Copyright 2002 The Washington Post  

The Washington Post
February 21, 2002, Thursday, Final Edition
SECTION: FINANCIAL; Pg. E01

LENGTH: 1439 words

HEADLINE: Lay's Lobbying Reached the Top of Treasury; Enron Chief Leaned Hard as Company Sought to Avoid U.S. Oversight of Derivatives Deals

BYLINE: Kathleen Day and James V. Grimaldi, Washington Post Staff Writers

BODY:
Enron Corp. chief executive Kenneth L. Lay offered then-Treasury Secretary Robert E. Rubin a seat on Enron's board of directors in 1999, when Enron was lobbying intensely to block government efforts to regulate its derivatives-trading business.

Letters and other documents released yesterday by the Treasury Department under a Freedom of Information Act request by The Washington Post and other news organizations show how Lay sought to influence the Clinton administration on issues affecting Enron. Lay also sought help from Bush administration officials last fall before the company filed for bankruptcy protection.

Lay wrote to Rubin two days after Rubin announced he would step down as President Bill Clinton's treasury secretary and about two months before he turned over the job to Lawrence H. Summers. Rubin rejected the offer of an Enron board seat.

A few months later, Lay referred to his connections with Rubin in a letter to Summers, urging Treasury officials to back off from proposals to regulate Enron's trading in financial products, known as derivatives, that were tied to energy commodities. Enron was preparing to launch an online operation to trade energy derivatives.

The Clinton administration, led by Treasury officials, decided against government oversight of derivative traders such as Enron. In December 2000, Congress adopted that policy in legislation that exempted from government oversight the kind of energy derivative contracts traded by Enron.

"The debate was not about deregulation, it was about an absence of regulation," Commodity Futures Exchange Commissioner Thomas J. Erickson, a Clinton appointee, said in an interview. Erickson was opposed to the portion of the bill that removed energy derivative contracts from government oversight.

Some market experts -- including former Treasury undersecretary of finance Gary Gensler, who served under Rubin and Summers -- said derivatives transactions didn't cause Enron's collapse. Still, others said the market should not be unregulated.

Enron relied heavily on derivatives in two ways. It traded them to capture profits across all its businesses. Enron's executives also used derivatives in complex financial transactions that distorted the financial picture that Enron projected to investors.

"I just hope we don't have to have another crisis in the financial markets to get everyone's attention," said Sen. Jon S. Corzine (D-N.J.), an advocate of increased regulation of derivatives.

Sen. Dianne Feinstein (D-Calif.) has introduced legislation to give the Commodity Futures Trading Commission more authority to oversee energy derivatives by revoking some provisions of the 2000 law, though it is unclear how much chance it has of passing. That would return the rules to what they were before the 2000 legislation, when the commission had some jurisdiction over companies such as Enron, Erickson said.

Over-the-counter derivatives are financial contracts that are not traded on a formal exchange. Their worth is based on the value of underlying stocks or bonds, interest rates, currencies, pork bellies, electricity, gold, metals or other commodities. They are used to hedge against the risk of price fluctuations or to speculate on those changes.

Federal bank regulators oversee banks that deal in over-the-counter derivatives. The Securities and Exchange Commission oversees securities firms that trade them. But there is no direct monitoring of the actual trading of over-the-counter derivatives. So derivatives traders such as Enron that are not affiliated with a bank or securities firm operate without government monitoring. As the government was trying to decide what kind of oversight -- if any -- was proper for these kinds of traders, Lay made his overture to Rubin.

In a May 14, 1999, letter, Lay wrote: "If you are considering joining any corporate boards, I would very much like to talk to you.

"Given the way Enron has evolved, not only do we badly need a person with your experience and insights (gained both at Goldman Sachs and at the U.S. Treasury), but also I think you would find serving on our board intellectually and otherwise interesting."

Lay said in the letter he also had placed a call to Rubin "in the hope that I mention this to you personally."

"Bob Rubin was offered 30 to 40 board memberships. Rubin had no interest; he declined," said Leah Johnson, a Citigroup spokeswoman.

Rubin became chairman of the executive committee of Citigroup, one of Enron's main creditors, after leaving Treasury. Last fall, when Enron ran into financial trouble, Rubin contacted Treasury Undersecretary Peter Fisher asking "what he thought of the idea" of calling bond-rating agencies to help forestall a crippling reduction in Enron's credit rating.

Fisher told Rubin that he didn't think it was advisable and he didn't make a call, Treasury officials have said.

In a letter sent on the same day as Lay's letter to Rubin, Lay wrote to congratulate Summers, the incoming Treasury secretary. "I can't imagine anybody better prepared" for the job, Lay said.

Five months later, in another letter, Lay complained to Summers about proposals to regulate over-the-counter derivatives. Lay said he was upset that the Treasury's assistant general counsel, John Yetter, had said at a public forum that the President's Working Group on Financial Markets might recommend regulation of "otherwise unregulated entities, such as Enron" that trade in derivatives.

"As you would expect, we are troubled by being singled out, but even more troubled by the notion that financial regulators may be considering any regulation of OTC [over-the-counter] dealers, particularly in the energy field, where we believe derivatives are truly customer based risk management tools," Lay wrote.

"Enron believes there is no need for any additional regulation" because there have been no problems," Lay wrote. He then asked for a chance "to make our case" if increased regulation were in the offing and requested "a call or note" in reply.

Lay concluded by referring to Summers's previous boss. "I spent some time with Bob Ruben [sic] in Shanghai last week and he appears to be doing very well," Lay wrote. "I must say he looked more relaxed than I have seen him in years."

The next month, in November 1999, the working group's report was returned and Summers sent a copy to Lay, telling him that it "is not recommending legislative action with respect to derivatives dealers [such as Enron] that are unaffiliated with a federally regulated entity at this time."

"My formulaic response to Lay's letter speaks for itself in making clear that the Treasury Department's position is set out in several previously issued reports," Summers said yesterday.

Lay said in his letter to Summers: "There have been no problems in the energy derivatives market that warrant regulation." But over-the-counter derivatives have been involved in a series of scandals over the past decade.

In 1994, Bankers Trust suffered significant losses on derivatives when two clients, Gibson Greetings Inc. and Procter & Gamble Co., refused to honor their obligations, arguing that Bankers Trust had misled them.

That same year, Orange County, Calif., reported a $ 1.7 billion loss on derivatives sold by Merrill Lynch and other major derivative dealers, leading the county to seek bankruptcy protection. In 1995, Britain's oldest investment bank, Barings, collapsed from more than $ 1 billion in losses related to derivatives trading.

Three years later, a giant Connecticut hedge fund, Long-Term Capital Management L.P., which relied heavily on over-the-counter derivatives to speculate on the difference in values among various currencies, nearly failed.

"There ought to be more regulation of derivatives given the explosion of the market," said Lynn Turner, former chief accountant for the Securities and Exchange Commission. "When you get a more regulated market -- meaning more transparency in pricing -- you not only get better pricing but it provides a more efficient market, because more people will trust it and participate."

Also among the correspondence released yesterday are letters to Treasury advocating and praising officials for taking free-trade, deregulatory stands in energy markets overseas and with the World Trade Organization. Lay also asked Treasury Secretary Paul H. O'Neill last year to speak before a meeting of the Business Council, a group of U.S. corporate leaders.

Staff writer Peter Behr and researcher Lucy Shackelford contributed to this report.



LOAD-DATE: February 21, 2002