Smoke-filled room

When Dan Morales brokered Texas' $17.3 billion tobacco settlement, he blew away Governor Bush. He also made sure his friends got a few puffs.

As a first-term governor, Bush had generally steered clear of controversial battles. The tobacco negotiations were no exception. He had declined an earlier invitation from Morales' staff to participate in the settlement talks.

On that January day, Bush would once again choose to stay out of the fray.
Morales' aide reported back to his boss that Bush couldn't meet with them. Apparently, the governor had other matters occupying his attention that morning--though it's hard to see what could take precedence over a multibillion-dollar settlement for the state.

As an alternative, Bush's office suggested that Morales brief Alberto Gonzales, the governor's secretary of state, and Terral Smith, Bush's legislative director.

The arrangement smelled like a snub, and Morales responded accordingly. He decided to send someone else to brief the governor's staff.

Bush's aides would wait hours that day for the arrival of Morales' first assistant, George Vega. But he never showed. Amazingly, the governor of Texas learned about the details of the tobacco settlement when everyone in the media did--at Morales' news conference that afternoon in Texarkana.

"We never received a briefing," says Gonzales, who waited all day, expecting to hear from the attorney general's assistants.

Morales and two of his aides chuckle about the episode today. They shrug off any talk of political gamesmanship, saying their no-show simply reflects the frazzled pace of those final days of settlement talks.

Throughout the day, Morales stayed at Texarkana's federal courthouse, where he'd filed the state's case against the cigarette makers two years earlier. Like many other state attorney generals have done since, Morales sued for repayment of Medicaid expenses linked to smoking-related illnesses. He was forced to reschedule his news conference several times that day as final details of the pact were set in place.

"I had to go out to a roomful of reporters three separate times and tell them it was delayed," recalls Morales' spokesman, Ron Dusek.

The episode exposed the deep mistrust that had built up between Bush and Morales, who had once enjoyed an amiable working relationship. That mistrust would very nearly wreck the deal.

Goodbye to Joe Camel
For the state, the tobacco deal rates as a landmark victory. For the first time last month, five tobacco companies began depositing their proportional shares of an initial payment of $350 million into the state treasury. Another $300 million will be channeled directly into counties and hospital districts this year. The cigarette makers will continue making payments for another 25 years.

Drivers will notice another result of the pact: no billboards or buses celebrating the Marlboro man or any other type of cigarette advertising, for that matter. The tobacco companies will also stop distributing T-shirts, caps, and other trinkets promoting their products in Texas.

No one disputes that the overall deal will benefit the state. But the fight over the attorneys' fees connected with the settlement is far from resolved.

On February 5, Bush filed a motion--drafted by Secretary of State Gonzales--to become a party to the tobacco lawsuit so he could protest the fees.

He wasn't the first to voice his objections. A group of seven state legislators and the Republican attorney general nominee, John Cornyn, had already made the same move. The legislators' and Bush's attacks on the fees weren't intended as a direct hit. They didn't ask the court to undo the deal that the trial lawyers had made with Morales; Bush asked only that the state's settlement be separated from the lawyers' fees.

According to the terms of the settlement, the settlement funds and attorneys' fees would come from the same source--the tobacco companies. In theory, then, the more the attorneys got, the less the state would get.

The tobacco companies, however, had agreed to pay the attorneys only what an arbitration panel determined was fair. This presented a potential problem for Morales and the state. If, for some reason, the arbitration panel didn't deem as reasonable the full $2.3 billion that Morales had already agreed to pay his lawyers, then those lawyers were free to demand the difference from the state.

Morales had, in fact, negotiated a deal that may eventually force the state to fork over a portion of the attorneys' fees itself. That aspect of the deal outraged Bush and the Republican legislators.

"We made a conscious decision not to attack the underlying agreement between the state and the tobacco companies and the pretense that this money was separate money from the settlement," says Pete Schenkkan, an Austin lawyer who represented some of the legislators. Instead, Bush and the legislators attacked the lawyers' right to hit up the state for money.

On the public-relations front, Bush's strategy presented problems. Morales, insisting that the lawyers' money was coming from tobacco and wouldn't diminish the state's settlement, lashed out at Bush for holding up the deal. Concedes Ken Hoagland, the director of a Houston-based tort reform group and cheerleader for Bush when he was attacking the fees, "The governor made the best deal he could, given that Dan Morales was saying every day that [Bush] was holding up the settlement. The governor had to get in a daily ping-pong match in the papers."

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