Rubin Foiled the Democrats' Best-Laid Plans
Bloomberg -
1/15/02
Caroline Baum
New York, Jan. 15 (Bloomberg) -- Enron appeared to be a dream come true for Democrats, a scandal that fell in their laps when they needed to damage a popular Republican president.
They wanted to make it their Whitewater. The close ties
between President George W. Bush and Enron Corp.'s CEO Kenneth Lay (Lay is the biggest individual contributor to Bush's presidential and Texas gubernatorial campaigns); the apparent conflict of interest, with Enron standing to benefit from government regulatory decisions; the destruction of documents by auditor Arthur Andersen; the calls from Enron executives to the Treasury and Commerce Departments as the energy-trading powerhouse was coming apart; the huge profits made by corporate insiders on the sale of their Enron shares compared with the catastrophic losses suffered by ordinary employees in their 401k accounts: Enron had it all.
Too bad for the Democrats one of their own got in the way.
Squeaky Clean Bob Rubin, the former Clinton Administration treasury secretary and Citigroup executive committee chairman, tried to use his standing in Washington to help his company on Wall Street.
Not in the same way Ken Lay did, mind you. Ken Lay did what any CEO would do: He acted in the best interests of his shareholders.
Questionable Ethics
Rubin did him one better. On Nov. 8, he called Treasury undersecretary for domestic finance Peter Fisher, an old bailout hand, having orchestrated Wall Street's rescue of Long-Term Capital Management in 1998, and asked him what he thought of the idea of calling the rating agencies to try and avert a downgrade.
At the time, Enron was rated ``Baa3,'' the lowest investment
grade rating, by Moody's Investors Service and was on review for a possible downgrade.
Rubin's call ``was a soft-sell,'' said Michele Davis, a Treasury spokesperson. ``He asked Fisher what he thought of the idea of Fisher placing a call to rating agencies to encourage them to work with Enron bankers to see if there was an alternative to an immediate downgrade.''
A downgrade to junk status would have scotched the proposed takeover of Enron by Dynegy, Inc. A junk rating would have made it almost impossible for Enron to act as a counter-arty on energy trades, the most lucrative part of its business.
A Lot to Lose
Citigroup, which was advising Enron on the takeover by Dynegy, stood to lose hefty fees if the deal fell through.
Moody's downgraded Enron on Nov. 28. The Dynegy merger collapsed that day. Enron declared bankruptcy on Dec. 2.
It's one thing for Ken Lay to make calls to the Treasury, to the Commerce Department, to the Federal Reserve, hoping to invoke the too-big-to-fail doctrine. It is incumbent on a CEO to act in the interest of his shareholders.
It's quite another thing for Rubin to use his government
contacts to attempt to compromise a private rating agency, whose function is to provide an independent evaluation of credit risk, to avoid a decision that would hurt his bank. Investors large and small make decisions based on a company's credit rating. If ratings can be manipulated, what purpose do they serve?
While Citicorp has refused to quantify its loan exposure to Enron, the bank was the largest arranger of syndicated loans to the company and is believed to have the largest exposure to Enron along with J.P. Morgan Chase. Citigroup will release fourth-quarter earnings on Thursday.
Separation of Powers
Yesterday, on ABC's ``This Week,'' Sam Donaldson asked Treasury Secretary Paul O'Neill about the Rubin phone call.
``I never would have made such a call,'' O'Neill said.
The secretary went on to explain that when he left Washington after his stint at the Office of Management and Budget in the 1970s, ``I made a deliberate decision that I was not going to trade on what I knew about the government and people that I knew in the government.''
Each phone call by Enron to the Bush administration for the purpose of providing information or asking, directly or indirectly, for help, was met with a firm ``no.'' There is no impropriety there unless the facts change.
Meanwhile, the Enron story has provided enough juicy material for a half-dozen Congressional hearings. The Democrats would love to use them to chip away at Bush's strong popularity ratings and deflect attention from his acknowledged success as a war president.
They have one of their own, Bob Rubin, to thank for ruining their fun. |
