Enron Democrats

If left-labor-liberal progressives had the cohesion and muscle of their right-wing opposites, they would be articulating a simple-to-understand litmus test for the Democratic Party--no "Enron Democrats" on the presidential ticket in 2004. That precondition would eliminate a number of presidential wannabes now mentioned by the Washington media's Great Mentioner. Scratch Senator Joe Lieberman. Forget the happy talk about Senate majority leader Tom Daschle's running for the White House. And Senator Joe Biden can stop daydreaming. These men--and perhaps some other would-be candidates--do not pass the Enron smell test.

It is not that Enron Democrats got a lot of money themselves from the now-ruined energy company, but they are implicated in more significant ways. On various matters, they helped set the stage for the scandalous behavior of Enron and other highfliers now in disgrace. They defended the degraded accounting standards that hoodwinked investors. Or they promoted financial gimmicks and deregulatory measures that opened the way for grand malpractice. Or they formed thick alliances with the very banks, auditing firms and corporations that are now running for cover--sued, investigated or defrocked as New Economy marvels.

Enron Democrats are compromised by their own past behavior, which explains why the Democratic Party's reaction to this spectacle is so muted. Much as in the S&L scandals of the late 1980s, an unspoken truce may emerge between the two parties--don't throw mud at me or I'll throw some back--since so many leading Democrats are implicated along with the Republicans. The hallmark of "Enron issues" is the ease with which Democrats desert the interests of their party's core constituencies to serve the political needs of business and banking. Some doubtless do so as a matter of conviction; some doubtless are convinced by the money.

Apostasy is a safe vote for Democrats, at least on financial issues that are obscure and complicated. Rank-and-file voters cannot connect the dots in order to recognize the betrayal; Republicans cannot attack them for their pro-banker votes. And labor-liberal groups--the valiant people who actively oppose these business-banking "reforms" in the legislative arena--will not attack either. This is because the Democrats always offer a billboard agenda at election time--a few important "people issues" like healthcare, Social Security, the environment--to draw a sharp contrast with the wicked Republicans. Other complaints are silenced, especially less familiar ones. Disappointed activists, from organized labor to consumer, civil rights and women's groups, swallow their anger and fall into line. Unlike the right, progressives feel too weak or scattered to propose their own litmus test, much less enforce it.

Enron Democrats understand this. They are masters at stroking their discontented constituencies while voting against them on bedrock economic issues. The Enron storm, among other revelations, illustrates the inconstancy of the Democratic Party or, as some say more simply, its loss of soul.

Citibank Democrats

Labor and consumer lobbyists felt a chill in early March when Senate majority leader Tom Daschle announced his intention to get "a strong bankruptcy bill out of conference and on the President's desk within four weeks, so the bill can be signed before we go home for the Easter recess." Bankruptcy "reform" is of a different order from Enron fraud or loophole bookkeeping by Arthur Andersen, but it emanates from the same political sources and is, likewise, hideously one-sided in its impact on ordinary citizens. The legislation was written by major banks and the credit-card industry, wishing to tighten the screws on debt-soaked families. No one doubts this measure will make life even more miserable for the people maxed out on their credit cards and on the brink of Chapter 7. Daschle's statement meant the Democratic leader thinks it is now safe to enact the bankers' bill. Last year, a record 1,492,000 Americans filed for bankruptcy protection, but now the recession is over, isn't it?

"It really is pretty much a creditors' wish list," explained Henry Sommer, vice president of the National Association of Consumer Bankruptcy Lawyers. "Some people won't be able to file at all [under various new restrictions], and everyone will have to pay hundreds of dollars more in fees, which knocks a lot of them out of filing. Many who by filing now could save their homes from foreclosure or their cars from repossession won't be able to do so under this bill. And many will come out of bankruptcy owing as much as they owe now. Congress gave a lot to the credit-card companies, but this is really an equal-opportunity bill; they also gave a lot to the car lenders, the mortgage lenders, the residential landlords, the finance companies, even credit unions."

In Congressional circles, a bill like this one is known as a "money vote," because it's an opportunity for good fundraising from monied interests (or, if you vote wrong, you face the risk of those interests financing your next opponent). For six years, the financial industry has lobbied intensively for this measure and both parties have milked it like a veritable cash cow. Contributions from finance companies and credit-card firms more than doubled during the last election cycle, passing $9 million. Commercial banks are the dominant credit-card issuers--led by Citibank, with $99.5 billion in credit-card debt--and this remains their most profitable line of business. Commercial banking as a whole increased political spending in the last election by nearly 60 percent, to $26.1 million, though the bankers' money speaks on many issues beyond tapped-out borrowers.

When George W. Bush took office, a bankruptcy bill was the first major legislation passed by the new Congress. Bill Clinton had vetoed a milder version, but in the new circumstances many former opponents scrambled aboard. Only sixteen Democratic senators voted against the bill, led by Paul Wellstone (the measure would have become law long ago, if not for Wellstone's guerrilla resistance). The "yea" votes included a couple of new faces much celebrated as "people" politicians and presidential possibles--Hillary Clinton and John Edwards. Two other potential candidates--Russ Feingold and John Kerry--voted against it.

In the House, only 107 Democrats voted against the measure, barely half their caucus. Minority leader Richard Gephardt, another presidential aspirant, ducked by not voting. While Senator Ted Kennedy voted with the debtors, his son in the House, Representative Patrick Kennedy, voted with the bankers. Patrick counts himself in the Progressive Caucus, but he also chaired the House Democrats' fundraising operation. Cave-in Democrats often hide behind this logic: If the bill is going to pass anyway, why piss off the bankers by voting against it?

Senator Daschle's solicitude for Citibank goes deeper than the money, though he gets money, too. Daschle treats the Wall Street behemoth like a hometown industry. Two decades ago, Citibank lobbyists persuaded South Dakota politicians to be the first state to repeal its anti-usury law--an obstacle to charging sky-high interest rates. The state was rewarded by the relocation of Citibank's credit-card processing operations, now a major employer there. That lends political cover, but Daschle's loyalty also relies on personal connections. Former Treasury Secretary Robert Rubin, now senior executive at Citigroup, the parent conglomerate, is the Senate leader's personal guru on big-think economics. Did we mention that Citigroup was one of Enron's lead bankers and on the griddle itself? Or that, in his day job, Rubin beseeched a top-level Treasury official to intervene to save Enron? The bank's active concern for its biggest debtors in trouble does not extend to its little ones.

In legislative matters like bankruptcy, Daschle plays faithful facilitator for Citibank's interests, while graciously assuring liberal-labor groups he will help them get a floor vote on their amendments (which routinely lose). It is Senator Joe Biden of Delaware, however, who plays tough-cop enforcer for the industry (a role also shared by Senator Robert Torricelli). Delaware is home to six major credit-card operations, led by MBNA America, Chase and Bank of America. Altogether, they process indebtedness of $230 billion. Biden is their guy.

The industry's main argument for relief is that its reckless customers pile up impossible debts, then escape by gaming the bankruptcy system. No doubt this occurs, but the bank lobbyists grossly distort the stressed-out predicament of millions of ordinary working families, some of whom borrow on credit cards to pay the rent. Did the banks themselves have anything to do with fomenting the explosion of credit-card debt? Evidently not, according to Congress, because numerous amendments to impose some restraint and accountability on the lenders were rejected. In a classic twist, Democratic senators instead tossed a couple of bones to the discontented constituencies--one amendment that prevents Texas millionaires from shielding their Enron-size mansions under state homestead laws and another that bars abortion-clinic terrorists from escaping fines and lawsuits in bankruptcy court. Both are meritorious, of course, but neither speaks to the general pain this legislation will inflict on rank-and-file constituents.

It is not too late to pound on Senator Daschle. If the conference committee resolves remaining obstacles--the two amendments offered as solace to liberals--Daschle alone has the power to stop the measure by withholding it from a final floor vote. Don't hold your breath.

Lieberman's Slippery Slope

Senator Joe Lieberman, as chairman of the Governmental Affairs Committee, presides over hearings into what-went-wrong with the air of sorrowful piety that is his specialty. "Gatekeepers weren't keeping the gate, watchdogs weren't watching," he lamented. He neglects to mention that he is one of the faulty watchdogs and also a leading gatekeeper who blocked the timely reform of corporate finance. The Senator has a hypocrisy problem. He frequently sermonizes on the moral failings of others, including other public figures. Meanwhile, he has shilled vigorously, sometimes venomously, for the very players who are new icons of corruption--major auditing firms, corporate executives who cashed stock options early while investors took a bath and, especially, those self-inflating high-tech companies in Silicon Valley that drove the stock-market bubble. As a New Democrat, Lieberman held the door for their escapades.

His most important crusade was protecting the loopy accounting for corporate stock options. Nervous regulators recognized early on that the profusion of stock options had the potential to deceive investors while cheating the tax system--illusions that could drive company stock prices to impossible heights. Tech startup firms, as well as established names like Microsoft, were issuing a growing volume of stock options as a substitute for wage compensation, especially for top executives. These companies did not have to report the billions in new options as an operating cost, thus making their earnings seem much greater than they were. Yet when employees eventually cashed in the options, the companies claimed them as tax deductions. This two-way mirror is symptomatic of the deceptive bookkeeping that permeated corporate affairs during the boom and the bubble.

Back in 1993, when the Financial Accounting Standards Board proposed to stop it, Lieberman went to war. "I believe that the global pre-eminence of America's vital technological industries could be damaged by the proposal," he warned. The FASB, he insinuated, was politically motivated or simply didn't grasp the bright promise of the New Economy. Lieberman organized a series of letters warning the accountants' board to stop its meddling. In the Senate, he mobilized a resolution urging the Securities and Exchange Commission to squelch the reform. It passed 88 to 9. The regulators backed off--and stock prices soared on the inflated earnings reports. Whenever FASB tried to reopen the issue, Lieberman jumped them again. He was well rewarded by Silicon Valley and auditing firms. He is the New Democrats' favorite candidate for 2004.

Lieberman's victory was extraordinarily costly for the economy, not to mention duped investors, unhinging valuations and fostering the overinvestments that now hang over the tech industry. Accounting professor Itzhak Sharav of the Columbia University Business School describes Lieberman's intervention as the first step on "the slippery slope that got us mired in the Enron swamp." Once auditors and corporate managers saw regulators defanged on stock options, Sharav explained, they were emboldened to explore further in the realm of gimmicky profit reports. "How much is two plus two? How much do you want it to be?" Sharav said. "Once you start playing games with the numbers, there's no limit to what you might do." Senators Carl Levin and John McCain have proposed a nifty solution--companies can no longer have it both ways. If they don't account for their stock options as a cost in earnings reports, then they cannot claim them later as tax deductions. Lieberman is opposed--still on the slippery slope.

During the 2000 election, other New Dems organized a direct assault on SEC chairman Arthur Levitt, who was challenging the big five auditing firms on their conflicted interests--consulting with companies on business strategy, then auditing the books with supposed independence. Dozens of politicians piled on Democrats Torricelli, Schumer and Bayh in the Senate; and Jim Moran, Cal Dooley, Ellen Tauscher and other New Dem regulars in the House. The New Democrat Network harvested more than $1 million that year for deserving politicians. Some have now recanted. "We were wrong, you were right," Torricelli told Levitt, though he neglected to mention the money. The luster of Silicon Valley fundraising has not been dimmed by the scandals and bankruptcies. The "economic stimulus" bill passed in March was described as a Democratic victory because it includes a minor dollop for the unemployed. But most of the $43 billion went to business--including a gorgeous tax bonus sought by the needy entrepreneurs of Silicon Valley.

Tort Reform for Wall Street

Senator Chris Dodd harvested nearly half a million dollars from the accounting industry alone, and he earned it. Dodd led the charge for the Public Securities Litigation Reform Act of 1995 (PSLRA), an item in Newt Gingrich's "Contract With America" that was supposed to liberate the New Economy from frivolous investor lawsuits. SEC chairman Levitt lent his prestigious endorsement, but later recanted as the legislation became laden with elaborate legal protections for auditors, corporate executives, financiers and insurance companies. The idea was to make it much more difficult for misled investors to recover losses, but the principal target was a single West Coast law firm, Milberg Weiss Bershad Hynes & Lerach, and its lead partner, William Lerach, who were bombarding high-tech firms and their investment bankers and accountants with multimillion-dollar lawsuits. The firm was accused of recruiting dummy shareholders as "plaintiffs," while creaming the settlements for itself, so various provisions in Dodd's bill were designed to punish it. Lerach called it "the Corporate License to Steal Act."

On one level, the legislation was quite ineffective. Investor lawsuits declined for a year or two, but have since exploded. That is because corporate fraud exploded too. The corporate settlements run into the hundreds of millions, even reaching low billions. On another level, the PSLRA produced perverse unintended consequences--actually stimulating the fraudulent behavior. Corporate auditors and executives were evidently convinced the new law insulated them from legal liability. "The PSLRA encouraged securities fraud because it made it much more difficult for defrauded investors to hold the perpetrators responsible," Lerach wrote. Objective observers agree. Richard Walker of the SEC: "The current increase in financial fraud...is partially attributable to court rulings limiting corporate liability for financial fraud and the [PSLRA]." Harvey Goldschmid, former SEC general counsel: "Now that many of the more grandiose projections of the 1990s have fizzled, some people are wondering whether Congress gave Silicon Valley a little too much protection."

Meanwhile, Milberg Weiss is booming, despite the snares set for it by Congress, and handles 70 percent of the investor-fraud cases, according to Lerach. Indeed, Congress may have inadvertently helped the firm attract a better class of plaintiffs. The PSLRA empowers a "lead plaintiff" with substantial holdings to take control of the case instead of entrepreneurial lawyers. Lerach is now suing Enron, and the lead plaintiff is the University of California Regents, with a $55 billion investment portfolio (and $144 million in Enron losses). The real losers in this scandal, aside from mom-and-pop investors, are the mammoth pension funds holding the savings of working Americans.

While the PSLRA was enacted over Clinton's veto, don't get the impression that the former President was standing with the folks on most of these issues. Clinton pushed through the repeal of the Glass-Steagall Act, enabling Citigroup, J.P. Morgan Chase and others to form the mega-conglomerates that financed Enron and other disasters. Clinton's leadership also insured that financial derivatives remain an unregulated time bomb at the center of the banking system.

In 1998, when Long Term Capital Management collapsed from its out-of-control derivatives speculation, three or four of the largest banks and brokerages were threatened. Brooksley Born, chair of the Commodity Futures Trading Commission, announced plans to tighten derivatives regulation as a safeguard against a larger crisis. That's not what Wall Street banks or the Chicago commodities exchange had in mind, and they swiftly buried their historic differences. Born was stomped, quite publicly, by Treasury Secretary Rubin, Fed chairman Alan Greenspan and SEC chairman Levitt. She resigned. Congress enacted the Commodity Futures Modernization Act of 2000, which, as you might expect, went in the opposite direction. Enron and other derivatives players were relieved of genuine accountability, freed to work their money-making magic in obscure financial transactions that are a danger still ticking.

The McAuliffe Problem

Many Democrats are inhibited as reformers by one other factor--Democratic national chairman Terry McAuliffe. He is their main money guy, an ebullient and fabulously successful fundraiser who's close to both Clintons, Gephardt and Daschle and other potential candidates, AFL-CIO leaders and hundreds of fat-cat contributors. McAuliffe is also thick with Gary Winnick, chairman of Global Crossing, the failed telecom company that is now in the cross-hairs of SEC and Congressional investigations. Winnick cut his pal in at the takeoff and McAuliffe reaped up to $18 million on an investment of $100,000. McAuliffe's good fortune was shared by other early investors like the AFL-CIO-affiliated Union Labor Life Insurance Company, which also made spectacular gains from Global Crossing and, according to BusinessWeek, cut in some union officials. Were other deserving Dems befriended in this way? McAuliffe categorically denies ever having suggested to anyone that they invest in the company.

His problem is, Global Crossing looks a lot like Enron: The insiders sold early; the employees, ordinary investors and pension funds got trashed big-time. Global Crossing is the fourth-largest bankruptcy in US history but lacks the sophisticated artistry of Enron's complex financial deceptions. That distinction doesn't help Democrats much. "People are reluctant to make the arguments that need to be made for the Democratic agenda," one of them said. "They don't want to hurt Terry."

McAuliffe may be more meaningful as symbol of the money culture that engulfs the Democratic Party rather than as suspect financier. In a 1999 interview with the New York Times, he freely discussed the many collateral business deals he entered into with big-time party contributors--real estate projects, credit-card franchises, even tangled transactions with wealthy Republicans. "You help me, I'll help you. That's politics," McAuliffe explained.

Yes, that is politics, but the ancient maxim of personal loyalty seems to have been relocated now--more relevant to private fortunes than public interest. Anne Bingaman, former antitrust chief in Clinton's Justice Department and wife of the New Mexico senator Jeff Bingaman, went to work for Global Crossing to lobby the Federal Communications Commission. She reportedly earned an astonishing $2.5 million in less than a year. Tom Daschle's wife, Linda, who lobbies for airlines and aircraft manufacturers, helped design the $16 billion bailout rushed through for the airlines after 9/11--the legislation in which majority leader Daschle stiffed labor's plea for aid to laid-off workers. Ruth Harkin, wife of Iowa Senator Tom Harkin, heads the Washington office of United Technologies and sits on the board of the National Association of Manufacturers. None of this suggests anything untoward or even unusual. The point is merely to illustrate that in the rarefied social milieu of high-powered Washington, most Democratic senators live a long, long way from the rank-and-file Democrats who put them in office.

The active liberal-labor organizations in Washington are naturally hesitant to make a stink about this disconnect. Embattled and outnumbered, they worry about losing Democrats for their top-priority issues, let alone challenging them on every business-banking vote. However, if these activists could jointly develop a mechanism for calling wayward Democrats to account--that is, threatening convincing reprisals at the next election--things might change. They would not necessarily defeat incumbents, but if they knocked 5 or 10 percent off a senator's or representative's vote count, it would produce a true religious experience for the apostates. If they don't, the party is likely to continue down Joe Lieberman's slippery slope.

Senate majority leader Tom Daschle announced his intention to get "a strong bankruptcy bill out of conference and on the President's desk within four weeks, so the bill can be signed before we go home for the Easter recess." Bankruptcy "reform" is of a different order from Enron fraud or loophole bookkeeping by Arthur Andersen, but it emanates from the same political sources and is, likewise, hideously one-sided in its impact on ordinary citizens. The legislation was written by major banks and the credit-card industry, wishing to tighten the screws on debt-soaked families. No one doubts this measure will make life even more miserable for the people maxed out on their credit cards and on the brink of Chapter 7. Daschle's statement meant the Democratic leader thinks it is now safe to enact the bankers' bill. Last year, a record 1,492,000 Americans filed for bankruptcy protection, but now the recession is over, isn't it?

For whom Tom Daschle and other Enron Democrats work? For the "the rank-and-file Democrats who put them in office" or for the "major banks and the credit-card industry"?

Banks and corporations = bad

Trial lawyers and easy bankruptcy = good

Sometimes banks and corporations can be bad and trial lawyers and "easy" bankruptcy can be good.

The "savings" from this new legislation will be negligible. A few quotes from April 6, 1999, ABI study
( ABI - American Bankruptcy Institute )

[...]
PART III--PROJECTED NET GAIN AND THE IMPOSSIBLE DREAMS.

How much more might unsecured creditors collect under means-testing? VISA estimated that number at "over $4 billion,"(94) then qualified that estimate by stating "[t]his assumes that income remained unchanged relative to expenses and liabilities during the 60 month repayment period."

In 1997, some 926,000 nonbusiness Chapter 7 cases were filed. If we assume that our sample holds for the nation as a whole and that 3.55% or 32,873 were can-pays, each with nonpriority unsecured debt of $35,303,(96) and that each could repay 75% or $26,477 of that unsecured debt. If all 32,873 debtors repaid $26,477 apiece, it would total about $870 million, nowhere close to VISA's estimate. However, even that $870 million is based on at least four unrealistic assumptions:

First, that well-counseled debtors will not evade can-pay status by increasing debt or charitable contributions;

Second, that the debtors' incomes, expenses and debts will remain relatively unchanged for five years;

Third, that 100% of the can-pays will file and complete five-year Chapter 13 plans; and

Fourth, that unsecured creditors will bear no part of the cost to sort all Chapter 7 cases for means-testing and to monitor the 30,000 + can-pays over five years in Chapter 13.

Fifth, that unsecured creditors collect nothing from Chapter 7 debtors at present.

None of these assumptions is well-founded. The first four are impossible dreams and the last is simply untrue. Let's start with the first, the assumption that well-counseled debtors will not choose to avoid can-pay status by increasing debt or charitable contributions prior to filing. As discussed above, the Tithing Bill allows debtors to divert up to 15% of annual gross income into H.R. 3150's extraordinary expense category. We also pointed out the incentives to increase secured debt, especially by buying a car, prior to filing. Many debtors with above-median income could and some would use these routes to escape five years of payments in Chapter 13. If we conservatively assume that only one-quarter of the can-pays would do so, that reduces the can-pay pool to 25,000 debtors and reduces net gain to about $700 million.

Now let's consider the likelihood that for five years, the incomes, expenses and debts of the can-pay debtors will remain relatively stable. Truly, this is an impossible dream. Over five years, of course, some will die. The rest will get five years older and many will be deeper in debt. Like other human beings, the can-pays will suffer disease, divorce, disability and downsizing that for some will substantially reduce income and increase expenses. Even delightful events like new babies entail years of additional expenses and, eventually, student loans. None of these events is stopped by the automatic stay. As the GAO remarked with reference to VISA's studies, there is "no empirical basis for assuming five years of stable income and expenses."(97)

Another impossible dream is that the can-pays would file and complete a five-year Chapter 13 plan. It is common knowledge that current voluntary Chapter 13 plans have only a 30% completion rate, and many of these were just three-year plans to begin with.(98) To be sure, the can-pays would be a select group, with above-average ability to repay at the outset, so one could expect a better completion rate, perhaps as high as 50%. But for all the reasons set forth above, plus sheer bad luck and for some, bad habits, many will not finish their plans.(99)

If only half of these 25,000 plans fail, after making payments for an average of two and one-half years, that would reduce net gain to about $525 million.

The fourth impossible dream is that it will cost unsecured creditors nothing to sort a million Chapter 7 cases a year into can- and can't-pays. Perhaps all these costs can be shifted to taxpayers, but there will be real costs, as the CBO has shown,(100) and unsecured creditors are taxpayers too. But let's be conservative here too. The CBO estimates that H.R. 3150's provisions as a whole would cost $214 million in the first five years, plus another $8-16 million a year for additional judges needed for means-testing.(101)

Assume that only $25 million of these costs are born by unsecured creditors either directly due to higher Chapter 13 administrative costs, or indirectly through increased taxes. That brings us down to $500 million.

Finally, the VISA studies also assume that unsecured creditors collect nothing from Chapter 7 debtors at present. This is false. Chapter 7 debtors frequently reaffirm debts scheduled as unsecured.(102)

They must also repay student loans and other nondischargeable unsecured debts. Let's assume that all such payments by 1997 Chapter 7 filers amount to $50 million. This $50 million is not new money dependent on means-testing; unsecured creditors already collect that much. So we subtract $50 million from our $500 million, giving us a projected net gain of $450 million .

In seeking that pot of gold from the can-pay minority, however, it is vital that we not bar the many can't-pays from a fresh start. Means-testing would be mean indeed if it hurt the many to capture the few.
[...]

Daschle's and Biden's home states are going to have long unemployment lines if the guys don't solve the banking problems soon.

Senator Daschle's solicitude for Citibank goes deeper than the money, though he gets money, too. Daschle treats the Wall Street behemoth like a hometown industry. Two decades ago, Citibank lobbyists persuaded South Dakota politicians to be the first state to repeal its anti-usury law--an obstacle to charging sky- high interest rates. The state [South Dakota] was rewarded by the relocation of Citibank's credit-card processing operations, now a major employer there.
In legislative matters like bankruptcy, Daschle plays faithful facilitator for Citibank's interests, while graciously assuring liberal-labor groups he will help them get a floor vote on their amendments (which routinely lose).It is Senator Joe Biden of Delaware, however, who plays tough-cop enforcer for the industry (a role also shared by Senator Robert Torricelli). Delaware is home to six major credit-card operations, led by MBNA America, Chase and Bank of America. Altogether, they process indebtedness of $230 billion. Biden is their guy.

I think I know why Biden has been acting so weirdly lately. He's afraid.

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