Published on Wednesday, July 10, 2002 in the Boston Globeby Robert Kuttner
DESPITE A tough-sounding speech, George W. Bush is suddenly vulnerable on the defining domestic issue of his presidency. The cascading corporate scandals are more than a temporary blow to investor confidence. They are a serious threat to American capitalism - and Republican doctrine.
Bush is at risk of becoming a Cinderella president. Terrorist attacks elevated him from an untested pretender with no mandate into a popular commander in chief. Now a domestic economic crisis, eerily reminiscent of Bush's own dubious financial history, could turn him back into a bumpkin.
On issue after issue, Bush's grand strategist, Karl Rove, has sought to blur the differences between Bush and his political opponents - to ''take Democratic issues off the table,'' as Rove likes to say. Yesterday's New York speech tried to get Bush back ahead of the curve and position him as tough on corporate crime.
But this act will be much tougher to pull off. Real reform demands not just tougher penalties; it will require an ideological reversal of two decades of Republican theory and practice.
For, as even Bush tacitly admits, the remedy for the self-dealing, the accounting frauds, and the other conflicts of interest that are now placing the entire economy in jeopardy is government regulation - something the Republicans have vilified since Ronald Reagan.
The entire system of self-regulation has collapsed. Free markets, it turns out, don't prevent brokers from peddling junk to unsuspecting investors while they enrich themselves or auditors from conspiring with executives to cook company books.
Market discipline doesn't stop insiders from selling shares they are promoting to the public even as the company is rotting from within or senior company officials from looting the pensions of workers or CEOs from scheming to pump up stock so they can cash in options. Only regulation can change these perverse incentives.
Moreover, the career of George Bush himself epitomizes the kind of self-dealing and insider enrichment that men like Ken Lay and Bernie Ebbers raised to new heights. Bush can tactically shift his current policies, but he can't erase his own record. Just as one corporation after another now faces close scrutiny of past dealings, so does Bush.
In the Harken affair, Bush served on the board of a company that falsely inflated its earnings - a smaller-scale version of Enron or WorldCom. Only eight days before the Harken Energy Corp. was forced to disclose large losses, Bush, who was given the stock for serving on the board and for ''consulting,'' sold his stock for $848,560. Once the losses were made public, the stock plunged. It's highly improbable that Bush, an insider, was ignorant of the company's real finances when he dumped the stock.
Bush failed to file timely documents disclosing this insider trade.
When the SEC (in the regime of the elder George Bush) investigated and excused Bush of wrongdoing, the SEC's general counsel was one James Doty, who had been George W. Bush's lawyer when young Bush, fronting for a group of businessmen, bought the Texas Rangers baseball club. Imagine the Republican indignation if the Whitewater investigation had uncovered anything like this kind of misconduct on the part of Bill Clinton.
So Bush is credible neither personally nor in terms of the remedies he proposes. His proposal of prison time for corrupt executives is a phony.
The SEC already has the power to prosecute criminal fraud. All it takes is someone tougher than former lobbyist Harvey Pitt in charge. The real need is a total restructuring of corporate governance and tight regulatory prevention of conflicts of interest at all levels. It's the barrel that's rotten.
There is a Republican leader on this issue, but his name is John McCain. Senator McCain has called for Harvey Pitt's dismissal and has teamed up with leading Democrats to demand tougher reforms.
Other Republican legislators are defecting from the administration and rallying to Democratic proposals in a manner previously unknown in the Bush presidency. The Sarbanes bill, resisted by the White House, would toughen accounting standards and oversight. It cleared the Senate Banking Committee 17-4, with wide Republican support, and is headed for quick floor action.
Many Wall Street leaders, fearing an investor meltdown, are clamoring for even tougher regulation, including prohibitions on corporate insiders dumping shares while they are working for the company.
Bush can perhaps get away with slogans about leaving no child behind and pale imitations of liberal measures on prescription drugs and patients rights. But he can't effectively lead on this crucial issue because so much of what infects corporate America reads like an ideological and personal biography of George W. Bush.
Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.
