White House’s Failure to Sound Alarm Faulted

Even though they mounted no formal effort to bail out Enron Corp., Bush administration officials are coming under fire for not publicly disclosing the extent of the company’s troubles when they became aware of them.

Some legal experts contend the administration was in a position to sound a warning to the public or the Securities and Exchange Commission after a series of phone calls from Enron executives to Treasury Department officials last fall. The fact that they didn’t, while Enron’s financial situation grew darker and its stock price declined steadily, raises the specter of special treatment for a powerful corporation, congressional critics say.

But the Bush administration, despite close ties to Enron, did not help the firm stave off bankruptcy as the federal government had done for failing enterprises such as Long-Term Capital Management, Chrysler Corp. and Lockheed Corp.

Enron was different. Many experts on government-business relations say the company’s relationship with the Bush administration made aiding it a potential political embarrassment. But others say the administration decided not to help the company because its failure did not threaten widespread damage to financial or energy markets and the economy as a whole.

Yet the fact that Enron’s failing condition went on without public disclosure for so long--even as high government officials were apprised of it--puzzled legal experts.

“I’d be surprised if they [Treasury officials] didn’t call the SEC,” said attorney John Hanson, a specialist in bankruptcy cases for the law firm Nossaman Guthner Knox Elliot LLP, which has offices in four California cities, including Irvine and Los Angeles, and in Washington.

In October and early November, Enron President Lawrence “Greg” Whalley made a series of six to eight calls in which he asked Peter Fisher, Treasury undersecretary for domestic finance, to help secure loans from the company’s bankers. Fisher refused, and on Nov. 8 Enron Chairman and Chief Executive Kenneth L. Lay telephoned Treasury Secretary Paul H. O’Neill to tell him of Enron’s dire financial situation.

That same day, Enron filed documents with the SEC revising its financial statements back to 1997, evaporating $600 million in nonexistent profits and accelerating its stock plunge.

Although the administration’s accounts of what happened are incomplete, it appears that neither Fisher nor O’Neill asked the SEC to demand that Lay tell stakeholders and investors about the firm’s deteriorating condition, observers note. “I cannot comprehend why they did not inform [SEC Chairman Harvey] Pitt,” said a onetime lawyer for the federal government who asked for anonymity because he still does business with the government.

“My counsel would have been to call Lay back and request him to do full disclosure,” said Lynn Turner, a former chief accountant at the SEC.

In the 1998 case of Long-Term Capital Management, a foundering investment firm kept out of bankruptcy by a government-assisted infusion of capital, Federal Reserve Chairman Alan Greenspan communicated constantly with then-SEC Chairman Arthur Levitt and with the Treasury Department and the Commodity Futures Trading Commission, Turner said.

Rep. Henry A. Waxman (D-Los Angeles) charged last week that Bush administration officials had “done nothing to mitigate the harm of the Enron bankruptcy to thousands of its employees and shareholders.” In response, White House Press Secretary Ari Fleischer said Enron officials had not provided the Treasury officials with any information that was not already in the general news.

Stock Rose After Earnings Revision Filed

But the record of SEC filings and public statements by Enron officials shows that Lay and other company officials maintained publicly that the company’s energy trading business was strong and that it had the financial wherewithal to survive the crisis even as some of the firm’s difficulties became evident in October and November.

The company reported a $618-million loss and a reduction in its shareholders’ equity Oct. 16, and Nov. 8 it revised its earnings for the previous four years, although without public reference to its overwhelming debts or the financial peril it was telling Treasury officials about. In fact, Enron stock rose almost 20% in the four days after the Nov. 8 disclosures as investment analysts anticipated its proposed merger with Dynegy Inc.--later canceled--and said most of Enron’s troubles were behind it.

Because the precise dates of Whalley’s phone calls to Fisher were not released, it cannot be determined how much shareholder value was lost between the time Fisher was first contacted and Enron stock plummeted (it dropped from $33.84 a share on Oct. 16 to $8.41 on Nov. 8). But company shareholders and employees lost more than $18 billion of market value in that decline.

From that point, Enron stock fluctuated until the end of November, when its bonds were reduced to junk status, and the firm filed Dec. 2 for protection from creditors under Chapter 11 bankruptcy. Enron stock closed Friday at 67.5 cents a share.

Legal experts are not certain whether officials have a responsibility to disclose information received in communications from private industry. “It’s a tough question,” said Turner, the former SEC accountant. “Officials can have confidential communications.”

In the case of Enron “the courts will decide” whether government officials should have pushed for public disclosure, said William Bagley, a lawyer in private practice who in 1974 served as the first commissioner of the Commodity Futures Trading Commission.

Matters of disclosure are only one part of the mounting debate concerning Enron’s collapse. Some say the Enron-Treasury discussions alone raise serious questions.

“It’s a terrible precedent for the rest of the economy if major companies feel like they have access to the highest levels of government and feel comfortable asking the government to intervene in their private negotiations,” said Austan Goolsbee, an economics professor at the University of Chicago Graduate School of Business. Goolsbee termed the Enron phone calls “borderline unethical.”

But Alice Rivlin, a former vice chairwoman of the Federal Reserve and a Clinton administration budget director, saw a responsibility for officials to communicate.

“When a really big company is in really big trouble, having the CEO call to say ‘You ought to know what’s going on’ is a good thing,” Rivlin said. “If they had gone down and not said anything, that wouldn’t have been responsible. I think the reaction of the Treasury secretary, if that had happened, would have been, ‘Why didn’t somebody tell me?’ ”

Some See Secrecy as Part of Problem

Others see Enron’s secrecy in all things as part of the firm’s difficulties. “There’s a front door in government and a back door, and most of these contacts were through the back door, hidden from public scrutiny,” said Paul C. Light, director of government studies at the Brookings Institution, a nonpartisan Washington think tank.

More appropriate, Light said, would have been public appeals by Enron for bailout legislation, filings with the Securities and Exchange Commission “or other above-board, in-the-sunshine approaches for help.”

But many experts see Enron’s political influence as a reason for its failure to get a bailout. Politically, the Bush administration already had been on the defensive for taking massive contributions from Enron, which in California had been pilloried for allegedly trying to gouge the public during the energy crisis.

But Edward Muller, an investor in energy projects and former president of Edison Mission Energy, said Bush administration energy officials did not rely on political considerations in their decisions to withhold help. “They simply decided that a bankruptcy of Enron would not disrupt energy or financial markets or the economy,” said Muller, who was in touch with officials last fall in connection with his own business interests.

Enron, despite generating massive revenues, did not employ hundreds of thousands of workers, as did Chrysler in the 1980s or Lockheed in the 1970s. And unlike Long-Term Capital Management in the 1990s, its collapse did not threaten banks across the country and the world.

Indeed, Enron’s bankruptcy did not greatly affect prices for electricity and natural gas, nor did it disrupt markets that trade in those commodities. One effect of Enron’s bankruptcy, energy analysts said, has been to make bankers and financial institutions more cautious about lending and investing in power companies. But such caution typically follows any publicized bankruptcy.

In any case, lawyer Bagley explained, federal bailouts are not easy to do. “There is no institutional structure, so it takes extraordinary action by Congress--as in Chrysler or Lockheed.” (In 1971, Congress narrowly voted special financing to save the aerospace firm from bankruptcy after an unwise investment in building a commercial airliner.)

Long-Term Capital was saved by emergency bank financing, but that was organized by the Federal Reserve. Enron could have been “rescued” by a similar infusion of capital, Bagley noted. “But where would the capital come from? The Bush administration would have had to seek congressional action for Enron.” And given Enron’s closeness to the White House, such an effort may well have raised political difficulties too great to surmount.

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Times staff writers Jube Shiver, Peter Gosselin and Warren Vieth in Washington and Nancy Cleeland in Los Angeles contributed to this report.