JAMES CARNEY and JOHN F. DICKERSON

July 28, 2002

George Bush may be an M.B.A. and a former CEO, but his experiences haven't taught him to warm to Wall Street. The President thinks the Street, not Big Business, is the problem. Here's how he does his figures

George W. Bush has a story he's been telling about the scandals plaguing corporate boardrooms. After unveiling his new policies for cracking down on deceitful CEOs to Wall Street a few weeks ago, he was approached by an audience member eager to air his own proposals—a college-professor type, as Bush tells it, with ideas both windy and unwieldy. Then a "regular guy" interrupted. "If you want more corporate responsibility," the new arrival advised, "start throwing some of them in jail."

Because he believes it reflects his own life story, Bush loves it when the elite are upstaged by the streetwise. But he repeated the anecdote at the inaugural meeting of his Corporate Fraud Task Force because it reflected his own view: complex reforms of securities law are well and good, but the best way to assure skittish investors that the government is fixing the problem is to nab a few bad guys. Bush got his cue when federal agents hauled away the founder of Adelphia Communications and his sons in handcuffs in front of a bank of television cameras. "This government," Bush said, jabbing the air to punctuate his words, "will investigate, will arrest and will prosecute corporate executives who break the law."

The Adelphia scalps gave the Administration a chance to look as if it was taking charge amid the dreadful financial news. Through much of July, as toxic stock syndrome plunged the market to five-year lows and nudged his poll numbers to mortal levels, the President and his top economic advisers appeared helpless and sometimes befuddled. Wall Street was not impressed. As a private equities fund manager told Time, "It doesn't seem like his top priority. It doesn't seem like he understands. It doesn't seem like they have their act together." Each time Bush gave a speech promising to attack corporate malfeasance or insisting that the fundamental economy remained strong, his face on television was bracketed by graphs showing stocks in free fall. Inside the White House, Bush's number crunchers debated whether to goose the market with a tax cut or a round of spending but ended up telling him that the best policy was to wait for a rebound and not meddle.

Does another Bush not get it? Sure, the son has got to focus on a war to preserve the nation's security, as his father did. But like Dad, he misjudges the nation's economy at his peril. Bush has shown a willingness to inject politics into some economic decisions. He imposed tariffs on foreign steel and signed a subsidy-laden agricultural bill, tinkering with markets in order to placate crucial constituencies. But faced with corporate scandals and a market meltdown, our first M.B.A. President hadn't found an easy remedy. He could draw from his own business defeats some empathy for the everyday victims of the current market malaise. But one day he is ducking questions, insisting all that matters is the economy's reviving fundamentals. The next he is doing what an adviser calls "his Charles Schwab imitation"—discussing price-earnings ratios and suggesting that bonds might be a good buy. Even his speech to Wall Street on corporate misconduct, which was promoted as proof that he shared investor outrage, was unconvincing to some. "You can tell when he really cares about something, when he's into it," says an adviser to the President's father. "And he didn't look into it."

That may be because Bush doesn't believe the market's gyrations have much to do with the basic vitality of the economy. For plenty of Americans, especially the 60% who own stocks, they're one and the same. But Bush's view is "more old-fashioned," as an adviser puts it. To him, corporations and businessmen who produce things are the backbone of the economy, while the markets and investors are a vaguely sinister sideshow. Bush's first reaction to revelations of corporate misconduct was to assume the best. Yes, corporate America tripped up here and there, but the subsequent hysteria was stirred up by the overheated media. He didn't want to overreact lest he hamstring honest executives. "He didn't want to do something that would hurt the real economy just to fix a perception problem," says a senior adviser.

Bush came to his benevolent view of corporate America by way of Midland, Texas, where the young Harvard Business School graduate landed in 1975 hoping to strike it rich in the oil business. There, Bush recalls, businesses were filled with "good men" who would strike a deal on a handshake or the strength of a family name. When the oil boom went bust, as it did for Bush in the mid-1980s, small-business men didn't cash out their stock options and run; they took pay cuts and tried to help their employees. To Bush, Enron and WorldCom were aberrations, the fault of a few bad actors in an otherwise sound system. "We were, like, What in the world?" says Commerce Secretary Donald Evans of his conversations with Bush. "We were just kind of bewildered. It is unbelievable to us."

What does make perfect sense to anyone from those Midland days is to blame Wall Street. Bush remains distrustful and not a little dismissive of the investment bankers who swooped into Texas with saddlebags full of cash when oil prices gushed but galloped out of town when prices sank. Back in April, when the Dow hovered around 10,000, a White House economic adviser told the President at a social gathering that "there's no reason this market shouldn't be around 7500." According to an eyewitness , Bush made a face, turned and walked away, as if the subject bored or annoyed him. Last week Bush was back on memory lane. "When I used to watch the stocks ... in Midland, Texas," he said, "[I was] somewhat skeptical about what was taking place on the floors of these exchanges. They'll buy you or sell you, depending upon if it's in their interest."

Bush's distrust of financiers and faith in CEOs determined his economic team. The month before he took office, he told Time that he viewed economists as he did "accountants—you hire them." Bush "hired" Lawrence Lindsey, a former Federal Reserve governor, for the backstage role of national economic adviser. And he chose Glenn Hubbard, an economics professor, as chairman of his Council of Economic Advisers. But for the out-front post of Treasury Secretary, Bush chose the CEO of aluminum giant Alcoa, Paul O'Neill, whose skepticism about investment bankers mirrored his own.

O'Neill was derided as an outsider by Wall Street and Washington, but that never troubled Bush. He considered it an asset. Yet O'Neill's stint has been rocky from the start. His penchant for making off-the-cuff quips on everything from Argentina's economic collapse to the merits of a strong dollar has roiled markets around the world and cost him the limited clout he had on the Street. "It's not that he's bad, and it's not that he's dumb," says a New York banker who attended a meeting with O'Neill last week. "It's just that he has no gravitas. And once you lose it, you can't get it back." O'Neill's habit of being out of the country during times of economic turmoil has led even some Republicans to call for his ouster. "O'Neill's been traveling everywhere but Main Street and Wall Street," G.O.P. Congressman Mark Foley of Florida told Time. "The Administration needs a central figure who can deliver a clear, potent message on the economy." But O'Neill scoffs at the notion that a Treasury Secretary's job should include trying to calm the markets or reassure the public. "I'm a little dubious," O'Neill told Time, "that in the middle of a hurricane, a soothsayer can make the wind go away."

It doesn't help that Bush's economic advisers don't play well together. Disputes among Lindsey, O'Neill and Hubbard have become so acrimonious that they have begun seeping out of this famously buttoned-up White House. Lindsey can roll his eyes when asked about O'Neill's latest unscripted remark. And according to allies, he has complained that Hubbard's status quo views have persuaded the President to reject as interventionist even modest new policy steps. The President's top economists, says a senior Administration official, "disagree on the analysis before they ever get to the remedies."

Bush may cling to his belief that the market's woes won't affect the basic soundness of the economy, but he knows from his father's experience that politicians who don't appear to take voters' pocketbook fears seriously pay for their callousness at the polls. "This President is acutely aware of the impact of the economy, both on regular Americans and on Presidents," says Mark McKinnon, a campaign 2000 veteran who still advises Bush. "Americans fundamentally understand a President can't move the markets, but they want to be assured that he cares about it and is doing all he can."

So prepare to see an Administration in motion. The President will hold a lavish ceremony this week to sign the corporate-responsibility bill. O'Neill, Evans and others will attend a series of events promoting good news about the economy. To ward off charges that Bush is lounging on his ranch while the economy burns, he will make trips into the "heartland" to meet with anxious Americans. Topping it off, he will host a day-long economic forum in Waco, Texas, on Aug. 13.

The folks at the White House are hoping all that activity convinces voters that the Bush team is finally on top of things. Meanwhile, they're praying that the "real economy" stays stable and the markets settle down. More made-for-TV indictments are likely this week, which will help too. But just in case, one topic slated for discussion at the Waco forum is—as White House communications director Dan Bartlett puts it—"ways to avoid a double-dip recession." And as some economists point out, on a graph, a double-dip recession looks like a W.

With reporting by Michael Duffy/ Washington

DAVID TEATHER in Dallas

July 31, 2002

White House attempts to clean up corporate America are dogged by the vice-president's years in the oil business

President Bush signed a wide-ranging corporate reform bill yesterday in the hope that taking action, together with a rebounding stock market, will restore confidence in Wall Street before the mid-term elections in November. The threat to the his administration posed by the corporate scandals that have shaken America is clear. His approval rating slipped below 70% last week for the first time since September 11.

But signing the bill, together with his recently adopted line in angry rhetoric, may not put the Republicans in the clear, in particular the vice-president, Dick Cheney, who is embroiled in controversy stemming from his stewardship of the oil services company Halliburton before he took office.

About 15 minutes' walk from Mr Cheney's former $3m (£2m) home lies Highland Park Village. This is no typical US retail centre: its 40 or so shops include Prada, Gucci and Calvin Klein - no Wal-Mart, Kmart or Piggly Wiggly here - piped classical music drifts into sharp blue skies, and it lies in in one of the most prestigious parts of Dallas.

But even in this affluent part of Texas, in what should be a Republican stronghold, doubts about the administration are beginning to creep in.

"The scariest thing to me is you really can't trust people," said Bob Johnson, a 44-year-old database manager. "I think most people who have voted Republican were happier with an ideologue like Reagan. Some of these guys talk the talk but walk the self-interest walk instead of being a little more high-minded and principled. Reagan may have had his problems but no one thought he was lining his pockets."

The White House is scrambling to deflate what some aides refer to as the "Cheney problem".

Vulnerable

As Washington attempts to take a firm grip on the accounting scandals and corporate greed that have stunned America, the White House is being forced to tread a difficult line. An administration packed with former businessmen is looking extremely vulnerable to accusations of at best, hypocrisy, at worst, past financial misdeeds of their own.

While President Bush has vowed to hunt down corporate wrongdoers, Mr Cheney has noticeably slipped back into the shadows.

The "problem" stems from Mr Cheney's five years as chief executive of Halliburton, an oil services company with annual revenues of more than $17bn. He steered the business between 1995 and 2000 before quitting to stand as vice-president. During that time he used his White House experience to win substantial government contracts for Halliburton.

To the Bush administration's embarrassment, the US financial watchdog, the securities and exchange commission (SEC), began investigating Halliburton's accounting practices in May. The inquiry centres on an obscure change to the company's accounting policy in 1998 which had the effect of inflating its revenue by $234m over a period of four years.

Greed

But that was not the only piece of controversy during Mr Cheney's time at the company. It was criticised for dealing with Libya and Iran, the latter now one end of President Bush's "axis of evil". The Washington Post reported two years ago that a Halliburton subsidiary had dealt with Iraq - something that Mr Cheney denied knowing anything about.

Nor does Mr Cheney appear to be in any position to take a strong line on the culture of greed and excess that President Bush has lately railed against. When he left Halliburton to take office, Mr Cheney pocketed $36m from cashing in share options and from a generous farewell package.

A former defence secretary and widely regarded as providing the diplomatic experience that President Bush lacked in Washington, Mr Cheney is in danger of becoming the administration's greatest liability. He even appeared in a promotional video for the now disgraced accounting firm Arthur Andersen, in which he praised its advice "over and above the, just sort of the normal by-the-books audit arrangement".

The Halliburton Mr Cheney left behind is struggling to stay afloat. Shortly after he left, the company warned that it was doing worse than expected and the share price fell heavily. It also admitted being under a grand jury investigation for allegedly over-billing the government.

Last week the company reported heavy losses, largely due to potential asbestos claims against businesses bought while Mr Cheney was chief executive. The shares, worth $52 when he sold, are now worth $12.70.

The SEC investigation into Halliburton is focusing on changes made to the way the company accounted for revenues that were in dispute on projects that had run over budget.

Halliburton builds everything from offshore drilling platforms to drill bits. Since the accounting change, it has estimated how much of the disputed costs it expects to collect and booked the unpaid revenue immediately.

The company maintains that the practice complied with accounting regulations. "Halliburton has always followed and will continue to follow guidelines established by the SEC and GAAP [generally accepted accounting principles] ," its finance director, Doug Foshee, said.

But the timing of the change is significant. Without the new policy in 1998, Halliburton's profits would have failed to meet the targets of Wall Street. It took the company more than a year to disclose the accounting change.

The California Democrat Henry Waxman has written to Mr Cheney suggesting that he donate some of his profits to the thousands of Halliburton workers who have lost their jobs in the past two years. "Vice-President Cheney could provide an extraordinary example of personal responsibility," he said.

Judicial Watch, a self-appointed public watchdog, is suing the company on behalf of two shareholders.

"To look the other way for the vice-president would be to set a precedent that the Washington elite are above the law," said Larry Klayman, chairman of the organisation and its general counsel.

Mr Cheney's close relationship to the big business world is still under examination in the formation of the administration's energy policy.

He is the head of the government's energy taskforce , which arrived at a policy last year that would ease the tax burden on oil companies and allow drilling in the Arctic national wildlife reserve in Alaska.

Conservationists have complained that they were barred from dozens of meetings held with the industry, including Enron, when forming the policy.

Mr Cheney received backing from the oil industry in his election campaign, including donations from two directors on the Halliburton board.

Fortunately for the White House, the SEC investigation is unlikely to yield any results before the November elections. One insider said this kind of inquiry could last several years.

"You first of all have to establish whether the accounting change was material or if it didn't make a dime's bit of difference," he said.

"Then you have to prove whether it was fraudulently done or just a goof-up. If there was fraud, you have to determine who committed it and then you look at the auditors and the executives. Depending on the complexities involved, it could take years."

Bush appointee

The assertion two weeks ago from President Bush that the SEC would clear Mr Cheney of wrongdoing raised plenty of eyebrows.

The chairman of the SEC was appointed by President Bush and is himself under fire for the volume of financial scandals. President Bush has backed him publicly and it is perhaps unwise to leave any hint of pressure over Halliburton.

Judicial Watch pointed out that George Bush Sr was president when his son was the subject of an investigation at Harken Energy a decade ago. Although unspoken, the suggestion is clear enough - that President Bush Sr may have pulled some strings behind the scenes to clear his son. The insider dealing investigation was closed and no action was taken.

To Democrats at least there is a chink of light in the otherwise impregnable popularity ratings that the administration has enjoyed since September 11.

Zac Porter, a real estate manager in Highland Park, said he was growing increasingly concerned about the allegations against Mr Cheney and President Bush. For now he gives them the benefit of the doubt, but that could change.

"The concern is there and you can't help thinking about it," he said. "It would be an election issue for me.

"We've got to keep the economy looking good and if it turns out the people in office are contributing to the smoke and mirrors on Wall Street on financial reporting, then, yeah, you have to take that into consideration when you are electing leaders."

Special report
George Bush's America

DAVID OLIVE

July 26, 2002

"By any measure you want to use, Halliburton has been a great success story."
Dick Cheney, U.S. vice-presidential candidate, campaigning in 2000

"Halliburton Co. said Wednesday that it lost $498 million in the second quarter, weighed down by charges against earnings for asbestos-related claims and a troubled project in Brazil."
— News report, July 24, 2002

WITH SPIRO ("TED") Agnew, it was so simple. He was charged with pocketing more than $100,000 in graft from Maryland engineering firms, one of which took the trouble to have someone personally deliver an envelope with $10,000 in small bills to the newly elected U.S. vice-president at his suite in the Executive Office Building in Washington. Bribery is plainly illegal, so Ted pleaded "no contest" to the charges against him and quit public life in 1973.

But you look at Dick Cheney's brief stint in business from 1995 to 2000, prior to joining the Bush ticket, and you don't see anything illegal. Not yet, anyway.

There's nothing illegal about a former U.S. defence secretary and Gulf War hero accepting a plum post as CEO of a tainted firm, Halliburton Co., that was harshly criticized in the early 1990s for selling oil-drilling equipment to, of all places, Saddam Hussein's Iraq. In 1995, the same year Cheney decided to try his hand at business with Halliburton after a lifelong career in politics, the company pleaded guilty to violating the U.S. ban on exports to Libya, having peddled to strongman Moammar Gadhafi six pulse nuclear generators that could be used to detonate nuclear weapons.

Nor was there anything illegal about Cheney's inability, as CEO, to stop the stain of questionable conduct at the Texas-based oil-services and construction company from spreading. Under Cheney, Halliburton continued to do business with countries the U.S. has described as "rogue nations," including Libya, Iran and Iraq.

And it overbilled the Pentagon on contracts over a four-year period ending in 1998 — charging $750,000 (U.S.) for electrical repairs at Fort Ord in California that actually cost about $125,000, for example — and ultimately reached a settlement with the Army in which it paid a $2 million fine.

Also in 1998, Halliburton, with the assistance of its auditor, Arthur Andersen, altered the company's accounting methods in a way that postponed losses from deadbeat clients, a device that artificially inflated Halliburton's profits by about $100 million and is now the subject of an investigation by the U.S. Securities and Exchange Commission.

There was nothing improper about the unusually limited role expected of Cheney as head of a Fortune 500 company. He was recruited as CEO not long after a fortuitous five-day fishing trip in B.C. with several CEOs, including his predecessor at Halliburton, who was impressed by Cheney's fireside tales of how he had reorganized the Pentagon. That revamp, which called for a 25 per cent reduction in personnel and the closing of 800 bases, laid the foundation for the allegations Cheney and George Bush would make in the 2000 campaign of how the Clinton-Gore team had run down America's fighting strength.

At Halliburton, Cheney would be paid a total of $45 million in salary, bonuses, stock-option profits and stock-sale proceeds for his services. The principal function of this novice CEO was to be a high-priced lobbyist, using his contacts at the Pentagon and with kings, emirs and oil ministers to drum up business. The actual running of the $9 billion enterprise was delegated to Cheney's future successor, David Lesar, who later explained, "On major types of things, I would tell Cheney what the decisions were."

There's nothing illegal about the political influence that Cheney did wield on Halliburton's behalf. The company's U.S. government contracts soared to $2.3 billion during Cheney's tenure, more than double its take in the previous five years. That relationship continues now that Cheney has moved on, with Halliburton, despite its reputation for padding expenses, recently winning a post-Sept. 11 contract as exclusive logistics supplier for the U.S. Army and Navy. It will do work such as running canteens and carting fuel that the armed forces claim they could do themselves for 10 per cent to 20 per cent less than Halliburton will be paid.

CEO Cheney, a hard-right opponent of government spending during his political career, also reinforced Halliburton's status as a leading recipient of corporate welfare. The $1.5 billion in government financing and loan guarantees that Halliburton netted in Cheney's time was a 15-fold increase over the previous half-decade.

There's nothing improper about the assertion by Bush campaign communications director Karen Hughes in 2000 that "The American people should be pleased they have a vice-presidential candidate who has been successful in business." After all, Cheney's legacy at Halliburton didn't turn into a flaming wreck until several months after his inauguration — and four years after he reassured fellow employees at Halliburton that "this is where I expect to spend the rest of my career."

Cheney's crowning achievement in business was Halliburton's 1998 merger with archrival Dresser Industries Inc., a one-shot deal that briefly obscured the underlying weakness of Halliburton's basic business. But alas, the transaction was a Harvard-worthy case of mutual non-due diligence.

Only in the aftermath of the $8 billion merger did Dresser executives learn to their dismay about hundreds of millions of dollars of losses on major Halliburton construction projects that did not appear on its books — another indulgence in creative accounting . For its part, Halliburton was surprised to discover the magnitude of asbestos-related liabilities at a former Dresser subsidiary, for which it has paid out $152 million in injury claims in the past year alone.

There was nothing illegal about the decision by Cheney and four other Halliburton insiders to dump their shares in the company in August, 2000, about two months before Halliburton stunned investors with news that its engineering and construction business was spiralling downward, and that a grand jury was investigating charges it had overbilled the government.

Cheney took an $18.5 million profit on the sale of his shares. Halliburton stock has since plummeted to a 16-year low, losing about 75 per cent of its value since Cheney left the company.

Last Wednesday, Halliburton reported a $498 million loss for the second quarter. It also said that a consultant's study has estimated it faces liability of $2.2 billion between now and 2017 for existing and potential asbestos claims, and that Halliburton has insurance coverage of just $602 million. The company has worked overtime this year to quash rumours of its imminent bankruptcy.

Finally, there's nothing unconstitutional about the disappearance of the vice-president during a national crisis, namely the widespread malfeasance in Corporate America that has factored into the bear market on Wall Street.

A spokesperson at Halliburton, suggesting that Cheney might have some insight into that issue, after all, has appeared to implicate Cheney in the firm's accounting irregularities by stating, "the vice-president was aware we accrued revenue on unapproved claims." But then there's that famous promotional video for Arthur Andersen in which CEO Cheney lavishes praise on the innovative auditing firm, saying, "I get good advice, if you will, from their people based upon how we're doing business and how we're operating — over and above the sort of normal by-the-books auditing arrangement."

As Michael Kinsley conceded in Slate, "This remark from Cheney is a pretty convincing performance of a man who doesn't know what the hell he is talking about."

So Cheney , who still vets Bush's major appointments and held his hand after Sept. 11, is perhaps wise to renege on his campaign promise, and not bring his business acumen to bear on this particular problem. It must be said that no one has dropped into his Washington office to slip him an envelope stuffed with cash. Cheney has merely helped a private-sector firm relieve the taxpayers of some money, and then swollen the ranks of CEOs who walked away from a corporate catastrophe with bulging pockets.

No crime in that.

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