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Hit and run
Citigroup buys itself out of its Enron mess — and Bush’s new SEC chairman will only make things worse

BUSINESS MOGULS, like politicians, prefer to announce bad news when few people are paying attention. Thus it was that last Friday, with the weekend looming, Citigroup, Inc., announced it would pay a $2 billion settlement to make a class-action shareholder suit over its dealings with Enron go away. The story was carried in the little-read Saturday papers and, for the most part, dropped quickly out of sight.

It shouldn’t have. For behind Citigroup’s bland press release, in which the company "denies committing any violation of law," is a tale of terrible wrongdoing. Average investors — enticed into buying Enron stock on the strength of glowing, unquestioning accounts in the business press — lost nearly all of their savings, while the masters of the universe who helped defraud them walked away unscathed. Above all, it is a tale of what can happen when unfettered capitalism is allowed to run amok with little or no government oversight. Sadly, George W. Bush is now moving as quickly as he can toward even less oversight.

According to investigators, Citigroup was a crucial player in Enron’s scheme to hide billions of dollars in debt, thus continuing to lure investors even as it was going bust. Enron, a Houston-based energy giant, was little more than a shell company, falsely claiming to be involved in business activities that didn’t even exist. The crash of Enron — a onetime favorite of Wall Street — wiped out $40 billion in stock value and hurt tens of thousands of small investors. Nor will Citigroup’s money do much to make them whole, given that the estimated number of affected investors will see just a few cents on the dollar. (On Tuesday night, as the Phoenix was going to press, J.P. Morgan Chase announced that it would pay a $2.2 billion settlement in a similar case involving Enron investors.)

Enron’s top executives, including former chairman Kenneth Lay, have all been subjected to criminal prosecution. Yet Citigroup — the world’s largest financial-services corporation, with a book value last year of $109 billion — has come out of this unharmed except for the relative pittance it has agreed to fork over. And it’s not as though the Enron scandal was a first-time offense for Citigroup: last year, it paid $2.65 billion to settle a similar complaint stemming from the collapse of WorldCom, Inc.

Citigroup came into being in 1998 as the result of a series of mergers masterminded by Sanford Weill, by many accounts a crude, abusive executive (he has been called the "Tasmanian Devil CEO") with a reputation for slashing his employees’ benefits while paying himself outlandish amounts of money. Several years ago, at the height of the 1990s Wall Street bubble, Weill ran into trouble for a complex yet petty scheme in which he got his star telecommunications analyst’s children admitted to a prestigious nursery school in return for the analyst’s upgrading his recommendation for AT&T’s stock. This took place at a time when Weill was trying to cultivate AT&T’s chairman, who also happened to sit on Citigroup’s board.

With Citigroup’s problems beginning to mount, Weill stepped aside as the company’s chief executive officer in 2003, though he retains the title of chairman. And amazingly, instead of being indicted, he has been paid — that is, he’s paid himself — an estimated $1 billion during his reign, including more than $16.8 million in 2004. His successor as CEO, Charles Prince, is earning high marks for cleaning up Weill’s many messes. But according to a report this week by the Bloomberg news service, the Enron settlement has brought to some $5.5 billion the total that Citigroup has paid to settle lawsuits and regulatory actions — proof that, on Wall Street, it is still possible to buy your way out of trouble.

It would be bad enough if this behavior were merely confined to Citigroup. Unfortunately, it comes in the midst of a scandalous attempt by President Bush to undo one of his very few progressive reforms. Recently, Bill Donaldson, Bush’s unexpectedly aggressive chairman of the Securities and Exchange Commission, resigned — and Bush proposes to replace him with California congressman Christopher Cox, a devotee of the libertarian philosopher Ayn Rand and a fierce opponent of regulation.

Donaldson, a friend of the Bush family, took the helm of the SEC following the crisis in confidence created by, among other things, the collapse of Enron. He is widely credited with taking seriously the Sarbanes-Oxley Act, a sweeping reform measure enacted by Congress aimed at making the stock market more transparent, and with reviving the morale and prestige of the SEC. As the New Republic notes this week, Donaldson was useful to Bush politically, since his very presence placed the president on the side of reform and reduced pressure for further regulatory legislation. In the end, though, Bush reverted to form, leaning on Donaldson to leave so that he could replace him with a free-market extremist.

When it comes to Wall Street excess, it seems that we are doomed to learn the same lessons over and over again. From the greed of the 1980s, to the "irrational exuberance" of the 1990s, to the radical deregulatory schemes of the Bush gang, Wall Street remains a place where the rich have little to worry about, while ordinary investors are forced to close their eyes and hope for the best. It’s a rotten system, and it’s not going to change anytime soon — especially with the Republicans in charge of the White House and both branches of Congress.

What do you think? Send an e-mail to letters[a]phx.com


Issue Date: June 17 - 23, 2005
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