News and Features
"Debacle in Kwangju." Were Washington's cables read as a green light for
the 1980 Korean massacre? (1996)
"Stiglitz Roars Back" (2001)
Tom White, who pocketed millions running Enron Energy Services, one of Enron's more egregious frauds, remains Army Secretary even after lying to the Senate about his Enron holdings. White continues to say he didn't mislead investors about EES's profitability even as his former Enron employees describe how he goaded them to pretend the unit was making money when it was losing money.
Harvey Pitt, lawyer-lobbyist for the big five accounting firms, continues to serve his former clients as head of the Securities and Exchange Commission, where he defends self-regulation. George W. Bush rebuffed Treasury Secretary O'Neill's recommendation that executives and accountants be held personally responsible for misleading investors, relying instead on Pitt's SEC to oversee executives--even as his budget starves the agency of resources needed merely to retain its staff, much less police the Fortune 500.
Enron's Ken Lay and Andrew Fastow remain at large, neither yet having seen the inside of a grand jury room. The secret partners in the off-balance-sheet enterprises remain undisclosed. The Justice Department--in an investigation headed by Larry Thompson, whose former law firm represented both Enron and Arthur Andersen--appears to be joining Pitt's SEC in pushing Arthur Andersen to cop a plea and settle claims before discovery.
The Bush Administration is staffed with more than fifty high-level appointees with ties to Enron, as documented by Steve Pizzo in a study for American Family Voices. It dismisses all Enron inquiries with imperial disdain. The President stonewalls Government Accounting Office efforts to gain access to Dick Cheney's Energy Task Force records while he continues to peddle the Enron energy plan, which lards more subsidies on big oil companies. Republicans held unemployed workers hostage to win passage of the corporate tax giveaways that Ken Lay lobbied for personally. And Bush continues to argue for turning Social Security into 401(k)-type retirement accounts like the ones that evaporated on Enron employees.
Each day brings another revelation of Enron's remarkable penetration of the Bush Administration, but the White House refuses to reveal the contacts its appointees had with Enron officials and executives. One result is that too little attention has been paid to the delay in imposing price controls when energy companies, led by Enron, were gouging California and other Western states in last year's ersatz "energy crisis." Bush brags that his Administration did nothing to help Enron, but holding off on price controls bought enough time for Lay and other executives to unload substantial amounts of stock.
The Administration's attempt to dismiss Enron as a business scandal, the case of a rogue company run by desperado executives, is laughable on its face. After all, Enron's "Kenny Boy" Lay was Bush's most generous financial patron. Enron's business plan, such as it was, depended on political favors. Enron's freedom from regulation was the result of political fixes. And now the fate of Enron's policies and principals depends in large part on political calculations.
Yet the Bush dodge seems to be working. The press has done its job, but Democrats have failed to find their voices or their spines. If Enron had been a Clinton patron and Gore was in the White House, Congressional Republicans would have forced a special counsel and resignations of compromised officials weeks ago.
Concerned citizens--and Democrats with a pulse--should take off the gloves. White and Pitt should be forced to resign. The criminal investigation should be taken out of the hands of compromised Republican appointees and placed under an independent prosecutor. Enron's energy, tax and privatization plans should be exposed and defeated. And fundamental reforms to protect investors, defend retirement accounts, shut down tax havens, and hold corporate executives, accountants and lawyers personally and criminally accountable are long overdue. For that to happen, voters will have to teach a lesson to the Enron conservatives of both parties who continue to betray their trust.
Campaign for a Living Wage
The Houston company was part of the biggest "big idea" of the past decade.
There aren't many Democratic Congressional candidates who can claim that they personally thwarted the agenda of organized labor in the most critical legislative battles of the past decade, but former Clinton White House aide Rahm Emanuel can--and does. Northwestern University, where Emanuel has served as an adjunct professor of communications studies, identifies him as the man who "coordinated the passage of NAFTA." In addition to getting the North American Free Trade Agreement "ball across the goal line," as Emanuel likes to put it, Clinton's former senior adviser for policy and strategy was also a point man for the Administration in fights with unions over granting China most-favored-nation trading status and over fast-track negotiation of a hemispheric free-trade-area agreement that union leaders call "NAFTA on steroids."
That résumé might not sound like one that would be a magnet for labor support. Yet, as the millionaire investment banker seeks the Democratic nomination for an open Congressional seat representing blue-collar Chicago neighborhoods hard hit by the loss of industrial jobs, Emanuel is running with the endorsement of the Illinois AFL-CIO. Weirder still is the fact that Emanuel's opponent in the close struggle to win the March 19 primary, former State Representative Nancy Kaszak, is a lifelong backer of union causes who speaks with passion about the devastation wreaked on Illinois by more than 37,000 lost jobs directly linked to the passage of NAFTA.
What gives? The national AFL-CIO defers to state federations on local endorsements. And Illinois AFL-CIO spokesman Bill Looby offers a realpolitik explanation of his federation's stance in the Kaszak-Emanuel race: "She had the good labor record, but he had the record of knowing his way around Washington. The feeling was, he could be more effective in Washington." Illinois politicos argue, however, that the federation's endorsement resulted more from the machinations of the Daley political machine, for which Emanuel has been a fundraiser, strategist and well-connected ally.
Emanuel is just one of a number of Democrats who, despite playing premiere roles in pushing a trade agenda that AFL-CIO president John Sweeney has referred to as "an assault on American workers, their families and their communities," enjoy AFL-CIO support in tight primary contests with Democrats who oppose unrestricted free trade. As in the 2000 presidential race, when the national federation went all out for Al Gore--who had consistently opposed it on trade issues--several state and local federations this year have made endorsements that are causing a lot of head-scratching among union members who embrace the "fair trade, not free trade" line.
In Texas, for instance, Representative Ken Bentsen, a Houston Democrat who helped the Bush White House secure its one-vote victory in December for fast track, won a dual endorsement just weeks later for an open US Senate seat--even though the man he shares the endorsement with, former Dallas Mayor Ron Kirk, clearly positioned himself on the opposite side of the issue. And divided labor loyalties in a freshly drawn Ohio Congressional district may well allow Representative Tom Sawyer, a frequent supporter of free-trade initiatives, to prevail over Ohio legislators with strong pro-labor records in a race to represent Youngstown and other steel-mill communities ravaged by the opening of US borders to cheap foreign steel.
When it's losing key Congressional battles over trade by a single vote, can labor really afford to send more Wall Street, not Main Street, Democrats to Congress? Paul Waterhouse, a top official with Teamsters Local 705 in Chicago, doesn't think so. "Unions begin to lose faith with their members when you tell them year after year after year that trade is the central issue and then at election time say never mind," says Waterhouse, whose 21,000-member local is backing Kaszak over Emanuel. Trade was a critical issue in convincing the Teamsters, the Machinists and a number of other blue-collar unions to break ranks with the state labor federation and endorse Kaszak. Indeed, to the extent that there is union "street heat" working the district, it appears mostly to be for Kaszak, who is described by Chicago Sun-Times columnist Steve Neal as having a record as "a genuine populist and community activist" that contrasts with Emanuel's "dubious claim that he has spent his life fighting for working families."
Intriguingly, the group that has placed an estimated $400,000 in advertisements on Chicago television complaining about Emanuel's support of NAFTA is not the labor federation that led opposition to the trade deal. It is EMILY's List, the national donors' network that backs pro-choice women candidates. EMILY's List was looking for an issue that would allow it to clearly distinguish Kaszak's Chicago roots from Emanuel's Washington-insider status. The Teamsters' Waterhouse says the group was wise to focus on trade policy. "Trade is an important election issue for working people in places where jobs are disappearing," says Waterhouse, who argues that unions need to recognize the power of the issue, as well as the importance of remaining consistent on it. "It really is a matter of credibility. We need to be the ones standing strong on these issues. If we say that trade is a central issue and then back people at election time who are on exactly the wrong side of the issue, we might as well say to politicians, Go ahead, screw us again."
On February 21 the California Public Employees Retirement System stunned financial markets in Asia when it said it would withdraw its $450 million investments in publicly traded companies in Indonesia, Thailand, the Philippines and Malaysia to comply with new investment guidelines on human rights, labor standards and other political factors.
But the new guidelines don't apply to the fund's substantial investments in private equity markets, including its $475 million stake in the Carlyle Group--nor does CalPERS, the nation's largest public pension fund, see any reason why it should. "I don't have any moral reservations at all" about Carlyle, said Michael Flaherman, chairman of the investment committee of CalPERS.
The $151 billion CalPERS retirement fund, the largest such fund in the world, is invested on behalf of California's 1.2 million state workers and includes $35 billion invested overseas. The fund's relationship with Carlyle began in 1996; over the next four years it invested $330 million in two Carlyle funds, including $75 million in Carlyle Asia Partners. The relationship deepened last spring when CalPERS invested $175 million to buy a 5.5 percent stake in Carlyle. The relationship--so close that CalPERS owns the elegant office building in Washington, DC, where Carlyle's headquarters are located--is far more important to Carlyle than it is to CalPERS, industry analysts said. "CalPERS is called an anchor investor," explained David Snow, editor of PrivateEquityCentral.net, an industry newsletter. "When Carlyle goes to other investors, they can say CalPERS is in."
Carlyle's experience with CalPERS has apparently whetted its appetite for labor pension money. According to an official close to Carlyle, the bank is raising money for a $750 million fund to invest in "worker-friendly companies." Of that total, Carlyle hopes to attract at least $250 million in labor pension money, the official said. Questions about pension fund investments in private equity have become more relevant since the collapse of Enron, with which CalPERS had extensive private business partnerships. Several unions, including the Service Employees International Union (SEIU), strongly opposed the partnerships as well as CalPERS investments in Enron stocks and bonds. Those concerns included Enron's support for energy privatization, its employment of former government officials to lobby for privatization and its sordid human rights record in India. (CalPERS made $133 million from one Enron partnership and may see a gain on another; it lost $105 million on its stock and bond holdings.)
Within the labor movement, CalPERS is highly respected for its cooperation in challenging managers and corporations suspected of violating human rights or abusing workers. In 1999 CalPERS supported two union-backed candidates for the board of Maxxam during a bitter strike by the United Steelworkers of America (USWA). Two years ago CalPERS joined the AFL-CIO in an investors' boycott when the Chinese government and Goldman Sachs took Petrochina, a state-owned oil company, public. The fund's new standards for public investments in emerging markets are the culmination of more than two years of sometimes fierce internal debate. CalPERS investment managers must now consider a wide range of non-economic factors, including a country's political stability, financial transparency and record on labor standards, workers' rights and building democracy. Based on a review by Wilshire Associates, the CalPERS pension consultant, thirteen emerging markets, including Turkey, South Korea and South Africa, passed the test, compared with four that failed. The fund had already banned its managers from investing in publicly traded companies in China and India. "CalPERS is taking more steps in this direction than any pension fund we know about," said Damon Silvers, the AFL-CIO's associate general counsel who focuses on investment strategy.
In December Carlyle sent its three founding partners to Sacramento to brief the CalPERS investment board. One, David Rubenstein, made passing reference to the budding media interest in Carlyle, noting that Carlyle's activities are "visible and under increasing scrutiny." To protect the Carlyle and CalPERS names, he assured the board that Carlyle is "following the highest ethical standards" by "avoiding investments in industries including tobacco, gambling and firearms."
But Carlyle's deep involvement with the military-industrial complex and its ties to the Bush Administration continue to raise questions. Both the SEIU and the Communications Workers of America are collecting information on Carlyle to provide to their pension trustees.
Down the road, Carlyle's investments in Asian companies facing downsizing, manufacturers in China and military conglomerates in Turkey could present serious dilemmas. It's not hard to find contradictions: Carlyle already has investments in China, which is on the CalPERS blacklist for public stock markets, and it is gearing up for more. Liu Hong-Ru, a former official with China's central bank who sits on Carlyle's Asian Advisory Board, is a senior adviser to Petrochina, the company whose public offering CalPERS boycotted in 2000. Until last year, Carlyle was the official adviser to Saudi Arabia's offset program, which allows buyers of US military hardware to use their purchasing power to pressure companies to transfer technology and jobs to their economies. "In effect, Carlyle was telling another country how to leverage their purchases of military equipment in ways that create the most jobs in that country, not this country," said Randy Barber, an expert on offsets at the Center for Economic Organizing in Washington.
Some trade unionists also know from experience that private equity funds aren't the best judge of what constitutes a worker-friendly environment. In 1998 several unions involved with CalPERS were shocked to learn that CalPERS was a partner with a private restructuring fund for Asia run by New York financier Wilbur Ross that played a key role in the suppression of a strike in South Korea. The strike led to the imprisonment of forty Korean trade unionists.
Investors in Carlyle's equity funds include state pension plans in Delaware, Florida, Louisiana, Michigan, New York and Texas, as well as in Los Angeles County. Others are the Ohio Workers Compensation Bureau and Union Labor Life Insurance, a union-run insurance company. According to industry newsletters, union pension funds with significant holdings in private equity markets include SEIU, the USWA, the Hotel and Restaurant Employees, the United Food and Commercial Workers, and the Union of Needletrades, Industrial and Textile Employees.
Bush Sr. and others open doors for the Carlyle Group.
Did George W. Bush once have a financial relationship with Enron? In 1986, according to a publicly available record, the two drilled for oil together--at a time when Bush was a none-too-successful oil man in Texas, and his oil venture was in dire need of help. (In early March The Nation broke the story on its website; two days later the New York Times covered this Bush-Enron deal.)
In 1986 Spectrum 7, a privately owned oil company chaired by Bush, faced serious trouble. Two years earlier Bush had merged his failing Bush Exploration Company with the profitable Spectrum 7, where he was named the company's chief executive and director. Bush was paid $75,000 a year and handed 1.1 million shares, according to First Son, Bill Minutaglio's biography of Bush. Bush ended up owning about 15 percent of Spectrum 7. By the end of 1985 Spectrum's fortunes had reversed. With oil prices falling, the company was losing money and on the verge of collapse. To save the firm, Bush began negotiations to sell Spectrum 7 to Harken Energy, a large Dallas-based energy company mostly owned by billionaire George Soros, Saudi businessman Abdullah Taha Baksh and the Harvard Management Corporation.
In September 1986 Spectrum 7 and Harken announced a plan under which Spectrum 7 shareholders would receive Harken stock. Bush said publicly that Spectrum 7 would continue to operate in Midland, Texas, as a wholly owned subsidiary of Harken and that he would become an active member of Harken's board of directors. As Minutaglio reports, the deal would give Bush about $600,000 in Harken shares and $50,000 to $120,000 a year in consultant's fees. It also would provide $2.25 million in Harken stock for a company with a net value of close to $1.8 million.
As the details of the Spectrum-Harken acquisition--which Bush badly needed--were being finalized, Enron Oil and Gas Company, a subsidiary of Enron Corporation, announced on October 16, 1986, a new well producing both oil and natural gas. A press release reported that the well was producing 24,000 cubic feet of natural gas and 411 barrels of oil per day in the Belspec Fusselman Field, fifteen miles northeast of Midland. Enron held a 52 percent interest in the well. According to the announcement, 10 percent belonged to Spectrum 7. At that point, Spectrum 7 was still Bush's company. Harken's completion of the Spectrum 7 acquisition was announced in early November.
To spell it out: George W. Bush and Enron Oil and Gas were in business together in 1986--when Ken Lay was head of Enron. (Lay was named Enron chairman in February of that year.) How did this deal come about? Was this the only project in which Bush and Enron were partners? The White House did not respond to a request for information but later was quoted as saying there had been nothing unusual about the arrangement. Spokeswomen for Enron and EOG Resources (formerly Enron Oil and Gas) said they could not provide information on the well or on other possible Bush-Enron ventures.
Does the relationship between the younger Bush and Lay go back further than heretofore reported--to the mid-1980s? The deal could have happened with no contact between Lay and Bush. But most company heads would be quite interested to know that the son of a sitting Vice President had invested in one of their enterprises. Is it possible that Bush and Spectrum 7 received undue consideration from Enron? Given Enron's penchant for using political ties to win and protect business opportunities, it's tough not to wonder whether this Bush-Enron venture involved special arrangements. This is one more Enron partnership that deserves scrutiny--especially since George W. Bush failed to acknowledge it before the details became public. The Spectrum-Enron deal is either an odd historical coincidence or an indication that there's more to learn about the Bush-Enron association.
An awakened sense of outrage has reporters and members of Congress playing a fierce game of hounds and hares with Enron executives and other bandits, which is most fortunate for Alan Greenspan. If the Federal Reserve were not treated with such deferential sanctimony, its chairman would also face browbeating questions concerning his role in unhinging the lately departed prosperity. Newly available evidence supports an accusation of gross duplicity and monumental error in the ways that Greenspan first permitted the stock market's illusions to develop into an out-of-control price bubble and then clumsily covered his mistake by whacking the entire economy. These offenses are not as sexy as criminal fraud but had more devastating consequences for the country.
The supporting evidence is found in newly released transcripts of the private policy deliberations of the Federal Open Market Committee (FOMC) back in 1996--the fateful season when the froth of asset-price inflation was already visible in the stock market. In a series of exchanges, one Fed governor, Lawrence Lindsey (now the President's chief economic adviser), described with prescient accuracy a dangerous condition that was developing and urged Greenspan to act. Greenspan agreed with his diagnosis, but demurred. If Greenspan had acted on Lindsey's observations, the last half of the nineties might have been different--a less giddy explosion of stock market prices without the horrendous financial losses and economic dislocations that are still unwinding.
Lindsey described back in 1996 a "gambler's curse" of excessive optimism that was already displacing rational valuations on Wall Street. The investment boom in high-tech companies and the rising stock prices were feeding off each other's inflated expectations, he explained, and investors embraced the improbable notion that earnings growth of 11.5 percent per year would continue indefinitely. "Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation," Lindsey said. Boy, was he right. The Federal Reserve has the power to cool off such a price inflation by imposing higher margin requirements on stock investors, who borrow from their brokers to buy more shares. That is what Lindsey recommended.
"As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst the bubble becomes overwhelming," he told his Fed colleagues. Acting pre-emptively is crucial; if the regulators wait too long, any remedial measure may be destabilizing. "I think it is far better to do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights," Lindsey warned.
Greenspan lacked the nerve (or the wisdom) to follow this advice. The chairman did make a celebrated speech in December 1996 observing the danger of "irrational exuberance" in the stock market, but he did nothing to interfere with it. In the privacy of the FOMC, the chairman agreed with Lindsey's diagnosis. "I recognize that there is a stock-market bubble problem at this point [the fall of 1996], and I agree with Governor Lindsey that this is a problem we should keep an eye on," Greenspan said. Raising the margin requirements on stock market lending would correct it, he agreed, but he worried about the impact on financial markets. "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it," Greenspan said. "My concern is that I am not sure what else it will do."
In hindsight it's clear the Federal Reserve chairman got it wrong. But his private remarks in 1996 also reveal flagrant duplicity. As the market bubble grew more extreme and many called for action by the Fed, Greenspan repeatedly dismissed criticism by explaining that raising the margin requirements would have no effect. In testimony before the Senate Banking Committee in January 2000, Greenspan said that "the reason over the years that we have been reluctant to use the margin authorities which we currently have is that all of the studies have suggested that the level of stock prices have nothing to do with margin requirements."
By 1999 the stock market was in the full flush of the gambler's curse--remember Dow 36,000?--and at that point Greenspan finally did act. But instead of tightening credit for stock investors, Greenspan proceeded to tighten credit for the entire economy, steadily raising interest rates in 1999 and 2000 until the long-running expansion expired. So did the stock market bubble (although stock prices remain very high by historical standards). Greenspan has always denied that this action was designed to target the bubble, but Bob Woodward, who wrote an admiring account of Greenspan's years at the Fed, reported that the "Maestro" was stealthily deflating the bubble by slowing the economy. Greenspan got that wrong too, since a recession resulted.
Millions of Americans are now paying the price, either as hapless investors or unemployed workers. The democratic scandal is that public officials are supposed to be held accountable for their actions, including human error. Accountability is impossible when the Fed chairman is allowed to make policy decisions in closed meetings and keep his true opinions secret for five years. The FOMC's verbatim meeting minutes should be shared with the citizens who will be affected and made available for timely political debate. When reformers get finished with the funny-money accounting at Enron, they might turn their attention to some holy illusions surrounding the Federal Reserve.
Corzine: You set the right context.
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