
the only company where these questions arise. Members of the corporate board
must retain their independence and hold management accountable.

In closing, Mr. Chairman, I typically prefer private sector regulation to
federal regulation. But if the private sector fails in its responsibilities and
creates a vacuum, then the Federal Government has a duty to protect its
citizens
by addressing the market failure. More Americans than even have their savings
invested in the stock market and we have an obligation to protect them from the
conflicts of interest we are investigating in the Enron collapse.

REP. BAKER: Thank you, Mr. Kanjorski.

I this time recognize Chairwoman of the Oversight Investigation Subcommittee,
Ms. Sue Kelly.

REP. SUE W. KELLY (R-NY): I want to thank Chairman Baker and Ranking Members
Kanjorski and Gutierrez for agreeing to hold this hearing on the recent
collapse of Enron and its impact on investors and the financial market.

In this hearing, I hope we can all gain a better understanding of why Enron
collapsed so quickly and why Enron's public filings and Andersen's audit
reviews
failed until it was much too late to give any indication of the problems they
were experiencing. Transparency is the goal of the disclosures a company is
required to make, and a fundamental necessity to a properly functioning open
market. Unfortunately, the disclosures made by Enron did not give any
indication of the problems they were experiencing until October 16th. News
reports have had many different versions of what may or may not have happened.

I've read about a partnership that hid the level of leverage the company had
incurred, mistakes, and misstatements, that may have occurred in the audits,
certain Brazilian investments that also may have contributed to Enron's fall.
What is clear is that people have been hurt by the collapse of Enron. From the
thousands of investors whose retirement and other investment savings have been
devastated, to the thousands of employees who now find themselves without a
job, and with a jeopardized pension plan.

We have, on our hands, what appears to be the largest bankruptcy ever, which
could have implications for our economy. We have the duty, and the
responsibility, to ensure that safeguards are in place to prevent a disaster of
this magnitude from ever being repeated. We must determine when the
accountants,
executives and regulators knew what was happening, what they did to rectify the
problems. While it would be impossible to ever have in place a system that
would
prevent failures in the future, we always must try to improve on the current
system of disclosures, and enforcement that's the responsibility of the SEC.
Enron's collapse underscores how important it is for Congress to act
immediately
to pass the netting provisions of the bankruptcy bill, which have already
passed
the House numerous times.

For the record, Mr. Chairman, I'd like to ask unanimous consent to have a
letter, signed by seven financial regulators who support the netting provision,
made part of the record. This legislation would reduce the uncertainty for
financial market participants about the disposition of their contracts in the
event one of their counterparts becomes insolvent. In this letter, the
financial
regulators state that failure to act, these financial contract netting
provisions would unnecessarily place the financial system at greater risk.

Chairman Oxley has been working on this. I want to add my strong support for
enacting these needed provisions before we adjourn this year.

I want to thank all the witnesses for taking their time out of their busy
schedules to share their views with us, and I look forward to discussing these
issues with them.

I yield back the balance of my time. And I do thank those members of my
committee who are here today.

REP. BAKER: Thank you very much, Ms Kelly. We certainly appreciate your
cooperation and assistance in this important matter.

The ranking member, Mr. Gutierrez?

REP. LUIS V. GUTIERREZ (D-IL): Good morning, Chairman Baker, and Chairwoman
Kelly, and the ranking member Mr. Kanjorski.

And I want to thank Mr. LaFalce for joining us also here this morning, and
for holding this hearing.

We are gathered here today because of a series of unfortunate events that
culminated on December 2nd, with the filing for bankruptcy of Enron. In Houston
alone, Enron has laid off more than 4,500 of its 7,000 employees as part of a
corporate restructuring program. The victims of this catastrophe, Enron's
employees, have been left wondering how bankruptcy will affect their severance
pay, health insurance, and financial future. For a vast majority of them, the
spectacular collapse of this company causes a financial and personal tragedy.
Many feel betrayed and angry. Sadly, many workers didn't even know they were
about to lose their jobs. They just came in one day to work, and they were
simply given 30 minutes to pack up their belongings and leave.

In addition to the lay-offs, a great number of Enron employees lost, in a
matter of months, almost all of the value of the stock they owned, which
plunged
to levels below one dollar. The Labor Department stated that Enron employees
may
have lost 70 to 90 percent of their retirement funds, which translates into
more
than a billion dollars. Many of Enron's employees have invested all of their
401(k) funds into Enron stock. And why shouldn't they? Just months ago, Enron
was the country's seventh largest company in terms of reported revenue. I state
reported revenue. Enron was a fast rising star that had turned the dreary
business of energy trading into one of the world's vast corporate empires. It
reported quarterly revenues of nearly $47 million.

The Enron case brings to the fore an issue that has long worried pension and
benefits experts, a retirement plan usually dependent on the health of a
co