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Lou Dobbs Moneyline
Dow Plummets 220.17 to 9687.09; Nasdaq Declines 55.71 to 1855.53
Aired February 04, 2002 - 18:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LOU DOBBS, ANCHOR: Good evening everyone. Tonight, a crisis of confidence is gripping Wall Street and Washington. On the New York Stock Exchange stock prices plunged more than 200 points on the Dow. The concern is that the Enron scandal may not be an isolated incident.
Feeding those fears, Tyco International, spending more than $8 billion on 700 acquisitions, all of which it failed to report to its investors.
Global Crossing, now bankrupt, facing an investigation of its own after a former employee complained about its accounting practices. The net effect, investors simply don't feel they can trust corporate America's financial reporting.
(BEGIN VIDEO CLIP)
LARRY WACHTEL: This is Enronitis up and down the line.
UNIDENTIFIED FEMALE: This is pretty much all earnings related and we still have a lot of, you know, the whole accounting thing going on in here. I mean there is not a lot of good news in here today.
JOSEPH BATTIPAOLIA: We are see-sawing back and forth just under 10,000. It suggests to me of a process of correction.
(AUDIO GAP)
(END VIDEO CLIP)
DOBBS: ... confidence has translated into yet another Enron- inspired sell-off. The Dow Jones Industrial Average plunged 220 points today. The Nasdaq fell 55 points, the S&P dropping 27 points. Jan Hopkins reports on a tough day on Wall Street -- Jan.
JAN HOPKINS, CNN ANCHOR: That's definitely true, Lou. Enron is casting a very long shadow on Wall Street. Investors are concerned about Ken Lay not testifying in Washington. They want to know what he knows that we don't know. Also, a lot of company stocks that have been tainted with the Enron (UNINTELLIGIBLE) or the Enron-itis as it is sometimes called, had more news today and the stocks fell sharply, including Tyco. Those shares were down about $5.75.
Elan, the Irish pharmaceutical company lost more than $15 to just under $15 a share. So there was a lot of selling, and as Ted Weissberg (ph) the trader that you just talked about on the floor, said, this was a day when investors said, keep the cheese, I want out of the trap -- Lou.
DOBBS: OK, Jan, and of course we will take a look at all of the day's activity on Wall Street later in the broadcast.
On Capitol Hill here today, the rhetoric about Enron heated up after Ken Lay refused to testify before Congress.
(BEGIN VIDEO CLIP)
SEN. ERNEST HOLLINGS (D), SOUTH DAKOTA: I've never seen a better example of "cash and carry" government than this Bush Administration and Enron.
SEN. PETER FITZGERALD (R), ILLINOIS: Enron Corporation went way beyond all hat and no cattle. It was pure bull.
SEN. RON WYDEN (D), OREGON: I think it was clear that when Enron was sinking like the Titanic, the powerful went above the waterline, protected themselves, got rid of their shares and in effect, they locked my constituents in the boiler room.
(END VIDEO CLIP)
DOBBS: Well those Senators, members of the Commerce Committee, the panel that was to have interviewed Ken Lay today. The House Financial Services Committee is currently meeting and hearing testimony. Earlier today members heard from the head of the FCC. Kate Snow has the report -- Kate.
KATE SNOW, CNN CORRESPONDENT: Well, good evening, Lou. In fact, I think they are still hearing from SEC chairman Harvey Pitt, telling them what they want to hear, which is that he has an investigation underway. Harvey Pitt saying that until that investigation is complete, he is not going to assess blame about the Enron scandal.
He began by being asked a lot of questions, a number of questions about what the SEC would do in future to prevent another disaster like Enron; how could they ensure that there wouldn't be failures of this sort. His answer is, ask more questions. But even doing that, he said, is not a perfect system. He said no matter how many questions we ask we may not be able to prevent another Enron in the future.
(BEGIN VIDEO CLIP)
HARVEY PITT, SEC CHAIRMAN: I think it is impossible to say that we can expect any agency of government, even one I think as expert as the SEC, and even on that might have significant additional resources, to review every single corporate filing, where they exist before they do damage to the public.
(END VIDEO CLIP)
SNOW: Now Pitt has told lawmakers that he has committed to reexamining everything. Following Pitt, we do expect to hear from William Powers tonight, Lou, he the gentleman who headed up that commission, that report that came out over the weekend, commissioned by Enron's board of directors, that scathing report about the outside partnerships of Enron. Of course the biggest witness, the star witness did not show today, that is Kenneth Lay.
At least one committee now, the Senate Subcommittee, planning to meet...
(AUDIO GAP)
SNOW: ... about 2:00 Eastern time, that's four hours ago, and they had a delay over whether they should swear in Harvey Pitt. It took a long time. They decided they would ultimately swear in every witness who would come. I think that is in part, you know, Democrats wanting to make sure that these folks were under oath and in part just an appearance thing, wanting to show that they are very serious about pursuing this Enron matter -- Lou.
DOBBS: Thank you very much, Kate.
Well, these hearing are just the beginning. Over the weekend the ranking Democrat of one committee said of the Enron mess, "maybe somebody ought to go to the pokey for this."
The hearing are being viewed by some as a precursor to federal criminal prosecutions. Tim O'Brien reports.
(BEGIN VIDEOTAPE)
TIM O'BRIEN, CNN CORRESPONDENT (voice-over): Did high ranking officials of Enron break the law? All over Washington, key lawmakers investigating the company's downfall declared they had no pre- conceived notions as they went on to offer -- well -- just notions.
SEN. RON WYDEN (D), OREGON: It sure appears to me that this company was on the financial equivalent of steroids.
SEN. PETER FITZGERALD (R), ILLINOIS: Enron was running a gigantic Ponzi operation within the confines of a publicly traded corporation.
O'BRIEN: And as for CEO Kenneth Lay's possible defense that he was out of the loop, offered last week by Mrs. Lay...
WYDEN: To believe that, you would have to believe that Mr. Lay was the most out-to-lunch CEO of any corporation in America.
(END VIDEO CLIP)
O'BRIEN: Although the Powers Report does not attribute any illegal activity directly to Lay, several former prosecutors say they would be astonished if at least some Enron officials were not prosecuted particularly if they tried to hide massive losses from auditors or the public. PAM STUART, FMR. FEDERAL PROSECUTOR: That would violate a section of the foreign corrupt practices act among other things; mail fraud, wire fraud could be implicated, plain securities violations.
O'BRIEN: And after the fact, destroying evidence or testifying falsely could also lead to criminal prosecution, which is why many witnesses may refuse to testify unless granted immunity. Many of the lawmakers investigating Enron have received thousands of dollars in campaign contributions from the company, as has George Bush. (AUDIO GAP) Fritz Hollings to call in the Justice Department to appoint a special prosecutor, even though Hollings himself has received Enron money.
HOLLINGS: I got 3,500 over 10 years, but our friend K. Bailey Hutchison, she got 99,000. Heck, I'm chairman of the committee. That wasn't a contribution. That was an insult.
(END VIDEOTAPE)
O'BRIEN: There is however, no evidence that anyone in government did anything improper in exchange for a campaign contribution. The likelihood of any special prosecutor being named, Lou, at this point, seems slim.
DOBBS: In terms of going after those who -- really the prosecutors determine should be, it is really a bit like the hearings themselves. So many people received donations, so nearly everyone is trying to prove that he or she is above those contributions. Is it incumbent upon the Bush Administration to be aggressive in prosecution, do you think?
O'BRIEN: The Bush Administration has a special task force and they are going to be aggressive. I don't think there's any question about that. The task force is independent from the U.S. attorneys around the country, none of them from Houston. It certainly is in their interest, and of course if it doesn't appear to be aggressive pursuit here, that could backfire badly.
DOBBS: Tim, thank you very much.
Joining us now, the chairman of the Senate Commerce Committee, Senator Byron Dorgan. Senator, good to have you here.
SEN. BYRON DORGAN (D-ND), CHMN, COMMERCE COMMITTEE: Hi, Lou, how are you?
DOBBS: Senator, I know you're disappointed with Ken Lay's decision not to testify. Is there any reason that has not been public to this point as to why he chose not to?
DORGAN: No, I think the major issue here is the release of what is called the Powers Report on Saturday evening. When that report was released, that report was produced by the board of directors of Enron, it was a devastating indictment about what has happened in Enron; overstating profits, parking debt off the books, and a series of things that just won't stand. And so, I think he was persuaded by that report that he probably ought not to be speaking publicly at this point.
DOBBS: Mr. Lay's attorney, Senator Earl Silbert, said that members of your committee had made inflammatory remarks over the weekend, particularly on the Sunday talk shows. How do you address that charge?
DORGAN: Well, the so-called inflammatory remarks were not any different than the vice president of Enron had communicated to Mr. Lay in August in a memo talking about accounting hoaxes inside that company.
They weren't any different than the CPA firm, the accounting firm that suggested there were probably illegal acts at Enron. And they were not any different than the Powers report, which was released on Saturday. And that's an Enron Corporation report. I'm sorry if it hurt Mr. Lay's feelings to hear things that weren't probably weren't pleasant to hear.
But I will tell you about hurt. I had a letter that I read late one night, the last of my pack -- pile of mail was from an Enron employee who lives in North Dakota who works for an Enron subsidiary, had a life savings in the 401(k) of $300,000 a matter of about six or eight or 10 months ago. Now it's worth $1,700. That's what hurt is about. That fellow and his family are trying to figure out: What to do they do next?
And that is why I think we have to get to the bottom of what happened here and how do we prevent this from happening again.
DOBBS: Senator, with Ken Lay refusing to testify, will you insist that he appear to take the Fifth, should he choose, as did David Duncan, the Andersen auditor for the Enron account?
DORGAN: Well, the committee is meeting at 9:30 tomorrow. And the committee will vote on whether to issue a subpoena. My expectation is, the committee will decide to do that, issue a subpoena to Mr. Lay. And we will ask him to appear at a certain time.
Everyone has a right to assert their Fifth Amendment rights if they choose to do that. But we also have a right to require someone to appear to see whether we can get them to testify. Some people at the top of this situation got very, very wealthy. And some people at the bottom lost everything. And the secret partnerships and the whole range of things that have been raised by the accounting firm and by the corporation itself now really require us to get to the bottom of this, Lou. I don't think we have any choice.
DOBBS: No choice.
And, to this point, with what you do no know, absent the testimony of Ken Lay, absent a lot of evidence that you will certainly garner throughout your hearings, what's the most perplexing and troubling aspect of Enron debacle, to you? DORGAN: The way the partnerships were constructed. The architecture of these partnerships, in many cases, appear to have been to steer off the books of Enron debt in a way that was not honest, and to try to apply to Enron profits that were not earned. And when you look at all of this, you say, well, this just looks like slight-of- hand.
And, in fact, that's what the company's own report said that the board of directors commissioned. But we accumulate capital in this country on the basis of trust. People invest in the company based on the accounting firm statements, the financial statements of the company and executives and so on. That trust was broken here. And we have to try to find a way to make sure this is not something that occurs on a usual basis.
DOBBS: And, Senator, if you are unable to get Ken Lay to testify, if other top executives decide to take the Fifth, what -- how important is their testimony to you? And what will be the reaction by your committee?
DORGAN: Well, we will try to get the testimony of key figures. If we're not able to, we're still trying to get the names of the investors in all of these partnerships. How much did they invest? Who invested? What did they make?
And then we have to answer a series of questions. How is it that the accounting firm could have missed $1 billion in profit that was described on the books but not earned? How could regulators have sat by? Were they asleep or brain-dead? Or did they figure they didn't have the authority? There are a whole series of questions. And then, inside the corporation, who did what and who's accountable?
DOBBS: Well, Enron is obviously first a failure of management and governance above all else. But you raise the other issue. And that is, where were the regulators here? Why was the SEC not reading those reports more carefully?
How troubled are you by the SEC in all of this and its failure to act?
DORGAN: Well, I'm troubled by the failure of regulators to see what was happening here. I'm troubled by the failure of accounting firms to see what was happening. I think investors rely very heavily on accounting firms and federal regulators to be the referees here in a fair way. And clearly it failed in this instance.
Now, we had some testimony before our committee in December from someone who said: Look, this is not unusual. This is the tip of the iceberg.
I hope that is not the case. I hope what we find is that Enron was just a case that went bad and we find a way to prevent this from happening again.
DOBBS: Senator, this is, first and foremost, a hearing over a debacle and perhaps something far worse in terms of criminal activity. But is it your sense that this, after we get through with the partisan rhetoric and some of the posturing and all these hearings and investigations, that we're going to see real reform here, real reform about corporate governance, real reform about the way Wall Street does business, real reform about the way the regulators conduct oversight of corporate America?
DORGAN: I really believe that is what will happen. And that is why this is important to do and to do right. You're not going to hear political rhetoric from me. I know that it's coming from some, but I'm not going to do that.
I think this is much more serious than just ordinary politics. At the end of the day, we need to evaluate: What kind of regulatory process can exist here that gives people confidence and hope that this system works? And I think you're going to see real reforms in a range of these areas.
But let's get through this and get through it so we know the facts and then do that right. I don't want to regulate just for the sake of regulating, but we've been through an area here where people say: Well, let's throw all the regulators out. We don't need regulation.
This case ought to demonstrate that we do. We need effective regulation.
DOBBS: And we need some confidence on the part of investors as well. Witness what has happened to these markets since concern about the integrity of accounting and financial reporting has come into question amongst investors.
Senator, thank you very much for being with us.
DORGAN: Thank you very much, Lou.
DOBBS: Still ahead here: the budget battle about to begin. We'll take a closer look at what promises to be a very big fight on Capitol Hill. Senator Joe Lieberman's committee wants to know how the government dropped the ball on Enron. He'll be joining us.
And we'll find out how the Securities and Exchange Commission plans to deal with all of these irregularities, the accounting industry, regulation and corporate governments and more when this special edition of MONEYLINE from Washington continues.
ANNOUNCER: Next, Lou is joined by Harvey Pitt, chairman of the Securities and Exchange Committee.
(COMMERCIAL BREAK)
DOBBS: The other major story in Washington today is the new Bush budget. It is a $2 trillion package that gives the military its biggest boost in 20 years. It also returns the country to deficit spending for the first time in five years.
White House correspondent Major Garrett joins us now with the story -- Major.
MAJOR GARRETT, CNN WHITE HOUSE CORRESPONDENT: Good evening, Lou.
Well, this is a story about politics and money of a different kind. Every year, the budget comes out, it's the most political document in this very political city. And, as you said, big money, but also a return to deficit spending. And, in part, a big reason for that deficit spending is because of the war on terrorism and the war to protect the homeland, a big part of the Bush budget.
Let's go over some of the big numbers, Lou. First of all, what's the size of the budget for 2003: $2.1 trillion. The Pentagon due to receive $48 billion or $49 billion -- it depends on who you talk to. Funny how in Washington $1 billion can be a rounding error.
Also, for homeland security, an increase up to $38 billion. That is almost twice what was allotted last year. That will go to Coast Guard, immigration and health research, particularly to deal with the threat of another bioterrorism attack. But, as we also discussed, Lou, deficit spending comes back to Washington. In the 2002 budget year that just ended, a projected deficit of $106 billion. In the upcoming year 2003, that will begin on October 1, $80 billion is the projected deficit.
That is not sitting well with some congressional Republicans. When the president went to the Greenbrier resort in West Virginia on Friday and talked to those congressional Republicans, some of them pulled his budget director, Mitch Daniels, aside and said: Look, the economy appears to be recovering. We don't need that stimulus package, because in the stimulus package is a lot a tax cuts and spending that are going to generate higher deficits this year. We would rather have an economy that's maybe just growing little bit, lower deficit numbers, more debt reduction. That would fit our needs better politically.
And what the budget director, Mr. Daniels, said: We need a rousing economy. We're going to push for those tax cuts because a stronger economy lowers that deficit faster not only this year, but in the years ahead. So there is some disagreements on the budget, Lou. Surprisingly, some of it is intramural and between Republicans.
DOBBS: Well, Major, also, there seems to be a little bit of one of those peculiar turns here. We've got Democrats talking about fiscal responsibility and the end of deficits and some Republicans obviously pushing for higher deficits.
GARRETT: Well, Republicans who complained to the White House said: Look, we completely support you on the increases for defend spending and homeland security. And the feeling here in Washington, Lou, is, Democrats are not going to oppose those budget allotments as well.
What they are going to do is sit back and say: Well, I wonder where all the surpluses have gone? And they'll say it was because of the Bush tax cut. Mitch Daniels, the budget director, today said the Democrats would blame the tax cut on everything in Washington save for mad cow disease.
(LAUGHTER)
GARRETT: The White House says it was really the slump in the economy that drained so much money from the revenue pools here in Washington and a stronger economy will put that money back in. Democrats say: No, not so fast. The tax cut was a big part of that.
It is going to be a fight that voters will have to decide on in part when the congressional elections come November. But it would not be Washington and a budget, Lou, without a little bit of fighting.
DOBBS: Absolutely. Major, thank you very much -- Major Garrett from the White House.
Well, you may think the Enron scandal would prop the president to raise funding for the Securities and Exchange Commission, but that's quite not the case.
Kathleen Hays joins us now and has more on that part of the budget story -- Kathleen.
KATHLEEN HAYS, CNN CORRESPONDENT: After all, they are the body that oversees the accountants, the auditors, the kind of thing that is at the heart of the Enron scandal.
Well, let's take a look just what the 2003 budget would give the Secretary: base-level increases. That's wages, rent, things like that, $21 million. Technology and telecommunication refinements and updates: about $7.5 million -- and for staffing and pay parity: absolutely nothing.
Now, this issue of pay parity. It's a big deal for the SEC because it's not just a matter of bodies. It's a matter of keeping experienced people. And they feel without pay parity, they can't. About one-third of the SEC's 2,900 staffers are involved in investigation and enforcement. That's things like accounting fraud, where you really need experienced investigators.
Let's look at turnover there. In 1999 and 2000, enforcement had 30 percent turnover. That was double the average for the federal government. A GAO study last year concluded the obvious: SEC staffers leave because of lower pay. Jim McConnell is SEC's executive director. He says it takes at least two years to get people up to speed. Lately, they haven't even been staying two years.
Until very recently, the president started backing pay parity. They have seen things starting to change. And we're not talking about pay parity with Wall Street. They just want pay parity with other financial regulators, like the FDIC, the office of the comptroller, where those people earn 25 to 40 percent more than SEC staffers. SEC says that would just cost them $76 million next year, Lou.
It's interesting that Marc Beauchamp, who is head of the North American Securities Administration Association -- they're state regulators -- he said it doesn't make sense. Investors should be concerned about it. He said it's like not funding the police department or the FBI after 9/11. It doesn't make sense.
DOBBS: And the SEC, in point of fact, obviously is going to have a much larger role here, at least in terms of the intensity of what they do, which will require more people. The money actually comes in from fees, does it not, form corporate America?
HAYS: This is what is so amazing. And I'll give you credit because you pointed this out to me earlier. But I looked into it, talked to the SEC, talked to Jim McConnell.
In 2000, they estimate they're going to take in over $1 billion in fees. Their budget was $437 million. The money goes into the federal coffers. They divvy it up and they tell the SEC how much of that they're going to get back. But it would seem to people like you and me, if they wanted to give the SEC money, even for just pay parity -- you just catch them up with other federal regulators -- the money is there.
DOBBS: Well, we're simple people.
HAYS: I know. That is why we're in this business.
DOBBS: We're taxpayers.
HAYS: That's right.
DOBBS: Thanks very much, Kathleen Hays.
Later here, I'll be talked with Senator Kent Conrad about the president's new budget, Kent Conrad, the senator, chairman of the Budget Committee here.
Well, first, let's go back to Jan Hopkins in New York, where she has followed a brutal session on Wall Street -- Jan.
JAN HOPKINS, CNN CORRESPONDENT: In fact, Lou, $295 billion in market value erased.
And, after the bell tonight, we have news from another company that has to restate earnings. Pennzoil-Quaker State says that it is going to have to restate earnings back to 1999 because of an error in the financial statements of a partnership between Conoco and Quaker State.
Now, the thing that is interesting about this is that the accountant for Pennzoil-Quaker State is, you guessed it, Andersen. And it says that it was relying on the accounting firm PricewaterhouseCoopers. The difference in income: a decline of $1.6 million for 2000; $0.6 million 1999. So this could roll through the markets tomorrow.
For today, let's take a look at some of the movers at the New York Stock Exchange, some of them affected by the concerns about accounting and Enron: GE, AOL Time Warner, the parent of this company, Citigroup, Calpine. And at the Nasdaq, technology stocks also selling sharply, including some networking stocks, including Cisco -- thanks, Lou.
DOBBS: Quaker State adding to the markets' problems, as well as obviously Andersen again.
And we have just received word here that Ken Lay, the former chairman and CEO of Enron, has just resigned as a member of the board of directors. Now, he resigned back on January 23 as the CEO of the firm, and today stepping away entirely from the board of directors. His resignation follows, of course, the announcement that he would not be testifying before Congress and by two days the release of the Powers report suggesting the prospect of criminality in some of the activities of Enron's management and financial dealings.
Well, Enron's accounting scandal at the heart of the today's sell-off, but the spark was Tyco International, a company that is coming under increasing scrutiny by the financial market.
Allan Chernoff has the report.
(BEGIN VIDEOTAPE)
ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Tyco stock lost one-fifth of its value Monday amid new worries about the company's complex financials. Fitch and Standard & Poor's lowered their credit ratings on Tyco. S&P dropped Tyco three notches from A to BBB.
The downgrades reflect worries about Tyco's ability to borrow short-term money in the financial markets. Earlier, Tyco said it would buy back $4.5 billion of commercial paper, short-term financing, and replace it with more expensive bank loans from a lending group led by J.P. Morgan Chase. The change will reduce earnings by as much as 2 cents a share this year.
Chairman and CEO Dennis Kozlowski said: "We are enhancing Tyco's flexibility, liquidity, and eliminating uncertainty about our ability to finance our recently announced plan to unlock shareholder value."
Tyco, a Bermuda-giant in electronics, health care and financial services, plans to split itself into four separate companies, with the goal of simplifying financials. Yet, thus far, the plan has only aggravated investor anxieties.
TIMOTHY GHRISKEY, GHRISKEY CAPITAL PARTNERS: In an environment of Enron, when there is distrust among investors, and certainly that distrust was growing because of Enron, we didn't want to be invested in any company where that distrust could build.
CHERNOFF: Further worries erupted from an article in "The Wall Street Journal" which said Tyco had failed to disclose $8 billion of acquisitions. Tyco's chief financial officer shot back in a letter saying "Today's story is blatantly false and malicious." Tyco had disclosed the total cost of the acquisitions in financial statements. It had not itemized the more than 700 acquisitions, mostly small companies, which it is not required to do.
Since issuing this report in 1999, analyst and short-seller David Tice has raised questions about Tyco's financials.
DAVID TICE, THE PRUDENT BEAR: Tyco is really more of a financial engineering company, which means it has generated a great deal of its growth from accounting and bookkeeping.
(END VIDEOTAPE)
CHERNOFF: Tyco does employ aggressive accounting methods, which, critics charge, allows the company to boost earnings. But, as far as they can see, it's legal. Yet, following the collapse of Enron, aggressive accounting is rapidly going out of style. The same can be said for Tyco stock -- Lou.
DOBBS: Legal, but at this point, when we're talking about this number of acquisitions and a failure to disclose, at least adequately in the minds of some investors, that's really not the relevant issue, is it?
CHERNOFF: Well, certainly it has increased investor anxiety, no doubt about it, that controversy between Tyco and "The Wall Street Journal," so that one more factor contributing to the sell-off.
DOBBS: And this sell-off is all about investor confidence, as you've just reported.
Allan Chernoff, thank you very much.
When we continue, we will be talking about the other big story here in Washington tonight: the president's new budget, $2.13 trillion. We'll be talking with a man who has to come to terms with it in one form or another. Senator Kent Conrad joins us next.
(COMMERCIAL BREAK)
DOBBS: The cast of fighting the war on terror is a large part of the president's $2.1 trillion budget, which he presented today. As we reported, the $379 billion for the Pentagon next year, the largest increase in more than two decades.
Joining us now for more on this story, Senator Kent Conrad, chairman of the Senate committee. Senator, good to see you.
SEN. KENT CONRAD (D-ND), SENATE BUDGET CMTE: Good to be with you, Lou.
DOBBS: This budget, large by any measure, the funding for the military, does this seem to you either adequate or insufficient?
CONRAD: Well, I think the president is going in the right direction, in terms of increasing funding for national defense and homeland security. The big trouble I have is the succeeding years. Because what I see is, he's going to be taking over $2 trillion out of the trust funds of Social Security and Medicare to pay for tax cuts, to pay for other government spending. And I think that's unwise when we're right on the brink of the retirement of the baby boom generation. DOBBS: As we step back and we talked about just $28 billion in increases for the military. Does that seem to you to be too much, given the war against terror?
CONRAD: Look, at a time of conflict, when the president asks for more resources for national defense, he's going to get them. I think all of us understand our top obligation is to defend this nation. So the resources that he thinks necessary are going to be provided.
DOBBS: And $2.1 trillion by any measure, even by the standards of this city, an extraordinary amount of money. With deficits that will run to $100 billion from five years of surpluses, is it in any part of your thinking that we can conduct the next two years of the people's business with this government without running deficits?
CONRAD: Yes, we could, if we didn't have an economic recovery package. But I think we need one. I think there's enough uncertainty about the economy that we need one. My greater concern is of the longer term. Because what I see happening is not unlike what happened at Enron, where they didn't really deal with their debt. They -- they hid their debt. And I'm very afraid we, in effect, are doing the same thing here, by taking trillions of dollars out of the trust funds, using it for other purposes. And, you know, those baby boomers are going to retire and where's the money going to be?
DOBBS: Well, Senator, you raise the issue of off-balance items, and frankly, I hadn't thought about it, but you're quite right. This city, this government, for decades, has been running off-budget items so as not to give the full facts to the voting public, if you will, whether Republican or Democrat. Are you saying that we're about to have new era of honesty and straightforwardness in Washington, in which we will be talking about Social Security, off-balance items, and moving straightforwardly to the federal budget?
CONRAD: You know, we need to do it. And we need to because by using these words -- and the president used it in his budget, he said there are surpluses. There are no surpluses. All the money is fully committed. In fact, it's overcommitted. As Chairman Greenspan said to our budget committee hearing last week, one of the things that concerns him are these so-called contingent liabilities that aren't contingent at all. These are moneys that are going to be owed and doing, and we're not prepared to deal with it. We're not prepared to meet those obligations.
DOBBS: You're making big news tonight here, Senator, when you suggest that this government is going to be straightforward and move these off-budget balance items onto the budget sheets of this government. Would this include, for example, the liabilities of Fannie Mae and Freddie Mac and those guarantees, and move them back to the balance sheet of the U.S. government?
CONRAD: You know, I think we need to start with those things that are most significant. The most significant things are Social Security and Medicare. We're talking about trillions of dollars of future obligational liability we don't recognize on the balance sheets of the United States. It is precisely what got Enron into trouble, and it's going to get us into trouble. Because when you talk about surpluses, which is what everybody talks about here, and there are no surpluses, there are really deficits and debts, I think it misleads people as to our financial condition.
DOBBS: Senator, you have got me excited about the prospect of a change in the way Washington does business. Can I ask you to sit there for two seconds while we take a commercial break, and come back and continue? Do you have time?
CONRAD: Yes.
DOBBS: We appreciate it. We'll be back with Senator Kent Conrad in just a moment. Please stay with us.
(COMMERCIAL BREAK)
DOBBS: We're back with Senator Kent Conrad. Senator, the idea of being straightforward and the government's business, and putting, whether it be Social Security or Medicare, and moving those deficits out in front of the public gaze, what device would you use?
CONRAD: Well Chairman Greenspan has recommended some kind of trigger or circuit breaker, so that we could bring a vote to the Congress on a fast track basis, an up or down vote, to restore the integrity of the trust fund, to affect both spending and revenue. So we're dealing with both parts of the equation.
DOBBS: And sometimes many of us forget that Chairman Greenspan was also the author of famous 1983 Greenspan commission on Social Security, so he's a man who knows whereof he speaks. As do you, Senator, and I just want to say thank you very much for being with us.
CONRAD: Good to be with you.
DOBBS: Very encouraging. Thank you, Senator Kent Conrad.
We will continue in just a moment. When we do, we'll be talking with the man in charge of the SEC, who spent the last considerable part of his day testifying before Congress. We will find out what Harvey Pitt has to say, next. Stay with us.
(COMMERCIAL BREAK)
DOBBS: Securities and Exchange Commission Chairman Harvey Pitt has just sat down here in the rotunda. He has spent last few hours testifying before the House Financial Services committee. The chairman says a better system of corporate disclosure and financial reporting is needed. He's also calling for new rules to insure the independence of auditors. Harvey Pitt joins us now. Mr. Chairman, good to have you here.
HARVEY PITT, CHAIRMAN, SEC: It's nice to be here.
DOBBS: Four hours of testimony suggest that Congress is focused on this issue very intently?
PITT: They are, and I think that's a good thing. I think Congress needs to be involved, and they're showing that they are.
DOBBS: You have, from almost the outset, suggested a number of changes in the way the accounting industry governs itself, is governed through oversight of your agency. Is it, though, however, as some suggest, a little too early to talk about the solutions here, until we know more about the facts?
PITT: I think we will keep learning as we know more facts. My concern is that investors need to have confidence that our system is the best we can make it. And if we wait until the Enron investigations are over, we might see another Enron. And that's something I don't want to have happen.
DOBBS: And if anyone has any doubts about that, they might look at this market, since the Enron scandal broke and the Andersen issue and that relationship with Enron became parent. What we saw today is being described by every professor on Wall Street is simply a crisis of confidence on the part of investors. That confidence is going to erode further, one could fairly well assume, as these hearings are protracted. what could your agency do to reassure the investing public, given all that's being disclosed, seemingly daily, if not we weekly?
PITT: We've taken a number of actions, and we continue to take actions. I think there is an erosion of confidence, but I think that investors can have confidence that we're in the job, that we're going to correct the abuses that have existed in the system for far too long. We put out guidance to corporations, we're proposing rules. We've adopted new standards for disclosure. We are creating a new accounting regulator that will be in the private sector, but not in the accounting profession the way the present one is. We're trying to improve the system.
DOBBS: One of your predecessors, John Chad, as you well recall, said he's going to come down with hobnail boots on insider trading. Are you going to come down with hobnail boots on inappropriate relationships between auditors, ratings agencies and corporate America?
PITT: Well, I don't know if I'm going to use hobnail boots, but I'll say this. We'll come down with a sledgehammer on any improper relationships, any improper conflicts of interests. We intend to eradicate all of that.
DOBBS: We have now seen four of the big five accounting firms withdrew from consultancy. Do you think that's appropriate? Do you think it's appropriate there be legislation or regulation, or that accounting firms function in the area of audit and tax, and stay away from operational or informational technology consulting?
PITT: I think what the accounting firms did is a step in the right direction. I think they showed that they will be responsive to the public concerns. And that, to me, is a step forward. But it can't delay us in doing the things that we think need to be done. My concern on the conflict issue is with the people who are on the line doing the audits. Those are people who have gotten compensated for cross-selling services. $100,000, $200,000 can make a world of difference to an audit partner, even though it makes no difference to the firm.
On the firm level, I believe strongly that the firms have to be incentivized and required to supervise all their auditors to make sure that there are no improper interests that guide their work.
DOBBS: Your agency -- as you talked about coming down with a sledgehammer -- it's going to require money. Are you going to press for far more money? Are you going to ask for better staffing? Are you going to look to professional firms for more pro bono work in behalf of the SEC?
PITT: If we need more people and money, I will not hesitate to ask for it. At the moment, what we're trying to do is set up a private sector regulatory system so that the costs are not borne by the American public, but are borne by the beneficiaries of the system, the users of the system.
DOBBS: Over a billion dollars in fees to the SEC, less than half that amount for your budget. You have ample latitude. Have you discussed this with anyone on Capitol Hill, or within the administration, as a way to bring money to your agency to be more effective?
PITT: We do have earmarked funds, although they have to be appropriated by Congress. Our concern was, when I first started, was to take a few months to sort of get the lay of the land before we decided we needed more people. Unfortunately I was hit with 9/11. And then after 9/11 was done, I was hit with Enron. I need about two or three months to decide whether we need more people.
But my big concern is pay parity. That's the one place where we did ask for funds and we have yet to get them. So we're working with OMB to try and persuade them that we deserve those funds.
DOBBS: Which will reduce your turnover on the staff by about 30 percent...
PITT: Exactly. It's twice what other financial services regulators have.
DOBBS: Next steps here, what you would like to see happen?
PITT: I think the first thing I'd like to see happen is the specific investigations wrapped up. But we have to move forward. We're going to have an investor summit conference in May here in Washington, where small investors could come in and tell us what they think. And we're going to have roundtables to get views on the proposals we've put out. I want to make sure that before we act, we've heard every point of view and what we do makes sense.
DOBBS: Could I ask you the same thing I asked Senator Dorgan. Do you believe -- and I could ask this because some of this doesn't require legislative intent -- do you pledge real reform as a result of all that's happened with Enron, and what we're learning in terms of other corporations as well?
PITT: Absolutely. Unquestionably.
DOBBS: OK. Chairman Harvey Pitt, a very busy man, who's going to only get busier. Thank you very much for being with us.
PITT: Thank you.
DOBBS: And when we return, we'll be talking with Senator Joe Lieberman. We're going to be talking about what he's looking for as he conducts a further investigation into the Enron scandal. Stay with us.
(COMMERCIAL BREAK)
DOBBS: Enron's spectacular collapse has highlighted many less palatable aspects of free market capitalism, and chief among them, outright greed. Specifically, the greed cultivated in board rooms because of excessive executive stock options and compensation. Kitty Pilgrim has the story.
(BEGIN VIDEOTAPE)
KITTY PILGRIM, CNN CORRESPONDENT (voice-over): There's no doubt about it, the fat cats got a lot fatter and the rank-and-file worker has not fared as well. And in the context of the current Enron scandal, more and more is coming to light.
CHARLIE LEWIS, THE CENTER FOR PUBLIC INTEGRITY: What's new about Enron are the other ways of hiding the money. The no-interest loans, worth millions of dollars, and the offshore corporate deals that you could make on the side in special little partnerships -- there's kind of discrete ways to augment the compensation that the public investors and shareholders generally can't find out about.
PILGRIM: In the market heyday of the 1990s, CEO pay went up more than 570 percent. By contrast, the S&P 500 went up 300 percent, corporate profits less than half that, and worker pay up 37 percent -- barely outpacing inflation.
JOAN CLAYBROOK, PRES., PUBLIC CITIZEN: In terms of fairness, there's an enormous gap between everyday workers and the top executives of these companies. Some are making tens of millions of dollars a year. It's totally ridiculous, and it does undermine the capacity of the company to invest in new ventures and projects, and so on.
PILGRIM: Stock options were the perk of choice in the last decade. Once study found stock options grew in popularity, and by the year 2000, made up half the compensation for CEOs at financial services firms. Other more Byzantine perks include low cost loans for houses, paying taxes for executives, and the ultimate golden handshake -- millions to let an executive go.
CEO turnover was high in recent years. In 2000, according to executive compensation firm, Pearl Myer and Partners, 42 CEOs in the top 200 companies left or were fired. The next year, 21 top guns left.
(END VIDEOTAPE)
Now, it looks like the issue of corporate greed is front page news with the accounting tricks. But now it looks like accountability will also be in the spotlight -- Lou.
DOBBS: At least it's beginning. All right, Kitty, thank you very much Kitty. When we continue, we'll be back with Senator Joe Lieberman, talking about what we can learn and what we can do to protect employees, next.
(COMMERCIAL BREAK)
(BEGIN VIDEO CLIP)
WILLIAM POWERS, ENRON DIRECTOR: Frankly, Mr. Chairman and members, what we found was absolutely appalling. First, we found that Fastow and other employees involved in these partnerships, enriched themselves in the aggregate by tens of millions of dollars that they should have never received. Fastow got at least $30 million, Michael Kopper, at least $10 million. Two others, $1 million each, and still two more, amounts that we believe were in the hundreds of thousands of dollars.
(END VIDEO CLIP)
DOBBS: William Powers, member of the directors investigating committee. The Powers report, accusing Enron's management of highly improper if not illegal conduct, and testifying right after SEC chairman Harvey Pitt.
Senator Joe Lieberman is the chairman of the Senate's governmental affairs committee. He's one of those who is leading the investigation into many of the issues that William Powers just raised. That panel wants to know how the government missed as well the warnings signs of Enron's collapse, and his committee begins their hearings tomorrow.
senator Lieberman is here. Senator, good to have you here.
SEN. JOE LIEBERMAN (D), CONNECTICUT: Good to be with you, Lou.
DOBBS: In terms of the horror stories that we've heard about the 401(k)s and the Enron employees, what does your committee hope to learn?
LIEBERMAN: We're actually doing a hearing that focuses on this tomorrow. I think, as we watch the markets, including today, reflecting what all of us are hearing as we go back home, which is the anxiety of the more than 40 million people, 42 million people, who have 401(k) plans in this country, worried that their plans are subject to the same problems and threats of insecurity that the Enron employees plans' were.
We're going to focus on what happened there. We're going to have some employees talk about it. We're going to have some of the folks at Enron who were in charge of the 401(k) plans, and two of the companies that administered those plans. And then I think we want to go from that to reaching some conclusions about what Congress can do to give some protections to people who hold 401(k)s. I think, the sooner the better.
DOBBS: The president, of course, has also proposed reforms. What do you think of those, and particularly, the ability to sell that stock after three years?
LIEBERMAN: President's proposals were a good start. But they fall far short of what's necessary here. Most importantly, he didn't really deal in any meaningful way with what I think was one of the big problems in the Enron case and a lot of other companies, which is the lack of diversification. Any investor ought to be diversified to protect themselves.
And here in Enron and a lot of other companies, through the employers' share contributions to the 401(k) and the hype that the employees got, they were so deep into the company's stock that they ended up suffering a lot more than they should have. So I think we need to do something on that, and we ought to do it in a way that's smart and doesn't regulate so much that the companies don't have the 401(k)s anymore.
But I think the president's three-year proposal is too long. I think we ought to have a law that says when the employers' part contribution to the 401(k) vest in the employee, and it ought to be much shorter than the three years after that that the employees can sell that stock. I'd do 30 or 60 days.
DOBBS: Balanced against that, of course, what a great boon to American employees the 401(k) has been -- the source of so much wealth.
LIEBERMAN: Yes, absolutely. So let's do this in a way that provides better protection for the employees, but doesn't hurt the 401(k)s. Incidentally, we're spending a lot of money every year, taxpayer money, to give tax incentives to employers and employees to go into 401(k)s. They're a big part of retirement security. The other two legs of that three-legged chair, Social Security and savings. Savings are way down. Social Security is OK, but we're a little worried about the impact on the federal debt on that. So we've got to really keep 401(k)s strong.
DOBBS: Senator Joe Lieberman, thanks for being here.
LIEBERMAN: Thank you, Lou.
DOBBS: That's MONEYLINE for this Monday evening. We thank you for being with us. Good night from Washington, D.C. "WOLF BLITZER REPORTS" begins right now.
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