Where Were the Watchdogs?
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SPOKESMAN: Do you swear that the testimony that you’re…
PAUL SOLMAN: For weeks now, we’ve been watching our government lambaste the private sector for its failure to oversee Enron.
SPOKESMAN: This is so mind-boggling. How do you let this happen, captain? Your ship is going to go down, and you’re going to be lashed to the mast unless you start taking to us about what happened.
PAUL SOLMAN: But if the auditors, members of the board, and Wall Street analysts all seem open to the charge of negligence or worse, what about the government itself? How come no one in Washington seems to have been watching? So we asked the regulators, who each pointed us somewhere else. At FERC, for instance, the Federal Energy Regulatory Commission, which is charged with overseeing, among other things, the transmission and sale of energy, the financial conduct of the companies in its jurisdiction. Chairman Pat Wood:
PAT WOOD III, Chairman, Federal Energy Regulatory Commission: The type of thing that we’re looking at is the physical sale of gas, the physical sale of power to a customer. There are a lot of the other agencies, of course– SEC and CFTC– look at the financial instruments that people use to manage the risk of such contract. And those tend to be really outside what we do.
PAUL SOLMAN: We went next to the CFTC, the Commodity Futures Trading Commission, which oversees those wild-looking futures markets, like the New York Mercantile Exchange or Chicago Board of Trade. But not, says CFTC lawyer Elizabeth Ritter, when big firms like Enron trade with each other over the counter online.
ELIZABETH RITTER, Commodity Futures Trading Commission: The Enron online trading was perfectly legal trading pursuant to a 2h1 exemption. Now, whether back of that there were accounting disclosure auditing problems — that’s different from the trading issues.
PAUL SOLMAN: Our last stop was the SEC, the Securities and Exchange Commission, whose official mandate is "to protect investors and maintain the integrity of the securities markets." Law Professor Bill Bratton:
BILL BRATTON: By law, you have to file your financials with the SEC; by law they have to be stated in accordance with generally accepted accounting principles. There is no SEC review of those financials when they come in.
PAUL SOLMAN: Now, when I reviewed Enron’s SEC filings with Accounting Professor Doug Carmichael several weeks ago, he pronounced them unintelligible.
PAUL SOLMAN: Anybody understand this stuff?
DOUGLAS CARMICHAEL, Baruch College: No. I think… any objective evaluation would be that it’s not transparent, it’s not adequate disclosure.
PAUL SOLMAN: But this is literally officially what they’ve disclosed to the government.
DOUGLAS CARMICHAEL: Yes.
PAUL SOLMAN: So I asked Professor Bratton, was the SEC reading Enron’s filings?
BILL BRATTON: There’s only so much they can do with a statement that on the surface looks like it is on the up and up. It’s at the other end where the SEC goes into action. That is its primary job, to enforce, to be the cop that catches you after you’ve committed the crime. Nobody is going to invest the resources that it takes to have the cop do an audit of you in advance. That’s Arthur Andersen’s job.
PAUL SOLMAN: Or, as outgoing SEC Commissioner Laura Unger puts it…
LAURA UNGER, Commissioner, Securities and Exchange Commission: We’re sort of the last part of this in terms of reviewing the filings. And there’s enough discipline imposed by the rest of the system, generally, to make companies do the right thing in terms of what they disclosed to investors.
PAUL SOLMAN: So every agency seems to say, "it’s not our job," and therefore, we were back to square one, but with a question begging to be answered: Is it just bad luck that Enron’s business, for each of these regulators, turned out to be none of their business? "No," say critics, and therein lies the story — because when it came to government, a key Enron goal was deregulation; a goal Enron and a lot of other companies pursued with great vigor. At FERC, for instance, where President Bush had appointed Curtis Hebert boss in January of last year. Within nine months, however, Hebert was gone; Pat Wood in charge. Many have suggested Enron’s Ken Lay was behind the switch because Hebert wouldn’t agree to Lay’s deregulation plans. Wood says lay had nothing to do with his hiring, and cites his work with then-Governor Bush of Texas.
PAT WOOD III: I hardly think I needed an endorsement from some outside party to get this job. I mean, I worked for the man for six years, for crying out loud.
PAUL SOLMAN: Over at the CFTC, meanwhile, say critics, the regulators didn’t regulate Enron by choice, exempting the company from regulation back in 1993, the last act of outgoing chair Wendy Gramm, wife of Texas Senator Phil Gramm. Professor Michael Greenberger was a CFTC lawyer in the late-’90s.
MICHAEL GREENBERGER, University of Maryland Law School: After these exemptions took place, they could in private make deals about how they would trade energy, and they were completely deregulated. Nobody knew about them.
PAUL SOLMAN: Wendy Gramm, meanwhile, became an Enron board member within weeks of the exemptions vote, while Enron and others kept pushing for less regulation.
MICHAEL GREENBERGER: Exemptions weren’t big enough after time went. They wanted to do more. So the philosophy they adopted and the philosophy industry adopted was twofold: We’re just going to ignore the regulators, we’re going to lobby like crazy on the Hill, and we’re going to convince Congress that this area needs to be deregulated in Toto. And they achieved that objective in December of 2000.
PAUL SOLMAN: The achievement was the Commodity Futures Modernization Act, legislation that exempted Enron and others permanently from CFTC oversight, written in part by Senator Gramm. Enron, however, was but one of many, says Elizabeth Ritter.
ELIZABETH RITTER: Enron was one of dozens of energy, metals, banks, market participants that come and talk to us, that go to the Hill. I mean, Enron was not… certainly by any means, the largest player who came and talked to us or tried to tell us what they wanted and what they needed.
PAUL SOLMAN: As to Enron’s collapse, says Ritter…
ELIZABETH RITTER: There is certainly a perceived problem with accounting and disclosure issues and auditing issues. That’s a completely separate issue from the trading paradigm.
PAUL SOLMAN: And trading is what the CFTC regulates. But the kind of trading Enron was pioneering became a separate issue outside the CFTC’s jurisdiction for a simple reason, says Greenberger: That’s the way Congress wanted it.
PAUL SOLMAN: What happens? A Congressperson calls on the phone and says, "Hey, you guys, I hear what you are talking about; forget it"? I mean…
MICHAEL GREENBERGER, Former CFTC Lawyer: What happens is, not a Congressperson, but five different committees have hearings, call you up, ask you to testify, and scream at you for interfering with the free market system; that you’re slowing down the American economy by trying to get some transparency in the system. The banks and the corporations are saying, "Hey, how can these federal financial regulators do this? We’re very sophisticated people. We don’t need to be regulated."
PAUL SOLMAN: There’s another aspect to deregulation as well. Outgoing Commissioner Laura Unger, a Republican appointee, says the SEC is hard put to keep up with the pace of financial innovation.
LAURA UNGER: What you have to look at is the resources that the commission has. Our budget is less than $500 million a year. We have 190 people total looking at 17,000 public company filings. So to the extent that we can review, obviously we can only review a limited amount on an annual basis. We review about 2,500 to 3,000 a year.
PAUL SOLMAN: Moreover, Unger says, the SEC Needs to pay more.
LAURA UNGER: We can attract more talented people, people who were just in the industry. What we need to do is pay them more money and incentivize them to come to the Commission and really help us keep up with innovation and the increasingly sophisticated marketplace.
PAUL SOLMAN: So deregulation is a strategy, say critics, that leads back to one key place in Washington: Congress, which, critics say, was in turn influenced by campaign money from companies like Enron and Arthur Andersen that wanted to be less regulated. Over the last decade, Enron has given almost $6 million to federal candidates and parties. Arthur Andersen has given just over $5 million. President Bush has received more than $700,000 from Enron over his political career. Senator Phil Gramm, who helped deregulate the energy industry, has gotten more than $100,000 from Enron, and $76,000 from Arthur Andersen. On the Energy and Commerce Committee now investigating Enron, Chairman Billy Tauzin received $57,000 from Arthur Andersen. Democrats got money, too. Presidential Candidate Gore, a little over $13,000 from Enron. Senators Chris Dodd and Charles Schumer each took tens of thousands from Andersen. How does the cash nexus between business and Congress work? We’d invited Bennett Johnston to lunch at one of Washington’s old-time lobbying haunts, the Occidental Grille, to ask him.
BENNETT JOHNSTON, Former Senator/Lobbyist: Hey, Paul. How are you?
PAUL SOLMAN: Very nice to meet you.
BENNETT JOHNSTON: It’s good to see you.
PAUL SOLMAN: A pro-business, conservative four-term former Democratic Senator from Louisiana, Johnston’s now a lobbyist. Enron was a client.
BENNETT JOHNSTON: Because members of Congress, by and large, are not experts– they are generalists. They come in, as I came in, a lawyer from a fairly small, medium-sized town, and without expertise in a lot of areas.
PAUL SOLMAN: So how much did Enron’s money influence the deregulation debate?
BENNETT JOHNSTON: Most politicians cannot be pushed too far, but… to go against the grain of what they would otherwise do. But if they don’t have a view on a particular issue, and a ken lay comes in and he is a good friend, he’s well respected, and he’s also been a contributor, and he suggests a certain course of conduct, and the member doesn’t have a view on it, he’s likely to accept that view, or at least consider it very carefully.
PAUL SOLMAN: To lobbyist Chris Horner, however, Enron wasn’t always buying deregulation. Horner joined Enron in 1997 because of its supposed devotion to deregulation. He was soon disillusioned.
CHRIS HORNER, Lobbyist: Enron was always very aggressively for Enron. They made their initial fortune, and therefore were labeled as an advocate of free market principles. In fact, they were an advocate of Enron. Sometimes that meant deregulation; sometimes it meant very heavy intervention policies.
PAUL SOLMAN: As when Enron began backing the carbon dioxide regulations of the Kyoto accord, for instance, because they would benefit the company, an issue over which Horner promptly left the firm. But much of the time, companies lobby Congress simply to keep hands off, as auditors did when Arthur Levitt ran the SEC, says longtime deregulation critic Henry Waxman, a California Democrat.
REP. HENRY WAXMAN, (D) California: He said, it doesn’t make sense for accountants to be auditors on the one hand, and then be consultants for the company they’re auditing. He said, that’s a conflict of interest– of course it is– and he proposed strong regulations. Well, what happened? The accounting industry gave tons of money to some of the key members of Congress, and they wouldn’t let those regulations go through. They forced the SEC to water them down to the point where the regulations had no teeth left in them.
PAUL SOLMAN: According to reports, Chairman Tauzin is the person who negotiated the deal between Arthur Levitt and the accounting industry that allowed auditors to continue to get consulting contracts.
REP. HENRY WAXMAN: What happened in this particular instance was that Congressman Tauzin and others who were in charge of this effort to weaken these rules, insisted that the big five accounting firms meet with the SEC and sign off on any regulations. And Arthur Levitt had to just keep on giving and giving and giving to get anything at all done.
PAUL SOLMAN: Chairman Tauzin denies the influence of industry in this case, or for that matter, in any other.
PAUL SOLMAN: Skeptics have said, it’s not in Congress’ interest, not in your interest, to promulgate a set of rules like that, a tough set of rules, because you get campaign support from the companies in whose interest it is to have lax regulation.
REP. BILLY TAUZIN, Chairman, Energy & Commerce Committee: No. If you want to believe that financial support makes the decisions here in Congress, as some do, believe that. The fact of the matter is that no one of us can determine the intent of a donor. You can donate money to my campaign for all the wrong reasons. I can’t govern that. I can determine the intent of the recipient. My campaign committee, and everyone else I know around here, accepts legitimate donations from individuals for one purpose: That is, they support what we are doing. They don’t like what I do — they don’t contribute to it.
PAUL SOLMAN: And suppose I want him to do what I like?
REP. BILLY TAUZIN: If you’re trying to buy influence, that’s your problem. I can tell you you’re wasting your money with me and with most members up here if you think you’re going to buy influence with a donation. What you get from me is a nice signed, autographed picture, and I’ll be glad to send you one if you’d like one.
PAUL SOLMAN: I didn’t give you a dime yet. ( Laughter )
REP. BILLY TAUZIN: Send it in. I’ll send you a picture.
PAUL SOLMAN: Chairman Tauzin was out of time, maybe because of the dizzying clip at which things are moving in DC these days: The political pressure now on Congress to reregulate. Since we began this story, FERC has announced hearings on Enron’s pricing in California; the SEC is discussing many new, tougher accounting rules; and campaign finance reform, of Congress and in Congress, is in the midst of a renaissance, arguably made possible by Enron and Arthur Andersen.