A Senate panel investigating Wall Street's role in the collapse of

Enron

is finding that when it comes to unraveling the mystery of special purpose entities and off-balance sheet financing, nothing is ever easy or simple.

Late last week, Sen. Carl Levin (D., Mich.), chairman of the Senate Permanent Subcommittee on Investigations, asked

Citigroup

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and

J.P. Morgan

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to provide the nitty-gritty details of several offshore SPEs that the banks used to provide some $8 billion in questionable financing to Enron.

Levin made the request after lawmakers came away from a hearing less than satisfied with the banks' claims that they neither owned nor operated the SPEs involved in the deals. So, in an attempt to tighten the screws on the nation's two biggest banks, Levin gave Citigroup Chief Executive Sanford Weill and J.P. Morgan Chief Executive William Harrison Jr. until Monday to respond in writing to some specific questions about the two SPEs in question: Mahonia and Delta Energy.

What You Ask For

But the responses, which both banks released to the news media, read more like tutorials on the mind-numbing complexities of SPEs than some sort of smoking gun that could expose the banks to potential liability.

Citigroup, in its response, reiterates its contention that it neither owns, operates, nor controls Delta Energy -- the SPE it used to arrange a series of so-called prepaid energy transactions with Enron. Citigroup says it actually established Delta with the assistance of a Cayman Islands law firm in 1993, originally to arrange a prepaid commodities transaction with

Amerada Hess

, not Enron.

The ownership structure of Delta, as outlined by Citigroup, is complex. An outfit called Grand Commodities Corp. is its reported owner and the sole shareholder of that outfit is Givens Hall Bank & Trust, a Caymans Island bank. While Citigroup acknowledges paying administrative fees to a charitable trust that manages Delta's affairs for Grand Commodities and Givens Hall, it notes that Delta has its own independent board of directors.

J.P. Morgan, meanwhile, offers a similar and no less Byzantine description of its relationship with Mahonia, an SPE established in 1992 by what was then Chase Manhattan Bank. The bank also relied on a foreign law firm -- Mourant du Feu & Jenue, which is based in the British island of Jersey -- to fill out and file the necessary paperwork. Mahonia, like Delta, is also owned and operated through a charitable trust that is a separate and distinct entity from J.P. Morgan. Meanwhile, J.P. Morgan, like Citigroup, pays for Mahonia's administrative fees and expenses.

The Pudding

None of the strained ownership structures for either Delta or Mahonia should really come as a surprise to the senators, given the way SPEs are supposed to work.

That's because SPEs, by design, are meant to create independent, arms-length entities that can be used to reduce a company's exposure to some risky investments, or lower its tax burdens. The complex ownership structures are part of a deliberate strategy of putting distance between the SPE and its sponsoring company.

"In a technical sense, the banks don't own an SPE," says Ronald Lott, a project manager for the Financial Accounting Standards Board -- the nation's official rule-making agency for the accounting profession. "And many are set up in a way that control really isn't an issue. The purpose of these vehicles is to divide up risk."

Indeed, there is a whole host of foreign law firms that specialize in establishing and managing offshore SPEs for U.S. businesses. Mourant du Feu & Jenue, the firm that established Mahonia, even advertises its work for SPEs on its Web site.

Some of the SPEs that Enron relied on to shift debts off its balance sheet were established and administered by Lord Securities/SPV, another English-based outfit, with offices in New York.

Divide and Conquer

It's important to note that many SPEs also are legally set up in this country. But Stephen Ryan, an accounting professor at New York University's Stern School of Business, who is writing a book on SPEs, says generally that when one is set up overseas, it's done to mitigate a company's tax liability.

But more than anything, the banks' responses may have pointed out the need for lawmakers on Capitol Hill to spend time studying whether financial institutions and other corporations that rely heavily on SPEs should be providing more information about these financial structures in financial statements.

This is not to say that there is anything intrinsically wrong with the use of SPEs. It's just that there is so much about them that investors -- and apparently the Senate -- don't know. Ryan, for instance, says big banks such as J.P. Morgan and Chase may regularly employ thousands of SPEs in their financial deals.

"It's very hard to analyze," says Ryan. "There's no doubt that disclosure of SPEs and risk participation is poorly disclosed in a firm's financial reports."

Star Turn

When Enron collapsed last winter, SPEs initially garnered a lot of attention because of the central role they had in the company's strategy of moving billions of dollars in debt off its balance sheet. Indeed, many people on Wall Street and Capitol Hill were surprised to learn that a company could legitimately move failing assets and bundles of debt off its balance sheet by shifting them into an SPE, as long as it could find outside parties willing to make as little as a 3% equity investment in these structures.

But in the ensuing months, the controversy over SPEs moved into the background as other corporate accounting scandals began to dominate the headlines. Lawmakers on Capitol Hill seemed willing to leave the issue of SPE reform in the hands of FASB, which was putting together a proposal to increase the minimum outside investment in an SPE to 10% in most instances. Lawmakers acted as if that kind of rule change was all that was needed to fix the SPE problem.

FASB, meanwhile, formally unveiled that proposal last month. It isn't expected to take any formal action on it until sometime later this year.

Yet the FASB proposal would have no impact on the legal structure of SPEs nor on the reporting requirements for banks and other companies that set them up. Lott, the FASB project manager, explains that the proposed rule only is directed at the accounting treatment for SPEs, not issues relating to ownership and control.

Indeed, under the proposed rule, if the 10% threshold can be met, the SPE can continue to exist as an off balance sheet entity and a company need report little information about it to shareholders in financial filings.

That's important to note because before Enron, few if anyone on Wall Street had ever heard of Mahonia or Delta. But imposing that kind of detailed reporting requirement is not something FASB is considering, or is even suited to tackle.

"FASB is much better at doing accounting than it does disclosure work," says NYU's Ryan.

It's something, however, that Congress or the

Securities and Exchange Commission

may want to take up after their own experience in the world of SPEs.