Why the Markets Don't Harken to Bush

For President Bush, Harken Energy HEC is like one of the villains in horror movies. No matter how many times he buries the miscreant, it keeps rising from the grave to haunt him.

In every campaign he's been involved in, reporters and political opponents have raised the now-familiar story of Bush's dealings with the Texas energy exploration company. And in every campaign, Bush has managed to fend off the questions and put them to rest.

But in his latest campaign -- the current initiative to alter the behavior of corporate insiders and restore investor confidence -- the Harken story may prove to be a real horror show.

Bush's ineffectual speech on corporate responsibility fell remarkably flat on Main Street, on Wall Street and in Washington. Perhaps he wasn't tough enough, and he surely didn't provide action to back up the rhetoric. But I believe the speech failed because Bush simply lacks credibility on the issues of executive and insider behavior -- in part because of his personal experience on the Harken board all those years ago, and in part because of the way he has dealt with it in recent weeks.

Let's stipulate up front that Bush was not guilty of insider trading. Let's further stipulate that if he had lost the election and remained governor of Texas, nobody would be talking about Harken today.

Some History

The back story: In 1986, Bush joined the board of Harken Energy when he and his partners sold their faltering oil exploration firm, Spectrum 7, to Harken for about $2 million in stock. Spectrum 7 was a dog, but Harken's leaders felt they would benefit from having the son of the sitting vice president as an ally and board member. "His name was George Bush," said Harken's founder, Phil Kendrick, when discussing the deal. "That was worth the money they paid him." Bush served on the board until 1993, when he left to prepare to run for governor of Texas.

While on the board, Bush engaged in all sorts of behavior that he condemned in his speech Tuesday and that he has criticized in recent months. To wit, Bush has called for more rapid disclosure of executive and insider stock sales. In 1990, however, he dumped most of his stake two months before the company announced an earnings restatement and failed to report the sale to the Securities and Exchange Commission for 34 weeks. There's no evidence to suggest that Bush was guilty of insider trading -- just sloppiness. He was cashing in all his other stock at around the same time because he needed to pay off the $600,000 bank loan he took to fund his 1989 investment in the Texas Rangers. And he was cleared by the SEC.

On Tuesday, Bush called for companies to ban the practice of making loans to executives. Another nice idea, though too late for WorldCom's WCOME shareholders, who could certainly make good use of that $400 million they lent to Bernard Ebbers. On Wednesday, however, it was reported that Bush took loans from the shareholders of Harken in 1986 and 1989 at below-market interest rates. And if you look through Harken's 10-Ks, it is clear that Bush never really paid them back.

Bush has called for board members to exercise greater oversight over compensation and audit activities, to ensure that companies no longer hide debt off the balance sheet. But as a member of Harken's audit committee, he signed off on a deal that unjustly inflated earnings. Harken lent money to a partnership composed of company insiders, which used the funds to buy a Harken subsidiary called Aloha Petroleum at an inflated price, creating a multimillion-dollar instant "profit." When it learned of this deal, the SEC forced Harken to restate its earnings, and that caused the stock to plummet in 1990.

The Current Reality

Bush's get-tough, no-excuses rhetoric has also been consistently undermined by his reactions to the disclosures about Harken. He continues to insist on treating it as a political story. And while Democratic attack dogs are certainly growling, he fails to grasp that something larger is at work here.

Rather than admit that he was lax and that, as a director, he should've taken pains to ensure that the proper forms were filed with the SEC -- these were major transactions for him, after all -- he has cast blame elsewhere. First, he offered the equivalent of the "dog ate my homework" excuse: He said the SEC lost the paperwork. Later, Bush spokesman Ari Fleischer blamed Bush's lawyers. (When all else fails, blame your lawyers.) "I still haven't figured it out completely," Bush said at a press conference last week.

As for the loans, Bush and his spokespeople said they were appropriate because they were accepted practice at the time, and, in any case, he didn't profit from them. Again, that misses the point. If giving shareholders' money to executives to buy stock is not a sound practice today -- especially when the rich people taking the loans don't have to repay back them -- it wasn't a sound practice in the late 1980s. In fact, Harken didn't even come close to collecting the loans it made to Bush and other officers, and the shareholders ended up eating them.

Bush also stumbled when discussing the Aloha transaction. Asked if he recalled discussing the deal as a member of the audit committee, Bush said, "You need to look back on the directors' minutes." And when asked why the audit committee didn't see that this Enronesque transaction would fail to pass regulatory muster, Bush responded, "In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures."

In short, Bush's responses sound familiar. The instinctive defensive crouch, the relentless passing of the buck, the denials -- this is exactly the sort of reaction we've seen from every CEO, director and official called to task about dealings at failed companies. The most infuriating aspect of the Enron-Tyco-Global Crossing-WorldCom-Andersen-etc. scandals is the utter lack of contrition, the refusal of anyone to take responsibility.

Layer the Harken story on top of some of Bush's other reactions to the unfolding corporate scandals, and you begin to see why the speech was such a downer. While calling for zero tolerance for unethical behavior, Bush has inexplicably maintained his support for Army Secretary Thomas White. White formerly ran Enron's Energy Services division, which artificially inflated its earnings to the tune of hundreds of millions of dollars.

What's more, Bush has stubbornly stood by SEC Chairman Harvey Pitt, whose past work forces him to navigate more shoals than a Mississippi River barge pilot. This loyalty, which in other times might seem admirable, now seems more pigheaded.

Think how much more effective Bush's speech would have been if he had dealt honestly with his experience on the Harken board and used it as an object lesson. If he had expressed regret that investors fared poorly in a company on whose board he served. If he had conveyed an inkling that this experience has given him some particular insight into the importance of insider conduct, of the need to follow both the spirit and the letter of the law, of the need for directors to be more vigilant and of the need for executives to take responsibility for their actions, to admit when they have failed or done wrong, and not to blame somebody else.

That would have been a speech worth listening to.