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by Sam Parry
By Sam Parry May 29, 2002
The story line has been that all
of Ken Lay’s millions couldn’t buy George W. Bush. For that reason, Enron
has been called a financial scandal, not a political scandal.
Growing evidence, however, shows
that this Bush-can’t-be-bought story line isn’t true.
It is now clear that prior to
Nov. 8, when the Securities and Exchange Commission delivered subpoenas to
Enron, the Bush administration did what it could to help Enron replenish
its coffers with billions of dollars. Enron desperately needed that money
to prevent the exposure of mounting losses hidden in off-the-books
partnerships, a bookkeeping black hole that was sucking Enron toward
bankruptcy.
As Enron’s crisis worsened
through the first nine months of the Bush presidency, Ken Lay got Bush’s
help in three principal ways:
--Bush personally joined the
fight against imposing caps on the soaring price of electricity in
California at a time when Enron was artificially driving up the price of
electricity by manipulating supply. Bush’s rear-guard action against price
caps bought Enron and other energy traders extra time to gouge hundreds of
millions of dollars from California’s consumers.
--Bush granted Lay broad
influence over the administration’s energy policies, including the choice
of key regulators to oversee Enron’s businesses. The chairman of the
Federal Energy Regulatory Commission was suddenly replaced in 2001 after
he began to delve into Enron’s complex derivative-financing schemes.
--Bush had his National Security
Council staff organize an administration-wide campaign to pressure the
Indian government to accommodate Enron, which wanted to sell its
generating plant in Dabhol, India, for $2.3 billion. Bush administration
pressure on India over the Dabhol plant continued even after Sept. 11,
when India’s support was needed for the war on terrorism. The
administration’s threats against India on Enron’s behalf didn’t stop until
Nov. 8.
On Nov. 8, Enron disclosed the
formal SEC investigation and admitted overstating earnings by $586 million
with losses hidden in off-the-books partnerships run by Enron’s Chief
Financial Officer Andrew Fastow. Over the next four weeks, Enron stumbled
toward its bankruptcy filing on Dec. 2.
Kenny Who?
When the corporate wreckage was
complete, the toll was devastating. Investors lost tens of billions of
dollars; retirees were left nearly penniless; and 5,000 Enron employees
were laid off. Beyond that, Enron’s accounting tricks discredited its
accounting firm, Arthur Andersen LLP, and sent shock waves through U.S.
securities markets.
As the accounting scandal
provoked disgust across the country and across party lines, the White
House sought to minimize its relationship with Enron. In spite of a
personal acquaintance best symbolized by Bush’s nickname for "Kenny Boy,"
Bush began to act as if he barely knew Lay. On Jan. 11, Bush told
reporters that Lay "was a supporter of Ann Richards in my run in 1994,"
implying that he had gotten to know Lay as Gov. Richards’ holdover
appointee to a Texas business council.
Striking a note in personal
disapproval, Bush said his sympathies rested with laid-off Enron employees
and small Enron investors who saw their life savings wiped out. Bush said
his own mother-in-law lost $8,000 when Enron collapsed.
The administration’s basic line
of defense was that it did nothing to bail out Enron. Exhibit One in this
argument was the fact that the administration took no substantial action
to help Enron after Lay sounded out senior Bush officials in late October
by placing calls to Commerce Secretary Donald Evans and Treasury Secretary
Paul O’Neill.
By late October, however, it
could also be argued that Enron’s troubles were too advanced – and the
public spotlight too intense – for the administration to launch a rescue
mission. News of Enron’s financial difficulties already was spreading
through the business press and the SEC had started to investigate.
In fact, the record shows that,
in spite of the risk, the Treasury Department did respond to Lay’s call
for help. The New York Times reported that Secretary O’Neill instructed
Under Secretary for Domestic Finance Peter Fisher to "look into the
condition of Enron." Fisher responded by following up with Enron President
Greg Whalley, speaking with him "six to eight times" over a few day period
in late October and early November. After the conversations, perhaps
recognizing the political peril, Treasury decided against further support.
[NYT, 1/13/02]
Treasury’s efforts on Enron’s
behalf in late October were not unusual for the Bush administration. Far
from doing nothing to help Enron, news accounts and newly released
documentary evidence show that that prior to Enron’s death spiral, the
young Bush administration did what it could to support Enron’s business
interests.
Enron’s Troubles
The Houston-based energy trader’s
financial mess can be traced back at least to 2000 when the long-running
stock market boom ended.
During the boom, Enron had soared
through the list of Fortune 500 companies to a perch at No. 7. A leader of
the so-called New Economy, Enron expanded beyond its core business
interests in natural gas pipelines, branching out into complex commodity
trading, which included electricity, broadband capacity and other ethereal
items, such as weather futures. It had investments in smaller companies
that operated in areas where Enron traded.
The bursting of the dot-com
bubble in March 2000 and the collapse of the telecommunications sector put
pressure on Enron as it did many other companies. Even though Enron’s own
stock held strong, hitting an all-time high of $90 on Aug. 17, 2000, the
tumbling market, combined with some risky overseas energy projects, left
Enron with a host of poor-performing assets that were a drag on the
company’s growth.
To protect its image as a darling
of Wall Street – and to prop up its stock value – Enron began shifting
more of its losing operations into off-the-books partnerships given names
like Raptor and Chewco. Hedges were set up, supposedly to limit Enron’s
potential losses from equity investments, but some were themselves backed
by Enron stock, creating the possibility of a spiraling decline if
investors lost faith in Enron.
Their Man Bush
Still, Enron saw a silver lining
in the darkening economic clouds of 2000. If George W. Bush could secure
the presidency, Enron would have a reliable ally for its deregulatory
plans at the top of the U.S. government. With Bush would come other allies
who could staff key positions in the federal bureaucracy.
Lay had reasons for optimism
about his ties to Bush. Having backed Bush’s father and the son’s
gubernatorial run in 1994, Lay was an insider’s insider. For the 2000
campaign, he was a Pioneer for Bush, raising $100,000. Enron also gave the
Republicans $250,000 for the convention in Philadelphia and contributed
$1.1 million in soft money to the Republican Party, more than twice what
it contributed to Democrats.
The contributions dwarfed what
was at stake for Enron. In its energy trading in California alone, Enron
stood to earn tens of billions of dollars.
Around the start of the 2000
general election campaign, the first signs of suspicions also arose that
Enron was trying to gain windfall profits by manipulating the California
energy market. In August 2000, an employee with Southern California Edison
sent the Federal Energy Regulatory Commission (FERC) a memo, entitled
"California Electricity Markets: Issues for Examination." The memo
expressed concerns that Enron and other electricity providers to
California’s deregulated energy market were gaming the system by cutting
off supply and creating phony congestion in the electricity grid to run up
energy prices. [Energy Daily, May 16, 2002]
By December 2000, even while FERC
was piecing together a strategy for dealing with the California crisis,
recently released documents now show that Enron lawyers were exchanging
letters about conducting just those kinds of schemes. With strategies
dubbed "Fat Boy," "Death Star," and "Get Shorty," Enron was siphoning
electricity away from areas that needed it most while getting paid for
phantom transfers of energy supposedly to relieve transmission-line
congestion. [See Washington Post, May 7, 2002]
That same month, Bush nailed down
his presidential victory, getting five Republicans on the U.S. Supreme
Court to halt vote counting in Florida. Lay and his wife lent a hand
there, too, donating $10,000 to Bush’s Florida recount fund that helped
pay the Republican lawyers and other operatives who ensured that a full
recount of Florida’s ballots never occurred.
With Bush’s victory secured,
another $300,000 poured in from Enron circles for the Bush-Cheney
Inaugural Fund. The company, then-Chief Operating Officer Jeffrey Skilling
and Lay each kicked in $100,000.
An Energy Plan
A grateful Bush gave Lay a major
voice in shaping energy policy and picking personnel. Starting in late
February 2001, Lay and other Enron officials took part in at least a half
dozen secret meetings to develop the Bush's energy plan.
After one of the Enron meetings,
Vice President Dick Cheney's energy task force changed a draft energy
proposal to include a provision to boost oil and natural gas production in
India. The amendment was so narrow that it apparently was targeted only to
help Enron's troubled Dabhol power plant in India. [Washington Post, Jan.
26, 2002]
Other parts of the Bush energy
plan tracked closely to recommendations from Enron officials. Seventeen of
the energy plan’s proposals were sought by and benefited Enron, according
to Rep. Henry Waxman, D-Calif., ranking minority member on the House
Government Reform Committee. One proposal called for repeal of the Public
Utility Holding Company Act of 1935, which limits the activities of
utilities and hindered Enron’s potential for acquisitions.
Besides listening to Lay's
advice, Bush put the corporation's allies inside the federal government.
Two top administration officials, Lawrence Lindsey, the White House’s
chief economic adviser, and Robert Zoellick, the U.S. Trade
Representative, both worked for Enron, Lindsey as a consultant and
Zoellick as a paid member of Enron's advisory board. Bush also named
Thomas E. White Jr., an 11-year veteran of Enron's corporate suites, to be
secretary of the Army. White had run a key subsidiary, Enron Energy
Services, which is now the focus of allegations about accounting
irregularities.
At least 14 administration
officials owned stock in Enron, with Undersecretary of State Charlotte
Beers and chief political adviser Karl Rove each reporting up to $250,000
worth of Enron stock when they joined the administration.
FERC Concerns
Lay exerted his influence, too,
over government regulators already in place. Curtis Hebert Jr., a
conservative Republican and a close political ally of Sen. Trent Lott of
Mississippi, had been appointed to the Federal Energy Regulatory
Commission during the Clinton administration. Like Bush and Lay, Hebert
was a promoter of "free markets." Bush elevated Hebert to FERC chairman in
January 2001.
While a strong believer in
deregulation, Hebert broke ranks with Lay on two key points. Hebert was an
advocate of state rights, an obstacle to Enron's desire for FERC to
mandate consolidation of state utilities into four giant regional
transmission organizations, or RTOs. By quickly pushing the states into
RTOs, Enron and other big energy traders would have much larger markets
for their energy sales.
Hebert told the New York Times
that he got a call from Lay with a proposed deal. Lay wanted Hebert to
support a faster transition to a national retailing structure for
electricity. If he did, Enron would back him, so he could keep his job.
The FERC chairman said he was
"offended" by the veiled threat. He understood that Lay's political
influence could put his job in jeopardy, since Bush held the power to
appoint FERC chairmen and Lay had demonstrated sway over selection of
administration appointees. Besides supplying Bush aides with a list of
preferred candidates, Lay had personally interviewed one possible FERC
nominee.
Lay offered a different account
of the phone call. He said Hebert was the one "requesting" Enron's support
at the White House, though Lay acknowledged that the pair "very possibly"
discussed issues involving FERC's authority over the nation's electricity
grids.
Lay also had reason to be
suspicious of Hebert’s interest in the complex derivative financing
instruments that he saw among the leading energy traders, including Enron.
After he became chairman, Hebert started an investigation into how these
deals worked. "One of our problems is that we do not have the expertise to
truly unravel the complex arbitrage activities of a company like Enron,"
Hebert said. "We're trying to do it now, and we may have some results
soon."
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