Enron's End Run

To make a mess as big as the Enron debacle, you need some friends in high places--Texas Senator Phil Gramm and his wife, for instance

Lay's much-touted role as one of the $100,000 pioneers for Bush's presidential campaign is not quite what it seems, says the fund-raiser. When the deadline came for contributions, the chairman was still a bit short.

"He hadn't made it yet, so I transferred $30,000 or $40,000 from my [fund-raising] account codes to him so he could get pioneer status on this big event day," Walden says. Fund-raiser Heidi Kirkpatrick worked with Walden, concentrating more on Democrats.

"It's like you visit Houston, and you visit Ken Lay," says Kirkpatrick. "He was pretty much the top target for fund raising on both sides of the aisle."

Senator Phil Gramm and Wendy Gramm, an Enron director, did their part to free Enron from federal restraints in the exotic derivatives markets.
Senator Phil Gramm and Wendy Gramm, an Enron director, did their part to free Enron from federal restraints in the exotic derivatives markets.
Ken Lay made some unlikely friends in Washington, such as ultraliberal Congress member Sheila Jackson Lee of Houston.
John Childs
Ken Lay made some unlikely friends in Washington, such as ultraliberal Congress member Sheila Jackson Lee of Houston.

While Bentsen may have been a big individual recipient, Enron's real go-to guy in the House was Sugar Land Republican Tom DeLay. According to an Enron source, DeLay was particularly aligned with the new Enron order under Jeff Skilling.

"Skilling and DeLay think the same on 'dereg': They are free enterprise, open markets, they believe it," says the source. "There's just a natural bond, plus DeLay is majority whip."

But the fight against reporting requirements would require a well-connected Senate commander, Phil Gramm of Texas.


Senator Gramm first attacked the Financial Accounting Standards Board, which had recommended that derivatives be included on companies' balance sheets. At a Senate banking committee hearing in 1997, Gramm challenged FASB Chairman Ed Jenkins to reach a "broader consensus" from the business community. Jenkins replied that the standards board held 123 public meetings before concluding that reporting practices for derivatives were inconsistent, allowing different companies to report the same transactions differently.

"I don't question that you've had extensive hearings," Gramm snapped. He recited a list of opponents to the FASB standard, which included Chase Manhattan Bank and Citicorp. "Are these people against the public's right to know?...If we are going to maintain generally accepted accounting principles, part of your job, it seems to me, is getting general acceptance."

"The focus of the FASB is on consumers," Jenkins argued, "users of financial information such as investors, creditors and others." He explained that corporate reports need to give accurate finances and "not influence behavior in any particular direction."

Soon after, Wendy Gramm told the House banking committee that derivative markets would suffer from "unnecessary or overly burdensome regulatory costs." Gramm, a professor at George Mason University's James Buchanan Center for Political Economy, described her views as "comments that reflect the public interest rather than any special interest."

What she didn't put on record, however, was any mention of her job as paid director for a company that planned to become the world's largest corporation by dealing over-the-counter derivatives. Gramm is currently on the board of two other firms that put investor funds to work in the derivatives market: Invesco Funds and Longitude, a company that develops software to help dealers keep track of prices and trading positions.

In 1998, anti-regulation forces advanced with the GOP's new majority in both the House and Senate. Phil Gramm was elevated to chairman of the Senate banking committee, which oversees legislation on any financial regulations.

Merton Miller, an economics professor and 1990 Nobel Prize-winner, told a roundtable discussion in spring 1999 that the Texas senator would be influential with the Securities and Exchange Commission in weakening financial derivative controls.

To unanimous agreement, Miller said that the way to weaken such regulations was "not by rational arguments, of which we have immense numbers. But by a fellow named Phil Gramm..." To persuade the SEC "to take this medicine," he said, "you've got to be able to get to the supervisor of [SEC Chairman] Arthur Levitt, who is, in effect, Phil Gramm, and I think you can fully expect him to listen."

As the general, Gramm raked in enormous contributions from those who stood to gain the most from derivatives deregulation: Enron and those in the banking and securities industry.

Enron donated more than $100,000 in individual and corporate contributions to Gramm's political campaigns, including $10,000 from Ken and Linda Lay, according to the nonpartisan Center for Responsive Politics. (Lay was also regional chairman of Gramm's failed presidential bid in 1996.) The banking and securities industry provided him with more than $2 million since 1989.

Michael Greenberger, the former chief of the CFTC's trading and marketing division, says the debate over off-exchange derivatives has been smothered by special interests. Even modest attempts to study the issue trigger a rush of lobbyists to Capitol Hill.

"The Enrons of this world, the investment banks, the commercial banks individually and through trade associations, are lobbying the congressional branch and the executive branch and whoever they need to lobby 24 hours a day, seven days a week for this kind of stuff," says Greenberger.

Enron, tasting victory, launched Enron Online. The computerized trading platform would standardize the company's long-term derivatives contracts, to close such deals in seconds rather than the hours formerly needed. That would increase trading volume exponentially.

That online debut was diminished by a November 1999 White House capital management task force report recommending more financial disclosures from hedge funds. The report also recommended proceeding slowly with online markets such as Enron Online. And then-futures trading commission chairman Brooksley Born also echoed those sentiments about derivatives trading.

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