The New Republic – July 22, 2002

The New Republic – July 22, 2002

TRB FROM WASHINGTON
Criminal Negligence
by Peter Beinart

Post date: 07.09.02 Issue date: 07.22.02

Lots of arguments are wrong; fewer are absurdly wrong. But the absurd ones are sometimes the most revealing. By stretching facts and logic past the breaking point, they lay bare the ideological assumptions that more plausible assertions often disguise.

So it is with the right's suggestion that Bill Clinton is to blame for today's corporate scandals. "If you're looking for someone who set the moral tone for the decade of the '90s, I don't think you have to look any further than the former president's behavior," explained House Ways and Means Chairman Bill Thomas on CNN late last month. "It's impossible to understand Enron," editorialized The Wall Street Journal, "outside the moral climate in which it flourished ... the Clinton years, when we learned that 'everybody does it.'" Or, as Steve Forbes put it recently, "If you want to look at the tone of the '90s, it started right at the top, at the White House, where the attitude was anything goes."

Yes, that's right: Respected conservatives are actually suggesting that Enron and WorldCom cooked their books because Bill Clinton lied about a blow job. It's not an argument that takes a lot of deep thinking to rebut. First of all, corporate fraud wasn't invented on Clinton's watch. The United States endured a wave of financial scandals in the late '80s as well, at the end of the last Wall Street boom. When Ivan Boesky was arrested for insider trading, Michael Milken was busted for market manipulation, Charles Keating was running a fraudulent savings and loan, and Gordon Gekko was declaring that "greed ... is good," Bill Clinton was an obscure Southern governor, and the man setting the moral tone "at the top" was Ronald Reagan. Maybe Boesky and Milken lost their moral bearings because the Gipper was a divorcé who neglected his children.

Second, Republican-leaning CEOs aren't exactly the demographic group most likely to take their moral guidance from Bill Clinton. And among those constituencies that did see Clinton as a role model--for instance, the African American poor--the '90s were a period of remarkable moral advance. From 1991 to 2000, while our "first black president" inhabited the Oval Office, teen pregnancy dropped 22 percent. Between 1993 and 1999, the crime rate dropped by roughly the same amount, and the welfare rolls declined 49 percent. Divorce, teen drinking, teen suicide, and abortion also grew more rare. As the magazine of the conservative American Enterprise Institute put it in 1999, "The alarm bells rung by cultural conservatives seem to have been heeded by many Americans, and a new pattern of recovery and even reversal has emerged." Does The Wall Street Journal hold Bill Clinton responsible for that as well?

The right's urge to blame Clinton stems partly from its refusal to acknowledge the basic tension within conservative ideology between cultural traditionalism and economic libertarianism. Whether it's Hollywood or Wall Street, conservatives hate to admit that it is the cultural amorality of the profit motive itself that sometimes produces moral rot. So when movie moguls or corporate chieftains choose the bottom line over basic decency, conservatives are reduced to suggesting that the scoundrels lost their family values at Woodstock (or by watching Clinton) rather than admit that they are simply following the structural incentives of an inadequately regulated free market.

Indeed, when it comes to big business, conservatives frequently deny that structural incentives matter at all. Even if they can't show that the corporate malefactors were corrupted by Clinton, they insist that what matters is that they were personally corrupt-bad people who did bad things because, well, that's what bad people do. As George W. Bush said in his corporate-responsibility speech this week, "[U]ltimately, the ethics of American business depends on the conscience of America's business leaders." Or, as the Journal put it, "Human nature being what it is-and capitalists being human-some will lose their moral bearings."

This is willful naïveté. When bureaucrats perform inefficiently or welfare mothers live on the dole, conservatives don't call them bad apples who lack the moral instinct for hard work. They blame the legal structures that govern their behavior--the fact that bureaucracies are insulated from market competition or that welfare mothers (formerly) received checks whether they worked or not.

And it is the legal structure governing corporate America that has produced the bad behavior we are learning about today. During the '90s, accounting firms realized they could boost profits by consulting for the companies they audited. And because the government never stepped in to prevent this mounting conflict of interest, accounting firms like Arthur Andersen developed a strong incentive to overlook fraudulent bookkeeping. Was every auditor equally willing to turn a blind eye? Of course not--just as not every welfare mother was equally willing to receive a check for sitting at home. But the overall structure created a corrupting pressure. And so it is not surprising that in the late '90s, as the accounting industry was publishing a handbook titled Make Audits Pay: Leveraging the Audit Into Consulting Services, the number of audited companies subsequently forced to restate their earnings was rising year after year.

Similarly, the penalties for corporate fraud were diminishing. In 1995 Newt Gingrich and the newly elected Republican Congress--having vowed to restrict lawsuits in the Contract with America--pushed through a bill making it much harder to sue companies for misleading their investors. And that same year the House and Senate froze the budget of the Securities and Exchange Commission (SEC), even though the agency (as the General Accounting Office would later find) already lacked the staff to adequately monitor corporate balance sheets. As David Ruder, a former Republican head of the SEC, told The New York Times in 1995, "The Republican Congress is dealing with the SEC as though it is the enemy, instead of the policeman on the beat." And, as conservatives often remind liberals, when you undermine the policeman on the beat, crime goes up.

Which brings us back to Bill Clinton. If conservatives are serious about blaming him for Enron and WorldCom, they should focus not on Monica Lewinsky but on the decline in white-collar law enforcement that occurred on his watch. But, if they do, they'll notice that Clinton vetoed the 1995 bill that shielded corporate executives from shareholder lawsuits, and his SEC chief, Arthur Levitt, proposed barring accounting firms from consulting for firms they were simultaneously auditing. Unfortunately, Clinton's veto was overridden-a slight majority of Democrats voted to uphold it, but virtually every congressional Republican voted to override. Levitt's proposal was torpedoed as well. By my count, 33 of the 37 members of Congress who signed public letters protesting his reform were Republicans. And the lobbyist who spearheaded the accounting industry's campaign against the Levitt proposal was none other than Harvey Pitt, President Bush's pick to head the SEC. In other words, the '90s moral tone that made Enron and WorldCom possible wasn't Clintonism; it was Gingrichism. And that's one moral tone George W. Bush hasn't changed at all.

Peter Beinart is the editor of TNR.

Slate.com

Posted Tuesday, July 9, 2002, at 4:11 PM PT

Harken Hypocrisy
Bush's corporate ethics: Do as I say, not as I do.
By William Saletan

On Monday, President Bush defended his stewardship of Harken Energy, a company on whose board of directors he served more than a decade ago. On Tuesday, Bush called for corporate responsibility in a speech on Wall Street. There are standards and assumptions under which the explanations Bush gave Monday can be defended, and there are company directors whose conduct can be defended under the standards and assumptions Bush outlined Tuesday. But there's no way to square the rules Bush applied to himself on Monday with the rules he applied to others on Tuesday.

The key facts in the Harken case are these: In June 1990, Bush sold more than $800,000 worth of stock in Harken. The SEC later disputed Harken's accounting of the sale of its subsidiary, Aloha Petroleum, which had taken place before Bush sold his stock. In January 1991, Harken revised its accounting accordingly, nearly quadrupling the net loss it had reported. Harken's stock, which had already declined, fell far below the price at which Bush had sold his shares. A form on which Bush was supposed to report his stock sale wasn't filed until eight months after it was due. However, he did file on time a form reporting his intent to sell the stock.

Let's compare Bush's Monday and Tuesday remarks on four issues.

1. Personal responsibility. Years ago, Bush said his form was filed late because the SEC had lost it. Last week, Bush spokesman Ari Fleischer retracted that claim and blamed Bush's lawyers: "The President believed at the time that he had filled out all the paperwork that was required, and it was filed, and that the lawyers did as they were required to do." Monday, Bush was asked why, as a member of Harken's audit committee, he didn't know at the time of his stock sale that the company's books were inaccurate. He replied that the inaccuracy "came up after I sold the stock." In other words, he wasn't responsible for knowing about inaccuracies until the SEC caught them.

Tuesday, Bush called for "a new ethic of personal responsibility in the business community." Specifically, he asserted, "Those who sit on corporate boards have responsibilities. I urge board members to check the quality of their company's financial statements; to ask tough questions about accounting methods." He added that shareholders "should demand an attentive and active board of directors."

2. Exploiting ambiguity. Monday, Bush called Harken's initial accounting of the Aloha sale "an honest difference of opinion as to how to account for a complicated transaction. … Sometimes the rules aren't as specific as one would expect." He explained to reporters that "in the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures. ... Sometimes there's differences—an ability to interpret one way or the other."

Tuesday, Bush demanded "higher ethical standards—standards enforced by strict laws … Our schools of business must be principled teachers of right and wrong, and not surrender to moral confusion and relativism. Our leaders of business must set high and clear expectations of conduct." Bush pledged to "end the days" of "shading the truth," and he declared that honest businessmen "do not cut ethical corners."

3. Adequacy of oversight. Monday, Bush brushed aside all questions about Harken by noting that the SEC had found no proof of wrongdoing. Why had Bush filed his form late? "This has been fully vetted. It has been looked at by the SEC," he replied. Why hadn't he known the books were inaccurate? "All these questions that you're asking were looked into by the SEC," he said. What was his role in the Aloha sale, and was that sale a ruse to conceal losses? "This and all matters that related to Harken were fully looked into by the SEC," said the president.

Bush assured the press that the SEC probe of Harken was "full" and "very thorough." When he was asked whether he would instruct the SEC to release all records related to the probe, he replied that the SEC had already demonstrated that "there's no 'there' there." As evidence for this conclusion, he touted an SEC "document" that declared, "[I]t appears that Bush did not engage in illegal insider trading because it does not appear that he possessed material nonpublic information." The "document" wasn't evidence; it was the conclusion for which reporters were requesting documentation. In short, Bush was asking reporters to take at face value the SEC's assertion of the adequacy of its oversight.

Tuesday, Bush bemoaned the SEC's inadequacy. He chastised Congress for failing to fund "100 new enforcement personnel in the SEC" in order "to expose corporate corruption." He pleaded "for an additional $100 million in the coming year to give the SEC the officers and the technology it needs to enforce the law." He outlined "a 10-point Accountability Plan" aimed at "ensuring that the SEC takes aggressive and affirmative action," and he urged the SEC "to adopt new rules to ensure that auditors will be independent and not compromised by conflicts of interest."

4. Late corrections. Monday, Bush argued that the SEC's eventual correction of Harken's books—a correction that wasn't made until after Bush had sold his stock—proved that "the system worked." The SEC "made the decision that Harken ought to restate some earnings, which Harken did," said the president. "And that's how the system is supposed to work."

Tuesday, Bush demanded that ordinary investors receive the same timely information available to insiders. While government could punish wrongdoing after the fact, he argued, it could also "do more to promote transparency and ensure that risks are honest." He stressed the importance of "moving corporate accounting out of the shadows, so the investing public will have a true and fair and timely picture of assets and liabilities."

Bush was elected on a promise to end the contradiction between presidential rhetoric and presidential rationalization. So far, all he's done is change the subject from sex to money.