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>From http://www.nytimes.com/2002/07/02/opinion/02KRUG.html
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July 2, 2002
Everyone Is Outraged
By PAUL KRUGMAN
rthur 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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