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Ladies and Gentlemen:
As a long time fan of William Greider's work, I was deeply disappointed to
read his article
"Reformer from Goldman Sachs."
The key to a sound financial system is to put excellent people in charge ---
people whose performance speaks to their integrity and refusal to
participate in wrongdoing.
When instead, William Grieder and The Nation promote and admire the people
who made the most money at the rape of Russia, reinvesting the profits of
organized crime, insider trading and otherwise lead the financial holocaust
we are living through, you contradict what I thought was your philosophy.
While The Nation objects to criminality in the abstract, you support the
individual criminals once they have consolidate their winnings and are ready
to "help". The message to honest investment bankers and honest government
officials who no money to buy Senatorial elections is ominous -- at The
Nation and in progressive politics, "crime pays."
Sincerely Yours,
Catherine Austin Fitts
Solari
Former Assistant Secretary of Housing, First Bush Administration
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March 11, 2002
Reformer From Goldman Sachs
by William Greider
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-fai!
re 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 www.thenation.com).
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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