Reformer From Goldman Sachs
Jon Corzine, the freshman senator from New Jersey, is uniquely positioned to deal with the swirling scandals of Enron and other related malpractices in high finance. He was a Wall Street insider himself and, indeed, did some deals for Enron. In 1994 Corzine rose to become chairman of Goldman Sachs, the vastly influential investment house, and presided during the decade's booming financial markets. Then he retired and spent more than $60 million (nearly one-seventh of his personal fortune) to win election to the Senate in 2000 as, in his words, a "self-funded candidate." Now Corzine is aggressively speaking for reform.
"I'm not sure I fully accept the 'rot' concept," the Senator said with a small smile, when I asked how bad the rot is. "I think we have not updated our financial system for many years, and we've allowed the theme of deregulation to erode the checks and balances in our financial system, at a period of time when technology and globalization and financial entrepreneurship were growing at geometric paces. So I think there was as much a failure to stay apace with the system as there was rot."
Still, he acknowledges, the rot is real too. "I think at the end of the day we will find it was more a bad-actor situation than systemic, but, you know, I wouldn't bet my life on it," he said. Corzine sees a degradation of values in business and finance that goes deeper than regulatory laws--a single-minded focus on earnings-per-share to the neglect of everything else. "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," he said.
In any case, the Senator recognizes the need for a long-term agenda of repair and reform and has already staked out a forward position in confronting the current outrages like the false independence of independent auditors, the ease with which much-celebrated corporations falsify their earnings and indebtedness and the myriad ways in which Wall Street banks and brokerages help companies game accounting principles and the tax code. "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 need to get on with updating our [regulatory] system for the twenty-first century, dealing with changes that we've been sitting on for a very long time, whether it's pension reform or accounting reform or corporate governance reform or campaign finance reform."
Senator Corzine promises to be an influential voice in all these matters, first, because he thinks and votes like an old-fashioned economic liberal (not many of those around anymore), and second, because he is intimately familiar with the inner mechanics of how finance and corporations function together and how their excesses damage society. His manner is deliberate and precise, even cautious, but also pleasantly free of the overheated rhetoric that passes for serious discussion among his colleagues. The man is not a bomb thrower. He is an investment banker who was at the table himself when deals were done and is not eager to turn on his former occupation. Still, his own stature and integrity will be measured by how deeply he is willing to dig into the muck. The present storm is an important turning point, a beginning, at least, of the long and difficult politics needed to restore the public values and protections eroded or destroyed during the past twenty years of laissez-faire orthodoxy. Corzine is taking the public's side in that fight.
"Unfortunately, we don't have Teddy Roosevelt in the White House," the Senator said. "And without the bully pulpit and the support of the President for a lot of the initiatives that need to be taken, I suspect we will get marginal, incremental steps but not really get at the heart of a lot of these issues." Many Democrats are as conflicted as Republicans on these matters, having taken the campaign money and bought into the virtues of deregulation themselves. Corzine, nevertheless, envisions a comprehensive reform agenda. "Do I think we are going to get it in the next six months before an election? Probably not. But, you know, these are processes that will continue. That I'm optimistic about."
The recurring financial crises and breakdowns during the past two decades--from junk bonds and the savings and loan collapse and major bank bailouts of the 1980s to the failure of Long Term Capital Management in 1998 and the current explosion--demonstrate the long-neglected need to rehabilitate government supervision and regulation, Corzine believes. Among other things, he wants to regulate hedge funds, reform pension protections, reconfigure the Securities and Exchange Commission with stronger enforcement powers over auditors and impose tougher limits on corporate SPEs--"special-purpose entities," like Enron's off-the- books partnerships. "You have almost the same sort of problems in each one of those [past] cases," Corzine observed. "Probably the most egregious was the savings and loan crisis--they used a lot of the same techniques you see in the Enron case."
"The fact is, it is too easy to cook the books if there is no regulatory structure to check it," he said. "And that is exactly what happened to Enron." What complicates reform, Corzine warned, is that many outrageous practices that look plainly criminal to citizens may not have technically broken the law. "The rules of the road are so ambiguous," he said, "they allowed their financial geniuses to do what served their aim in getting market value." He demurs on the idea of stiffer criminal penalties, but suggests there may be a need for more sentencing guidelines on civil fraud and failed audits.
As scandalous revelations bubble up around other companies, Corzine worries about a danger that hasn't yet gotten much attention--the potential impact on the US economy and America's vulnerability as a debtor nation. "If people don't have confidence in how they go about making investment decisions," he explained, "it soon will show up in aggregates in regard to investment.... For instance, I don't think it's going to happen to my old company, but if a company like Goldman Sachs, which is super-well-regarded in the economic and financial system, or GE or Citigroup, came unwound like it's Enron, then people start losing confidence in what they believe in--then you have a much more serious effect."