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Interview with Senator Jon Corzine | The Nation

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Interview with Senator Jon Corzine

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February 12, 2002

About the Author

William Greider
William Greider
William Greider, a prominent political journalist and author, has been a reporter for more than 35 years for newspapers...

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Corzine:

You set the right context. As interesting as Enron is as either a criminal or regulatory investigation, and it is, I'm mostly interested in it for purposes of revealing the meaning--the need to get on with updating our system to make sense for the twenty-first century, dealing with changes that have occurrred that we've been sitting for on a very long time, whether it's pension reform or accounting reform or corporate governance reform or campaign finance reform.

Q: I read in Congress Daily that you intend to recuse yourself on financial reform. I hope you reconsider.

I will recuse myself if it has something specific to do with Goldman Sachs.

Q: But that's a lot.

No, no--only if I think it is going to impact their bottom line. If we were talking about analysts generically, I wouldn't recuse myself. If we brought Goldman Sachs in, I would not question them. When we had a vote last year about SPE's [special purpose entities] and tax deductions, I thought that would impact their bottom line, so I recused myself from that vote. I have an opinion about it.

Q: But why? Because if farmers recused themselves on the Ag bill----

I just think, given my specific role at Goldman Sachs, until it's confirmed to me that I no longer have stock in the company--I put my stock in a blind trust and told them to use a sensible approach to liquidate it as soon as possible--that, until I know that is done, I just don't want to create an appearance of a conflict. For the same reason, I think [SEC chairman] Harvey Pitt should recuse himself on Arthur Andersen-specific issues [his former client]. If you want his ability to comment as an important part of the dialogue, I don't have any objection to it. But about Arthur Andersen-specific--are we going to have an investigation?--I think he should opt out.

Q: How bad do you think the rot is in our financial system?

You know, I'm not sure I fully accept the "rot" concept. I think we have not updated our financial system for many years and we've allowed for the theme of deregulation to erode the checks and balances in our financial system substantially at a period of time when technology and globalization and financial entrepeurship were growing at geometric paces. So I think there's as much a failure to stay apace with the system as there was rot. Now I think there is an element of culture--a degradation--about what it is the mission of a company is about. And it has become so narrowly defined in public company terms--an earnings per share or earnings growth philosophy--that the system to some extent has lost track of its other objectives of social responsibility, of ethics, as they relate to employees and their position in society. There is a stewardship reponsibility in the context of society and for the people who work there and for the client customers that use their services or products that is as important as is the bottom line. As a matter of fact, we had a principle at Goldman Sachs--I didn't create this one, my predecessors did--serve your clients well, your profits will follow. But the point was, there was something more important than just the bottom line 'cause the bottom line will follow if you do a great job.

Q: In terms of deregulation, I know you've already made a number of proposals on specific problems, but I look back over the last twenty years since the real financial deregulation legislation and there is this string of crises and breakdowns, not just in investment houses but in commercial banks--junk bonds, the savings and loan collapse, the Mexico bailout, Long-Term Capital Management. Is there a systemic, structural problem there that ought to be fixed?

I think the thing that business often fails to understand is that, without checks and balances in the system, without some regulation--not overbearing regulation, but without some involvement of government in the workings of the economy in terms of its excesses--those who are outside the purview of the supervision and regulation end up operating to their own interests and to the detriment of the system at large. And it happens repetitively. It has throughout history. And I suspect it'll happen again in the future. It's one of the reasons I believe we ought to go out and bring hedge funds into the system of financial regulation. It's the same reason I believe we ought to have real reform with regard to SPE's {"special purpose entities" like Enron's off-the-book partnerships] that just scatter to the winds of non-regulatory venues or purposes. You have the same sort of problems in almost each one of those cases you mentioned. Probably the most egregious was the savings and loan crisis--they used a lot of the same techniques you see in the Enron case to provide for the kind of leverage that we have.

Q: But also in concert with Wall Street?

Right. No, no, no--I think Wall Street has looked at the rules and the ambiguity of the rules and accounting statements and has reinforced the view that the sole purpose of the company is to produce ever- growing earnings per share so you can get high multiples--and maybe lost perspective on the quality of earnings, the quality of product, the quality of reputation, which are equally important issues built on relationships with clients, with your employees, with things that matter in addition to financial performance.

Q: That sounds like you think Congress should go beyond these specific scandals and take a broader look at financial regulation?

I think there's plenty of room for broad-scoped review and reform in accounting, the reporting practices and functions of companies at large. A lot of that will end being focused on the financial structures of companies and I think that's probably appropriate. But, you know, you have some of the same situations in regulatory structures of other industries and activities. We haven't had a crisis in the pharmaceutical industry, but you know there are plenty of questions that surround that. We now have a lagging regulatory system regarding telecommunications that we, as a society, haven't pulled back to update. There are suggestions, but we haven't gotten anywhere. I just happen to think that the one that deals with the backbone or foundation of financial market competence is the accounting and reporting. Get an honest picture. If it's too easy to cook the books, correct it. Now not everybody's going to cook the books. I don't believe that everybody is cooking the books. You know, people are using the SPE's approrpriately. But, the fact is, it is too easy to cook the books if there is no regulatory structure to check it. And that's exactly what happened to Enron. And I hope it hasn't happened extensively. But, you know, certainly one has to worry about the case of Sunbeam and Waste Management which are pretty flagrant and now it looks as if Global Crossing may be quickly fitting into this. You know, this is really complicated because the whole idea of income recognition is something that the people at Enron and Global Crossing may not have broken the law. The rules of the road were so ambiguous that they allowed their financial geniuses to do what served their aims in getting market value. And there are a whole bunch of people who will argue that it's the same case in the whole dot.com phenomenon.

Q: Step back from the series of scandals. I gather you're a little worried, maybe more than a little worried, about the broader economic impact of all this.

Well, I think that society should recognize that, if people don't have confidence in how they go about making investment decisions, it soon will show in aggregates with regard to investment. If I don't know whether what I read about Global Crossing is right or wrong, then I would be a lot less inclined to put money into them so they can go out and lay down fiber optic cable as they did. You could imagine that on a whole series of companies and aggregate it across the economy and the investment function in society is severely diminished. And it becomes particularly important when you're so dependent on foreign investors to finance our current account deficit in this country, which is huge.

Q: A dangerous situation?

Right, if people look to our numbers that we put out in our statments as the basis for making their investments. I'll give you a perfect example of it. Much of the merger business has been driven by foreigners trying to become members of Americans' economic operating club. If they say, hey, I'm not going to do that anymore, I can't tell what the hell I'm buying, by the time we get done with this thing, I will be taking a big write-off. And, you know, the Japanese really did feel like they got taken for a lot during the 1980s and '90s. Maybe they didn't get good information and maybe they failed to properly analyze what they did get.

Q: Do you wake up in the middle of the night thinking we could wind up with a currency crisis down the road if foreign investors suddenly pulled back?

Well, you know, I think of things in probability mixes. I don't think of that as likely, but I see the conditions on which that could develop, based on people whose competence comes in questioned. For instance, I don't think it's going to happen in my old company, but if you had a company like Goldman Sachs who's super-well-regarded in the economic and financial system, or GE or Citicorp come unwound like it's Enron, then people starting losing confidence in what they believe in, then you have a much more serious effect. In the neartime, that's a crisis issue. In the nearterm, it continues to hold back both the economic and financial markets recovery that people hope would be stronger this year because people have to sort through whether this is just a bad actor or we've got a systemic issue. I think at the end of the day we will find out it was more of a bad actor situation than systemic but, you know, I wouldn't bet my life on it.

Q: Let's go to some specifics. You mentioned the SPEs like the partnerships Enron created off the books, thousands of these things...

But a lot of companies use those. In fact, the whole asset securitization that provided so much liquidity, starting with home ownership, got through similar methods. It is the hiding of those SPEs and using them for non-economic purposes that Enron was so egregious about.

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