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Suspicion Spreads to Banks

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By Selena Maranjian (TMF Selena)
July 24, 2002

Fools interested in investing in some financial services companies may be happy to see that several are now priced considerably cheaper than they were a few days ago. Of course the reason for their fall is not as encouraging.

Shares of Citigroup (NYSE: C) and J.P. Morgan Chase (NYSE: JPM) dropped between 15% and 20% yesterday, in tandem with a congressional hearing into the firms. Investigations have revealed that the banks raked in more than $200 million in fees for their services, helping energy companies such as Enron hide debt and enhance cash flow. According to an article in The Wall Street Journal (subscription required, free trial available to Fools), "... investigators also laid out evidence from company documents that suggested the bankers knew of Enron's aim to avoid scrutiny through the deals. Along with the banks' acknowledgment that they marketed such schemes to other energy companies, some legal specialists said the evidence raised the specter of possible criminal or civil liability for the nation's two largest financial institutions."

Also at issue is the degree to which the banks helped companies engage in "complex circular trades" of prepaid oil and gas contracts involving offshore companies allegedly controlled by the banks.

The banks defended themselves and their actions, of course, explaining that their clients are responsible for their own actions. Read more, if you're interested, in The Washington Post. And if you're tempted to jump in and snap up shares of these fallen companies, consider holding off a bit while you learn more.

Selena Maranjian holds shares in Citigroup. The Fool is investors writing for investors.

The Motley Fool is investors writing for investors. To view a writer's current stock holdings, check out his or her online personal profile.