Published on Tuesday, July 2, 2002 in the New York Times
Everyone Is Outraged
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
But Mr. Bush and Mr. Pitt say they are outraged about
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
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
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.
Copyright 2002 The New York Times Company