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White House's Failure to Sound Alarm Faulted

That no warnings were issued as Enron collapsed raises the specter of special treatment, critics charge.


Even though they mounted no formal effort to bail out Enron Corp., Bush administration officials are coming under fire for not publicly disclosing the extent of the company's troubles when they became aware of them.

Some legal experts contend the administration was in a position to sound a warning to the public or the Securities and Exchange Commission after a series of phone calls from Enron executives to Treasury Department officials last fall. The fact that they didn't, while Enron's financial situation grew darker and its stock price declined steadily, raises the specter of special treatment for a powerful corporation, congressional critics say.

But the Bush administration, despite close ties to Enron, did not help the firm stave off bankruptcy as the federal government had done for failing enterprises such as Long-Term Capital Management, Chrysler Corp. and Lockheed Corp.

Enron was different. Many experts on government-business relations say the company's relationship with the Bush administration made aiding it a potential political embarrassment. But others say the administration decided not to help the company because its failure did not threaten widespread damage to financial or energy markets and the economy as a whole.

Yet the fact that Enron's failing condition went on without public disclosure for so long--even as high government officials were apprised of it--puzzled legal experts.

"I'd be surprised if they [Treasury officials] didn't call the SEC," said attorney John Hanson, a specialist in bankruptcy cases for the law firm Nossaman Guthner Knox Elliot LLP, which has offices in four California cities, including Irvine and Los Angeles, and in Washington.

In October and early November, Enron President Lawrence "Greg" Whalley made a series of six to eight calls in which he asked Peter Fisher, Treasury undersecretary for domestic finance, to help secure loans from the company's bankers. Fisher refused, and on Nov. 8 Enron Chairman and Chief Executive Kenneth L. Lay telephoned Treasury Secretary Paul H. O'Neill to tell him of Enron's dire financial situation.

That same day, Enron filed documents with the SEC revising its financial statements back to 1997, evaporating $600 million in nonexistent profits and accelerating its stock plunge.

Although the administration's accounts of what happened are incomplete, it appears that neither Fisher nor O'Neill asked the SEC to demand that Lay tell stakeholders and investors about the firm's deteriorating condition, observers note. "I cannot comprehend why they did not inform [SEC Chairman Harvey] Pitt," said a onetime lawyer for the federal government who asked for anonymity because he still does business with the government.

"My counsel would have been to call Lay back and request him to do full disclosure," said Lynn Turner, a former chief accountant at the SEC.

In the 1998 case of Long-Term Capital Management, a foundering investment firm kept out of bankruptcy by a government-assisted infusion of capital, Federal Reserve Chairman Alan Greenspan communicated constantly with then-SEC Chairman Arthur Levitt and with the Treasury Department and the Commodity Futures Trading Commission, Turner said.

Rep. Henry A. Waxman (D-Los Angeles) charged last week that Bush administration officials had "done nothing to mitigate the harm of the Enron bankruptcy to thousands of its employees and shareholders." In response, White House Press Secretary Ari Fleischer said Enron officials had not provided the Treasury officials with any information that was not already in the general news.

Stock Rose After Earnings Revision Filed

But the record of SEC filings and public statements by Enron officials shows that Lay and other company officials maintained publicly that the company's energy trading business was strong and that it had the financial wherewithal to survive the crisis even as some of the firm's difficulties became evident in October and November.

The company reported a $618-million loss and a reduction in its shareholders' equity Oct. 16, and Nov. 8 it revised its earnings for the previous four years, although without public reference to its overwhelming debts or the financial peril it was telling Treasury officials about. In fact, Enron stock rose almost 20% in the four days after the Nov. 8 disclosures as investment analysts anticipated its proposed merger with Dynegy Inc.--later canceled--and said most of Enron's troubles were behind it.

Because the precise dates of Whalley's phone calls to Fisher were not released, it cannot be determined how much shareholder value was lost between the time Fisher was first contacted and Enron stock plummeted (it dropped from $33.84 a share on Oct. 16 to $8.41 on Nov. 8). But company shareholders and employees lost more than $18 billion of market value in that decline.

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