January 11, 2002
BIG COMPANIES never go bust without causing some collateral damage. But the collapse of America's Enron, the world's biggest energy-trading company, is proving to be spectacularly destructive by any standards. Impoverished shareholders and employees were already outraged by the behaviour of the firm's top executives, many of whom seem to have cashed in their own shares before the collapse. But the many links between Enron's top executives and the Bush administration always looked as if it might cause even more trouble. On Thursday January 10th, the day following the announcement that America's Justice Department had opened a criminal investigation into Enron's collapse, the storm broke. President George Bush and his aides spent Thursday frantically trying to distance themselves from the firm as new revelations poured out. Unless the Bush administration can quickly control the proliferating questions about Enron's collapse, they could grow into a scandal that overshadows the rest of Mr Bush's presidency. That may not happen, but this week it looked ominously like a real possibility.
Mr Bush, a former oilman whose election campaign was backed by Enron, has hastily ordered a review of pension and financial-disclosure rules, to be led by Paul O'Neill, the treasury secretary, to prevent another corporate disaster of this magnitude. A criminal investigation has also been launched by America's Justice Department, while the Securities and Exchange Commission is investigating Enron's behaviour. At the same time five different Congressional committees have issued subpoenas related to the affair and are now likely to proceed with investigations of their own.
There have been a series of potentially damaging revelations over the past few days. These include the news that Kenneth Lay, Enron's boss, had had contact with two cabinet ministers, including Mr O'Neill, even as the firm's problems mounted. In addition, Mr Lay and other Enron executives had contact with White House officials and Dick Cheney, the vice president, before and during Enron's slide towards bankruptcy. On top of that, Arthur Andersen, Enron's auditor, admitted this week that it had destroyed many documents and electronic files relating to the company's financial position.
Enron pioneered deregulation of America's power business and expanded rapidly to become one of the largest energy companies in the world before its sudden demise. Its success had, to a large extent, only been made possible by legislative and regulatory changes, and because of this Enron has always been a politically savvy firm, contributing cash to both major political parties as well as individual candidates, though the bulk of its contributions seem to have gone to Republicans.
The problem for Mr Bush is that the ties between the company and his administration were especially intricate and close. Mr Lay has been a supporter of Mr Bush ever since the president's unsuccessful campaign for Congress in 1978, and has been known as a close personal friend of Mr Bush and his family. At one stage, Mr Lay was mooted as a possible energy secretary under Mr Bush.
The company has been one of Mr Bush's biggest corporate backers. According to the Centre for Public Integrity, an independent research group, Enron, its employees and directors had given $623,000 to support Mr Bush from 1993 to November 2001. Mr Lay and other Enron executives have also long known other members of the administration. John Ashcroft, the attorney general, has had to remove himself from overseeing the criminal investigation of the company because he received campaign contributions from Enron during his failed bid to retain his Senate seat in 2000. Dick Cheney, the vice-president, has refused repeated requests for the release of information about the rather cosy relationship between the company and the energy taskforce which he led earlier in the year. That taskforce formulated the energy legislation currently before Congress.
Everyone involved denies any wrongdoing. Enron admits that Mr Lay contacted Mr O'Neill and Don Evans, America's commerce secretary and Mr Bush's campaign manager in 2000, in the autumn before the full extent of Enron's difficulties were made public. But it denies that this was to seek government help. Instead, it says, Mr Lay was trying to alert the government to the firm's problems, which might have a wider impact on American financial markets. For the same reason, Enron officials say, Mr Lay also called Alan Greenspan, the chairman of the Federal Reserve. Both Mr O'Neill and Mr Evans say they decided to do nothing after being told of the company's mounting problems. When asked on January 9th if Mr Lay was seeking a bail-out, Mr O'Neill said "absolutely not". However, according to one report, Mr Lay did raise the case of Long-term Capital Management, a hedge fund that received a government-orchestrated private bail-out in 1998.
As for Mr Bush, officials claim he was only told of these contacts this week. "I have never discussed with Mr Lay the financial problems of the company," Mr Bush told reporters on Thursday. The president said that the last time he saw Mr Lay was in the spring of 2001 at a literacy fund-raising event.
Even if Mr Lay was trying to call in a favour as a long-time supporter of Mr Bush, he seems to have got nowhere. The dates of his telephone calls are important. Was he telling Wall Street one thing and the government another? Perhaps not. He rang Mr O'Neill on October 28th and November 8th, according to the Treasury Department. This was after Mr Lay had moderated the previously optimistic message which he was sending to investors. But it was also at a time when Enron's finances had begun to unravel.
"Bankruptcies happen in our economy," said Ari Fleischer, the White House press secretary. "And it's not uncommon for people who are in the community, business community or in the labour community, to talk to a cabinet secretary to tell them about the financial status of their business and it ends there."
Whether the Bush administration can ride out the controversy will depend to some degree, of course, on whether there was any wrongdoing on the part of Mr Bush or other officials. But even in the absence of proven wrongdoing, the affair could still turn out to be uncomfortable, and prolonged. It contains elements of a classic political scandal. A huge company based in Mr Bush's home state of Texas and led by his biggest campaign contributor files the biggest bankruptcy in American history. A small group of top executives sell shares before it collapses. At the same time thousands of employees are barred from selling, and lose not only their jobs but their life savings and pensions as well. Meanwhile there are revelations of frequent contacts between the company and top administration officials.
The problem for Mr Bush is that even if all these contacts turn out to be completely proper, the Enron case still embodies many of the doubts that Americans have about him: that he is too close to Big Business (and the energy industry in particular); and that his concerns are not the concerns of ordinary Americans. This is the president whom last summer Democrats were skewering for his desire to open up Alaska's oil fields supposedly "for his friends in Houston" and for allegedly letting industrialists put arsenic into drinking water.
What can he do? The obvious targets of change in the wake of Enron's collapse are campaign-finance rules and regulations governing the auditing profession. Mr Bush could throw his weight behind these issues. But Congressional Democrats are unlikely to be happy confining themselves to such specific reforms. After the Republicans dogged pursuit—initially on a questionable land deal which seems puny by comparison with Enron—and then impeachment of Bill Clinton, Mr Bush can expect little mercy from the Democrats. Mr Fleischer, Mr Bush's spokesman, has warned Congress against launching "a one-party witch hunt" which he argued would "remind the country on why people soured and tired of those types of partisan investigations." That will seem richly ironic to Congressional Democrats, some of whom were already this week talking about appointing a special prosecutor to investigate Enron's dealings with the government.
Nevertheless, the Democrats will have to consider whether Mr Fleischer has a point: is the American public ready for another long drawn-out investigation after Mr Clinton's travails, and against a president who is fighting a war on terrorism and enjoys the highest public-approval ratings on record? The first of many Congressional hearings on Enron is due to begin on January 24th by the Senate Government Affairs Committee. The committee's chairman is Joseph Lieberman, Connecticut's Democratic Senator who also happened to be the party's vice-presidential nominee in 2000 and is a contender for its presidential nomination in 2004. The hearing could provide the first signal of what route the Democrats have decided to take.
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