Barclays Bank provided crucial loan at genesis of Enron scam

Barclays Bank was at the centre of the very first attempts by Enron employees to construct the shadowy off-balance sheet vehicles that hid its calamitous borrowings, it has emerged.

Enron turned from being the US's seventh-largest corporation into history's largest bankruptcy after massive debts hidden "off" its balance sheet came home to roost, forcing it to restate its accounts in November. The borrowing had been transported into partnership companies, for which Enron was liable. However, if at least 3 per cent of the equity in these companies was owned by a third party, the vehicles were allowed to be excluded from Enron's accounts.

Enron's own internal investigation into its demise, completed earlier this month by the US academic William C Powers, reveals that Barclays helped to finance an off-balance sheet vehicle that later "played a central role" in Enron's decision to restate its accounts. There is no suggestion that Barclays helped structure, as oppose to finance, the vehicle.

The company, named Chewco after the character Chewbacca from Star Wars, was created at short notice in 1997 as a vehicle for Enron to buy out its partner in a four-year-old investment vehicle. Chewco did not meet the requirements on external equity, but for reasons that remain unclear it was not consolidated in Enron's financial statements.

According to Mr Powers, transactions surrounding Chewco formed the "prologue" for Enron's dealings with other off-balance sheet vehicles that served to hide its liabilities. Upon restatement of the Enron's accounts, Chewco alone was responsible for decreasing Enron's revenues by $405m (£279m) and increasing its debts by some $2.59bn between 1997 and 2000.

Enron managers failed to find any third parties willing to invest in Chewco, which needed equity financing to the tune of $11.5m if it were to be kept off the balance sheet. Barclays, however, agreed to provide what were described as "equity loans" of $11.4m to two Enron-controlled entities, Big River and Little River (Big River's sole shareholder), which would take a stake in Chewco. The other $125,000 came from an investment by the former global finance chief Michael Kopper and William Dodson, another executive.

In line with accounting practice for off-balance sheet vehicles, the documentation described the loans as "certificates" and "funding agreements" and referred to the interest payments as "yield", thereby allowing Enron to characterise them as equity contributions for accounting purposes.

The parties "initially made an effort to maintain the 'equity' appearance of the transaction", Mr Powers said, by including a condition that Barclays could not tap an allocated reserve fund if doing so would bring Chewco's "equity" below 3 per cent. But the bank in effect precluded Chewco's classification as an off-balance vehicle by insisting on $6.6m of cash collateral to secure its financing. This ruled out any chance of compliance with off-balance sheet accounting regulations.

In the event, Chewco was kept off the balance sheet anyway. Mr Powers said several of the principal participants in the transaction declined to be interviewed or provide information to his investigations.

The company was later bought out for $35m, with Mr Kopper and Mr Dodson receiving approximately $7.5m during the term of their investment, along with an additional $3m cash payment at closing.

A spokesman for Barclays yesterday declined to comment on the bank's involvement in Chewco, other than saying: "We are totally comfortable with everything we did in this financing."

Barclays is not the first UK bank to have emerged as closely involved in Enron's off-balance sheet financing. Earlier this month it emerged that bankers at Greenwich NatWest, formerly part of National Westminster Bank, carried out dozens of transactions for Enron. There is no suggestion that the individuals – Gary Mulgrew, Giles Darby, David Bermingham– understood the purpose of the off-balance-sheet financing. Greenwich was later folded into Royal Bank of Scotland after RBS's takeover of Natwest in 2000.