Enron Spoils The Party

By Michael Duffy and John F. Dickerson

We're not going to have to tear up the speech, are we?" George W. Bush asked late last week, as his aides labored over the text of Tuesday night's State of the Union address. Bush was gently mocking the endless process--and perhaps acknowledging how many reasons there are for last-minute rewrites: a war and a recession, an anxious public, an aggressive opposition party, and above all the fast-moving story of the largest corporate bankruptcy in U.S. history--a scandal that has so far defied White House attempts to isolate it or explain it away. In the space of five days last week, the story of Enron's collapse went from the merely unusual to the truly baroque, with plot elements lifted from the pages of Robert Penn Warren and John Grisham. On Tuesday FBI agents moved in when document shredding was discovered inside Enron's Houston headquarters. On Wednesday Enron CEO Kenneth Lay, until recently the national cheerleader for a frictionless new economy and a man the President nicknamed "Kenny Boy," resigned in disgrace, forced out by a board of directors who had apparently been napping for months. One of 11 congressional investigations opened its hearings on Thursday with a tableau we might as well get used to: Enron's former outside auditor taking the Fifth Amendment. On Friday J. Clifford Baxter, 43, an executive who left Enron last May, was found dead in his Mercedes-Benz in the median of a divided highway in the fancy Houston suburb of Sugar Land--an apparent suicide. That same day, as if on cue, the White House acknowledged that Bush's top political strategist, Karl Rove, had recommended that Enron hire a key G.O.P. consultant during the early days of Bush's presidential campaign five years ago.

It was one more intimate link between Enron and the Bush team, one more unwelcome story at a time when the President is hoping that his big speech will change the subject back to heroism and unity and patriotism, the themes that have helped make him so popular of late. But even Bush's poll numbers--playing a game that Enron accountants know so well--are beginning to tell two different stories at the same time. For a President with two wars to fight and a 77% approval rating in the new TIME/CNN poll, the Enron story has been up to now little more than a bother. The poll shows that most Americans give Bush high marks indeed for his handling of the war and the terror threat. But when it comes to domestic issues--the economy, health care, the budget deficit--his grades are middling, and Enron is reviving some of Bush's least favorite issues, such as campaign-finance reform, while stoking old questions about whose side he is on. With 45% of those surveyed predicting the recession is going to get worse, 51% said that Bush cares more about Big Business than he does about regular people--an ominous combination for the White House. And so last week Bush told about how his mother-in-law got socked by Enron's collapse. As Bush and his team know, the growing links between the Administration and the company that cooked its books and wiped out the retirement savings of thousands provide the best ground Democrats have had in months for staging fights over issues like tax cuts, the budget and pension reform--the subjects that are increasingly important to people and where Bush gets his lowest marks. No wonder nervous Bush aides reached out last week to at least one prominent Republican who had been critical of the Administration and asked him to tone it down. They called allies in the House and told them to keep it to a dull roar.

One night two weeks ago, White House Press Secretary Ari Fleischer pushed back from his desk and smiled. The evening news had just ended and, once more, all the TV stories about Enron dealt with it as an accounting debacle, not a political one. Fleischer looked over at Tom Brokaw of NBC, whose cameras had been shadowing Bush all day, and said, "All right. Did you notice all the Enron stuff that everybody was asking about? Look what made it on the air--the business-scandal side of it."

By mid-January, Fleischer and other senior officials assumed they had put the Enron problem behind them. They were mistaken. Over the last year, the Bush team had quietly performed a host of political sacraments for the Texas company before it began to go bust, and vice versa: there was the $1.76 million in contributions that Enron executives sent to the G.O.P. during the 2000 campaign; there was the energy policy Vice President Dick Cheney drafted in 2001 after meetings with Enron officials, portions of which seem to have sprung directly from Enron's wish list; there were ex-Enron chiefs and consultants salted around the Bush Administration, from the Army Secretary Thomas White to the U.S. Trade Representative Robert Zoellick. And last summer Bush chose Pat Wood--a man strongly backed by Lay--to be his top energy-price regulator.

But when top Enron officers bombarded Washington with dire pleas for help last fall, something almost unprecedented happened: nothing. Though both sides had been in contact for months on a variety of issues, at the moment the company threw itself down at the mercy of the feds, top officials at Treasury and Commerce said, in effect, "See ya." Even Robert Rubin, the Clinton Treasury Secretary who dialed up on behalf of Enron's creditors at Citigroup, was turned away by Bush officials.

The we-did-nothing defense bought the White House time, but there were enough failures in the government's safety net of market, accounting and energy regulation to open the door to more than half a dozen congressional probes--and to give some cover to the hundreds of lawmakers from both parties (including 212 of the 248 involved in the hearings) who had taken money from Enron or its accounting firm, Arthur Andersen. By then the White House seemed cocky. For reasons no one can explain, it went through with its plan to make one of Enron's former lobbyists, former Montana Governor Marc Racicot, the new Republican National Committee boss.

Each new development had the Democrats rubbing their hands together in anticipation. For months the opposition party had had almost nothing to say, partly because the nation was at war and partly because it was keen to align itself with a popular President. With nothing much to argue about, the Democrats had nothing with which to distinguish themselves. Worst of all, no one in the country was willing to blame the state of the economy on anyone other than Osama bin Laden. "You can only do what you can do based on the cards you have to play," said Senator John Breaux last week. "We don't have many cards."

Then Enron dealt them a fresh hand. The implosion of the huge Texas energy firm and the sudden loss of retirement funds for thousands of employees and pensioners opened up all the pathways to Scandalland that had been closed since Sept. 11. Every populist conflict in the Democratic playbook has at least a cameo role in the Enron drama: fat cats versus little guys, energy producers versus energy consumers, corporate secrets versus shareholder democracy, business-friendly Republicans against lunch-pail Democrats.

Last week, when the Congressional Budget Office found that 70% of the federal budget surpluses for this year and the next had evaporated under the weight of last year's tax cuts, the recession and lower post-Sept. 11 spending, it was only a matter of time before someone made Enron a verb. Bush, said Senate Democratic leader Tom Daschle, is "slowly Enronizing the economy. Enronizing the budget. We are taking the same approach Enron used in sapping retirement funds and providing them to those at the very top. That's exactly what Enron did. And I'd sure hate to see the U.S. do that."

Looking around for other things to Enronize, the Democrats turned next to campaign-finance reform. Last week the long-suffering backers of the Shays-Meehan bill to eliminate unregulated soft money finally attracted the 218th signature they needed to get the stalled measure onto the House floor. That doesn't mean it will pass at all, much less soon. The phrase "discharge petition" sounds encouraging but permits a vote only on certain Mondays. The House rarely, if ever, meets on Mondays. (Got that?)

Like teenagers trying to see how far they can get on a stolen credit card, Democrats then moved on to energy policy. House minority leader Dick Gephardt, gearing up for a presidential campaign, proposed a new "Apollo project" to make the U.S. energy-self-sufficient by 2010. Last week another White House hopeful, Senator John Kerry of Massachusetts, gave a similar speech, calling for Americans to produce 20% of electricity from renewable sources by 2020. Both proposals are designed to force the White House to side with energy producers and against average Americans. The White House said it is sticking with its own energy plan.

And when the first Senate hearing on Enron got under way, it felt less like an inquiry and more like a warm, ritual bath designed to soak away the stain of contributions. Senator Joe Lieberman of Connecticut, who got $2,000 from Enron and $11,500 from Arthur Andersen in the past decade, invited former SEC chairman Arthur Levitt, the nation's leading accounting hawk, to do the scrubbing and apply the rinses. That gave Senator Robert Torricelli of New Jersey, who was until recently the subject of a federal probe into his campaign finances, a chance to apologize to Levitt, who had pushed unsuccessfully for lawmakers to tighten accounting standards. "Congress did not respond," Torricelli intoned. "We were wrong. You were right."

While Senators were making their acts of contrition, Republicans on the House side--with a nervous eye on the coming midterm elections--were trying to score points by publicly flaying some scapegoats. Arthur Andersen auditor David Duncan, who the company says ordered the shredding of Enron documents at the giant accounting firm's Houston office, took the Fifth in front of the House Energy and Commerce Committee (but not before briefing the panel's investigators behind closed doors). Then Duncan's superiors appeared before the committee and tried to pin all the blame on Duncan rather than take responsibility for a "document retention policy" that seemed to encourage shredding. Republicans got more than twice as much campaign cash from Enron employees as Democrats did in 2000--$1.7 million compared with $683,000--which may be one reason the House panel plans on more hearings next week.

None of these plot twists brought the story into the West Wing until the New York Times reported last week that conservative strategist Ralph Reed had received a $10,000-a-month consulting contract from Enron in 1997 with a little push from Rove, who was political adviser to then Governor Bush. Like so much about Enron's business practices, it is unlikely that such an arrangement would have been illegal. But the timing of Reed's Enron work had people who know about the finances of fledgling presidential campaigns clucking. A powerful force among Christian conservatives in the late 1990s, Reed was hired by Enron to bang the drum for energy deregulation in Pennsylvania at a time when the Bush team in Austin would have appreciated a low-cost, low-profile way of keeping Reed on their side, off their payroll and yet far from the crowd gathering around Steve Forbes and other conservative rivals. If Rove gave Enron a nudge about Reed--"Karl Rove gave Ralph Reed a good recommendation," said press secretary Ari Fleischer, and Rove says he doesn't recall--then the young Bush campaign was at least capable of the same sort of creative accounting that ultimately brought down Enron in December: finding quiet, off-the-books ways to help itself and its friends.

Democrats termed the disclosure serious and promised to investigate. Reed, a political consultant in Georgia, points out that Enron tried to hire a Democrat, James Carville, for the same work in 1997--something Carville, no friend of Rove's, acknowledges. And Rove told Time that if he spoke to anyone at Enron about Reed, it might have been only after Reed was hired. An Enron official, meanwhile, who says he and two others made the decision themselves, told TIME they had no contact with Rove about the matter. But a veteran G.O.P. organizer who was in contact with Reed in 1997 said Reed told him the Bush campaign had steered business his way--something Rove doesn't deny.

After a year in office, one thing is clear about Bush's political operatives: when they make a mistake, they fix it fast. When their conservative instincts lead them down a path that much of the country isn't keen on, they are awfully good at changing the subject while holding to their original course. Which is why Bush, early last week, said his mother-in-law was one of the little people who got screwed by the corporate giant. On a trip to a West Virginia machinery shop Tuesday, Bush told workers that Jenna Welch, 82, had lost almost all of her $8,000 investment in Enron last year. And he fired up his own boilers a bit, saying he was "outraged" by what happened at the Texas firm. But the Bush team didn't stop there. By late last week, it got out a few more iron shields to wedge between the White House and the mess in Texas. On Friday the Administration announced that it had ordered a government-wide review of more than $60 million in federal contracts with Enron and Andersen. Mitch Daniels, Bush's budget director, said the move was "purely a management issue."

Meanwhile, the long-simmering dispute between Dick Cheney and Congress about the Vice President's energy task force started bubbling again. The General Accounting Office, which is as close as Congress comes to having an independent auditor, announced that it would file a lawsuit against the White House this week if Cheney did not fork over the details of his energy task force's private meetings with Enron officials. The GAO had postponed the suit after Sept. 11, but when it became clear Cheney had no intention of complying with its request, or even negotiating, the tiny agency decided to fight.

Congressional interest in those documents increased last week when House Democrats discovered what they think may be a subtle but significant last-minute change in Bush's energy policy, made before it was submitted to Congress. According to Rep. Henry Waxman, a California Democrat, language was added to the final energy plan that was designed to help Enron with a financially troubled power-plant project in India. Waxman obtained a copy of an earlier draft of the plan, dated March 30 and written by an interagency group. That version, sent to Cheney, included no reference to India's energy output, Waxman said. But when Cheney made his final energy plan public in May six weeks later, the proposals included a new section calling for increased energy production in India. The plan directed the secretaries of State and Energy to work with India to help that country maximize its domestic oil and natural-gas output. The provision was significant because Enron has a controversial $2.9 billion natural-gas-fired Dabhol power plant in India, but the plant's only customer, the state of Maharashtra, found Enron's prices too high and began buying power elsewhere. Enron was eager to get out of the Dabhol investment or get the facility back on line and had sought Washington's help. Cheney met with Lay on April 17, exactly one month before the final energy proposals were unveiled. Waxman asked Cheney in a letter late last week to explain how the provision evolved and who recommended it.

Waxman's line of questioning is exactly the kind of inquiry that White House officials say the public has no patience for. Lengthy probes into the provenance of a few sentences in an already aging federal report, they add, is the sort of duck soup that turned voters off about Washington and politics for much of the Clinton era. Republicans believe this in part because they learned that lesson the hard way. The party's take-no-prisoners wing is still smarting a bit from 1998, when it did not realize until too late that its drive for Bill Clinton's scalp did as much if not more harm to their own party than it did to the President's.

However much oxygen Enron has pumped into Democrats, it doesn't change the fact that Bush has the highest sustained approval ratings in memory--and a monumental set of tasks ahead of him. That explains why, after delivering his State of the Union speech Tuesday, he planned to hit the road for two days selling his proposals to the public. Many are sure to be popular: more money for defense, intelligence gathering, homeland security and border controls and more tools for police and fire fighters. If Bush has had to shelve his plans to reform Medicare and Social Security--money is tight, and the country is in no mood to experiment with retirement benefits--that's not an entirely unpleasant outcome. Those waters are treacherous, and many wondered why he ever thought about diving in.

Bush will try lots of little things to release the pressure building up in the Enron pipeline. He has indicated that he will sign the campaign-finance measure if it ever makes it to his desk. Aides indicated last week that he will also get behind efforts to strengthen the rules that require companies to disclose information about hidden liabilities. He will call on Congress to make sure that employees have ways to diversify their retirement savings so that other Enrons don't happen. And with unemployment rising, the former oilman is capping talk of tax cuts and boosting talk about jobs, jobs, jobs.

But the main valve Bush will open now is the one labeled "war." In that arena, the public has given him a free hand to spend whatever he wants, finish off al-Qaeda in Afghanistan, hunt down its cells around the world and build up U.S. military muscle. He is already moving into the second phase of the war, tracking terrorists in countries like the Philippines, Somalia and Sudan. Sitting at Camp David two weekends ago, he told his aides he believed that roughly 100,000 al-Qaeda-linked terrorists might still be at large around the world. "We're not going to stop short," he said.

All is fair in war and politics, but there are some battlefield tactics the combatants would rather not discuss. Democrats want to take away Bush's fatigues and drag him back to last year, to the days when his presidency lacked a clear purpose. The President wants to go in the opposite direction, wrapping the entire country--Democrats included--in a warm, unifying embrace, complete with new proposals to foster volunteerism and charity. Safe inside that hug of unity, he dares the Democrats to break the mood that faced down terrorism. A senior official predicted to TIME that voters who care about Enron and its White House ties will lose interest after the next big bombing raid. If Bush has his way, investigating the Administration's links to Enron or challenging his plans for mending the economy will seem as unpatriotic as questioning the choice of bombing targets in Tora Bora.

--With reporting by Cathy Booth Thomas/Dallas and Karen Tumulty and Michael Weisskopf/Washington

With reporting by Cathy Booth Thomas/Dallas and Karen Tumulty and Michael Weisskopf/Washington