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Bush Lied About Social SecurityNew York Times by Paul Krugman June 22, 2002
(6/21/02) It is difficult to get a man to understand something," wrote Upton Sinclair, "when his salary depends upon his not understanding it." To make sense of what passes for debate over Social Security reform, one must realize that advocates of privatization of replacing the current system, at least in part, with a system of personal accounts are determined not to understand basic arithmetic. Otherwise they would have to admit that such accounts would weaken, not strengthen, the system's finances.
Social Security as we know it is a system in which each generation's payroll taxes are mainly used to support the previous generation's retirement. If contributions from younger workers go into personal accounts instead, the problem should be obvious: who will pay benefits to today's retirees and older workers? It's just arithmetic: 2-1=1. So privatization creates a financial hole that must be filled by slashing benefits, providing large financial transfers from the rest of the government or both.
During the 2000 election campaign, George W. Bush was able to get away with the nonsensical claim that private accounts would not only yield high, low-risk returns, but save Social Security at the same time. For whatever reason, few reporters pointed out that he was claiming that 2-1=4. But when it came time to produce concrete plans, the arithmetic could no longer be avoided.
Sure enough, the plans laid out by Mr. Bush's Commission to Strengthen Social Security, though presented as confusingly as possible, involve both severe benefit cuts and huge "magic asterisks," infusions of trillions of dollars from an undisclosed location. The extent of the damage is documented in a new Center on Budget and Policy Priorities report by Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag of the Brookings Institution. (Mr. Diamond, who is one of the world's most eminent economists, and is arguably the world's leading expert on retirement systems, was my colleague when I taught at M.I.T.)
The Diamond-Orszag report is informative; even I was surprised by a couple of revelations. For example, the mystery money infusions that the commission assumes will somehow be forthcoming are almost enough to preserve Social Security exactly as it is, with no benefit cuts, forever. Also, the commission's plans include severe cuts in disability benefits, a crucial part of Social Security that privatizers have a habit of overlooking.
But in a way, the most interesting thing about the new report is the administration's reaction. Charles Blahous, who was executive director of the commission and is now on the White House staff, quickly responded with a memo best described as hysterical. The number of non sequiturs and misrepresentations Mr. Blahous manages to squeeze into just a few pages may set a record. Among other things, he angrily accuses Mr. Diamond and Mr. Orszag of failing to address issues they cover quite clearly. Of one such accusation, Mr. Orszag remarks drily that "in his haste to issue a response to our paper, the Executive Director appears to have overlooked the final box . . . which addresses precisely that issue and provides the comparisons he requested (though he may not be pleased with the results). We direct his attention to that box."
A sample of Mr. Blahous's tactics is his insistence that private accounts don't weaken Social Security, because diverting money from the trust fund into those accounts doesn't reduce the total sum of money available if you still count private accounts as part of the total. As they say in the technical literature, "Well, duh." Of course the money doesn't disappear but it is no longer available to pay benefits to older Americans, whose own Social Security contributions were used to pay benefits to previous generations.
As the facts about Social Security privatization gradually emerge, the general strategy of the privatizers seems to be to keep the public confused as long as possible. Indeed, Republicans are now being told to deny that personal accounts which expose their owners to all the risks of any private investment constitute "privatization." "Do not be complicit in Democratic demagoguery," urges one party memo. So it looks like a duck and walks like a duck, but it isn't a duck not until after the next election.
But whatever they say, it is a duck. And the administration economists who claim that privatization will strengthen Social Security are, more than ever, revealed as quacks.
Market Crisis ManagementNew York Times by Hedrick Smith June 21, 2002
(6/20/02) - WASHINGTON With the conviction of Arthur Andersen for obstruction of justice, the Bush administration can claim an early, if shaky, victory in the Enron scandal. But that case does not address the central problem: the deceptive bookkeeping at Enron and elsewhere that has left a cloud of public distrust hanging over the financial markets.
The Bush administration has two potential strategies to restore this trust. It can vigorously prosecute corporate executives and their auditors for putting out flawed financial reports. And it can revamp the standards and oversight system to prevent misleading reports from being issued and make enforcement easier when potential fraud is discovered.
On regulatory reform, the proposal put forth Tuesday by Harvey Pitt, chairman of the Securities and Exchange Commission, falls short. At any rate, the S.E.C. can only impose civil penalties; it cannot bring criminal charges against wrongdoers.
But fines and even stockholder lawsuits have been insufficient deterrents. Last year, for example, the S.E.C. reprimanded and fined Arthur Andersen $7 million for what the S.E.C. called a six-year cover-up of "massive fraud motivated by greed" at Waste Management. Andersen promised never to do it again. But it was already enmeshed in Enron, and there was no visible effect on its conduct. In general, accounting firms see fines and even huge stockholder settlements as a cost of doing business.
But the threat of going to jail will get the attention of top executives. What's more, cynicism about the markets will persist until the public sees some corporate officials sent to prison for putting out false financial reports.
Oddly, better criminal enforcement is the easy part and the part for which the Bush administration has thus far shown a preference. The hard part is finding better ways to prevent failed audits and dishonest books, and on that score, both the Bush administration and Congress have failed. Neither the administration's proposal nor a bill passed Tuesday by the Senate Banking Committee does enough of what is necessary: tightening up auditing standards, assuring auditor independence from corporate clients, imposing effective oversight and having a federal agency not accounting firms determine what documents must be kept and provided to regulators.
In April the House of Representatives passed a bill that does little to plug the legal loopholes or materially strengthen oversight. At the S.E.C., Mr. Pitt who spent years serving as a lawyer for the accounting industry has put forward a modest proposal for a new Public Accountability Board, consisting of three accountants and six public members, to monitor the quality of audits. It would have power both to replace poor auditors and to discipline corrupt ones. But it leaves the initiative for setting standards in the hands of the accounting industry, a process that has served corporate clients better than investors.
Senator Paul Sarbanes of Maryland, chairman of the Senate Banking Committee, crafted a bill with significantly stronger provisions that would change the way the accounting profession does business. The Sarbanes bill moves to reduce the conflicts of interest for auditors. It puts strong limits on the consulting work that accounting firms can do for corporate audit clients and requires the rotation of auditors every five years.
Where the Sarbanes proposal fails is in creating a public oversight board of five members, two from the accounting profession. This leaves the board too vulnerable to dominance by the industry it is charged with regulating. And the bill could still be watered down on the Senate floor or, if it passes, in conference with the House.
In short, the momentum for reform so visible in January has largely evaporated. Debate is now bogged down in politics, mostly out of public view and couched in legislative complexity that leaves millions of disillusioned investors shut out.
To show a serious commitment to fighting the corporate scandals represented by Enron, the Bush administration must aggressively pursue criminal prosecutions of corporate executives and auditors not just at Enron but elsewhere. And it will need to show the investing public that it is taking action to restore the independence of auditors by curbing the hand-in-glove collaboration of accounting firms and their corporate audit clients.
But what investors really need may be a political champion who will make honest accounting a high-profile issue, as Senator John McCain did with campaign finance reform. Otherwise, they should brace themselves for more Enrons.
Hedrick Smith is correspondent and senior producer for "Bigger Than Enron," a Frontline investigative report airing tonight on PBS.
FERC: Guard KittenAssociated Press June 20, 2002
WASHINGTON (AP) - Energy regulators are ill-equipped to deal with abuses in fast-moving electricity markets and need more authority to monitor transactions and levy fines, a congressional investigation finds.
The Federal Energy Regulatory Commission, which oversees wholesale electricity trading, is hampered by antiquated rules and a shortage of staff knowledgeable about the complex competitive energy markets, the General Accounting Office concluded in a report Tuesday.
Despite some improvements since the California power crisis of more than a year ago, the commission still lacks the expertise or the ``enforcement bite'' to adequately monitor and respond to the kinds of market manipulation that caused Western electricity prices to soar in 2000 and 2001.
The report, released by Democratic Sens. Joe Lieberman of Connecticut and Jean Carnahan of Missouri, said Congress should strongly consider giving FERC additional powers to keep tabs on electricity trading and to issue stronger civil penalties.
Energy legislation recently passed by the Senate would expand the areas where FERC would be able to issue civil penalties, but it does not increase the size of penalties, which today amount to only $500 per violation in some cases. A House-passed bill contains no electricity provisions at all.
FERC Chairman Pat Wood, said he generally agreed with the conclusions reached by the congressional investigators that FERC ``has not kept pace'' with the rapidly moving energy markets.
``We have not yet done all we can to oversee energy markets,'' Wood wrote in a letter, responding to the GAO. But he said that since assuming the chairmanship last September, the commission has taken a number of actions ``to assure the energy markets are competitive, efficient and fair.''
While acknowledging some improvement, the GAO said to date, the commission ``has not yet adequately revised its regulatory and oversight approach to respond to the transition to competitive energy markets.''
Lieberman said market abuses and manipulation caused consumers in the West ``to pay billions of dollars more than they should have'' for electricity and that FERC ``is just now uncovering these abuses.''
The GAO findings suggest FERC ``failed the consumers of California'' a year ago and that ``Americans are vulnerable to another energy crisis'' because of market abuses, said Carnahan.
The congressional auditors said the commission's struggle to deal with energy traders has been severely hampered by a staff still learning how the markets work and a lack of technical expertise.
``FERC's initiatives to monitor competitive markets have served more to help educate FERC's staff about the new markets than produce effective oversight,'' the GAO report said.
Furthermore, the commission ``does not have authority to levy meaningful civil penalties'' against violators when market abuses are discovered.
``Without a meaningful range of penalties, FERC lacks adequate enforcement bite to deter anticompetitive behavior and other violations of market rules,'' the GAO said.
Sen. Dianne Feinstein, D-Calif., said the GAO's findings make clear that FERC should continue the price caps on Western power markets, which are scheduled to expire in September.
``It was FERC's inability and unwillingness to regulate the California energy market in the first place that led to the severe energy crisis,'' Feinstein said.
Western lawmakers sharply criticized FERC for failing to intervene aggressively as wholesale electricity prices soared in 2000 and early 2001. Until last summer, FERC refused to impose any significant price controls, contending price caps would impede energy production, worsening the supply problem.
Wholesale cost receded after FERC imposed a price cap last summer. Under the leadership of Wood, who joined the commission last August, FERC has moved more assertively to oversee the markets as it created a new market monitoring office.
Amid recent revelations that wholesale power marketers such as Enron had, in fact, used schemes to manipulate Western energy markets, FERC has begun an industrywide investigation into energy traders' activities.
Government Crackdown SignaledL. A. Times by James Flanigan June 19, 2002
(6/18/02) - The Andersen guilty verdict will prove to be only the first of many prosecutions in the government's version of a police crackdown on unethical business practices.
Former executives of Enron Corp. are expected to be charged with fraud, perjury and obstruction of justice after a federal grand jury in Houston completes its work. Last week saw the indictment of Tyco International Ltd.'s chief executive on tax evasion and the arrest of ImClone Systems Inc.'s founder on suspicion of violating insider trading laws.
Chief executives of half a dozen companies have lost their jobs in the last few months, pushed out by boards of directors newly energized by threats of shareholder lawsuits and calls from prominent businesspeople for reform of corporate America. But more is needed. Fired executives walking away with multimillion-dollar severance packages and sermons from business leaders are not likely to restore public confidence in U.S. business and the stock market.
Too much has come out in the last year about shoddy ethics and dishonest behavior in business, from cheating in the California energy market to spurious accounting and overstated profits by a broad swath of U.S. industry.
Yet despite numerous disclosures and evidence of investor disgust, Congress is unlikely to pass legislation governing business because it is in thrall to business lobbying and dependent on campaign contributions.
So the shock treatment of government police action will force reform and change. The aggressive move on Andersen--indicting the whole company and penalizing thousands of partners and employees--has been criticized for driving the firm practically out of business. But it got the attention of the firm and the rest of the accounting industry.
Recent Securities and Exchange Commission investigations of disclosure at firms such as Xerox Corp. and Dynegy Inc. typify a new activism at a regulatory agency that never questioned a single one of Enron's hundreds of financial filings over the last decade.
Some substantial reforms are underway. The New York Stock Exchange is likely to implement new requirements for corporate boards this summer. Directors will have to be independent of ties to corporate management and enforce stricter auditing standards and control of stock options. Any firm not complying with the new requirements would be delisted.
Ira Millstein, a prominent attorney and expert on directors and corporations, praised the Big Board's action as a "historic step forward in promotion of good corporate governance."
On Monday, Samuel DiPiazza, CEO of PricewaterhouseCoopers--the world's largest accounting firm--called for corporations to adopt broader and more truthful standards of reporting their condition to shareholders.
But clearly there is division within the accounting profession. A reform bill that Sen. Paul S. Sarbanes (D-Md.), chairman of the Senate Banking Committee, hopes to move to the Senate floor today, for example, faces strong industry opposition.
That's why government's enforcement powers are needed, even though police crackdowns can be messy. U.S. business has been here many times.
At the end of each boom period, distortions and finagling abound. The roaring '20s were followed by regulation in the '30s, when tough securities laws were adopted.
But the consequences aren't always so neat. In the late 1980s, after a decade of unrestrained corporate takeovers financed by high-yield, or junk, bonds and a misuse of savings and loan associations, government prosecutions put the firm Drexel Burnham Lambert out of business and its most important officer, Michael Milken, in prison.
S&Ls were closed and legislatures forbade state agencies from holding junk bonds. But that led to more unintended consequences than long-lasting reforms. Wealthy investors and financially astute firms, such as GE Capital, picked up S&L real estate and junk bonds at bargain prices and prospered on such holdings through the '90s.
Will the results of this new reform period be different? Yes, reforms of disclosure and corporate governance may well be more effective because the offenses of the '90s hit directly at so many Americans. Those corporate offenses lay in overstating profits and distorting stock markets, in which almost all Americans now have a stake through corporate and personal pension accounts.
"Lack of business ethics is a long-term threat to U.S. equity markets," says Robert Arnott of First Quadrant, a Pasadena-based investment management firm.
But if lack of ethics is a threat, reforms that reinforce a structure of rules and regulations backed by such government agencies as the SEC are a guarantor of fair and honest markets.
That guarantee is what the original reforms of the 1930s brought to U.S. stock and bond markets, which then flourished after World War II. And that is the hope behind government actions today.
The Mother of all InvestigationsKnight-Ridder June 14, 2002
(6/11/02) DALLAS -A federal regulatory official promised Monday that tighter rules on electricity trading will be put in place by year's end, saying companies that have manipulated the market will be exposed.
Speaking at the American Public Power Association meeting in Dallas, Federal Energy Regulatory Commissioner Nora Mead Brownell predicted "public canings" for rogue trading companies, such as Enron and others, that exploited the system.
"Like many of you, I have looked on in horror at the chaos and confusion of the last year in the electricity markets," she said.
Brownell's remarks referred to a breakdown of the deregulated wholesale electricity market in California, the bankruptcy of Enron Corp. of Houston and subsequent revelations of various market gaming schemes that have been cited as one of the causes of the electricity crisis in California last year.
Brownell told delegates that the commission, on which she is one of five governing board members, plans to ready a new electricity market trading supervisory mechanism by the end of the year.
She said those who have abused the deregulated wholesale markets should be punished. Several agencies, including her own and the Securities and Exchange Commission, as well as state energy regulatory commissions, have been examining how rogue electricity traders contributed to unstable electricity markets last year.
"We simply didn't understand the complexity of the market and the system," Brownell told the delegates, who represent the nation's publicly owned electric power systems. Texas has 79 public power organizations, including municipally owned systems in Denton, Weatherford, Garland, Austin and San Antonio.
The woes of the investor-owned utilities and energy traders in the unregulated environment drew a wry response from Alan Richardson, president of the public power association. Richardson and his group have criticized deregulation for a decade.
"We were told that deregulation would bring us cheaper power and better service," Richardson told the delegates. "Instead it brought us 'Death Star,' 'Fat Boy,' 'Round-tripping' and 'Inc-ing,'" he said, referring to code names for electricity trading strategies that came to light last month in memos written by Enron executives.
Brownell said the Enron revelations have prompted what she called "the mother of all investigations" at the energy commission to determine the identity of wrongdoers and the level of manipulation.
But she said that instead of just stopping at the punishment of a few, agency officials want to overhaul and revamp electricity trading.
"Until we bring this to a close, the air will be poisoned," Brownell said, describing what she called a political and financial pall cast over the electricity industry.
In a later interview, Brownell, who oversaw electricity deregulation in Pennsylvania, said Texas "has hit a few bumps in the road" since opening its electricity markets Jan. 1.
But she praised the Texas Public Utility Commission for responding quickly to an incident of electricity overscheduling on the state's grid system last August. Prices shot up to more than $1,000 per megawatt-hour for several days during the peak demand period, prompting the PUC to investigate six utilities and trading companies. It recommended last week that Enron be fined $7.8 million for its role in the incident. The others, including TXU and Reliant Energy, are negotiating settlements.
Texas PUC member Brett Perlman told the audience at a convention briefing that residential electricity prices in Texas are going up, and that deregulation has been dogged by problems in getting customers switched from one electricity provider to another.
"This hasn't been perfect," Perlman said of Texas' foray into deregulation.
He said he was disappointed that only about 250,000 Texans have opted to switch from their traditional utility to another provider.
The state has about 5.5 million residential meters.
"Frankly, the number of switches has been lower than we expected," Perlman said.
Evils of Selling AccessNew York Times by Paul Krugman June 10, 2002
(6/7/02) As Senate investigators examine evidence on the administration's Enron contacts, the White House counsel, Alberto Gonzales, has already delivered the verdict: Everything's fine, because officials did nothing to help Enron as it was collapsing.
I believe him. I also believe that the administration played no role in the death of Elvis Presley, an equally relevant assertion.
Mr. Gonzales is pulling the same trick on energy policy that Dick Cheney has pulled on antiterrorist policy: Respond to real, serious questions about the administration's actions by self-righteously denying charges that nobody is actually making. Nobody has accused the White House of helping Enron when it was down, just as no Democratic leader has accused the administration of deliberately allowing Sept. 11 to happen.
The real questions in both cases are whether the administration failed to act against real threats because it was preoccupied with a preconceived agenda; why officials who manifestly got it wrong have not been held accountable; and whether, because nobody has been held accountable, the administration is continuing to make the same mistakes.
I know that I'm about to get a barrage of mail saying that energy policy and terrorism are not comparable; but bear with me for a minute.
In the case of energy policy, the administration still won't release information about Dick Cheney's energy task force. But it's clear that energy companies, and only energy companies, had access to top officials. The result was that during the California power crisis which, it is increasingly apparent, was largely engineered by Enron and other companies that had the administration's ear the administration did nothing.
But just as John Ashcroft, who brushed aside appeals to make terrorism a priority, remains in charge of our effort against terrorism, Mr. Cheney who ridiculed conservation and price controls, which in the end were what saved California remains in charge of energy policy. And that scares me more than terrorism.
Earlier this week the Environmental Protection Agency released a report confirming what the vast majority of climatologists, and every other advanced-country government, had already concluded: human activity is causing global warming, and the consequences will be nasty. But the E.P.A. did not propose any preventive action. Instead, it talked only about adapting to the changes.
Old hands recalled the days of James Watt, the interior secretary back in the 1980's. When scientists discovered that industrial chemicals were depleting the earth's protective ozone layer, Mr. Watt suggested that people wear hats, sunscreen and dark glasses. Luckily for the planet, he was overruled; the United States joined other countries in curbing production of ozone-depleting chemicals. The ozone hole is still growing, but disaster has at least been postponed.
No such happy outcome seems likely on global warming. After a curious pause, George W. Bush rejected his own administration's analysis. "I read the report put out by the bureaucracy," he sneered.
Clearly, this was a replay of what happened early last year, when the E.P.A.'s Christie Whitman assured the public that Mr. Bush would honor his pledge to control carbon dioxide emissions only to be betrayed when the coal and oil industries weighed in on the subject. So the administration learned nothing from the California crisis; it still takes its advice from the energy companies that financed its campaign (and made many administration officials, including Mr. Bush and Mr. Cheney, rich).
And it's one thing to reward your friends with subsidies and lax regulation. It's something quite different to let them dictate policy on climate change.
Many people believe that the Bush administration had a special window of opportunity on global warming policy. Politically, it could have been a Nixon-goes-to-China moment: Mr. Bush could have passed legislation that would have been totally out of reach for a Democrat. Furthermore, many corporations were actually eager for guidelines that would allow them to make long-term plans.
But because the administration continues to listen only to the usual suspects, that window of opportunity is closing fast. And bear this in mind: Whatever he imagines, Osama bin Laden can't destroy Western civilization. Carbon dioxide can.
Dept. of Political SecurityNew York Times by Maureen Dowd June 10, 2002
(6/9/02) - WASHINGTON With the most daring reorganization of government in half a century, George W. Bush hopes to protect something he holds dear: himself.
After weeks of scalding revelations about a cascade of leads and warnings prefiguring the 9/11 attacks that were ignored by the U.S. government, the president created the Department of Political Security.
Or, as the White House calls it for public consumption, the Department of Homeland Security.
Mr. Bush's surprise move was a complete 180, designed to knock F.B.I. Cassandra Coleen Rowley off front pages. He had resisted the idea of a cabinet department focusing on domestic defense for nine months.
But clearly, Iago Rove saw his master's invincibility cracking and did a little whispering in W.'s ear. Why not use national security policy for scandal management?
So the minimalist Texan who had sneered about the larded federal bureaucracy all through his presidential campaign stepped before the cameras to slather on a little more lard and nervous Republicans all over town found themselves suddenly praying that bigger government could save those in need (of re-election), after all.
By introducing yet another color-coded flow chart, the president tried to recapture his fading aura of wartime omnipotence. The White House even gave lawmakers "sample op-ed" pieces they could rewrite and submit to their local papers, beginning: "President Bush's most important job is to protect and defend the American people."
Even that champion of bloated government, Teddy Kennedy, seemed dubious: "The question is whether shifting the deck chairs on the Titanic is the way to go."
And others wondered whether it would be too unwieldy to have a department with 22 agencies devoted to eradicating both Al Qaeda and boll weevils. (The proposed Homeland behemoth does not include the F.B.I. or C.I.A., but it would envelop the Animal and Plant Health Inspection Service.)
All day Thursday, before Mr. Bush addressed the nation, Special Agent Rowley, who was sporting a special badge allowing her to pack heat in the Capitol, and Bobby Three Sticks Mueller, who wasn't, had given the Senate Intelligence Committee a stunning and gruesome portrait of just how far gone the bureau is.
Their testimony made clear that there is no point in creating a huge new department of dysfunction to gather more intelligence on terrorists when counterterrorism agents don't even bother to read, analyze and disseminate the torrent of intelligence they already get.
"I think at the present time it's not done very well," Ms. Rowley said about the clogged-up information flow. Looking at the bureaucratic trellis of the F.B.I. reorganization chart, she asked: "Why create more? It's not going to be an answer."
There are already too many pompous gatekeepers between the F.B.I. chief and the field offices, she said. And the computers are ridiculous, unable to send e-mail or access the Internet or to search for two words together, like "aviation" and "school."
The blunt Midwesterner with the oversized glasses suggested that the disarray was less about modernity than the ancient flaws of ego and ambition "careerists" with a "don't rock the boat" attitude that hampered aggressive investigations. (Mr. Bush's plan would do nothing to disempower them.)
Mr. Mueller was confessing all kinds of dysfunction, as well. "When I first came in, I did a tour," he recalled. "There's a computer room downstairs . . . there were a number of different computer systems. There were Sun Microsystems, there were Apples, there were Compaqs, there were Dells. And I said, `What's this?' And the response was, every division had a separate computer system until a year or two ago."
Asked how long it would take to get their computers up to snuff, Mr. Mueller replied: two to three years.
If we're really in a national emergency, couldn't the president call America's software geniuses and tell them to wire up the F.B.I. this week?
Maybe if Mr. Bush brings Rudy Giuliani in as the new cabinet officer, he can work magic. But reorganization is an old dodge here.
The shape of the government is not as important as the policy of the government. If he makes the policy aggressive and pre-emptive, the president can conduct the war on terror from the National Gallery of Art.
Department of Homeland InsecurityNew York Times by Frank Rich June 10, 2002
(6/8/02) - When it comes to striking terror in a White House waging a war on terrorism, Osama bin Laden has nothing on a forthright American woman spilling her guts on daytime television.
This week began, you may distantly recall, with George W. Bush telling Americans that the F.B.I. and C.I.A. were now in "close communication" even as they seemed to be mainly in close communication with the press, with each agency rabidly planting leaks to scapegoat the other for pre-Sept.-11 incompetence. As further reassurance, Mr. Bush added that he had "seen no evidence to date that said this country could have prevented the attack" even though less than a week earlier his own F.B.I. director, Robert Mueller, had said his agency might have been sitting on just such evidence.
Mr. Bush presented this rosy picture on Tuesday. On Wednesday Arlen Specter, a Republican, told CBS that the government possessed not just unconnected dots before Sept. 11 but a "veritable blueprint" for impending terrorist acts. On Thursday morning, just hours before the F.B.I. agent Coleen Rowley began to testify about why that blueprint was ignored, the administration announced the creation of yet another new scheme to fix everything the White House had previously claimed to be already on the mend.
Is the new Department of Homeland Security an antidote to a broken system? Or is it merely a hastily contrived antidote to Ms. Rowley's TV debut, knocking her out of the evening-news lead lest she wreak damage on this Bush administration akin to what Anita Hill, appearing before the same committee, inflicted on the first? It's not Ari Fleischer but Al Qaeda that will ultimately provide the answer.
What is clear is that the White House has lost control of a hagiographic story line that, as codified everywhere from Annie Leibovitz's triumphalist photos in Vanity Fair to a multipart series co-written by Bob Woodward at The Washington Post, portrayed it as a steely, no-nonsense team of razor-sharp executives running government like a crack Fortune 500 corporation. When it comes to domestic security, the administration turns out to mirror America's C.E.O. culture all right but not that of Thomas Watson's I.B.M. or Jack Welch's General Electric so much as that laid bare by the dot-com crash. It's a slipshod business culture in which arrogant C.E.O.'s, held accountable by no one (including their own boards), cash out just before their own bad deals take their companies south. It's the culture that has wrecked Americans' trust in the market and that this week prompted Henry M. Paulson Jr., the chief of Goldman Sachs, to speak out, chastising "the activities and behavior of some C.E.O.'s" and concluding, "I cannot think of a time when business over all has been held in less repute."
Mr. Paulson, whose firm's clients include Global Crossing and Tyco, didn't name names. I'll name one: Dick Cheney, who from 1995 to 2000 ran Halliburton, the energy services company whose stock collapsed after he went to Washington. Halliburton has suffered not because of Mr. Cheney's departure but because of the damage he inflicted while there. It was his disastrous decision to merge with Dresser Industries, a company whose huge asbestos liabilities were somehow minimized during the due diligence that was his responsibility. It was also on his watch that Halliburton allegedly pulled a cute, Enron-like accounting trick, now under S.E.C. investigation, that allowed it to inflate revenues.
"C.E.O.'s are the ones who know what's going on in their companies," said Paul O'Neill, the Treasury secretary, in a blistering February speech. "There's no excuse for them not to know." But this tough talk doesn't apply to Mr. O'Neill's own peers in the administration. We are asked to believe that Mr. Cheney didn't know what was happening at his own company he was a "hands-off" manager, says one Halliburton crony much as Ken Lay, in the words of his wife, Linda, "wasn't told" about what was going down at Enron.
For those of us without a stake in Halliburton, it's not our problem. What is everyone's problem is the extent to which Mr. Cheney brought his management style into the White House. No one seems to remember anymore that President Bush put Mr. Cheney in charge of not one but two task forces last year. The first, of course, was the energy task force, whose secret deliberations have landed the vice president in court. But even more intriguing is the second. On May 8, 2001, the president charged Mr. Cheney with overseeing a "national effort" to coordinate all federal programs for responding to domestic attacks in league with a new Office of National Preparedness at the Federal Emergency Management Agency.
That day the vice president went on CNN to explain his duty. After noting that "one of our biggest threats as a nation" may include "a terrorist organization overseas," Mr. Cheney said: "We need to look at this whole area, oftentimes referred to as homeland defense. The president's asked me to take on the responsibility of overseeing all of that, reviewing the plans that are out there today."
Did Mr. Cheney take on that responsibility with the same urgency with which he met with Enron executives to develop energy policy? A FEMA spokesman this week said that the Office of National Preparedness was up and running by early last summer; Tom Ridge said on the "Today" show yesterday that the new Homeland Security Department would "continue the work the vice president started back in May of 2001." But when Ari Fleischer was asked to list the vice president's policy portfolio at a press briefing on June 29, 2001, he made no mention of such work, according to the White House transcript. When a reporter then specifically asked him if he could recall what task force Mr. Cheney had been appointed to head "after energy," Mr. Fleischer answered, "No." After Sept. 11, Barton Gellman of The Washington Post reported flatly that the government-wide review that Mr. Bush had entrusted to Mr. Cheney had never taken place. Even if it did, history will deem it about as successful as the Halliburton-Dresser merger.
Were the vice president to be quizzed about his pre-Sept.-11 efforts at preparedness, he'd likely either invoke secrecy or impugn the questioner's patriotism. But he's not the only one who avoids accountability for past inaction. After Mr. Mueller told the Judiciary Committee on Thursday of the F.B.I.'s primitive DOS-era computer capabilities, Charles Schumer, the Democrat from New York, indignantly asked, "But how was it we were so far behind the curve that it was almost laughable?"
One answer is that the Judiciary Committee, in charge of F.B.I. oversight, was itself asleep. As Ronald Kessler, the author of "The Bureau," points out, it was no secret that the technophobic director of the Clinton years, Louis Freeh, refused even to use e-mail himself, let alone make it viable for his agents to do so.
The cure Mr. Bush now proposes for such ailments a big new federal bureaucracy with 169,000 employees that stands apart from the F.B.I. and C.I.A. bureaucracies is still another avoidance of accountability and still another repudiation of the efficient, lean-government corporate Republicanism that he supposedly champions. (No wonder Democratic leaders are falling over each other to take credit for thinking of it first.)
This Rube Goldberg contraption will take months to pass in some form and may not be in action before Google arrives at the F.B.I. It allegedly requires no new funds (a feat to be achieved only by Enron off-balance-sheet bookkeeping) and reshuffles the same deck of lightweights we have now. That includes the irrepressible John Ashcroft, who this week announced a plan to have the I.N.S. fingerprint 100,000 Middle Eastern visa holders. The day after he did so, his own department's inspector general testified before Congress that the I.N.S. and F.B.I. were still "years away" from integrating the fingerprint files already in their possession.
Instead of creating a new organizational chart, Mr. Bush might have enlisted one man to hose down our security bureaucracy: Rudolph Giuliani. Instead of speechifying that "only the United States Congress can create a new department of government," he might have followed the suggestion of Stansfield Turner, the former C.I.A. chief who, like others, has called for the president, "with a stroke of the pen," to give the director of central intelligence the authority to coordinate the 14 entities in our intelligence apparatus. Rather than take such old-time C.E.O.-style action, the president wrapped himself in the mantle of Harry Truman. These days that's a sure sign that the buck-passing will never stop.
SEC Deloitte & Touche InquiryNew York Times by Andrew Ross Sorkin May 30, 2002
(5/29/02) - The fiasco at Adelphia Communications is posing its own set of thorny problems for Deloitte & Touche, the firm that audited Adelphia's books.
The Securities and Exchange Commission, which has been investigating Adelphia's dealings with the Rigas family and why the company failed to disclose more than $3 billion in transactions with entities controlled by the family, has begun a separate inquiry into the role of Deloitte, people briefed on the situation said yesterday.
Whatever the inquiry concludes, Deloitte is bracing for an almost guaranteed wave of lawsuits by disgruntled shareholders whose investments have plunged in value in the wake of Adelphia's debacle.
Deloitte is in an especially precarious position, analysts said, because it appears that Deloitte not only acted as the accountant for Adelphia but also was the auditor for the Rigas-controlled entities.
In one of the most significant disclosures made last week by Adelphia in a filing with the S.E.C., it seems that Deloitte never informed Adelphia's audit committee that the family was using the company's credit lines to buy Adelphia stock.
The latest trouble for Deloitte comes just as its reputation was beginning to top the Big Four firms that dominate the auditing business for large companies after Arthur Andersen was indicted on a charge of obstruction of justice for destroying documents related to Enron. The developments with Deloitte come as dozens of lawsuits have been brought against Andersen by Enron shareholders and the scrutiny of accountants has never been higher.
"The timing is not good," said Arthur W. Bowman, editor of Bowman's Accounting Report. "The Andersen situation has just opened the doors for lawsuits. And Deloitte was looking pretty clean in the last five or six months."
A spokeswoman for Deloitte declined to comment on the S.E.C. inquiry or the firm's role as Adelphia's auditor.
Like Andersen, which agreed earlier this month to pay $217 million to settle a fraud case in Arizona, Deloitte had an earlier accounting scandal to fight. Unlike Andersen, it has been unable to reach resolution in the case, now seven years old, one that brought it unwanted international attention.
Deloitte was an auditor for Barings Bank, the oldest investment bank in Britain. It was brought down by the rogue trader Nicholas W. Leeson in 1995. In that case, Mr. Leeson, an options trader in Singapore, embarked on a secret trading spree that left the bank facing fatal losses of $1.3 billion. As one of the bank's auditors, Deloitte was sued by bondholders for £200 million, or about $300 million, accusing it of negligence for not properly identifying the rogue trades.
While Baring's other auditor, Coopers & Lybrand, which merged to become PricewaterhouseCoopers, settled its case with the bondholders for £65 million, or $95 million, Deloitte continues to defend its actions.
If it is any indication of how Deloitte might fare against Adelphia shareholders and bondholders in court in the United States, the firm does not appear to be winning the battle in England, where Deloitte's lawyers have been trying to have the case dismissed for years and have spent nearly $40 million on its defense over the years, a vast amount by English standards. A British judge recently moved to begin a full trial after holding a six-week mini-trial where evidence was heard. Now, Deloitte could be on the hook for $300 million or more and the bondholders' legal expenses if it loses.
As for its role in Adelphia's questionable dealings with the Rigas family, it is unclear how much Deloitte knew about the arrangements or if it thought they were material enough to advise disclosing them. People close to Adelphia's special committee of independent directors suggest that Deloitte never advised them of the situation until this February.
Separately, Adelphia announced yesterday that it had appointed Leonard Tow and Scott Schneider to its board as part of the company's shake-up.
Mr. Tow, chairman of Citizens Communications and the largest shareholder in the company outside the Rigas family, had been threatening to sue to obtain three board seats that he said he was contractually entitled to. Mr. Tow received the right to be on Adelphia's board when he sold Century Communications to the company in 1999.
Previous article about Duke Energys auditor
FBI Terrorism Whistle-BlowerL. A. Times by Josh Meyer - May 29, 2002
WASHINGTON - -- FBI officials in Washington stymied an investigation of flight student Zacarias Moussaoui before Sept. 11, then tried to stop field agents from connecting the suspected 20th hijacker to the terrorist attacks after they occurred, a Minnesota field agent contends in a 13-page "whistle-blower" letter made public Sunday.
FBI agent Coleen Rowley, general counsel in the Minneapolis field office, also charges in her letter to FBI Director Robert Mueller that intelligence on Moussaoui provided by the French government, which included information on his "activities connected with Osama bin Laden," was more than enough to obtain a special surveillance warrant to search Moussaoui's laptop computer in the weeks before the terrorist attacks.
But requests for such a warrant were thwarted by FBI supervisors in Washington who seemed so intent on ignoring the threat posed by Moussaoui, Rowley wrote, that some field agents speculated that key officials at FBI headquarters "had to be spies or moles ... who were actually working for Osama bin Laden to have so undercut Minneapolis' effort."
Last August, FBI agents in Minnesota had become increasingly desperate to search the laptop and personal effects of the mysterious Frenchman of Moroccan descent, Rowley wrote. He had been detained on immigration violations after arousing suspicion at a Minnesota flight school, where he was trying to learn how to fly a commercial airliner.
Moussaoui, 33, has since been indicted as an al-Qaida operative and is the sole person charged with conspiracy in the Sept. 11 attacks. He faces the death penalty if convicted in a trial scheduled for later this year.
Rowley's scorching May 21 letter, which caused an uproar on Capitol Hill last week, was posted in full by Time magazine on its Web site Sunday, two days after the FBI refused to turn it over to congressional investigators or even to U.S. senators.
Excerpts of the letter were leaked to the media late last week. Rowley sent her letter to Mueller and several congressional intelligence committee members.
FBI officials said Sunday they would not comment on the letter. But there was immediate and angry reaction on Capitol Hill, from Democrats and Republicans alike. Some said on the Sunday TV talk shows that it was further proof that the FBI needs an overhaul and called for additional inquiries and public hearings.
"It is ... shocking," Sen. Carl Levin, D-Mich., chairman of the Senate Armed Services Committee, said of Rowley's letter during an appearance on CNN's "Late Edition." "And the only way, I believe, that we're going to get to the bottom of this thing is if we have a broad investigation with a blue-ribbon panel, but also if we release the documents now and hold people accountable."
Senate Majority Leader Tom Daschle, D-S.D., seized on the Rowley memo as evidence that an independent commission was needed to investigate the FBI, despite strong opposition to such an inquiry from the White House. Daschle said on NBC's "Meet the Press" that President Bush and Vice President Dick Cheney both personally lobbied him last January "not to investigate the events of Sept. 11."
"They were concerned about the diversion of resources ... (involved in) an investigation of any kind," Daschle said. Bush and Cheney have said that the House and Senate intelligence committees are the proper forums for such a sensitive investigation involving classified materials.
On CBS's "Face the Nation," Senate Minority Leader Trent Lott, R-Miss., sidestepped taking a position on an independent inquiry. But, citing the Rowley letter, he, too, called for aggressive FBI reforms and inquiries into what officials knew and did in the Moussaoui case.
Rep. Porter Goss, R-Fla., said he would use the forthcoming hearings of the House Permanent Select Committee on Intelligence, for which he is chairman, to examine whether officials at FBI headquarters had removed information from the Minnesota agents' request for a warrant -- as Rowley contends -- out of concern they were using racial profiling.
The full disclosure of Rowley's letter came as a U.S. official confirmed Sunday that the Federal Aviation Administration had told airlines more than three years ago to be on a "high degree of alertness" against possible hijackings by followers of bin Laden.
The FAA issued the warning in a Dec. 8, 1998 circular that expired about seven weeks later, the official said. Like other FAA circulars issued in 2001 before the Sept. 11 attacks, it did not contain any specific threats and did not order the airlines to increase security, the official said.
"It was designed to be a specific warning around that period of time, based on intelligence information we get from other agencies," the official said. "It was not designed to be a permanent warning."
Rowley's detailed, often bitter comments raised a raft of fresh questions Sunday -- particularly her assertion that high-ranking bureau officials had sought to impede an investigation into Moussaoui after the attacks by "a delicate and subtle shading/skewing of facts" concerning mistakes they had made before Sept. 11.
By doing so, Rowley contends, the FBI put Americans at further risk by failing to act quickly and aggressively to determine whether Moussaoui was part of the Sept. 11 conspiracy or of unrelated and unlaunched attacks.
Within days of Moussaoui's arrest on Aug. 15, FBI field agents in Minneapolis were convinced that he was a dangerous Islamic militant who had sought aviation training for terrorist acts. That belief stemmed from their investigation, as well as a wealth of information provided by the French intelligence service, Rowley said. Her reference to "activities connected to ... bin Laden" is the first indication that authorities had suspected Moussaoui of being linked to the alleged terrorist mastermind prior to Sept. 11.
Despite those concerns, officials at FBI headquarters in Washington repeatedly quashed efforts to help the field agents secure a special warrant under the Foreign Intelligence Surveillance Act, which would have allowed them to run wiretaps and search Moussaoui's computer and personal effects, Rowley said.