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Was Enron Just a Dream?

Cox will return the SEC to its lax old ways.

June 17, 2005|JONATHAN CHAIT

Remember Enron? In calendar years, the scandal occurred just three years ago, but in political time it's been eons. Back then, in the wake of news reports showing how Enron had fleeced its investors and put its employees at risk, the public was up in arms.

"Suddenly there may be a political price to pay for not acting," the New York Times reported. President Bush professed "outrage" over the scandal and declared support for reforms.

Those days are long over. Today, all the pressure comes from business lobbyists who chafe at tough new restrictions and the Securities and Exchange Commission breathing down their necks. They yearn for the good old lax pre-Enron days. And Rep. Christopher Cox (R-Newport Beach), Bush's nominee to head the SEC, is just the man to give it to them.

Bush's taste in SEC chairmen was best reflected by Harvey Pitt, his first appointee in 2001. Before his nomination, Pitt spent most of his career representing the industries that the SEC regulates. He began his SEC tenure by replacing career staffers with fellow industry representatives, declaring an amnesty against previous violators and promising, "We aren't going to play 'gotcha.' " Most notoriously, he called for "a kinder, gentler" SEC.

This suited Bush just fine until Enron broke the next year. At that point, having an obvious industry lap dog as SEC chairman proved to be too much of a liability. Bush had to replace Pitt with William Donaldson, an old-line Republican (which is to say, a Republican who occasionally disagreed with the business lobby). Donaldson, a longtime Bush family friend, had a reputation for integrity, but he was not expected to make waves.

Instead, he proved unexpectedly tough. Businesses howled, and now that everybody has completely forgotten about Enron, Bush feels free to force out Donaldson and replace him with the distinctly Pitt-like Cox.

Cox's defenders offer two rationales. The first, and most obviously hilarious, is "consensus."

As Sen. Richard Shelby (R-Ala.) told the New York Times, "I have long thought that the lack of consensus on a number of big issues was very troubling, with 3-to-2 votes, and especially with a Republican chairman slipping from the other two Republicans on several big votes. Under Chris Cox, you are probably not going to have much of that." No, you're probably going to have 3-to-2 votes going the other way. How will this produce consensus? I'm not sure, but I believe it would work something like Bush's 2000 campaign promise to end partisan acrimony in Washington.

The second rationale, offered with a somewhat straighter face, is that Cox is (in Bush's words) "a champion of the free-enterprise system." This description reflects a common confusion between support for free enterprise and slavish espousal of anything businesses desire, which may or may not have anything to do with free markets.

Cox endeared himself to the business lobby not only through his general pro-business views but specifically with his long-standing crusade to let businesses disguise the cost of stock options. Stock options are a perfectly fine way for businesses to compensate their employees and give them an incentive to participate in the company's growth. The trouble is that corporations can treat them as a cost in their tax statements, without disclosing the cost in their financial statements. In other words, they make themselves look poor to the IRS and rich to their stockholders. Government regulators and reformers in Congress have tried to end this double standard -- claiming support from such capitalist icons as Alan Greenspan and Warren Buffett -- but corporate lobbyists have squelched them for years, with Cox as their chief water carrier.

How does it help the "free market" to let companies deceive their shareholders? It doesn't. Economists understand that markets are inefficient when one party has reason to believe that the other is withholding crucial information. (That's why many car buyers steer clear of the used car market.) The same problem applies to capital markets when investors can't be sure that management is leveling with them.

Bush, apparently, doesn't see it that way. In fact, according to his former Treasury secretary, Paul O'Neill, Bush asserted in one meeting that post-Enron uncertainty in the markets was caused by "SEC overreach."

So, in Bush's way of thinking, the problem wasn't that executives were getting away with too much, it was that they were getting away with too little. If that is indeed what's ailing the economy, then the appointment of Cox is an excellent cure.

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