The Ultimate in Cynicism: Bush to Pose
as Corporate Accountability Advocate

"Responsible leaders do not take home tens of millions of dollars in compensation as theircompanies prepared to file for bankruptcy, devastating the holdings of their investors." --George W. Bush speech on "corporate accountability" July 9, 2002

"I get good advice, if you will, from their people based upon how we're doing business and how we're operating over and above the just sort of normal by-the-book auditing arrangement," --Dick Cheney in a 1996 promotional video for Arthur Andersen

By Paul Krugman
Sunday, July 7, 2002 New York Times

The preceding quotes were not part of Mr. Krugman's article.

On July 9, George W. Bush is scheduled to give a speech intended to put him in front of the growing national outrage over corporate malfeasance. He will sternly lecture Wall Street executives about ethics and will doubtless portray himself as a believer in old-fashioned business probity.

Yet this pose is surreal, given the way top officials like Secretary of the Army Thomas White, Dick Cheney and Mr. Bush himself acquired their wealth. As Joshua Green says in The Washington Monthly, in a must-read article written just before the administration suddenly became such an exponent of corporate ethics: "The `new tone' that George W. Bush brought to Washington isn't one of integrity, but of permissiveness. . . . In this administration, enriching oneself while one's business goes bust isn't necessarily frowned upon."

Unfortunately, the administration has so far gotten the press to focus on the least important question about Mr. Bush's business dealings: his failure to obey the law by promptly reporting his insider stock sales. It's true that Mr. Bush's story about that failure has suddenly changed, from "the dog ate my homework" to "my lawyer ate my homework - four times." But the administration hopes that a narrow focus on the reporting lapses will divert attention from the larger point: Mr. Bush profited personally from aggressive accounting identical to the recent scams that have shocked the nation.

In 1986, one would have had to consider Mr. Bush a failed businessman. He had run through millions of dollars of other people's money, with nothing to show for it but a company losing money and heavily burdened with debt. But he was rescued from failure when Harken Energy bought his company at an astonishingly high price. There is no question that Harken was basically paying for Mr. Bush's connections.

Despite these connections, Harken did badly. But for a time it concealed its failure - sustaining its stock price, as it turned out, just long enough for Mr. Bush to sell most of his stake at a large profit - with an accounting trick identical to one of the main ploys used by Enron a decade later. (Yes, Arthur Andersen was the accountant.) As I explained in my previous column, the ploy works as follows: corporate insiders create a front organization that seems independent but is really under their control. This front buys some of the firm's assets at unrealistically high prices, creating a phantom profit that inflates the stock price, allowing the executives to cash in their stock.

That's exactly what happened at Harken. A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989. White House aides have played down the significance of this maneuver, saying $10 million isn't much, compared with recent scandals. Indeed, it's a small fraction of the apparent profits Halliburton created through a sudden change in accounting procedures during Dick Cheney's tenure as chief executive. But for Harken's stock price - and hence for Mr. Bush's personal wealth - this accounting trickery made all the difference.

Oh, and Harken's fake profits were several dozen times as large as the Whitewater land deal - though only about one-seventh the cost of the Whitewater investigation.

Mr. Bush was on the company's audit committee, as well as on a special restructuring committee; back in 1994, another member of both committees, E. Stuart Watson, assured reporters that he and Mr. Bush were constantly made aware of the company's finances. If Mr. Bush didn't know about the Aloha maneuver, he was a very negligent director.

In any case, Mr. Bush certainly found out what his company had been up to when the Securities and Exchange Commission ordered it to restate its earnings. So he can't really be shocked over recent corporate scams. His own company pulled exactly the same tricks, to his considerable benefit. Of course, what really made Mr. Bush a rich man was the investment of his proceeds from Harken in the Texas Rangers - a step that is another, equally strange story.

The point is the contrast between image and reality. Mr. Bush portrays himself as a regular guy, someone ordinary Americans can identify with. But his personal fortune was built on privilege and insider dealings - and after his Harken sale, on large-scale corporate welfare. Some people have it easy.

Note: This story is important not so much because of Bush's crime (though we certainly believe he is obligated to abide by the law like all of us and face prosecution for crimes not past the statute of limitations if he has not) as to again make the point that our problems are systemic. A system that relies on corporate executives acting morally is a failed system. Please refer to our primer on "Inherent Rules of Corporate Behavior" for more on this point.

We'd also like to hear Mr. Bush answer a few more questions on Harken, like: "Why do your think the government of Bahrain chose Harken to drill its offshore wells even though it had never dug overseas or in water and was on shaky ground financially"? Clue: who was the White House occupant in 1990?

The Wall St Journal provides an in-depth account of this story in How Oil Firm Linked to a Son Of Bush Won Big Drilling Pact (WSJ online July 9--available to subscribers only).