Going After Greed

Treasury Secretary Paul O'Neill made his reputation as a straight-and-narrow kind of CEO. As head of aluminum maker Alcoa, he guarded his image as an honest steward of a company that cared about employees as much as stockholders. On a recent Friday George W. Bush sat down with O'Neill and a handful of senior economic advisers to work on the details of the president's upcoming speech laying down the law to corporate America. Angered by news of yet another major accounting scandal, this time at long-distance-telephone giant WorldCom, O'Neill urged Bush to make greedy CEOs pay for their crimes. "A kid caught with half a pound of marijuana gets more jail time than a corporate executive," he said. "That's not square." Bush emphatically agreed. "You're absolutely right," he said. O'Neill went on to detail how WorldCom executives played with the numbers, hiding nearly $4 billion in losses. "Can you imagine that?" he asked. The president frowned. The two men sat, shaking their heads.

This week Bush will shake his finger--before a group of top CEOs at the Regent Hotel on Wall Street. White House aides were characteristically tight-lipped about the contents of the speech, but GOP sources say that the president will likely support criminal charges for corporate officials who engage in dodgy accounting or file misleading or late papers to the government, and make CEOs and members of corporate boards more accountable for their companies' actions. The speech will be the president's most extensive remarks yet on the business scandals that have devastated investor confidence. In recent weeks he has attempted to project an image of concern and disapproval, but he's had little in the way of specific prescriptions.

Bush can't afford to wait much longer. As Congress returns from the July 4 recess and the election season approaches, the Democrats think they have found a powerful issue with anxious voters: the Bush crowd's ties to a fudge-the-numbers corporate culture that could drag the country into a double-dip recession. The stock market dipped below 9000 points last Wednesday, but rebounded at the end of the week.

White House strategists deny that Bush is vulnerable on what they call the "corporate-responsibility issue." As an M.B.A. and businessman himself, they say, Bush's words will resonate with corporate chiefs. But the speech has all the earmarks of a full-scale offensive, with outgoing counselor Karen Hughes supervising the project even as she packed for Texas.

Even so, there's plenty of concern at the White House that the whole thing might backfire, serving only to highlight the Bush team's own embarrassing corporate blemishes. "There's been a lot of nervous talk about this," says one GOP strategist. The Democrats are only too happy to remind voters that both Bush and Vice President Dick Cheney have themselves come under scrutiny for business practices at companies where they worked, as has Army Secretary Thomas White, who made millions as an Enron official. O'Neill has also taken heat, after he delayed selling his steadily rising Alcoa shares despite promises that he would divest.

For months Cheney has stayed silent about a preliminary investigation into questionable accounting practices at Halliburton, the oil-services firm he headed before resigning to run with Bush. The Securities and Exchange Commission probe began after The New York Times reported in May that during Cheney's tenure, the company allegedly adopted aggressive accounting practices, counting deals for long-term construction projects as revenue even before the contracts had been settled. The maneuvers were approved by the company's auditor--Arthur Andersen. Halliburton officials have tried to depict the bookkeeping change as routine, and said it never reached Cheney's desk. Cheney himself has not been contacted by the SEC. His spokeswoman says the company "is not something we've ever commented on from day one."

The White House was especially irritated last week when Democratic operatives began circulating old allegations about Bush's tenure on the board of directors of Harken Energy Co. In the early '90s Bush was investigated by the Securities and Exchange Commission after selling $850,000 in stock--which he later used to help purchase a stake in the Texas Rangers--shortly before the company announced a $23 million loss. According to a March 1992 internal memo, the SEC declined to bring charges against Bush after concluding he didn't have access to "material" insider information that affected the company's stock price. (Harken's stock dropped after the loss was announced, but rebounded the next day.) Last week White House aides were also trying to explain why it took Bush so long to report the transaction to the government. Another internal SEC memo that first surfaced during the 2000 presidential campaign asserted that Bush waited 34 weeks to file a required form notifying the SEC that he'd sold the stock. Bush aides explained that it was the fault of Harken lawyers. (When he was first asked about the matter back in '91, Bush blamed the SEC for misplacing the papers.) In fact, an April 1991 memo tags Bush as habitually delinquent, saying he failed to submit papers on time in three other stock transactions.

SEC documents also show that during Bush's tenure on Harken's board, the company came under scrutiny for another questionable deal. In 1989, Harken sold 80 percent of a subsidiary, Aloha Petroleum, to a partnership of Harken insiders for $12 million. The company claimed an $8 million profit on the deal, and used the gain to offset company losses. But in fact, the company itself financed the sale, lending the money for the transaction to the partnership--an arrangement critics are now likening to Enron's off-the-books deals. When the SEC aggressively questioned the deal, the company agreed to restate its earnings and wipe the $8 million profit off its books. White House Press Secretary Ari Fleischer downplayed the transaction last week as a dispute over "accounting procedures," and said it bore no resemblance to Enron's corporate malfeasance. Yet Bush's seat on the Harken board puts him in an awkward position to now demand accountability from others.

That's a point Democratic leaders will relentlessly try to drive home in the weeks and months ahead. "The point is, Bush and Cheney want everyone to behave with utmost rectitude," says DNC spokeswoman Jennifer Palmieri. "The question is, how did they behave?"

Senate Democrats are ready with a bill calling for a new regulatory agency independent of the SEC--a proposal far more sweeping than Bush's. Look for leading Democrats--and John McCain--to call for the resignation of SEC chairman Harvey Pitt. A longtime lawyer for accounting firms, Pitt is too compromised to be credible, they will argue. The response: "The president thinks Pitt is doing a great job," says a White House spokeswoman. Pitt has said that he was a lawyer, not a lobbyist, for the accounting industry.

The Democrats know "corporate responsibility" won't give them much political traction if it is narrowly defined as getting more cops to walk the Wall Street beat. So they want to widen the lens, in part by arguing that the Bush team lacks the hands-on experience needed to drive the economy.

It's a fairly extraordinary act of political chutzpah: the Democrats attempting to argue that they are really the party of business and that Republicans are merely stewards of corporate scandal. It's up to Bush to make sure the image doesn't stick.