Bush Did Try to Save Enron
Bush's defenders have said the administration's refusal to bail out the sinking energy trader is proof of Bush's integrity. Growing evidence, however, shows that this Bush-can't-be-bought story line isn't true.
Bush Did Try to Save Enron
By Sam Parry
May 29, 2002
Since Enron Corp. plunged into bankruptcy six months ago, George Bush's defenders have said the administration's refusal to bail out the sinking energy trader is proof of Bush's integrity, given that Enron's Chairman Kenneth Lay was one of Bush's top financial backers.
The story line has been that all of Ken Lay's millions couldn't buy George W. Bush. For that reason, Enron has been called a financial scandal, not a political scandal.
Growing evidence, however, shows that this Bush-can't-be-bought story line isn't true.
It is now clear that prior to Nov. 8, when the Securities and Exchange Commission delivered subpoenas to Enron, the Bush administration did what it could to help Enron replenish its coffers with billions of dollars. Enron desperately needed that money to prevent the exposure of mounting losses hidden in off-the-books partnerships, a bookkeeping black hole that was sucking Enron toward bankruptcy.
As Enron's crisis worsened through the first nine months of the Bush presidency, Ken Lay got Bush's help in three principal ways:
--Bush personally joined the fight against imposing caps on the soaring price of electricity in California at a time when Enron was artificially driving up the price of electricity by manipulating supply. Bush's rear-guard action against price caps bought Enron and other energy traders extra time to gouge hundreds of millions of dollars from California's consumers.
--Bush granted Lay broad influence over the administration's energy policies, including the choice of key regulators to oversee Enron's businesses. The chairman of the Federal Energy Regulatory Commission was suddenly replaced in 2001 after he began to delve into Enron's complex derivative-financing schemes.
--Bush had his National Security Council staff organize an administration-wide campaign to pressure the Indian government to accommodate Enron, which wanted to sell its generating plant in Dabhol, India, for $2.3 billion. Bush administration pressure on India over the Dabhol plant continued even after Sept. 11, when India's support was needed for the war on terrorism. The administration's threats against India on Enron's behalf didn't stop until Nov. 8.
On Nov. 8, Enron disclosed the formal SEC investigation and admitted overstating earnings by $586 million with losses hidden in off-the-books partnerships run by Enron's Chief Financial Officer Andrew Fastow. Over the next four weeks, Enron stumbled toward its bankruptcy filing on Dec. 2.
When the corporate wreckage was complete, the toll was devastating. Investors lost tens of billions of dollars; retirees were left nearly penniless; and 5,000 Enron employees were laid off. Beyond that, Enron's accounting tricks discredited its accounting firm, Arthur Andersen LLP, and sent shock waves through U.S. securities markets.
As the accounting scandal provoked disgust across the country and across party lines, the White House sought to minimize its relationship with Enron. In spite of a personal acquaintance best symbolized by Bush's nickname for "Kenny Boy," Bush began to act as if he barely knew Lay. On Jan. 11, Bush told reporters that Lay "was a supporter of Ann Richards in my run in 1994," implying that he had gotten to know Lay as Gov. Richards' holdover appointee to a Texas business council.
Striking a note in personal disapproval, Bush said his sympathies rested with laid-off Enron employees and small Enron investors who saw their life savings wiped out. Bush said his own mother-in-law lost $8,000 when Enron collapsed.
The administration's basic line of defense was that it did nothing to bail out Enron. Exhibit One in this argument was the fact that the administration took no substantial action to help Enron after Lay sounded out senior Bush officials in late October by placing calls to Commerce Secretary Donald Evans and Treasury Secretary Paul O'Neill.
By late October, however, it could also be argued that Enron's troubles were too advanced - and the public spotlight too intense - for the administration to launch a rescue mission. News of Enron's financial difficulties already was spreading through the business press and the SEC had started to investigate.
In fact, the record shows that, in spite of the risk, the Treasury Department did respond to Lay's call for help. The New York Times reported that Secretary O'Neill instructed Under Secretary for Domestic Finance Peter Fisher to "look into the condition of Enron." Fisher responded by following up with Enron President Greg Whalley, speaking with him "six to eight times" over a few day period in late October and early November. After the conversations, perhaps recognizing the political peril, Treasury decided against further support. [NYT, 1/13/02]
Treasury's efforts on Enron's behalf in late October were not unusual for the Bush administration. Far from doing nothing to help Enron, news accounts and newly released documentary evidence show that that prior to Enron's death spiral, the young Bush administration did what it could to support Enron's business interests.
The Houston-based energy trader's financial mess can be traced back at least to 2000 when the long-running stock market boom ended.
During the boom, Enron had soared through the list of Fortune 500 companies to a perch at No. 7. A leader of the so-called New Economy, Enron expanded beyond its core business interests in natural gas pipelines, branching out into complex commodity trading, which included electricity, broadband capacity and other ethereal items, such as weather futures. It had investments in smaller companies that operated in areas where Enron traded.
The bursting of the dot-com bubble in March 2000 and the collapse of the telecommunications sector put pressure on Enron as it did many other companies. Even though Enron's own stock held strong, hitting an all-time high of $90 on Aug. 17, 2000, the tumbling market, combined with some risky overseas energy projects, left Enron with a host of poor-performing assets that were a drag on the company's growth.
To protect its image as a darling of Wall Street - and to prop up its stock value - Enron began shifting more of its losing operations into off-the-books partnerships given names like Raptor and Chewco. Hedges were set up, supposedly to limit Enron's potential losses from equity investments, but some were themselves backed by Enron stock, creating the possibility of a spiraling decline if investors lost faith in Enron.
Their Man Bush
Still, Enron saw a silver lining in the darkening economic clouds of 2000. If George W. Bush could secure the presidency, Enron would have a reliable ally for its deregulatory plans at the top of the U.S. government. With Bush would come other allies who could staff key positions in the federal bureaucracy.
Lay had reasons for optimism about his ties to Bush. Having backed Bush's father and the son's gubernatorial run in 1994, Lay was an insider's insider. For the 2000 campaign, he was a Pioneer for Bush, raising $100,000. Enron also gave the Republicans $250,000 for the convention in Philadelphia and contributed $1.1 million in soft money to the Republican Party, more than twice what it contributed to Democrats. [www.opensecrets.org]
The contributions dwarfed what was at stake for Enron. In its energy trading in California alone, Enron stood to earn tens of billions of dollars.
Around the start of the 2000 general election campaign, the first signs of suspicions also arose that Enron was trying to gain windfall profits by manipulating the California energy market. In August 2000, an employee with Southern California Edison sent the Federal Energy Regulatory Commission (FERC) a memo, entitled "California Electricity Markets: Issues for Examination." The memo expressed concerns that Enron and other electricity providers to California's deregulated energy market were gaming the system by cutting off supply and creating phony congestion in the electricity grid to run up energy prices. [Energy Daily, May 16, 2002]
By December 2000, even while FERC was piecing together a strategy for dealing with the California crisis, recently released documents now show that Enron lawyers were exchanging letters about conducting just those kinds of schemes. With strategies dubbed "Fat Boy," "Death Star," and "Get Shorty," Enron was siphoning electricity away from areas that needed it most while getting paid for phantom transfers of energy supposedly to relieve transmission-line congestion. [See Washington Post, May 7, 2002]
That same month, Bush nailed down his presidential victory, getting five Republicans on the U.S. Supreme Court to halt vote counting in Florida. Lay and his wife lent a hand there, too, donating $10,000 to Bush's Florida recount fund that helped pay the Republican lawyers and other operatives who ensured that a full recount of Florida's ballots never occurred.
With Bush's victory secured, another $300,000 poured in from Enron circles for the Bush-Cheney Inaugural Fund. The company, then-Chief Operating Officer Jeffrey Skilling and Lay each kicked in $100,000.
An Energy Plan
A grateful Bush gave Lay a major voice in shaping energy policy and picking personnel. Starting in late February 2001, Lay and other Enron officials took part in at least a half dozen secret meetings to develop the Bush's energy plan.
After one of the Enron meetings, Vice President Dick Cheney's energy task force changed a draft energy proposal to include a provision to boost oil and natural gas production in India. The amendment was so narrow that it apparently was targeted only to help Enron's troubled Dabhol power plant in India. [Washington Post, Jan. 26, 2002]
Other parts of the Bush energy plan tracked closely to recommendations from Enron officials. Seventeen of the energy plan's proposals were sought by and benefited Enron, according to Rep. Henry Waxman, D-Calif., ranking minority member on the House Government Reform Committee. One proposal called for repeal of the Public Utility Holding Company Act of 1935, which limits the activities of utilities and hindered Enron's potential for acquisitions.
Besides listening to Lay's advice, Bush put the corporation's allies inside the federal government. Two top administration officials, Lawrence Lindsey, the White House's chief economic adviser, and Robert Zoellick, the U.S. Trade Representative, both worked for Enron, Lindsey as a consultant and Zoellick as a paid member of Enron's advisory board. [ http://www.public-i.org/story_01_011102.htm]
Bush also named Thomas E. White Jr., an 11-year veteran of Enron's corporate suites, to be secretary of the Army. White had run a key subsidiary, Enron Energy Services, which is now the focus of allegations about accounting irregularities.
At least 14 administration officials owned stock in Enron, with Undersecretary of State Charlotte Beers and chief political adviser Karl Rove each reporting up to $250,000 worth of Enron stock when they joined the administration.
Lay exerted his influence, too, over government regulators already in place. Curtis Hebert Jr., a conservative Republican and a close political ally of Sen. Trent Lott of Mississippi, had been appointed to the Federal Energy Regulatory Commission during the Clinton administration. Like Bush and Lay, Hebert was a promoter of "free markets." Bush elevated Hebert to FERC chairman in January 2001.
While a strong believer in deregulation, Hebert broke ranks with Lay on two key points. Hebert was an advocate of state rights, an obstacle to Enron's desire for FERC to mandate consolidation of state utilities into four giant regional transmission organizations, or RTOs. By quickly pushing the states into RTOs, Enron and other big energy traders would have much larger markets for their energy sales.
Hebert told the New York Times that he got a call from Lay with a proposed deal. Lay wanted Hebert to support a faster transition to a national retailing structure for electricity. If he did, Enron would back him, so he could keep his job.
The FERC chairman said he was "offended" by the veiled threat. He understood that Lay's political influence could put his job in jeopardy, since Bush held the power to appoint FERC chairmen and Lay had demonstrated sway over selection of administration appointees. Besides supplying Bush aides with a list of preferred candidates, Lay had personally interviewed one possible FERC nominee.
Lay offered a different account of the phone call. He said Hebert was the one "requesting" Enron's support at the White House, though Lay acknowledged that the pair "very possibly" discussed issues involving FERC's authority over the nation's electricity grids.
Lay also had reason to be suspicious of Hebert's interest in the complex derivative financing instruments that he saw among the leading energy traders, including Enron. After he became chairman, Hebert started an investigation into how these deals worked. "One of our problems is that we do not have the expertise to truly unravel the complex arbitrage activities of a company like Enron," Hebert said. "We're trying to do it now, and we may have some results soon." [NYT, May 25, 2001]
Bush's ascension to power also came at a critical juncture in the California energy crisis. In a partially deregulated energy market served by Enron and other traders, electricity prices soared 800 percent in one year. Rolling blackouts crisscrossed the state.
After taking power, the Bush administration pulled back on federal efforts to monitor market manipulations. Bush also turned a deaf ear to appeals from public officials in California to give the state relief from the soaring costs of energy. To the Bush "free traders," price caps were anathema. The market should set the prices, they said, and any government interference would only make matters worse.
As California's electricity prices continued to soar, however, Gov. Gray Davis and Sen. Dianne Feinstein voiced suspicions that the "free market" was not at work. Rather they saw corporate price-fixing gouging consumers and putting California's economy at risk.
But California's suspicions were mocked in Washington as examples of finger-pointing and conspiracy theories. The administration saw the chief culprit as excessive environmental regulation that discouraged the building of new power plants.
While Lay had easy access to the White House, California's top Democratic officials found the doors closed. Feinstein said her requests for a one-on-one meeting with Bush to discuss the state's energy crisis were rebuffed several times. The first time the rejection came in a form letter with her name misspelled, she said. [L.A. Times, April 19, 2001]
Instead of a personal meeting with Bush, Feinstein was allowed to join large groups that met twice with Cheney. She said both meetings were brief and the vice president seemed distracted. "When someone is looking at their watch, it gives you a pretty good idea they want to get out of the room," Feinstein said. [NYT, May 8, 2002]
Read My Lips
Senior Bush administration officials paid much closer heed to the views of Ken Lay.
An April 2001 memo from Lay to Cheney advised the administration to resist price caps. "The administration should reject any attempt to re-regulate wholesale power markets by adopting price caps or returning to archaic methods of determining the cost-base of wholesale power," Lay said. Even temporary price restrictions "will be detrimental to power markets and will discourage private investment." [San Francisco Chronicle, Jan. 30, 2002]
Cheney and Bush adopted Lay's position in their political battles with Davis and the Democrats. On April 18, 2001, Cheney told the Los Angeles Times that the Bush administration opposed price caps because they would discourage investment, which Cheney called "the basic fundamental problem." [L.A. Times, April 19, 2001]
In May, Bush traveled to California on a trip choreographed like a president visiting a disaster area. Only this time, Bush wasn't promising federal help to a state in need. He was carrying the same message that Lay had sent to Cheney. In effect, Bush was saying: Read my lips. No price caps.
"Price caps do nothing to reduce demand, and they do nothing to increase supply," Bush said. [L.A. Times, May 30, 2001]
After weeks of standoff, as electricity prices stayed high and began spreading to other Western states, the political showdown ended on June 18, 2001. FERC approved limited price caps, a reversal prompted by Republican fears of a political backlash that could cost them seats in Congress.
According to the Los Angeles Times, the Bush administration had received warnings from Republicans in Congress that "the administration's opposition to price caps was a political blunder that could endanger GOP control of the House." [L.A. Times, June 19, 2001]
Still, the administration's rear-guard action had bought Enron and the other energy traders precious months to reap hundreds of millions of dollars in trading profits in California. Although it may be impossible to put an exact figure on the overall cost or the damage to California's economy, Gov. Davis has sought a refund of $9 billion from the energy traders.
The imposition of FERC's limited price caps - and the state's aggressive conservation efforts - brought the energy crisis under control. That may have been good news for California, but not for Enron. By losing control over its ability to keep electricity prices artificially high, Enron faced new economic pressures.
"There are some hints of a connection (between the price caps and Enron's collapse), including the billions of dollars in cash that flowed in and out of Enron as the crisis waxed and waned," the New York Times reported later. [NYT, May 9, 2002] Enron's stock price began to decline, slipping from around $80 early in the year to the high-$40's. That began to put pressure on the stock hedges inside the off-the-books partnerships.
In June, as FERC relented on California price caps, the White House went to bat for Enron on another touchy issue, the natural gas power plant that Enron had built in Dabhol, India.
The cost of the plant's electricity was several times what India was paying, leading to an impasse that made the plant an expensive blunder. Enron wanted India to pay $250 million in unpaid bills or buy out Enron's stake in the plant, worth about $2.3 billion.
Contract disputes between U.S. companies and foreign governments are normally handled by the Commerce Department or possibly at the State Department. But Enron's Dabhol problem became a priority of Bush's National Security Council staff. That level of interest was almost unprecedented, according to former NSC officials in both Republican and Democratic administrations.
On June 27, Cheney personally discussed Enron's problem with Sonia Gandhi, the leader of India's opposition Congress Party. "Good news is that the Veep mentioned Enron in his meeting with Sonia Gandhi yesterday," said an NSC e-mail on June 28, which was later released under a Freedom of Information Act request.
Throughout the summer, NSC staff coordinated U.S. pressure on India, drawing in the State Department, the Treasury Department, the Office of U.S. Trade Representative and the Overseas Private Investment Corp., which had committed $360 million in risk insurance to the Dabhol project.
The NSC-led "Dabhol Working Group" sought to broker meetings between Lay and senior Indian officials, including Brajesh Mishra, the national security adviser to Indian Prime Minister Atal Bihari Vajpayee. During a trip to India, a senior State Department official delivered a "demarche" or official warning to the Indian government. Still, New Delhi balked at the U.S. pressure.
Also in the summer of 2001, Enron was consolidating its influence at FERC.
Nora Mead Brownell, a controversial member of the Pennsylvania Public Utility Commission, was named as a new FERC commissioner. In support of Brownell's appointment, Lay called White House aide Karl Rove to say that Brownell "was a strong force in getting the right outcome" in deregulating Pennsylvania's energy market, according to a July, 17, 2001, letter that Waxman referred to the White House counsel, citing a Wall Street Journal report. [ http://truthout.com/0452.Waxman.Rove.htm]
Then, in August 2001, FERC Chairman Hebert, who had ordered that inquiry into Enron's arbitrage schemes, abruptly resigned. He offered as an explanation a desire "to seek other opportunities." Hebert resigned six months into his four-year term.
While it appears that Bush engineered Hebert's resignation, it remains unclear how much progress Hebert's inquiry had made in penetrating the secrets of Enron's complex financial instruments.
Bush appointed former Texas Public Utilities commissioner Pat Wood III to be the new FERC chairman. Lay had included Wood and Brownell on a list of preferred FERC candidates. His support appears to have been critical to their selections. [AP, Jan. 31, 2002]
As Lay was exerting his influence in Washington, out of public view back in Houston, Enron's accounting house-of-cards was tottering. On Aug. 15, Sherron Watkins, an Enron vice president, warned Lay that accounting irregularities, including the hedges tied to Enron stock, were threatening to undo the corporation.
On Sept. 11, the course of George W. Bush's presidency took a sharp turn, as Islamic terrorists seized four U.S. airliners. Two were crashed into the World Trade Center towers at the heart of the U.S. financial markets. Another smashed into the Pentagon and the fourth crashed in Pennsylvania when passengers apparently battled for control.
Bush vowed to retaliate for the attacks with a war against terrorism and specifically with an offensive in Afghanistan to oust the Taliban government that had provided a safe haven for terrorist mastermind Osama bin Laden. On the front lines of that new war were Pakistan and India, traditional enemies who were engaged in a brush-fire war over the disputed territory of Kashmir.
Despite the importance of New Delhi's cooperation in the war on terror, Enron's Dabhol power plant stayed at the center of U.S. relations with India. On Sept. 28, the NSC-led Dabhol working group was preparing "talking points" about the Enron business dispute for Cheney to deliver in a meeting with India's Foreign Minister Jaswant Singh.
On Oct. 9, the State Department was pressing Enron's case with the Indians again. Undersecretary Alan Larson "raised the Dabhol issue with both FM Singh and NSA Mishra and got a commitment to 'try' to get the government energized on this issue prior to the PM's visit to Washington on Nov. 9," an Oct. 23 NSC e-mail said. "Pls give me one/two bullets for the President to use during his meeting with Vajpayee."
Meanwhile, Enron's financial situation was unraveling. Its credit rating was cut and its stock was falling. On Oct. 30, behind closed doors, SEC commissioners approved a formal investigation of Enron's accounting.
The Dabhol Working Group, however, continued to press for India to make concessions to Enron. On Nov. 1, a couple of weeks after Lay had called Treasury Secretary O'Neill and Commerce Secretary Evans for financial assistance, the White House prepared a memo citing Dabhol talking points for Bush's meeting with Prime Minister Vajpayee during a state visit to Washington.
On Nov. 6, OPIC President Peter Watson sent a stern warning to Vajpayee's national security adviser Mishra. "The acute lack of progress in this matter has forced Dabhol to rise to the highest levels of the United States government," Watson said in a letter. The dispute "could have a negative effect regarding other U.S. agencies and their ability to function in India."
The Bush administration's pressure on India over Dabhol did not end until Nov. 8, the day the SEC delivered subpoenas to Enron and the company announced that it was under formal SEC investigation. "President Bush can not talk about Dabhol," reported one internal e-mail timed off at 2:33 p.m. on Nov. 8. [For details on the Dabhol initiative, see the Washington Post, Jan. 19 & 25, 2002; Bloomberg News, Jan. 18, 2002]
On Jan. 18, 2002, after the Dabhol initiative became public, White House spokesman Ari Fleischer called the effort "not uncommon."
The White House, however, dragged its heels when pressed for details about both the meetings of Cheney's energy task force and internal White House documents on Enron. The administration is battling the congressional General Accounting Office in court over the GAO's subpoena for the task force records.
The Document War
On May 22, another front in the battle over Enron documents opened when the Democratic-controlled Senate Governmental Affairs Committee approved subpoenas to the White House in a 9-8 party-line vote. "We are asking for conversations that the president and vice president and others at the White House might have had with Enron," said Sen. Joseph Lieberman, D-Conn., the committee's chairman.
The committee's ranking Republican, Sen. Fred Thompson of Tennessee, said the subpoenas were unfair because "there has not been any indication that the executive office of the president had any involvement in the collapse of Enron in any way."
White House counsel Alberto R. Gonzales also stressed that theme in releasing a chronology of the White House contacts with Enron in an initial response to the committee's action. He said Enron did not approach anyone in the White House "seeking help in connection with its financial difficulties prior to bankruptcy," an assertion that seems inaccurate given Lay's calls to Treasury and Commerce.
While the White House is expected to battle to keep secret its Enron documents, the pieces of the mosaic continue to fall into place, revealing a picture of an administration eager to do what it could for Bush's number one patron.
With tens of thousands of American investors hurt by Enron's accounting shenanigans and millions of Californians gouged by energy-market manipulations, Bush may have reason to worry about what the release of more documents might show. If the White House doesn't succeed in keeping its records secret, more damaging details could emerge.
With Democrats reluctant to directly challenge a popular wartime president, these details could yet prove damaging to Bush and his party in an election year. In any case, the record is now clear that the Bush administration did what it could for Enron right up to the company's collapse.
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