Friday, July 12, 2002
Compare and contrast: It's Friday, and that means that we can expect New York Times columnist Paul Krugman's latest screed against the Bush administration.
Krugman reveals in his piece that the Bush administration is full of corporate or Washington insiders. Well, what administration isn't? The former secretary of the treasury under Bill Clinton, Robert Rubin, was definitely an insider. As was Clinton-era SEC chairman Arthur Leavitt.
Current SEC Chairman Harvey Pitt is under attack by Sen. John "Keating 5" McCain because he is allegedly too close to the big accounting firms, who he used to represent as a lawyer. Others, including Democratic Sen. Chuck Schumer, are willing to give Pitt a chance. Sometimes "insiders" have insight and connections to get things done faster and better. My point: being an insider isn't necessarily bad or a disqualifying attribute.
And the Bush administration is full of such insiders. That's why President Bush cannot get away with merely rhetorical opposition to executive wrongdoers. To give the most extreme example (so far), how can we take his moralizing seriously when Thomas White -- whose division of Enron generated $500 million in phony profits, and who sold $12 million in stock just before the company collapsed -- is still secretary of the Army?
If White was guilty of cooking the books, he should go. Thus far there's no evidence out there that White knew about the book-cooking. (Of course, ignorance is a pretty lame defense. Maybe he shouldn't be running the Army for that reason -- but that's a different issue.) What Krugman is doing here, lacking evidence of White's malfeasance, is guilt by association. By that measure, Krugman is sitting in a glass house with a handful of very large rocks.
Another point to make is Krugman's suggestion that White sold off $12 million in Enron stock knowing that the company was about to go under. In fact, White sold that stock (months after) he was ordered to sell it by the government's ethics office. If he had sold it off when he was first directed to, he'd have made even more money. On the other hand, if he'd defied the government ethics office and held onto it, it would be worthless -- but then Krugman couldn't claim that he'd made millions. What a dilemma.
And he still opposes both reforms that would reduce the incentives for corporate scams, such as requiring companies to count executive stock options against profits, and reforms that would make it harder to carry out such scams, such as not allowing accountants to take consulting fees from the same firms they audit.
Actually Bush supports the only reform that would reduce the incentive for corporate scams -- tougher penalties for white-collar crimes and zealous prosecution. With the exception of a CEO having strong moral fiber (which too many lack), the only thing that creates a desire to be honest is the prospect of going to jail if you're not. CEOs who spend the day looking at balance sheets, marketing reports and pondering opportunity costs, needs to conclude, when the opportunity comes to cook the books, that it just isn't worth it. Other reforms may make it more difficult to carry out scams, but a determined cheat will always find a way around them. That's why the prosecution is of primary importance.
The closest thing to a substantive proposal in Mr. Bush's tough-talking, nearly content-free speech on Tuesday was his call for extra punishment for executives convicted of fraud. But that's an empty threat. In reality, top executives rarely get charged with crimes; not a single indictment has yet been brought in the Enron affair, and even "Chainsaw Al" Dunlap, a serial book-cooker, faces only a civil suit. And they almost never get convicted. Accounting issues are technical enough to confuse many juries; expensive lawyers make the most of that confusion; and if all else fails, big-name executives have friends in high places who protect them.
Charles Keating. Michael Milken. Leona Helmsley. Do these names ring bells? It's true that no indictments have been brought in the Enron case -- yet. And Krugman, unwittingly, tells us why -- because explaining accounting nuances to juries of consisting of your average Joes and Janes is difficult. It takes time to get all your ducks in a row. Imagine the cry from Krugman and his friends on the left if the Justice Department ran into court with criminal charges -- and lost. Krugman seems like the type of guy who wants to learn patience -- and wants to learn it quickly.
In this as in so much of the corporate governance issue, the current wave of scandal is prefigured by President Bush's own history.
An aside: Some pundits have tried to dismiss questions about Mr. Bush's business career as unfair -- it was long ago, and hence irrelevant. Yet many of these same pundits thought it was perfectly appropriate to spend seven years and $70 million investigating a failed land deal that was even further in Bill Clinton's past. And if they want something more recent, how about reporting on the story of Mr. Bush's extraordinarily lucrative investment in the Texas Rangers, which became so profitable because of a highly incestuous web of public policy and private deals? As in the case of Harken, no hard work is necessary; Joe Conason laid it all out in Harper's almost two years ago.
Just for the record, you can find the Joe Conason article here. I've read the article, and the best I can come up with is -- so what. Krugman makes a big deal out of the "highly incestuous web of public policy and private deals" regarding the Texas Rangers and the public/private funding of the Ballpark at Arlington. Well, they're building a new ballpark for the Padres here in San Diego and it was done much the same way. If Krugman wants to write an article on how the public is helping fund millionaire sports teams owners then he should go ahead and do that. (He won't be the first one.) But to suggest that Bush did something illegal or unethical in his dealings with the Texas Rangers -- Conason doesn't even attempt to make that case.
But the Harken story still has more to teach us, because the S.E.C. investigation into Mr. Bush's stock sale is a perfect illustration of why his tough talk won't scare well-connected malefactors.
Mr. Bush claims that he was "vetted" by the S.E.C. In fact, the agency's investigation was peculiarly perfunctory. It somehow decided that Mr. Bush's perfectly timed stock sale did not reflect inside information without interviewing him, or any other members of Harken's board. Maybe top officials at the S.E.C. felt they already knew enough about Mr. Bush: his father, the president, had appointed a good friend as S.E.C. chairman. And the general counsel, who would normally make decisions about legal action, had previously been George W. Bush's personal lawyer -- he negotiated the purchase of the Texas Rangers. I am not making this up.
Let's just walk through this. You're investigating to see if Bush had inside information regarding bad financial news before he decided to sell his stock. Do you interview Bush first? No. You get documents, you interview others who aren't the target of your investigation. If all that turns up negative, then why would you need to interview Bush? What's he going to say?
SEC: Mr. Bush, did you engage in insider trading?
Where did that get you?
Of course, all of this ignores the fact that someone approached Bush asking to buy the stock -- and not the other way around. Krugman still hasn't mentioned in his column that Bush did file a form announcing his intent to sell the stock on the day he sold it.
Note Krugman's wording: "And the general counsel, who would normally make decisions about legal action, had previously been George W. Bush's personal lawyer -- he negotiated the purchase of the Texas Rangers." [emphasis added] This seems to imply that Bush's former personal lawyer recused himself from the case -- as he should have. If he had made the decision and exonerated Bush that would've been reason for a serious look. Unfortunately for Krugman's hunt for dirt, he can only make lame insinuations.
Most corporate wrongdoers won't be quite as well connected as the young Mr. Bush; but like him, they will expect, and probably receive, kid-glove treatment. In an interesting parallel, today's S.E.C., which claims to be investigating the highly questionable accounting at Halliburton that turned a loss into a reported profit, has yet to interview the C.E.O. at the time -- Dick Cheney.
I'm sure that the SEC has not interviewed Cheney for the same reason that no indictments have come down against Enron executives (yet). It's a case of the government getting information and getting its ducks in a row before it goes after the big fish. Of course it could also be a lack of manpower. The July 8 issue of Fortune magazine revealed that the SEC has too few lawyers and the turnover rate is alarming -- that's something that does need the Congress and the president's attention.
The bottom line is that in the last week any hopes you might have had that Mr. Bush would make a break from his past and champion desperately needed corporate reform have been dashed. Mr. Bush is not a real reformer; he just plays one on TV.
Can we expect an apology from Krugman once a bill is passed and the president signs it?
In contrast to Krugman's Captain Ahab-like obsession with President Bush, The Washington Post has an excellent editorial on the Harken energy "Distraction."
I'd quote the entire thing, but you're better off just hopping over there and reading it if you haven't.