Andrew Wheat

Much as Enron Corp. 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University speech last August, the new cabinet member aired his view that parts of a key post-Enron reform should be repealed.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 Inc., and Tyco International Ltd., just three members opposed it. The nays included “Dr. No,” lonely Lone Star Rep. Ron Paul.

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.”

Soon after a Thanksgiving celebration of what was turning out to be a bullish year on Wall Street, the committee published an “Interim Report” that fleshed out Secretary Paulson’s agenda. Despite the stock market’s banner year, the report warned that U.S. capital markets are failing to cope with unprecedented global competition. 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 LLP, the report groused that “improper criminalization of entire companies has sometimes forced them out of business, eliminating thousands of innocent employees’ jobs.”

The report neglected to mention that the number of companies and jobs that prosecutors have destroyed is negligible when compared with the wreckage inflicted by corporate fraud. Indeed, much of the report is imbued with a narcotic nostalgia for the go-go Enron days, when corporate fraud basked in regulatory indulgence. At that time investor class-action lawsuits were one of the only checks on corporate fraud. Yet the report also concludes that investor class actions must be sharply curtailed to save America’s endangered capital markets.

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 for Wall Street, the Street’s real problems 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. Bush moneymen who had foundered in Houston swamps by 2004 included Enron’s Ken Lay, Dynegy Inc.’s Chuck Watson, Reliant Energy Inc.’s Steve Letbetter, El Paso Corp.’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. As the Observer reported three years ago (“Bush’s Bounty Hunters,” February 13, 2004), financial executives 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 dogged pursuit of white-collar crime changed Wall Street’s political calculus.

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 of its aims appears to be combating Spitzer and those who would follow his lead.

Early in the 2004 re-election campaign, Bush’s then-Securities and Exchange Commission Chair William Donaldson endorsed an industry-backed bill to centralize state securities powers into his hands. But the timing was bad for such a scheme, with memories of corporate abuses fresh and Spitzer unearthing one industry conflict after another. By the 2006 midterm elections, the market value of the financial industry’s heavy investment in Bush was plummeting with his approval ratings and the “thumping” that voters gave Republicans at the polls. Three weeks later, Wall Street’s elite made its doomsday case that key post-Enron reforms must be revoked to save American markets—a theme that Paulson had struck again days earlier in a speech to the Economic Club of New York. 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. 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 that are supposed to prevent “another Enron.” Such a demand would be laughable but for the extraordinary clout that the Street has cultivated within the White House. 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.

Award-winning Observer columnist Andrew Wheat is research director of Texans for Public Justice.