Everyone is Outraged - Krugman

New York Times Op Ed ^ | 7/2/02 | Paul Krugman

[gridlock]

Everyone Is Outraged

By PAUL KRUGMAN

Arthur Levitt, Bill Clinton's choice to head the Securities and Exchange Commission, crusaded for better policing of corporate accounting — though he was often stymied by the power of lobbyists. George W. Bush replaced him with Harvey Pitt, who promised a "kinder and gentler" S.E.C. Even after Enron, the Bush administration steadfastly opposed any significant accounting reforms. For example, it rejected calls from the likes of Warren Buffett to require deduction of the cost of executive stock options from reported profits.

But Mr. Bush and Mr. Pitt say they are outraged about WorldCom.

Representative Michael Oxley, the Republican chairman of the House Financial Services Committee, played a key role in passing a 1995 law (over Mr. Clinton's veto) that, by blocking investor lawsuits, may have opened the door for a wave of corporate crime. More recently, when Merrill Lynch admitted having pushed stocks that its analysts privately considered worthless, Mr. Oxley was furious — not because the company had misled investors, but because it had agreed to pay a fine, possibly setting a precedent. But he also says he is outraged about WorldCom.

Might this sudden outbreak of moral clarity have something to do with polls showing mounting public dismay over crooked corporations?

Still, even a poll-induced epiphany is welcome. But it probably isn't genuine. As the Web site dailyenron.com put it, last week "the foxes assured Americans that they are hot on the trail of those missing chickens."

The president's supposed anger was particularly hard to take seriously. As Chuck Lewis of the nonpartisan Center for Public Integrity delicately put it, Mr. Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive." Mr. Lewis was referring to the saga of Harken Energy, which now truly deserves a public airing.

My last column, describing techniques of corporate fraud, omitted one method also favored by Enron: the fictitious asset sale. Returning to the ice-cream store, what you do is sell your old delivery van to XYZ Corporation for an outlandish price, and claim the capital gain as a profit. But the transaction is a sham: XYZ Corporation is actually you under another name. Before investors figure this out, however, you can sell a lot of stock at artificially high prices.

Now to the story of Harken Energy, as reported in The Wall Street Journal on March 4. In 1989 Mr. Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Mr. Bush was C.E.O. Explaining what it was buying, Harken's founder said, "His name was George Bush."

Unfortunately, Harken was also losing money hand over fist. But in 1989 the company managed to hide most of those losses with the profits it reported from selling a subsidiary, Aloha Petroleum, at a high price. Who bought Aloha? A group of Harken insiders, who got most of the money for the purchase by borrowing from Harken itself. Eventually the Securities and Exchange Commission ruled that this was a phony transaction, and forced the company to restate its 1989 earnings.

But long before that ruling — though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble — Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.

Given this history — and an equally interesting history involving Dick Cheney's tenure as C.E.O. of Halliburton — you could say that this administration is uniquely well qualified to chase after corporate evildoers. After all, Mr. Bush and Mr. Cheney have firsthand experience of the subject.

And if some cynic should suggest that Mr. Bush's new anger over corporate fraud is less than sincere, I know how his spokesmen will react. They'll be outraged.

[gridlock]

Mrs. Gridlock felt that this was an important article that deserved posting.

[jwalsh07]

Paul Krugman was a good economist, now he's a crappy leftist shill.

Oh well.

[olliemb]

I don't know the reason why Mrs. G thought this was important or what her views are. Unfortunately, the author forgets to mention that Lieberman lobbied against Leavitt's attempt to separate the accounting from the auditors.Mr. Krugman also fails to mention that the accounting problems began during Clinton's tenure. Unfortunately, Mr. Krugman wrote another article against Bush and stocks he sold in 1989. Sounds like Krugman has an agenda against the present prez and not the prior prez. You should have labelled it barf alert.

[bloggerjohn]

But the Harken stuff is fact-based - I checked - although I feel the slant should have been why are they then pillorying Martha Stewart for similar stuff? She's created a lot of value and is too, well, Perfect so I see envyitis there.

[spyone]

Good info. Thanks.

[concerned about politics]

I'd like to see an audit of the federal government. That would be news.

Worldcom did the feds a favor, unlike Enron. They claimed a bigger profit than they had, which means they paid more taxes than they should have.
Should they ask for a correction in the books and a refund? It could be worth millions!
Watch the politicians bitch if Worldcom wants their tax overpayment back!

[Torie]

About a month ago, I emailed my somewhat more liberal than I finance friend that used to admire Krugman (as did I), to tweak him that the guy had gone bonkers, and he agreed. He thought that fame had gone to Krugman's head. More like it, is that he felt it unleashed him to spill his guts to the rest of us. It is not a pretty sight. He is probably a mean drunk, unlike I who became more loveable than ever as I recall. :)

[Enduring Freedom]

Hillary in my opinion resembles in appearance and aroma a big fat sow.

Bill Clinton in my opinion is a cheese eater.

And Liberals in my opinion are the scum of this earth.

What in God's name leads to the universal stench of Liberal bias in the media?

Are they funded by enemies of America?

[Nick Danger]

Mr. Krugman's slander of Mr. Bush would have more heft had he not gone out of his way to lie to us concerning the SEC under Clinton. His doing so makes this a partisan hit piece, and a dishonest one at that. While dishonesty in the service of liberal politics is a frequent component of New York Times editorials, it does not serve Mr. Krugman's own interests to be a part of that.

A large part of the Enron scandal revolves around partnerships that were nominally against the law. However, Enron had sought and received special dispensation from the SEC to engage in such transactions. They did this after being rebuffed by the Republican Congress. That SEC ruling occurred under Mr. Levitt's tenure. Mr. Krugman not only fails to mentions that, he gratuitously draws a red herring across the trail by praising the man as an accounting reformer.

Well, at least one of Levitt's "reforms" has now caused quite a stir. It's a shame that Mr. Krugman is dishonest enough now to try to smear Bush with what Levitt in fact did.

it rejected calls from the likes of Warren Buffett to require deduction of the cost of executive stock options from reported profits.

I have nothing but respect for Warren Buffet, but proposals like that are always going to be controversial because they introduce yet another kind of fudge into accounting statements. Krugman passes this off as if companies know what those stock options cost and are just hiding it because they are crooks.

The accounting problem is that the future hasn't happened yet, and so no one knows what those options are going to cost the company. Financial statements are already full of these kinds of guesses, and I suppose we could claim that adding another one is not that big a deal, but I think it's dishonest to insinuate that anyone opposed to this is hiding something. Such people may just prefer to keep financial statements based on known fact, not speculation as to what a stock option might be worth five or ten years down the road.

In both these cases, Krugman had a choice, and he chose to be dishonest with his readers for the purpose of creating a more vicious hit piece. An economist? No, he's just another one of the New YorkTimes' paid assassins. And a liar, to boot.

[gridlock]

Working from the assumption that Krugman is working hard to make GWB look as dirty as possible, there are a few glaring ommissions from his detailing of the "smoking gun" transaction.

But long before that ruling — though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble — Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.

A few questions Krugman chooses not to answer:

- How many weeks before the stock drop did GWB sell? Did he have access to information that the stock was about to drop at the time? If not, why not share this information?
- How far did the stock actually drop? Did it recover? How much money was lost?
- How big was GWB's profit (or loss) from this transaction?
- What is the "prompt disclosure" period required by the SEC? Was it two weeks or 32 weeks? Krugman doesn't say.
- What is the reason given for no prosecution in the SEC internal memorandum? Krugman posits his reason, but doesn't waste the ink telling us what actually happened.

Oh, and BTW, Paul, back in GHWB's administration, the New York Times used to capitalize "President". This lower case "president" thingie is the petty game that only applies to GWB.

[Donald Stone]

The president's supposed anger was particularly hard to take seriously. As Chuck Lewis of the nonpartisan Center for Public Integrity delicately put it, Mr. Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive." Mr. Lewis was referring to the saga of Harken Energy, which now truly deserves a public airing.

[Nick Danger]

the nonpartisan Center for Public Integrity

Heh. It's a collection of East Coast journalists, professors, and trial lawyers. Like the "non-partisan" Brookings Institution, it's where Democrats go to eat during Republican administrations.

[Dog Gone]

The fact is that this has been publicly aired many times. The Democrats tried to use it to defeat Bush when he was running to unseat Governor Ann Richards of Texas. Whole books have been written on it.

If you selectively report the facts, omitting many relevant and important details, you can certainly create the impression that Bush was manipulating the books and doing insider trading. That is their goal.

The fact that it's not true, and they know it's not true, is disgusting. But it's an orchestrated campaign at this time to paint Bush as somehow part of the problem with Wall Street today, and the willing American press is more than happy to follow the lead of the New York Times and treat this Harken story as news.

[Askel5]

The president's supposed anger was particularly hard to take seriously.

Sorta the way I felt as the Pro-Lifer quoted Scripture from his Favorite Philosopher as he made best use of the Excess, already-been-killed embryos in some Clintonesque compromise forced by Science & Tech heavyweights Superman, Mary Tyler Moore and back to the future Boy.

[Askel5]

Might this sudden outbreak of moral clarity

<cough>

[Donald Stone]

LOL !!!!!!!!!

[Pitchfork]

Its mazing how much the defense of Bush on this issues echoes the Dems defense of the Clintons.

1) Remember the old "they lost money" dodge? Apparently, it's only coruption or a crime if you profit regardless of whether your a Dem or a Rep. Its laugable to read a critique of Krugman asking whether Bush profited from the sale--the same kind of defense used so often for Bill and Hillary!

2) "These activities were raised as during his sucessful Gubernatorial campaign". Apparently if your dirty laundry has been aired once in a state-wide election it's 'old news' that can't ever be used against you again regardless of how much current events make it relevant. We heard this kind of defense endlessly over both Whitewater and Clinton's affairs. "We knew all this when he was re-elected in 92" they chimed.

3) Ad-hominem attacks. Krugman is a squishy liberal and therefore we can reject everything he says as a lie. This type of attack was regularly repeated by the "right wing conspiracy" pundits on the left during Clinton's impeachment and the SP investigations.

What does this tell you? Simply this: Human beings are facinating psychological specimens who will go to extrodinary lengths to avoid having to re-assess their beliefs. "I like Bush, he's a good guy who agrees with me" so I'll stick my head in the sand or make up lame counter-arguments to hide from myself from the fact that he's not a straight-arrow. It's amazing what partisanship can do!

[TLBSHOW]

is the miss a liberal?

[Dog Gone]

Get a clue. If you want to discuss the specific allegations, have at it. They have been thoroughly aired before, investigated, and there is nothing to them.

The fact that Krugman raised them again, spun them in a way to make look Bush responsible for the wrongdoing in some corporations today, and interjected these tired allegations into the news cycle was a cheap attack by him.

You bet your ass we're going to berate him for it.

[Pitchfork]

Sure, "investigated" as is noted in the article by the SEC while Dad was President. I'm sure it was completely thorough! And if you believe that I've got a bridge in Brooklyn for you. I bet it was significantly less rigourous than the going over Clinton got from a partisan special prosecutor!

What makes me laugh it how much Republicans love to point at how Bush went to Yale, "made it in business" and got an MBA from Harvard when it is constantly being made clear that it was all handed to him because he had the same name as the President. A legacy admission to Yale (meaning his way was paved with gifts to the University), he fails in oil but gets a big buyout, is invited to get in on the Texas Rangers for a few hundred grand (which made him millions) etc. Its been a tough road for George Jr., but that's obviously built up a lot of character!