Wall Street Rallies for Bush -
And Seeks Payback

by Andrew Wheat

Much as Enron once used the likes of George W. Bush to deregulate energy markets, Wall Street is leveraging chits amassed as the premier financier of Bush’s re-election campaign to try to roll back post-Enron market reforms.

Leading the charge is new Treasury Secretary Henry Paulson. As head of New York-based investment bank Goldman Sachs in 2004, Paulson served as an elite Bush fundraiser along with George Herbert Walker IV — the presidential cousin then running Goldman’s hedge fund division. Media reports about Paulson’s nomination last June made much of how hard White House Chief of Staff Josh Bolten — Goldman’s ex-director of legal and government affairs — had to woo a “reluctant” Paulson to the post. To land this fish, the Wall Street Journal reported, Bolten “promised him more clout in domestic and international economic policy” than his predecessors wielded.

Clues to what Paulson intended to do with this influence soon surfaced. In a Columbia University speech last August, the new cabinet member aired his view that parts of a key post-Enron reform should be repealed. When Congress passed the so-called Sarbanes-Oxley, or “Sarbox,” reform in 2002 as its response to scandals involving Enron, WorldCom, Tyco, and others, just three Members of Congress opposed it.

Wall Street: The Sky Is Falling

The month after Paulson advocated eviscerating some Sarbox reforms, an elite group of corporate and financial leaders announced it was forming the Committee on Capital Markets Regulation to recommend ways to improve U.S. capital markets. What set this newborn group apart was that it came into the world with the explicit blessing of a sitting U.S. treasury secretary. “This issue is important to the future of the American economy and a priority for me,” the press release announcing the group’s formation quoted the secretary as saying. “I look forward to reviewing their findings and ideas.” The committee became known as the Paulson Commission, though the secretary was not involved with its work.

In December, the committee published an “Interim Report” that presented Wall Street’s deregulatory agenda. Despite the stock market’s banner year, the report warned that U.S. capital markets are failing to cope with unprecedented global competition. The main evidence for this claim is an alleged decline in the number of Initial Public Offerings (IPOs — the new floating of a stock) launched on U.S. markets. It blamed this dire situation on the “excessive regulation” and “unwarranted litigation” that followed “several high-profile corporate scandals and abuses.” It identified Sarbox as a major culprit. The Wall Street elite’s report fixated on provisions requiring corporate managers and auditors to formally vouch for a company’s lawfulness and financial reports. The report said these honesty pledges are too costly and make auditing firms “virtually uninsurable.” Alluding to Enron’s late auditing firm Arthur Andersen, the report groused that “improper criminalization of entire companies has sometimes forced them out of business, eliminating thousands of innocent employees’ jobs.”

More generally, the committee found that “in the shift of regulatory intensity, balance has been lost to the competitive disadvantage of U.S. financial markets.” In other words, there should be less financial regulation. The recommended means to this end is for the Securities and Exchange Commission (SEC) and other regulators to take greater account of the costs as well as benefits of regulation.

Yet the report also concludes that investor class action lawsuits must be sharply curtailed to save endangered U.S. capital markets. Since securities lawsuits have actually declined in recent years, the committee complained that the average settlement size has risen. (The committee did not consider in its report if this trend perhaps might correlate with the size of the fraud or misconduct perpetrated by defendants against their victims.) Rising settlement size notwithstanding, the aggregate settlement costs for securities litigation are tiny — $3.5 billion by the committee’s estimate for all of 2005 — as compared to corporate revenues.

One of the report’s most innocuous-sounding findings may be the most telling. “Insufficiently coordinated state and federal enforcement laws and activities have led to state authorities driving matters that are more national in scope,” the report found. The state authority that inflicted the most misery on Wall Street was Eliot Spitzer, the New York attorney general whom New Yorkers elected governor in a landslide three weeks before the report’s publication.

Although Enron was a huge embarrassment, the real problems for Wall Street firms began when Spitzer decided to go beyond Enron in pursuing the industry’s many conflicts. In 2002, 10 top investment banks agreed to pay a record $1.4 billion to settle Spitzer’s charges that they had won lucrative stock-underwriting contracts by pressuring their analysts to publicly hype stocks that they privately scorned. Spitzer next ripped into conflicts at mutual funds and insurance companies — taking on some of the most powerful financial wizards in the world.

Spitzer’s jihad came at a pivotal moment. The aftershocks of Enron’s 2001 implosion temporarily decimated the Houston-based energy industry that did so much to bankroll Bush’s first presidential race.

Replacing Jey Lay and Friends
Bush moneymen who had foundered in Houston swamps by 2004 included Enron’s Ken Lay, Dynegy’s Chuck Watson, Reliant Energy’s Steve Letbetter, El Paso’s William Wise, and Arthur Andersen’s Stephen Goddard.

To eke out a second term, Bush needed another flush-yet-needy industry to fill his war chest. Financial executives were among those who answered this call. While the New York-based finance industry has keen interests in such perennial Bush issues as tax cuts and privatizing Social Security, it had provided limited financial aid for Bush’s first White House run. By the end of the first term, the patriotic fallout from the September 11 terrorist attacks on Manhattan and Spitzer’s pursuit of white-collar in the finance industry changed Wall Street’s political calculus.

In the 2000 election, the Bush campaign labeled contributors who managed to bundle $100,000 or more in campaign donations as “pioneers.” Fifty-two financial firm executives raised enough money to become Bush pioneers.

In 2004, the Bush campaign reinstated the “pioneer” fundraising moniker, but added a new status for bigger contributors. Those who could bundle $200,000 or more in contributions won the appellation of “ranger.” Fifty-three financial executives were pioneers. An additional 45 surpassed them, raising enough money to become rangers.

One of Spitzer’s bitterest enemies is elite Bush fundraiser Maurice “Hank” Greenberg, who was ousted as head of New York-based insurance giant American International Group Inc. while battling Spitzer-induced fraud charges in 2005. Soon after the Interim Report’s publication, the media revealed that the report had been financed with $500,000 from the Starr Foundation — a private foundation chaired by Greenberg.

Spitzer stuck Greenberg’s family on the hot seat in 2004 when he accused insurance broker Marsh & McLennan Cos. Inc. — headed by one of Greenberg’s sons — of taking undisclosed kickbacks from insurers to which it awarded corporate insurance contracts. Insurers admitting to such bid-rigging with Marsh & McLennan included AIG and ACE Ltd. — an insurer headed by yet another Greenberg son.

The Greenberg money trail suggests that the Interim Report’s agenda may not have been solely concerned with saving U.S. capital markets from impending doom. Another report aim appears to be combating Spitzer and those who would follow his lead. (Notably, Spitzer — now New York governor — has endorsed some of the deregulatory agenda from the raft of committees proclaiming hardship for Wall Street.)

Early in the 2004 re-election campaign, Bush’s then-Securities and Exchange Commission Chair William Donaldson endorsed an industry-backed bill to take away state securities powers and concentrate them at the federal level. But the timing was bad for such a scheme, with memories of corporate abuses fresh and Spitzer unearthing one industry conflict after another.

Although Wall Street is raking in unprecedented profits, and a controversy over improper grants of stock options threatens to envelop hundreds of firms, the Street elite have evidently decided that now is the time to make the doomsday case that key post-Enron reforms must be revoked to save U.S. markets.

They have the support of President Bush. In an address to business executives on Wall Street in January, Bush called for a regulatory rollback of post-Enron reforms.

R. Glenn Hubbard, the former head of Bush’s Council of Economic Advisers who co-chaired the panel producing this report, pointedly told reporters that federal regulators could implement many of the report’s prescriptions without the approval of Congress’s new Democratic majority. But it might not be that easy.

Notwithstanding the expanded authority that the White House pledged to Treasury Secretary Paulson, the rollback of post-Enron reforms is likely to be a tough sell for the finance industry in the immediate future.

The new Democratic leaders of congressional finance committees have expressed views ranging from caution to scorn about such a rollback.

Moreover, Bush’s current Securities and Exchange Commission chief, former GOP lawmaker Chris Cox, repeatedly has defended the very Sarbox provisions that Paulson and his cronies want repealed.

On the other hand, some Democratic leaders, among them New York Senator Charles Schumer, are offering their own warnings about Wall Street vulnerability. And some SEC commissioners have joined the Street in bashing Sarbox reporting requirements.

Whatever the outcome, it is remarkable that Wall Street has sprung from the just-cremated ashes of Ken Lay to demand a rollback of the common-sense regulatory reforms intended to prevent “another Enron.”

Such a demand would be laughable but for the extraordinary clout that the Street has cultivated within the White House and Congress.

To a remarkable extent, this industry fostered this clout by following the Enron playbook. Apparently Arthur Andersen, Enron and Ken Lay did not die in vain. Their legacy thrives among the dealmakers on Wall Street and Pennsylvania Avenue.

Meanwhile, Republicans eyeing the 2008 presidential race — including Rudolph Giuliani, John McCain and Mitt Romney — already are scrambling to commandeer the elite Bush fundraisers for their own campaigns, while leading Democratic presidential contenders are lining up Wall Street hotshots to raise buckets of cash for their campaigns. 

Multinational Monitor Contributing Editor Andrew Wheat is Research Director for the Austin, Texas-based Texans for Public Justice.