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CNN Novak, Hunt & Shields

Interview With Senator Paul Sarbanes

Aired July 20, 2002 - 17:30   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.
ROBERT NOVAK, CO-HOST: I'm Robert Novak. Mark Shields and I will question the author of the accounting reform bill nearing congressional passage.

MARK SHIELDS, CO-HOST: He is Democratic Senator Paul Sarbanes of Maryland, the chairman of the Senate Banking Committee.

(BEGIN VIDEOTAPE)

SHIELDS (voice-over): House Republicans late this week yielded to major elements of a Senate Democratic bill sponsored by Senator Sarbanes that would regulate corporations more than the bill passed by the House months ago.

SEN. TOM DASCHLE (D-SD), MAJORITY LEADER: I am very pleased that the House chose not to kill the economic -- the accounting bill, the Sarbanes bill, yesterday. A little light brought a different reaction, and we're delighted that they made the decision they did.

SHIELDS: Earlier, Republicans had found fault with the Sarbanes bill, particularly with its independent review board.

REP. MIKE OXLEY (R), CHAIRMAN, FINANCIAL SERVICES COMMITTEE: I have some real concerns about the oversight board in the Senate provision that could very well be unconstitutional, because it grants governmental powers of subpoena to a private entity, and I don't think that's ever been done.

SHIELDS: The change by Republicans came as stock prices continued to tumble in a volatile market, despite assurances by Federal Reserve Chairman Alan Greenspan.

Paul Sarbanes, a Rhodes scholar with degrees from Princeton, Harvard and Oxford, entered politics as a 33-year-old member of the Maryland legislature in 1966. Four years later, he was elected to Congress, and in 1976 to the U.S. Senate.

Now the longest serving senator in Maryland history, he became Banking Committee chairman last year when Democrats regained control of the Senate.

(END VIDEOTAPE)

SHIELDS: Senator Paul Sarbanes, you had your opening conference meeting with the Republicans and the House and the Senate on Friday. Are you confident that the Republican conferees will accept the tougher bill that you wrote and the Senate passed?

SEN. PAUL SARBANES (D), MARYLAND: Well, I'm never confident before it actually happens. I think they're looking with better favor on what the Senate has done than they were earlier on. Of course, we passed the bill 97-0. We think it's a good strong balanced bill, and now we're going to try to work out the differences.

But the conference meeting on Friday morning I think got launched with a considerable degree of good feeling, and also a commitment to try to get a bill done in the very future.

SHIELDS: Other than your vast legislative skill, the climate, the atmosphere seems to have changed since the time that this legislation first was considered in the Congress. A prominent Washington, D.C. business lobbyist, Fred Griffey (ph) said: "These scandals had done more to hurt capitalism than Lenin, Stalin and Karl Marx put together." Has that really contributed to the momentum for passage of the bill?

SARBANES: Oh, I think it has. I mean, we are out there to restore capitalism. We want to get a system in place that will provide some assurances that these abuses won't happen again in the future, and that's what we are trying to do with this legislation. But clearly business has a bad name right now, because of -- actually, the majority of business people I think are very much committed to doing their job according to the rules and strengthening the economy, but obviously we've had some very bad actors on the scene.

NOVAK: Senator Sarbanes, we ran a soundbite at the beginning of this program by your House Republican counterpart, Congressman Oxley, in which he said that he thought that your independent audit board being apart from Congress and independent was very probably unconstitutional. Now, you're a lawyer yourself. Have you considered the constitutionality of that provision?

SARBANES: Well, we considered that very carefully, and we went outside and got some opinions from expert constitutional scholars who all said they thought what we were doing was pass muster. So we think we are OK in terms of passing muster on that question.

NOVAK: Even though it's independent?

SARBANES: Well, here's your choice. At the moment, the accounting industry is overseen by the accounting industry. That's not working very well.

One alternative is to put it all over under the SEC. Of course. that would be an enormous expansion of the SEC jurisdiction.

So we set up an independent accounting standards board to promulgate the standards, do the inspections, do the investigations and mete out punishment. We use the same system with respect to others, for instance, broker dealers in the stock market. So we think this will work. NOVAK: Mr. Chairman, the -- at the Friday morning House Senate conference, Senator Robert Bennett, Republican of Utah, suggested that perhaps the very tough legislation was spooking the market, or could spook the market as much as the excesses and the corruption of the business men. And, in fact, after you met on Friday, there was a 300- point plunge in the Dow. Do you have some concern that this tough regulation is having the opposite affect on the market than what you intended?

SARBANES: Now, I doubt what we've done up to now has had much affect on the market. I mean, the president made a speech, the market went down. Then Greenspan testified before the committee; originally that, sort of, helped the market, and then the market went down again. So we're going through a very difficult time right now.

What we need to do to quiet down the situation, in my judgment, is we need to put a statutory framework into place with an independent oversight board for the accounting industry. We need to separate auditing and some of these consulting services that lead you to behave, not as an auditor ought to do because you've got the fat consulting fees. We need to do corporate governance, corporate disclosure, something about the stock analysts who are telling people buy at the same time they're saying to one another, "What a turkey that company is," in their internal e-mails. And we need to strengthen the SEC. And this bill does all of that.

Once you get the framework in place, then the SEC, the other regulatory agencies and the private sector people can go to work, to, in effect, cleanse the system and tighten up its monitoring and its oversight to avoid these occurrences happening.

SHIELDS: Now just on that point, how prevalent do you think the practice has been of stock brokers recommending stocks to clients and at the same time privately in e-mails and to each other saying, "This thing is really a dog"?

SARBANES: Well, Attorney General Spitzer, of course, nailed one of the big investment houses on that basis and he's now looking into some of the others. So, I mean, I haven't been part of that inquiry or investigation, but apparently the talk is that it's going on in a number of places.

SHIELDS: Do you think that -- and you've been sympathetic to the examining stock options expense proposed by Senator Levin of Michigan -- do you think or is it a concern of yours that if, in fact, that is adopted and they are considered an expense, that it could cut some companies' earnings from 20 percent to 30 percent of their net earnings?

SARBANES: Well, it may well have that impact. My position is that this ought to be examined by the Financial Accounting Standards Board. I don't think the Congress itself should be legislating accounting standards.

But by the same token we ought to leave the Accounting Standards Board to do its job. It's an independent board and that's what its responsibility is.

Now, when they tried to address this issue a few years ago, they were subjected to enormous pressure. I mean, really, and one of the things that we've done in this legislation is we've provided independent funding for that board.

Before they got their funding by voluntary contributions to the very people with respect to whom they were promulgating the standards. So they said to them, "Well, if you don't do the right standard, we're not going to give you any money to run your operation."

NOVAK: Mr. Chairman, last Sunday on "Meet the Press," Senator John McCain, saying why his proposal -- his amendment on stock options was not considered, he said, "The fix is in"; that lobbyists had descended on the Senate and prevented a vote. You were sitting next to him and you neither confirmed or denied that. Do you think the fix was in; that lobbyists killed the McCain amendment?

SARBANES: No, I think this talk about the fix being in is greatly overdone. Lobbyists were descending upon the Congress, there's no question about that. They're all over the place. But he was blocked out because, parliamentary, there was no way to get his amendment up. I mean, that was the fact of the matter.

And many other people in the same situation as we were dealing with this legislation were also blocked out. So it's not as though he was experiencing something that was unique unto him and to his amendment.

NOVAK: Senator Sarbanes, the conferees -- several of the House Republican conferees who you met with Friday, you'll be meeting with next week, have received hundreds of thousands of dollars from the accounting firms and some of the corporations being investigated and being accused of fraud. Do you think the members of the conference who have received those contributions should recuse themselves, should not vote on anything affecting the companies who gave them the contribution?

SARBANES: No, I think it's on the record that they received the contributions, and their performance will have to be judged accordingly. I mean, we all receive contributions from one sort or another under our system. It's not the best system in the world, I hasten to add, but it's the one we have and you have to deal with it. And as long as it's out on the record and people know where the money's coming from, then they can judge the actions of the member in that context.

NOVAK: OK, we're going to have to take a break. And when we come back, we'll ask Senator Sarbanes whether Harvey Pitt should still be chairman of the SEC.

(COMMERCIAL BREAK)

SHIELDS: Senator Paul Sarbanes, Ed Markey, a senior Democrat in the House, a dean of the New England delegation, said that Harvey Pitt's participation as chairman of the SEC in decisions involving his former clients would further deepen the crisis of confidence in the securities markets and call into question the SEC's ability to vigorously enforce the law.

Is Ed Markey right?

SARBANES: Well, Harvey Pitt's been confirmed by the Senate, he has a term. The president has indicated that he is strongly supportive of him continuing as the chairman, and I think the real question is that -- is for Harvey Pitt to do the job that he's charged to do.

Now, he made a speech on Friday in which he laid out a lot of the things they've done, and in some respects he's moving pretty aggressively. In other respects, I think he's really been a bit behind the curve. We'd like him to get fully behind our bill, but we'll see how that develops.

I've said all along, the real question is whether Harvey Pitt, the chairman of the SEC, is going to be the Harvey Pitt who was the youngest general counsel in SEC history when he went to the SEC and had just an incredible record of performance, or the Harvey Pitt who for 25 years thereafter represented a lot of the interests that are now before the SEC.

But, you know, under our system people leave the private sector, they go into public jobs, and the assumption is that they will leave the private sector behind them and that they will respond to the public interest. And Pitt certainly stated that in his nomination hearings, and so I'm hopeful that's what he'll carry through as chairman.

SHIELDS: Would we be better off with a new chairman?

SARBANES: It'll take you months to get a new chairman. I mean, you have a vacancy there, who would you get? I'm for Pitt doing his job, is what I'm for, and he'll get plenty of oversight in the course of doing it, so he'll be measured in terms of the standard he reach both by the -- I'm sure you all will provide some oversight as well.

That may push him along if he knows that Bob Novak and Mark Shields are going to be looking over his shoulder.

NOVAK: That sure is terrifying.

(LAUGHTER)

Mr. Chairman, the chairman of the Federal Reserve, Alan Greenspan; you have sometimes been critical of him more than some of your colleagues have. He came up before Congress this week and he talked about infectious greed by businessmen. And coincidentally or not, the market took a little nosedive when he said that. Do you think it is proper for the chairman of the central bank to use that kind of rhetoric at this time, when markets are so skittery?

SARBANES: I was very struck, because I was at that hearing, how intensely Alan felt about this issue. And he went on to develop it, to say that he thought these people were really undermining the workings of our free enterprise system; that they really, in their own way, were criminals in terms of what they were doing to the workings of our economic system. And I think in that regard he's right.

We potentially face a very severe economic crisis...

NOVAK: So you don't criticize him for saying that...

SARBANES: No, no, no. But I was struck by how deeply he felt it. And it's not like Greenspan ordinarily to do this sort of thing, make this kind of statement. So I think he's very strongly motivated by what he sees as gross abuses to the workings of our economic system.

NOVAK: I interrupted you as you were about to say we face a deep economic crisis. Do you think that -- sometimes the stock market plunges lead to a deeper economic decline, sometimes they don't. Do you think this is going to lead to a economic decline? Do you think we're in for a rough ride in this country?

SARBANES: Well, I certainly hope not. I certainly hope we won't get there. And I don't think there are any clear signals at the moment that that's where we're going. In fact, the economy is strengthening a bit.

On the other hand, you can't rule out that possibility, because there's clearly a lack of investor confidence, and it's affecting investors overseas and investors in this country as well; for obvious reasons.

SHIELDS: Senator Sarbanes, in Thursday's New York Times poll, the voters, while expressing general support for the president, not strong criticism, said by a 2-to-1 margin that they thought that the Bush administration itself was more interested in the well-being and interests of large corporations than of ordinary Americans.

Does this kind of public attitude and skepticism make it really impossible for the president to be an effective reformer in this area?

SARBANES: Well, first of all, I think that is the general perception. I don't think it makes it impossible for the president to be a reformer, but it means he's got to be very active and very much out in front in the reform efforts.

And particularly he has to bring the substance that underlies his rhetoric into balance with the rhetoric. It's not enough to make a tough-sounding speech if you don't back it up with the measures to support it. And I think the administration has been short on that score, although I think they're trying to pick up the beat.

SHIELDS: Two presidents named Roosevelt, both born to the manor, both privileged backgrounds, not unlike George W. Bush's, charged with saving capitalism by the reforms that they lead, championed and imposed in large part. Do you see that same element present in George W. Bush at all? SARBANES: Well, we're looking for it. And we're looking hard for it. And I'd very much like to see it, because I think both Teddy Roosevelt and Franklin Roosevelt really strengthened the American economic and political system by the measures that they took. They were ready to blow the whistle on the malefactors.

The president's talked about punishing the bad apples, and I'm all in favor of doing that. But that's not enough. You have to strengthen the system within which all of this operates in order to keep it from happening in the first place. Once the bad actor appears, the bad deeds have happened.

I mean, tens of thousands of people at WorldCom got laid off. Retirement plans were completely devastated. Pension plans were hardly -- badly hit.

So you have to punish the bad actor, but in the meantime you got to put in place a system that does the best it can to keep this thing from happening.

NOVAK: Mr. Chairman, we've just got about a minute before we take another break, and I've got two quick questions. I hope you can give a quick answer.

There have been a tremendous number of nominations in the Senate held up, including four nominees for the SEC, the Securities and Exchange Commission, in your committee, one of the nominations made last December. Without going into the details, would you say this has not helped the SEC in its regulatory function to be so shorthanded?

SARBANES: Well, the SEC's supposed to be balanced. We said to the administration, "As soon as you get the nominees up, we'll do hearings on them." They sent two at the end of December, the two Republican nominees. They didn't send the Democratic nominees, the one at the end of May, and one just a few days ago. We've already held hearings on two of them. We've scheduled hearings on Tuesday on the other two. And I hope to be able to move them through the committee next week, and hopefully through the Senate by the week after.

So we'll have the balance on the committee, and we'll have a fully staffed commission. But we had a great difficulty in getting these nominees up from the administration.

NOVAK: A piece of legislation under your committee's jurisdiction, terrorist insurance legislation, which has been passed by the House, passed by the Senate, hasn't gone -- nothing been done and accomplished; no conference has been appointed. Isn't this an important piece of legislation for the country?

SARBANES: Oh, I think we should go to conference. In the Senate, unfortunately, we have been held up by the Republicans who have been unwilling to go to conference. But we're anxious to get there. And I agree with your characterization of the...

NOVAK: You think you will go to conference, though? SARBANES: Yes, I think so.

NOVAK: OK. We are going to have to take a break. And when we come back, we'll have the Big Question for Senator Paul Sarbanes of Maryland.

(COMMERCIAL BREAK)

NOVAK: The Big Question for Senator Paul Sarbanes of Maryland.

Senator, you're now the chairman of the Banking Committee. You're a senior member of the Foreign Relations Committee. The information you received, do you see an imminent, soon, an attack in the near future by the United States against Iraq to remove Saddam Hussein from office?

SARBANES: It depends what you mean by the word "imminent." But if you mean what imminent usually means, I would say no to that.

But Senator Biden has announced the committee's going to start doing hearings on the Iraq policy and I think we need to do that. And I think the president and his administration ought to come to the Congress and, through the Congress, the country, and lay out more carefully their plans.

We ought not to pick up the paper and discover the Pentagon's got one of these plans working that no one really knew much about.

SHIELDS: Don't the Democrats in particular, though, and the Congress in general, have a responsibility to demand a free, full, public debate, much like the one that preceded the Gulf War in 1991, where the Congress goes on record?

SARBANES: Well, I think that's a reasonable point, yes. And that's why I think Senator Biden now has announced that he's going to undertake these hearings in the committee. So we start examining it in an organized, concerted way in the proper form.

It obviously needs to be looked at. We need to get beyond this, sort of, floating trial balloons that's happening all the time. And then they say, "Well, we're depending on these countries over there to help us." And then the prime minister of the country says, "Well, we're not going to help them. You know, no one talked to us about it." How can you develop a policy that way?

SHIELDS: Senator Paul Sarbanes, thank you very much for being with us.

My partner Robert Novak and I will be back in a minute with a comment.

(COMMERCIAL BREAK)

SHIELDS: Bob, for most Americans they're getting their first glimpse and glance at Senator Paul Sarbanes, and he is the classic example of someone who's been a work horse not a show horse. He hasn't been chasing down cameras or reporters, but boy I'd say he is totally prepared for this moment, and a big moment it is.

NOVAK: He's doing a very good job, I think, but he also acts like the guy at the poker game with four aces in his hand because he knows that Republicans cannot fight these proposals. They'd look terrible. And they're pretty much at his mercy as to what ends up in this bill.

SHIELDS: Bob, the Republicans have been suggesting that Democrats are trying to politicize this issue of corporate scandal and corruption for the November elections. Paul Sarbanes is the perfect antidote to this. This is a man really free of cant and free of demagoguery.

NOVAK: Well, I was very impressed, too. He didn't joint the lynch mob against Harvey Pitt, chairman of the SEC. And he said that if you got rid of him, you'd have a long wait without an SEC chairman. That would be terrible. So I thought that was a statesmanlike performance.

I'm Robert Novak.

SHIELDS: I'm Mark Shields.

Coming up at 7 p.m. Eastern on "Capital Gang," the tumultuous effects of Chairman Greenspan's proclamation of infectious greed on Wall Street, President Bush's new blueprint for homeland security and film-maker Rick Burns on the plans to rebuild the World Trade Center.

NOVAK: That's all for now, thanks for joining us.

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