July 12, 2002
Bush’s Rangers Deal Violated President’s Corporate Responsibility Rules Of Ethics, Integrity, Personal Responsibility, Transparency, And Public Trust
A BUZZFLASH READER CONTRIBUTION
President Bush’s Newly Announced Standards. On July 9th, President Bush’s corporate responsibility speech stressed the theme that ethical standards, personal responsibility, personal integrity, and transparency are critical to restore both "confidence in the character and conduct of all of our business leaders" and confidence in our economy. President Bush announced that "government can do more to promote transparency and ensure that risks are honest. And government can ensure that those who breach the trust of the American people are punished." [White House transcript of President Bush’s Corporate Responsibility Speech, (7/9/02)]
One remedy Bush advocated was to "use the full weight of the law to expose and root out corruption. My administration will do everything in our power to end the days of cooking the books, shading the truth, and breaking our laws." President Bush also advocated "moving corporate accounting out of the shadows, so the investing public will have a true and fair and timely picture of assets and liabilities and income of publicly traded companies. Greater transparency will expose bad companies and, just as importantly, protect the reputations of the good ones." In addition, President Bush stated that "corporate officers who benefit from false accounting statements should forfeit all money gained by their fraud.... When a company uses deception – deception accounting to hide reality, executives should lose all their compensation – all their compensation – gained by the deceit." And, "corporate leaders who violate the public trust should never be given that trust again." The upshot is that "we need men and women of character, who know the difference between ambition and destructive greed, between justified risk and irresponsibility, between enterprise and fraud." It is not enough to remain silent: Personal responsibility and integrity require that board members "ask tough questions." [White House transcript of President Bush’s Corporate Responsibility Speech, (7/9/02)]
Bush Violated These Standards In His Sale Of The Rangers Franchise.
Applying these standards to Bush's sale of his interest in the Rangers, which resulted in a personal benefit to Bush of $15 million dollars, it is clear that Bush violated these rules. Essentially, as governor, Bush appointed donors to oversee investment of a public university fund, which funneled millions of dollars to donors and friends, who in turn gave Bush a significantly larger interest in the Rangers. In addition, one of Bush’s political appointees bought the Rangers franchise for three times the price paid for the team by Bush and his partners. Bush would have received only a few million dollars if his partners had not increased his ownership interest at the time of sale from his original investment of 1.8% to 12%. And, the political appointee may not have paid three times the acquisition price if he had not reaped the benefits derived from investments made from the public fund. It now appears that the Rangers franchise sale was nothing more than corporate welfare, crony capitalism, political corruption, or the outright "laundering" of public monies by placing investments with donors/friends, who then spread the wealth by paying Bush their now private funds in the form of a larger share of the franchise ownership. Does President Bush qualify as the "corporate wrongdoer" described by Treasury Secretary Paul O’Neill: "In their greed and their gluttony, these crooks sacrificed the retirement years of teachers, truck drivers, nurses and farmers to enrich themselves?" [Jonathan Weisman, The Washington Post "O’Neill Warns Senate on Accounting Oversight Board" (7/10/02) ]
Bush appointed donors to Texas University Regents Board to oversee a $ 1.7 billion University of Texas investment portfolio. Initially appointed by Gov. Richards at the time of gubernatorial transition in 1994, Gov. Bush agreed to appoint Tom Hicks, chief executive of Hicks, Muse, Tate & Furst, an investment partnership, to the regents board. Hicks ultimately bought the Texas Rangers baseball team from Bush and his copartners. In addition to Hicks, "all of Bush’s regent appointees were contributors to his own campaign and to the Republican party." [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ]
Bush signed legislation to privatize management of funds and thus remove transparency from the investment of public funds. The regents board was in charge of investments; however, the regents board was required to conduct business in the public eye in compliance with open meeting laws, conflict of interest laws, public records laws, and financial disclosure rules. [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ] By the single stroke of a pen, Bush removed these inherent structural safeguards of the agency which invested public money. In 1995, Bush signed legislation to create a privatized board, called the University of Texas Investment Management Company (UTIMCO), a nonprofit corporation, which held closed door meetings and was no longer subject to public scrutiny. [R.G. Ratcliffe Houston Chronicle "Secrecy cloaks $1.7 billion in UT investments" (3/21/99)] Until 1999 or 2000, "the citizens of Texas had no way to ascertain precisely where their largest public university’s money had been invested and with whom." [Joe Conason, Harpers Magazine "Notes On A Native Son"(Feb.2000) ]
Bush’s UTIMCO entity funneled $1.7 billion of the university endowments in private investment to friends and major Republican contributors. Privatizing the agency which managed public funds enabled the UTIMCO, and thus Bush donors, to change the nature and quantity of historical university investment practices. Moreover, it enabled Bush and his donors to invade the state’s secure lockbox and transfer the monies to Bush’s donors, and then ultimately, to Bush. Aided by the corporate veil of secrecy provided by privatization, the Texas taxpayers did not know about the funneling of millions of dollars of public funds to Bush’s friends and donors.
First, the university’s "standard investment vehicles" were public stocks, bonds, and other instruments." UTIMCO changed that practice to placing "large sums of university money in private investments." [John Mecklin, SF Weekly "Tail of Two Races" (12/6/00) ] "Since 1996, UTIMCO has handled more than $11 billion in the investments of the UT endowment funds as well as the state’s higher education trust, known as the Permanent University Fund." [R.G. Ratcliffe Houston Chronicle "Secrecy cloaks $1.7 billion in UT investments" (3/21/99)] UTIMCO directed $1.7 billion (of the $11 billion) of state money to private investment management companies. [R.G. Ratcliffe Houston Chronicle "Secrecy cloaks $1.7 billion in UT investments" (3/21/99)] The Permanent University Fund was sacred prior to UTIMCO: "The Permanent University Fund had been the lockbox of all lockboxes, the bunker where the financial future of the University of Texas was secured. If there was anything sacred, inviolable, and transparent in Texas government finance, it was the Permanent University Fund. Until, that is, George W. Bush became governor." [John Mecklin, SF Weekly "Tail of Two Races" (12/6/00) ]
Second, the amount of money that UTIMCO placed in private investment increased substantially from the amount of private investments historically made by the regents board: The $1.7 billion is "five times larger than the $282 million that was placed in such private deals between 1987 and 1992, before UTIMCO was born." [R.G. Ratcliffe Houston Chronicle "Secrecy cloaks $1.7 billion in UT investments" (3/21/99)]
Third, of the 1.7 billion, $252 million was "committed to funds run by Hicks’ business associates or friends. Another $205 million has gone to five funds run by major Republican political donors." [R.G. Ratcliffe Houston Chronicle "Secrecy cloaks $1.7 billion in UT investments" (3/21/99)] UTIMCO investments included: Carlyle – $10 million (President Bush and his father both have business relationships with Carlyle), KKR 1996 Fund – $50 million (Kohlberg Kravis Roberts, founding partner Henry Kravis --15 months after investment, joint venture between the Kravis firm and the Hicks firm), Bass Brothers Enterprise – $20 million (Harken Energy brought in the Basses to save the Bahrain deal), and Maverick Capital – $96 million (main investors and general partners in Maverick Capital include the Wyly family. It was Sam and Charles Wyly who bought ads denouncing McCain during the primary) "The making of so many deals suggests a Republican version of the Lincoln Bedroom sleepovers at the Clinton White House." [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ]
Fourth, UTIMCO’s nontransparency enabled it to use an internal rate of return, a subjective method which can be used to easily manipulate returns, to measure rates of loss and profit on its investments. Unfortunately, many of the UTIMCO investments to donors did poorly or sustained losses. [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ] This may be why the White House concluded that officers and directors of a company "should not be able to treat a public company like their own personal bank." [Mike Allen, The Washington Post "Bush Took Oil Firm’s Loans as Director" (7/11/02)] Nor should government officials be allowed to use public funds for their own private investments.
Bush’s Financial Benefit From UTIMCO. "In 1998, after Bush had been in office for four years, and after his circle had been able to reap years of benefits from the UT privatization," Hicks purchased the Rangers. [John Mecklin, SF Weekly "Tail of Two Races" (12/6/00) ] Hicks paid $250 million, or more than three times the $86 million price of acquisition for Bush and his partners. [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ] Bush received $15 million for his share of the Rangers franchise because his copartners increased his ownership interest in the team from his buy-in interest of 1.8% to 12% when Hicks bought the Rangers. This $15 million dollar benefit was a 2,400 percent increase on Bush’s initial investment just 9 years earlier. [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ] If Bush’s copartners had not been so generous by raising Bush’s ownership interest, Bush would have received only a few million dollars in the Hick’s acquisition. And, if Hicks had not paid three times the purchase price, Bush would not have received so much money. "Two months after the sale, Bush told the Houston Chronicle, "I swear I didn’t get into politics to feather my nest or feather my friends’ nest. Any insinuation that I have used my office to help my friends is simply not true." [John Mecklin, SF Weekly "Tail of Two Races" (12/6/00) ] However, during Bush’s tenure as governor, many "public benefits [were] conferred upon some of those same businessmen" who were involved in the Rangers franchise transaction. [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ]
What did Bush Know? There is no reported smoking gun in terms of how much Bush knew about UTIMCO’s investments. However, as governor, Bush should have monitored the newly privatized UTIMCO fund, which included the sacred lockbox, in order to protect the public’s money. Monitoring would not have taken much effort. After all, Bush appointed friends and donors to UTIMCO, including "Donald Evans, the governor’s best friend and trusted adviser, ...[who] was privy to UTIMCO’s activities from the very beginning." [Joe Conason, Harpers Magazine "Notes On A Native Son" (Feb. 2000) ]
Accounting And Investment Standards Must Be Reformed. Bush admitted one big loophole at his July 8th press conference: The SEC may determine that a corporation’s actions were improper but the accounting used by the corporation may in fact be legal. President Bush described accounting standards as including nonspecific rules subject to differing interpretations between accountants/auditors and the SEC: "sometimes things aren’t exactly black and white when it comes to accounting procedures." If there is an "honest difference of opinion" and no malfeasance or no "attempt to hide anything," then the appropriate remedy a la Harken is restatement of earnings. Under this standard, there is no corporate responsibility, just one good defense to inflated numbers or Enron phantom deals. [7/8/02 White House Press Conference] One problem is that public auditors have "almost universally failed to warn of accounting irregularities" but instead give a "clean bill of health" to public companies which had accounting problems. According to one study, "as a result of these alleged accounting irregularities, [it is estimated] that investors suffered losses of up to $1.276 trillion...." [Phil McCarty, Dow Jones Newswires "Auditors Gave OK To 94% Of Companies With Accounting Woes - Study" (7/10/02) ] Thus, a corporation’s overstatement of its revenue may be legal. "If the experts are right, ... Merck’s [overstatement of revenue by $12 billion] was not only legal but within generally accepted accounting practices. So, even though investors believed they were buying into a larger company than actually existed, there may be nothing to prosecute. It’s the accounting practices that are twisted." [Los Angeles Times, Editorial "Auditing Reform, Do or Die" (7/9/02)]
Can
we trust President Bush to fix the economy and reform corporate corruption?
Bush does not have a stellar track record. All of his business ventures
were failures that were repaired by the financial strength of his family’s
friends and donors. Until now, the Rangers franchise was his one success
story. We handed Bush a strong economy and a strong market on Wall Street.
Now, we learn that "the U.S. stock market has declined more during
George W. Bush’s first 17 months as president than at any time since Richard
Nixon took office in 1969." [David Morris, Bloomberg.com "Stock
Tumble During Bush Term Is Biggest Since Nixon," (7/9/02) ] Given
Bush’s violation of his own rules, can we trust him to restore integrity,
confidence, and public trust in the market?
Submitted by a BuzzFlash Reader
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