The congressional probe of Enron's collapse is moving increasingly beyond the energy firm's Houston boardroom, beyond memos by its accounting firm, and onto Wall Street.
The emerging picture is of an investment-house culture where being a player in major deals may at times mean ignoring dubious or even illegal practices.
At the heart of the investigation now is the appearance that Wall Street firms made concerted efforts to hide Enron's financial woes and to win Enron's underwriting business at the expense of giving sound advice to investors.
Tuesday, lawmakers heard testimony about how Merrill Lynch, even though only a bit player in the Enron debacle, felt pressure to "put its balance sheet to work" for the Houston energy firm.
"What our investigation has uncovered ... is that Enron did not weave its elaborate web alone," says Carl Levin (D) of Michigan, and chairman of the Senate Permanent Subcommittee on Investigations. "Without the support and assistance of major financial institutions, Enron could not have engaged in the extent of the deceptions that it did."
The revelations have broadened the focus from the still-central questions of how and why Enron collapsed to matters that challenge the credibility of Wall Street.
At the same time, they add impetus to further efforts on Capitol Hill to crack down on corporate fraud, rather than stop with the reforms signed by President Bush Tuesday. While the new law contains tougher penalties and a new oversight board for the accounting profession, some lawmakers in both parties are saying it's only a first step.
Wall Street's involvement with Enron included fiendishly complex transactions between the energy-trading giant and financial firms prominently Citigroup and J.P. Morgan Chase that helped conceal billions in Enron debt. That helped Enron avoid credit downgrades that might have cued investors to bail out.
Documents and e-mails released at Tuesday's hearing suggest that Enron was putting pressure on Merrill to raise its rating of the energy stock from "neutral" to "accumulate." Merrill did end up changing the advice it gave to its investor clients after changing the analyst responsible for the rating.
Internal e-mails suggest that as a result of the rating upgrade, Merrill picked up $40 million to $50 million in new investment business from Enron, according to congressional investigators.
Two of the top executives in Merrill's energy investment-banking department, Schuyler Tilney and Robert Furst, invoked constitutional protections and refused to answer questions on these issues at Tuesday's hearing. Also, the former Merrill analyst responsible for the "neutral" ratings did not testify at Tuesday's Senate hearings.
But in an appearance before a House panel in February, he offered this assessment of how the corporate culture worked: "Enron had a considerable investment-banking agenda every year, and attracted bankers like roaches to honey. The common unspoken, unwritten understanding came back thus: [Enron] would be happy to do banking business, provided the analyst had a strong 'buy' recommendation on the stock," said John Olson, who is now director of research at Sanders Morris Harris, a Houston-based securities firm.
Merrill Lynch says the firm's new analyst was, in fact, one of the first to downgrade Enron as its problem became public last fall. "If we knew then what we know now, we would not have conducted business with Enron," Merrill vice president Kelly Martin said at Tuesday's hearing.
Senate investigators also documented a deal involving the purchase of three Nigerian barges in 1999 that helped Enron misrepresent its losses. Internal Merrill documents refer to this as a "balance sheet deal."
Financial experts say that such deals were not unusual in the climate of the 1990s. "Merrill knew why the transactions were being executed sham transactions designed to get an accounting result that made no economic sense whatsoever," says Lynn Turner, director of the Center for Quality Financial Reporting at Colorado State University and former chief accountant of the Securities and Exchange Commission.
"That was not unusual," he adds. "The message is that unregulated, Wall Street will put the dollars they are generating well before the interests of investors."
Meanwhile, lawmakers are ramping up new bills to help avoid future corporate accounting scandals. House GOP leaders say they plan legislation to aid defrauded investors in getting back some of their losses.
"There is a lot of sunlight being shone on what the practices of Wall Street have become," says Mr. Turner. Resulting litigation may change those practices.
On the Senate side, John McCain (R) of Arizona promises to attach an amendment to remaining bills this year that would require firms to clearly disclose stock options as an expense.
House Democrats are calling for a broader agenda they dub a "business, investors', and employees' bill of rights," including pension reform, curbs on golden parachutes for corrupt executives, and a new law to penalize companies who avoid taxes by moving abroad. "The President's decision to sign the corporate accountability reform bill today is a good first step ... but Congress and the President need to do much more," says House Democratic leader Richard Gephardt.