Bush’s Doubts on Regulation Again Surface

Even in a speech that urged a new government offensive against corporate fraud, President Bush on Tuesday again revealed his deep-seated skepticism about the ability of Washington regulation to solve social problems.

While endorsing “tougher laws and stricter requirements,” Bush insisted that in the end, something else would be more important in curbing the wave of corporate crime dominating the headlines. “Ultimately, the ethics of American business depend on the conscience of America’s business leaders,” he said.

That emphasis on individual change over collective action is a consistent element in Bush’s thinking. After the shootings at Columbine High School in 1999 in Colorado, he made almost exactly the same arguments in asserting that cultural change would do more to prevent a repeat of such violence than new laws.

As he frames his response to the wave of corporate scandals, Bush seems buffeted between that fundamental leeriness about new regulations and the growing political and economic pressure for measures to restore confidence in the stock market. The result has been to steadily tug Bush toward more aggressive securities regulation than he envisioned when he took office--although still not nearly as sweeping as most Democrats believe is necessary.

On Tuesday, Democrats quickly criticized Bush for failing to specifically endorse the reform measures they are pushing in the Senate, particularly the proposal to create an independent new oversight board to regulate the accounting industry.

“What the president did today in using the bully pulpit was good,” Gary Gensler, an undersecretary of Treasury under former President Clinton, said Tuesday. “But calling for ... just throwing a few more laws at the bad apples falls short. At the heart of this, the president has still not spoken strongly for real reform of the accounting profession.”

This hard line is a change in direction for many congressional Democrats, who in recent years sided with the financial industries to resist tougher government oversight. Only last year there was so little opposition in the Senate to an industry-backed measure to cut the stock fees that fund the Securities and Exchange Commission that it passed on a voice vote.

Yet it is Bush who has adjusted his course most dramatically since the corporate scandals erupted.

Even with his insistence that “the vast majority of businessmen and [business]women are honest,” the pointed criticism of corporate executives in his speech was a hairpin reversal for a president who has mostly praised business and drawn heavily on industry officials to staff his government.

At the SEC, for instance, Bush not only appointed former accounting industry lobbyist Harvey L. Pitt as chairman, but has sought to install two other industry alumni as members of the five-member commission. Like other Bush regulators, Pitt initially stressed his desire to pursue a less confrontational relationship with business.

“In general,” Pitt said in November, “my preferred approach to any regulatory issue is one in which the government’s participation is as limited as reasonably possible, while vigorously ensuring that the public interest is protected.”

Measured against that starting point, Bush’s agenda Tuesday marked a striking level of new intervention, from a corporate fraud task force in the Justice Department to increased penalties for mail fraud and wire fraud, enhanced SEC authority to block payments to executives while a company is under investigation and a plea for the stock exchanges to approve rules requiring that a majority of all corporate boards be composed of outside directors, a longtime priority of investor groups.

“Self-regulation is important, but it’s not enough,” Bush declared in a formulation that came close to reversing Pitt’s original credo.

But as Democrats and investor advocates picked over the fine print of what Bush said--and even more so what he didn’t say--many argued that government needed to do considerably more to meet those goals than the president proposed.

“There definitely has been movement by the administration,” said Ann Yerger, research director at the Council of Institutional Investors, a coalition of pension funds and investment firms that seeks corporate reform. But, referring to Bush and his aides as “reluctant reformers,” she added, “The question is whether the changes go far enough. From our perspective ... we don’t think they do.”

Critics disliked only a few specific elements of Bush’s proposals. Gensler, for instance, said that Bush was still moving too timidly by proposing to toughen penalties for mail and wire fraud--an indirect way of pursuing stock manipulation--rather than establishing a clear new criminal sanction against securities fraud, as Senate Democrats want. Others complained that Bush’s proposed $100-million increase in funding for the Securities and Exchange Commission was only one-third the level Senate Democrats are pushing.

Mostly, though, critics complained about what Bush didn’t say. Several noted that the president never endorsed the proposal from Sen. Paul S. Sarbanes (D-Md.) that the Senate is likely to approve this week. That measure would establish an independent new oversight board to regulate the accounting industry and limit the consulting services accountants can provide for companies they audit.

Sen. Jon Corzine (D-N.J.), a leading sponsor of the Sarbanes bill, termed Bush’s speech “extremely weak,” and “lacking in detail and specifics.”

White House aides have hinted Bush might sign the Sarbanes bill if it reaches him. But the more immediate question is whether Bush will try to bring a bill to his desk by forging a compromise between the House--which has passed a less stringent measure--and the Sarbanes bill.

The same political pressures that encouraged Bush to deliver Tuesday’s speech will pressure him to craft a compromise. But his speech also showed that he remains skeptical that new laws and regulations are the key to solving the problems unearthed in the last several months.

He seemed to be speaking most clearly from the heart when he argued that it was as urgent to change business culture as business law. While new statutes might help, he said, “we need men and women of character who know the difference between ambition and destructive greed, between justified risk and irresponsibility, between enterprise and fraud.”

That argument touched on some of Bush’s deepest beliefs about government’s role in society.

In an interview with The Times just after the Columbine school shooting, Bush made almost exactly the same case. While endorsing a series of measures to control access to guns or limit children’s access to violent entertainment, he made clear that he considered all of those public initiatives secondary to private change.

Bush offered much the same balance Tuesday, suggesting that a key to solving problems in the boardroom was for chief executives to set a “moral tone.” Embedded in that summons is the conviction that the crisis of corporate ethics is primarily a problem of individuals who go bad, rather than a financial system that encourages even good people to make bad decisions--and a regulatory system that fails to deter them.

That fits with his broader belief in the primacy of individual responsibility. But it may not be enough to resolve the anxiety of spooked investors now depressing the stock market--or end the rising criticism from Democrats who see the first chinks in Bush’s political armor since Sept. 11.