Markkula Center of Applied Ethics

Bush's Role in Corporate Fraud

By Willliam Black and James Galbraith

President George W. Bush has reassured us that ''From the antitrust laws of the 19th century to the S&L reforms of recent times, America has tackled financial problems when they appeared.'' But the savings & loan reforms came seven years and 150 billion taxpayer dollars late. Nor did that problem merely ''appear.'' It was created by a deregulation bill in 1982 overseen at that time by Vice President George Bush.

From 1981 to 1988, the Reagan-Bush administration covered up the S&L debacle. It forced reductions in S&L examiners and fought against the top federal regulator, Ed Gray, who sounded the alarm. Charles Keating, the felon who drove Lincoln Savings into the most expensive S&L failure in history ($3 billion) considered Vice President Bush an ally in his efforts to force Gray from office. Only after he was safely elected president did Bush propose to reregulate the S&L industry in 1989.

Meanwhile, Neil Bush, private citizen, was getting a ''loan'' from a business partner. The partner invested the loan for the president's son with the agreement that if the investment succeeded Neil would get all the profits and repay the debt, but if it failed he would not have to repay. Neil knew that this business partner was not creditworthy and yet was borrowing over $100 million from Silverado S&L, where Neil was a member of the board. Neil did not warn Silverado that the borrower was not creditworthy. When Silverado failed, the Office of Thrift Supervision proposed a minor enforcement action against Neil, which the Bush administration then attempted to block.

George W. Bush, private citizen, emulated his brother Neil. He became rich through a buyout of his interest in the Texas Rangers at a huge profit. How did he purchase that interest in the first place? He got a very large loan from a very friendly bank. How was the bank able to justify the loan? If at all, because of the market's valuation of Bush's shares in Harken. Why was he on Harken's board of directors and also a well-paid consultant? Because his name was Bush. Why was he able to sell his Harken shares for a profit? Because Harken committed a financial fraud that hid real losses and created fictional income.

What was the nature of that fraud? It was a variant on the Enron and Lincoln Savings frauds. Harken insiders formed a entity which ''purchased'' Harken's bad assets for a grossly excessive price. But Harken financed almost all of the sale. If the bad assets had stayed on the books, Harken would have had to report severe losses, threatening its survival and causing its stock values to plummet. George W. Bush is a wealthy man today because his business friends were willing to stoop to fraud to make him rich.

George W. Bush is in trouble, in part, because of his clumsy coverups of this fraud. Knowing of the severe problems at Harken, Bush sold around 200,000 shares of stock for around $4 a share. (We do not know who purchased Bush's shares, but was it the ever-friendly Harvard Management Corp., which had started buying Harken when Bush joined it and had, by 1990, become one of its largest holders?) He then failed to file required notice of these sales. When challenged on that point, he first claimed that the SEC ''lost'' his filing. His second story was to blame the failure on Harken's lawyers. But that won't wash. Bush was selling his own stock, and was therefore personally responsible for filing the documents.

Bush claims to see nothing wrong about Harken's frauds. However, the goal was to hide real losses and to book fictional income. The people who made the decision and the board of directors stood to gain directly from the fraud, and Bush did benefit—enormously.

Bush is also wrong on the accounting. This was a deliberately complicated transaction for the same reason that Enron's and Lincoln Savings's partnerships were complicated. Complexity makes it hard for regulators to discern fraud. While the transaction was complicated, the underlying fraud is so well known that the accounting rules governing such transactions are not vague. There was no ''honest dispute'' about accounting rules. There was a deliberate fraud structured in a complicated manner in order to claim that it wasn't really deliberate.

Now Bush tells us that the Securities and Exchange Commission needs to be strengthened. But he appointed an SEC head, Harvey Pitt, who as a lawyer for the accountants led the campaign to block the Clinton administration's effort to clean up the accounting profession. Back in Texas, then-Governor Bush was proud that he had made it extremely difficult for securities fraud victims to receive compensation through lawsuits. When the Enron scandal broke, Bush continued this line, suggesting that victims of fraud who bring suits are ''extort[ionists].'' He, and Republicans in the House, have fought vigorously to stop real accounting reform.

President George W. Bush is right to bring up the S&L debacle as an analogy. He is following in his father's footsteps: First, create the problem by taking actions that encourage fraud. Second, do nothing while the frauds become epidemic. Finally, when the scandal breaks, claim like Claude Rains in ''Casablanca'' that he is ''shocked, shocked'' that gambling is going on. In Bush's case, the winnings from gambling were safely pocketed long ago.

Bill Black and James Galbraith teach at the University of Texas at Austin. Black was counsel to the Federal Home Loan Bank Board in the early 1980s; Galbraith is an economist. Bill Black is also the visiting scholar at the Markkula Center for Applied Ethics 2002-03.

This story ran on page A11 of the Boston Globe on 7/23/2002.
© Copyright 2002 Globe Newspaper Company.

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