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Gramms and Enron: A Mutual Aid Society

Rules backed by senator, wife helped company

By Elaine S. Povich
WASHINGTON BUREAU

February 10, 2002

Washington - Former Commodity Futures Trading Commission chief Wendy Gramm - a subject of congressional investigators because she sits on Enron's board of the directors - had a free-market philosophy she likened to tending a garden. Weeds, she said at a January 1993 CFTC board meeting, should be rooted out, but "we must be careful that we don't pull up anything green, just because it might turn into a weed." That philosophy indicated Gramm was reluctant to cut off new kinds of financial instruments before they had a chance to grow without being regulated. It was that mind-set in January 1993 that led Gramm to conclude that sophisticated financial instruments used to hedge against risk, called "swaps," should be free from regulation by her board. Energy "swaps" were among the financial instruments traded by Enron, out of sight of government regulators, and which may have been used to hide the company's true financial condition. The CFTC voted unanimously to exempt swaps, though at least one regulator had misgivings. Six weeks later, Gramm left the CFTC for a seat on Enron's board.

Gramm's husband, Sen. Phil Gramm (R-Texas), too, was a friend to free markets and had a hand in legislation that also exempted the sophisticated financial instruments. "It should come as no surprise to anyone that I believe in competition," he said last week.

Phil and Wendy Gramm have links to Enron and were involved in legislation and rules that benefited Enron. The relationships were sometimes murky and complex.

The company donated almost $100,000 to Sen. Gramm over the past decade, according to the Center for Responsive Politics, and Wendy Gramm, once she left the CFTC in 1993, has been paid at least $900,000 in fees, stock options and dividends by the company over the past eight years, according to the consumer group Public Citizen.

But the Gramms said they lost $686,000 of that amount in the Enron collapse, mostly in the form of Wendy Gramm's deferred compensation. Phil Gramm got $97,000 in campaign contributions from Enron employees over the past decade, both for his Senate re-election campaigns and his short-lived run for the presidency in 1996. When he announced in September 2001 that he would not be running for a fourth term in the Senate, he said he would return all donations directed at that campaign.

Sen. Gramm says he and his wife never discussed her job at Enron, but said that in 1999, in anticipation of a Senate debate on electricity deregulation, the two decided that Wendy Gramm's stock options in Enron, which were part of her compensation package, should be put into "deferred compensation," a kind of retirement plan. Declines in the deferred compensation led to the Gramms' financial losses, he said.

In 2000, when Sen. Gramm, along with Sen. Charles Schumer (D-N.Y.), drafted a bill to deregulate the electricity industry, it also included an exemption from oversight for swaps. But that bill died in the Senate. While the CFTC rules would have dealt with some of the sophisticated financial instruments, a new law would have taken precedence and would have included other financial instruments as well.

Later that year, some of the items in that bill were included in legislation to renew the charter of the CFTC, which also included an exemption from regulation for swaps and other sophisticated trading instruments. Just as it was about to be approved late in 2000, Gramm raised concerns about items in the bill unrelated to the swaps Enron was interested in. He was concerned about banking issues and put a hold on the bill. But he was persuaded in the end to support it after talks with the Treasury Department, not Enron, Gramm's spokesman said.

Treasury officials and others argued that if the financial instruments were too closely regulated, the market would simply move overseas.

Gramm said his final decision had nothing to do with Enron.

But Larry Noble, director of the Center for Responsive Politics, a political watchdog group, said Gramm was there when it counted. "Senator Gramm was a close friend of Enron's and remains a close friend of Enron's," Noble said. Gramm said that's implication by innuendo.

"I objected to the bill for three months and would have killed it had they not fixed an unrelated problem," Sen. Gramm said. "I sure as hell wasn't doing Enron's business."

Wendy Gramm has been asked to testify before Congress, and more than likely will be asked to explain her relationship, if any, to Enron while she was at the CFTC, considering that her husband was a major recipient of their money and that her regulations appeared to favor the firm. They also want to know about her transition from CFTC chief in 1993 to, six weeks later, a member of the Enron board of directors.

A spokeswoman for the Senate Permanent Subcommittee on Investigations, Kathleen Long, said the panel is particularly interested in looking into the role of Enron's board in "overseeing Enron activities," particularly "offshore activity." The board, including Wendy Gramm, is charged with being the shareholders' eyes and ears at the company.

Back in 1993, minutes of the CFTC board meeting show Gramm was inclined from the first to exempt swaps. She told the story about the garden at the meeting, saying that the board should "make sure that we carry out our statutory mandate of protecting customers and providing financial integrity, but also to allow innovation where appropriate and not impose an unnecessary burden or cost so that this garden can continue to flourish."

At least one commissioner, Fowler West, had concerns and suggested that President Bill Clinton appoint a special board to look into regulation of such instruments. But in the end, West voted for the rule to exempt swaps from regulation.

Wendy Gramm currently is a member of the Mercatus Institute think tank, which is affiliated with George Mason University in the Virginia suburbs of Washington. The institute also has been a beneficiary of Enron. The institute has received $50,000 from Enron since 1996, according to a spokeswoman, Laura Hill. Hill took a list of written questions for Gramm and passed them along to her, but Gramm did not respond.

Copyright © 2002, Newsday, Inc.

-- Cherri (jessam5@home.com), February 13, 2002