For weeks, conservative commentators and Bush White House defenders have been huffing that the Enron matter is a corporate scandal, not a political controversy–that it is an affair of business skulduggery (accountants shredding, executives bamboozling), not one of influence-peddling and favoritism in Washington. The first Senate hearing on Enron of the new Congressional session, overseen by Senator Joseph Lieberman, a Connecticut Democrat, provided comfort to the ain’t-no-scandal-for-Bush crowd.
True, it was not a good four hours for American capitalism, but the hearing, which focused on corporate governance (as opposed to government governance), barely ventured into the area of Enron’s relationship with political figures or the reasons for the lax regulatory policies that permitted Enron to develop its shady finances. Lieberman’s opening bid was conducted mostly in a dispassionate style; it showed no sign of any Democratic strategy to make political use of the Enron mess. If the investigations on Capitol Hill follow the lead Lieberman established, Bush and the GOP will not have much to fret about.
The point of the hearing, said a Lieberman aide, "was to put the whole story in a large context." Toward that end, the committee heard only from five financial experts who testified about the problems at Enron and what these improbities say about Corporate America. With this the topic of the day, committee members whacked away at business-as-usual within the corporate world. Senator Fred Thompson, a Tennessee Republican, observed, "All too often the name of the corporate game is to conceal the true financial situation of the company while doing the minimum amount of disclosure to avoid legal exposure. The system is clearly not designed with the primary interest of the general public or the investor in mind." Such a sentiment–the current markets system is rigged against most people–is not often expressed by GOPers on the Hill. Senator Susan Collins, a Maine Republican, noted that oversight of public companies is rife with conflicts of interest. Lieberman called into question the entire system, asking if "the average American trusting his or her future to the stock market is inadequately informed and, therefore, poorly protected?" Senator Dick Durbin, an Illinois Democrat, quoting Teddy Roosevelt, remarked, "The genius of capitalism could also be a triumph of greed."
The witnesses, with little pause, indicted the current financial system. "What has failed is nothing less than the system for overseeing our capital markets," said Arthur Levitt, who chaired the Securities and Exchange Commission (SEC) in the Clinton years. Levitt noted that Enron’s collapse occurred within a "culture of gamesmanship," in which executives "bend the rules, tweak the numbers," companies "bend to the desires and pressures of Wall Street analysts," analysts "overlook dubious accounting practices" as they seek to put together deals of their own, auditors "are more preoccupied with selling other services and making clients happy than detecting potential problems," and board directors "are more concerned about not offending management than with protecting shareholders."
Levitt added that Wall Street analysts–those supposed experts who millions look to for buy/sell advice–have "lost all credibility." And in hard-to-follow testimony, Frank Partnoy, a professor at the University of San Diego Law School, detailed how Enron–which not only "wiped out $70 billion of shareholder value but also defaulted on tens of billions of dollars in debt"–fell apart because of its sleazy and complicated use of unregulated derivatives. "How did Enron lose so much money?" Partnoy asked in his written testimony. "That question has dumbfounded investors and experts in recent months. But the basic answer is now apparent: Enron was a derivatives trading firm [more than an energy company]; it made billions trading derivatives, but it lost billions on virtually everything else it did, including projects in fiber-optic bandwidth, retail gas and power, water systems, and even technology stocks. Enron used its expertise in derivatives to hide these losses. For most people, the fact that Enron had transformed itself from an energy company into a derivatives trading firm is a surprise." Partnoy added, "The collapse of Enron makes it plain that the key gatekeeper institutions that support our system of market capitalism have failed."
The markets were roughed up at the hearing. But the politics of Enron received little scrutiny. Lieberman acknowledged that the company has made "substantial political contributions" to members of Congress and to the President (without specifically noting that he himself received Enron booty). Senator Mark Dayton, a Minnesota Democrat, referred to a former chair of the Commodity Futures Trading Commission who in 1993 developed a regulatory exemption crucial for Enron’s wheeling-and-dealing and who five weeks later joined the Enron board–without mentioning her by name: Wendy Gramm, the wife of Senator Phil Gramm.
During his testimony Levitt noted that two years ago, when his SEC proposed limiting the types of consulting work an accounting firm could provide to a company it audits, "an extraordinary amount of political pressure was brought to bear on the commission." None of the senators pressed him on this point. They had good cause for such reluctance. After he left the committee room, Levitt was happy to elaborate. He noted that as he was trying to push through that change at the SEC–which would have forced accounting firms to give up lucrative consulting contracts and be more independent from the companies they examine–he was besieged with protests from 200 to 300 members of the Senate and the House. These lawmakers had been enlisted in a lobbying blitz mounted by the accounting industry, which contributes heavily to members of Congress.
"The suggestion was made by several senators and congressmen," Levitt recalled, "that if we didn’t knuckle under, a rider would be attached to our appropriations bill" that would decrease funding for the SEC. "This relates to campaign finance reform," he added. If Congress is serious about examining the question of how Enron collapsed, it has to look at the role of political influence–the lobbying activities and political contributions of Enron and its allies, which for years were wheedling Washington.
Durbin wondered if Congress is willing "to pass the laws needed to rein in the greed of the next Enron." Good question. Some suggested legislation was mentioned at the hearing. Senator Jean Carnahan, a Missouri Democrat, proposed a measure that would require company executives to disclose immediately when they sell stock in their own company. Some senators raised the possibility of beefing up the SEC. Lieberman noted that there might be a need for public auditors, instead of private accountants, to review the finances of public companies. But a full reply to Durbin’s query might be informed by a thorough examination of how members of Congress and executive branch officials–from both parties–enabled Enron’s rise to shiftiness. (Meanwhile, the Enron controversy may have spurred one significant shift in Congress. As the hearing was under way–and while a House committee was looking at allegations of shredding at Enron’s accounting firm, Arthur Andersen–supporters of a modest campaign finance reform bill in the House finally collected the number of signatures needed on a petition to bring that legislation to the House floor for a vote.)
On the politics of Enron, the Democrats were treading lightly. There were spasms of outrage directed against Enron and Arthur Andersen and sharp criticisms of the market, but no references to the sort of crony capitalism that permits corporate swindlers to enter the doors of 1600 Pennsylvania Avenue to offer self-serving advice on crucial policy matters. A few senators noted that teachers or public employee pension funds in their states had lost millions of dollars due to Enron’s demise. But no one railed against the Enron affair as a transfer of wealth from low- and middle-income Americans to corporate pals of the Bush White House. No one asked how and why Enron had acquired influence in Washington and state capitals across the country. Or whether members of Congress had ignored corporate governance issues for years because confronting these issues was bad for political bidness.
Lieberman promised that the hearing was but one step in a journey "that will be long, complicated and controversial." He noted that a subcommittee will be probing wrongdoing at Enron and Arthur Andersen, while his full committee will examine the relevant government agencies and laws "and ask why they did not better protect the thousands of employees and investors who have suffered." As the committee members pursue that trail, they ought to keep their own institution and past and present government officials well in their sights.