Reformer From Goldman Sachs

Reformer From Goldman Sachs

Senator Corzine speaks from knowledge when he calls for regulatory reform.


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.”

At a recent Senate hearing Corzine asked Federal Reserve chairman Alan Greenspan if he saw any “economic value” in the special partnerships Enron had devised to hide debt, avoid taxes and prettify its earnings reports. None, Greenspan replied. Corzine’s question carries an important insight that goes to the guts of what’s wrong in the financial-corporate operating system. These arcane accounting maneuvers obviously benefit companies (and the Wall Street banks and brokerages that invent such devices for corporate clients), but do they add any real benefit to the economy and thus for the general public? When I suggested that his question should be asked across-the-board about the corporate gimmicks employing offshore banking havens to avoid US taxes and escape US securities laws, the Senator turned a bit defensive, perhaps because his firm invented some of those gimmicks. “Objectively and statistically, I can’t tell you whether more of them are eyewash than not,” he said. “But I saw a lot of them that were used for good purposes when I was an investment banker.” The examples he offered seemed unpersuasive to me (but judge for yourself–the interview text is posted at

The Wall Street Journal recently zinged Corzine and Goldman Sachs for inventing their own peculiar device for Enron back in 1993 with a similar purpose–the “monthly income preferred shares” (or MIPS) that enabled Enron to sell fifty-year securities through an entity it created on a Caribbean island. For tax purposes, Enron described the preferred stock as “debt” and claimed tax deductions on the interest payments to investors. For shareholder reports, Enron called it “equity” that supposedly boosted the company’s capital value. As Goldman’s chairman, Corzine joined the lobbying efforts to overturn the Treasury Department’s objections to this novel device. He signed an industry letter to members of Congress, urging them to keep the regulators off their backs, and Treasury eventually gave up the fight. The device is now used by other companies to raise somewhat cheaper capital offshore and, in the same stroke, reduce their US tax obligations.

“In that particular case, there’s no question the financial engineering did what you just said it did,” Corzine responded. But he argued that unlike other Enron deals, it was fully disclosed at the time, vetted by the credit-rating agencies and eventually upheld in litigation. Goldman, he added, stopped doing deals with Enron about five years ago because “we ended up having difficulty with how people did business with each other.” He has recused himself from voting on any item that goes directly to Goldman Sachs’s bottom line.

On reflection, the Senator agreed that he may need to re-evaluate some of his work as an investment banker now that he represents the public interest. “By the way,” Corzine said, “I’m not sure, as a senator now who is interested in absolutely making sure, particularly in the current environment, that we have transparency and openness, that I would be as supportive today, given that we have created a world where people are skeptical of why [business] people are doing this.” Maybe he will look back through all those letters to Washington he signed as chairman.

That brought the conversation around to the power of Wall Street and the one-sided contest in which financial-corporate interests influence lawmakers and help shape ambiguous regulatory language they then manipulate into ingenious loopholes. As Goldman Sachs chairman, Corzine spoke for the firm and its clients’ interests, but he said he always tried to frame a larger public purpose. “If it was pure self-interest you were about, you quickly lost an ability to have any advocacy of acceptability, except to those particular folks who were so happy for the money that they were just dealing with it,” he said. “I’m not going to name names.” What about former Treasury Secretary Robert Rubin’s call to the Assistant Treasury Secretary on behalf of Citigroup and Enron, asking him to pressure credit-rating agencies to go easy on the failing company? “I’m sure Bob didn’t feel good about the call he was making…. In fact, he’s torn between his responsibility as a senior member of Citigroup who’s working to represent a client’s interest and representing what he thinks is good public policy.”

Corzine himself is now experiencing the lopsided political pressures from the other end, as he tries to push pension-fund reforms to protect future retirees from various corporate abuses. “The companies holding 401(k)s are resisting changes that would bring sound diversification to portfolios,” he said. “The response, I think, of a lot of folks in political life is, well, they can’t be all wrong, those guys on that side. There’s a more willing ear because of how the system works. You know, nobody is coming up here speaking for the individual investor.”

“I’d like to level the playing field so that all points of view have the same throw-weight,” he said. “Some of those who are left out of the debate don’t seem to have much, relative to others. And I think it’s potentially dangerous.” With a hint of anger, he mentioned the one-sided bankruptcy bill passed with bipartisan support in both houses, but now lingering in conference committee because its sponsors are embarrassed to enact it during bleak times and rising unemployment. “A bankruptcy bill that was basically written by the banking and credit-card industry,” Corzine said, “and completely ignored the hooting and hollering of small folks and their rights in the legal system.”

Campaign finance reform is essential to creating a “level playing field” for citizens, but, though he voted for McCain-Feingold, he fears it will mainly lead to unintended consequences, including more “self-funded candidates” of wealth like himself. “I think that we need to get public financing of campaigns generally, and if we did that, I’d be willing to make sure that folks who are wealthy come into the system–that they either comply or, if they don’t comply, they’d get the opprobrium of the public,” Corzine said. “But I think what’s going to happen now is, we’re going to get just derivative political-action committees taking up most of the soft money and repositioning it.”

The one element in McCain-Feingold that seemed most valuable to Corzine was the provision forcing lower prices for TV campaign advertising–a vital first step, he believes, toward en-acting broad public financing for campaigns, real public debates and other reforms to restore democracy. Yet as we talked, Corzine also predicted that the very powerful broadcasting industry would find a way to kill this measure before final enactment. Sure enough, the next day it was removed from the bill before the House passed it. The Senator from Wall Street appears to understand well enough how Washington works.

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