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Everybody outraged { July 2 2002 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2002/07/02/opinion/02KRUG.html?ex=1026597892&ei=1&en=a9c3eb5459621217http://www.nytimes.com/2002/07/02/opinion/02KRUG.html?ex=1026597892&ei=1&en=a9c3eb5459621217
Everyone Is Outraged
July 2, 2002
By PAUL KRUGMAN
Arthur Levitt, Bill Clinton's choice to head the Securities
and Exchange Commission, crusaded for better policing of
corporate accounting - though he was often stymied by the
power of lobbyists. George W. Bush replaced him with Harvey
Pitt, who promised a "kinder and gentler" S.E.C. Even after
Enron, the Bush administration steadfastly opposed any
significant accounting reforms. For example, it rejected
calls from the likes of Warren Buffett to require deduction
of the cost of executive stock options from reported
profits.
But Mr. Bush and Mr. Pitt say they are outraged about
WorldCom.
Representative Michael Oxley, the Republican chairman of
the House Financial Services Committee, played a key role
in passing a 1995 law (over Mr. Clinton's veto) that, by
blocking investor lawsuits, may have opened the door for a
wave of corporate crime. More recently, when Merrill Lynch
admitted having pushed stocks that its analysts privately
considered worthless, Mr. Oxley was furious - not because
the company had misled investors, but because it had agreed
to pay a fine, possibly setting a precedent. But he also
says he is outraged about WorldCom.
Might this sudden outbreak of moral clarity have something
to do with polls showing mounting public dismay over
crooked corporations?
Still, even a poll-induced epiphany is welcome. But it
probably isn't genuine. As the Web site dailyenron.com put
it, last week "the foxes assured Americans that they are
hot on the trail of those missing chickens."
The president's supposed anger was particularly hard to
take seriously. As Chuck Lewis of the nonpartisan Center
for Public Integrity delicately put it, Mr. Bush "has more
familiarity with troubled energy companies and accounting
irregularities than probably any previous chief executive."
Mr. Lewis was referring to the saga of Harken Energy, which
now truly deserves a public airing.
My last column, describing techniques of corporate fraud,
omitted one method also favored by Enron: the fictitious
asset sale. Returning to the ice-cream store, what you do
is sell your old delivery van to XYZ Corporation for an
outlandish price, and claim the capital gain as a profit.
But the transaction is a sham: XYZ Corporation is actually
you under another name. Before investors figure this out,
however, you can sell a lot of stock at artificially high
prices.
Now to the story of Harken Energy, as reported in The Wall
Street Journal on March 4. In 1989 Mr. Bush was on the
board of directors and audit committee of Harken. He
acquired that position, along with a lot of company stock,
when Harken paid $2 million for Spectrum 7, a tiny,
money-losing energy company with large debts of which Mr.
Bush was C.E.O. Explaining what it was buying, Harken's
founder said, "His name was George Bush."
Unfortunately, Harken was also losing money hand over fist.
But in 1989 the company managed to hide most of those
losses with the profits it reported from selling a
subsidiary, Aloha Petroleum, at a high price. Who bought
Aloha? A group of Harken insiders, who got most of the
money for the purchase by borrowing from Harken itself.
Eventually the Securities and Exchange Commission ruled
that this was a phony transaction, and forced the company
to restate its 1989 earnings.
But long before that ruling - though only a few weeks
before bad news that could not be concealed caused Harken's
shares to tumble - Mr. Bush sold off two-thirds of his
stake, for $848,000. Just for the record, that's about four
times bigger than the sale that has Martha Stewart in hot
water. Oddly, though the law requires prompt disclosure of
insider sales, he neglected to inform the S.E.C. about this
transaction until 34 weeks had passed. An internal S.E.C.
memorandum concluded that he had broken the law, but no
charges were filed. This, everyone insists, had nothing to
do with the fact that his father was president.
Given this history - and an equally interesting history
involving Dick Cheney's tenure as C.E.O. of Halliburton -
you could say that this administration is uniquely well
qualified to chase after corporate evildoers. After all,
Mr. Bush and Mr. Cheney have firsthand experience of the
subject.
And if some cynic should suggest that Mr. Bush's new anger
over corporate fraud is less than sincere, I know how his
spokesmen will react. They'll be outraged.
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