Free Lunch (26 page)

Goldschmidt announced that Texas Pacific proposed to buy Portland GE, and that he would shepherd the
deal through Oregon's Public Utility Commission. At his side stood two business leaders, Gerald Grinstein, the chairman of Delta
Airlines, and Tom Walsh, a prosperous developer. The promise was of local leadership of the utility, although the investment
money was coming from far away. Things soon took many unexpected, even salacious, turns.

Texas Pacific instantly persuaded state officials to seal most of the documents about how it would finance
the purchase. It claimed that the information would be of value to competitors, a curious argument, since Portland GE is a legal
monopoly that has no competitors. But Oregon's Public Utility Commission, whose members were so lackadaisical that the
chairman was known to nod off during official proceedings, went along. Lawyers representing big industrial customers, consumer
groups, and others could see the financial records, but only if they promised not to reveal what was in them.

Ann Fisher, a veteran utility lawyer who represented downtown building owners, was vexed by what she
saw. So Fisher wrote an essay for
The Oregonian.
She wrote that the sealed files told a
very different story than the public announcements about the purchase. Fisher took care not to disclose any specifics that might
be of value to Portland GE's mythical competitors, but she wrote that from the viewpoint of Texas Pacific, a 50 percent profit was
not out of the question. Her words suddenly turned an issue that bores most people into the hottest topic in town.

Soon after that, someone slipped the sealed documents to an exceptionally savvy reporter named Nigel
Jaquiss. He had made a fortune as a Wall Street oil trader and then decided his children would have a better life if their father had a
job he really enjoyed. Jaquiss reported for the local alternative newspaper,
Willamette
Week.

Using skills he had learned at Goldman Sachs, Morgan Stanley, and
Cargill, Jaquiss plowed through the documents and determined that Texas Pacific had found a way to earn more than three times
the rate of return that was authorized for Portland General Electric. The key was a complicated ownership structure with a lot of
debt and very little cash, which meant that the real risk if anything went wrong would be borne not by the owners of the utilitiy, but
by its customers. The public knew none of this, thanks to the official secrecy.

Such official
secrecy in regulatory proceedings is becoming commonplace across the country. It fits the ideology that government is the
problem, which it certainly is for some corporations when government acts as a guardian of the people against profiteers. It also
has its attractive benefits for politicans, allowing them to do their work and even make subtle side deals to benefit friends without a
spotlight on their actions. Keeping people in the dark also reduces the risk that the public will realize how much of its government
has been twisted into a tool of the rich seeking to expand their riches at the expense of those with less.

The disclosures about the financial aspects of the deal followed an earlier story by Jaquiss that discredited
Goldschmidt. It was the story of a secret that many of Oregon's business and political elite had known about, and many others had
suspected or heard about, but that everyone had kept to themselves for more than three decades. Jaquiss showed how a few
prominent Oregonians had even traded on the secret, getting official favors from Goldschmidt when he was in office.

The secret was that Goldschmidt, when he was mayor, repeatedly had sex with a 14-year-old girl, a neighbor
whose mother was a close political ally. None of those who knew had stepped forward to protect the girl or to have Goldschmidt
arrested for statutory rape. For years Goldschmidt paid the victim hush money. There was no indication that anyone among
Oregon's elites ever shunned the child rapist, but plenty of evidence that some of those who knew turned to him when they needed
to work the city, the county, or the state for official favors. Goldschmidt was, by all accounts, the man to see about getting
government to help the rich and powerful, both fixer and kingmaker.

When Goldschmidt
realized that the intrepid reporter Jaquiss had all the facts to break a story in the weekly newspaper, he went to
The Oregonian
, the largest daily paper in the state. He hoped that by giving the big daily
newspaper a scoop he would get as friendly a story as possible, one that would not carry the sting that was certain to come from
Jaquiss. It was a smart move. The next morning
The Oregonian
reported that when
Goldschmidt was mayor he had “an affair” with a girl of 14.

The financial disclosures and the
sex scandal eventually brought an end to the Texas Pacific bid. Jaquiss won an extraordinary honor for a reporter at a weekly
newspaper, a Pulitzer Prize. The city of Portland tried to buy the utility, promising to pay more than anyone else, and then to lower
rates, because as a municipal utility it would not have to pay big executive salaries or dividends. The corporate lawyers and
executives who by then controlled Enron declined to take this high bid. Instead they had Portland GE issue stock, and it became a
freestanding company, one that immediately asked for a hefty rate hike and a change in rules that shifted the risk of rising fuel
prices entirely onto customers. As with Warren Buffett's hardball moves in Iowa, corporate power worked to make sure customers
paid the highest possible prices for electricity.

What is significant about the Portland deal is
how it exposes the willingness, even eagerness, of government officials who are supposed to be acting on behalf of the public to
use official secrecy to benefit private interests. And even when Texas Pacific's fixer was revealed to be a sexual predator whose
victim was a 14-year-old girl, the local elite did not turn on him, did not demand an inquiry, and did not queston their own
complicity. Instead, the state conducted a long, costly, and ultimately failed investigation to try to determine how Jaquiss got hold
of the financial documents. The state tried to pin the blame on Ann Fisher, who had acted honorably, and who had not been the
source of the documents.

Fisher paid a terrible price for being honest. She lost her business
clients. She has had a tough time finding new ones, as the tightly knit Portland business elite closed ranks.

And Goldschmidt? After laying low for months he resumed working for clients seeking subtle favors from
government. But unlike his public announcement in the utility deal, Goldschmidt adopted a lower profile, working the telephones
and backrooms.

Advocating competition, and then using government as a way to make deals
shrouded in secrecy that promise enormous profits and few risks for those getting richer, is a core strategy for those who have
discovered how easily government can be turned into a source of personal enrichment. Next, let's examine the career of one of the
biggest beneficiaries of this self-serve approach to government.

T
HAT MARKETS ARE SUPERIOR TO GOVERNMENT REGULATION
LOOKS
compelling on paper. Arranging symbols on pieces of paper with reasoned
logic is, however, a much easier task than applying ideas in the real world. Human beings must act out the policies, bringing their
strengths and shortcomings into play. They bring their own goals and ambitions and they must contend with external forces
working under different assumptions.

The career of John Snow, the CSX railroad chief
executive who became Treasury secretary for more than three years beginning in 2003, illustrates this dichotomy. The arc of
Snow's career shows how the movement to weaken government while strengthening corporate power has enriched the few at the
expense of the many.

John William Snow was born in 1939. He grew up comfortably in Toledo,
where his father was a corporate litigator who enjoyed success despite being nearly blind. Mealtime in the Snow household was a
family debating society with only one winner, which shaped Snow's remarkable skills at lobbying and flattery of those in a position
to do him favors. Snow once told an interviewer about a valuable lesson he learned from the autocrat of the dinner table. “If you
argued with my father, he was quite pleasant about it, but you would lose,” Snow said. “Early on, I saw the tactical advantage of
stating my views as hypotheses.”

Snow graduated from college in 1962 and went to the
University of Virginia for graduate studies in economics. It was a heady time. Two professors there, James Buchanan and Ronald
Coase, were developing ideas about markets and government, for which each would later win the Nobel Prize.

Coase questioned established principles about who should pay for harm inflicted as a by-product of
business. The idea that those who cause harm should be made to pay involved a subtle slip of the mind, Coase wrote in “The
Problem of Social Cost,” which every serious economics student reads.

Sometimes, Coase
reasoned, society would be better off, or at least richer overall, if businesses were excused from paying for some or all of the
damages they inflict on others. That concept would take on concrete meaning for Snow. He slashed safety spending at CSX by
$2.4 billion between 1981 and 1993, conduct a judge called “willful, wanton negligence” that was “borderline criminal” in the death
of Miami police sergeant Paul Palank. Yet the cost for what three other judges called a “flagrant violation of the public trust” was
paid not by CSX, but was a free lunch the railroad obtained from the taxpayers.

Buchanan, for
his part, argued that politicians often espouse good intentions and then act in their own self-interest. A similar pattern has been
identified in how many chief executives run companies. Buchanan's insights also bore relevance to Snow's work, looking out for
himself in his positions in both government and business.

Snow's 1965 doctoral thesis, a
document with less intellectual heft than some papers written by college seniors, argued that government-sponsored training for
auto mechanics contributed to an oversupply of these workers, depressing the future earnings of mechanics.

After teaching for two years and earning a law degree, Snow worked as a lawyer and a law school professor.
He also held legal and policy positions in the Transportation Department during the Nixon and Ford administrations, where he
worked on what was called “deregulating” the trucking industry. The resulting changes in regulation brought about numerous
bankruptcies of trucking companies, which under the new rules were unable to earn what the government said was the necessary
return to stay in business. More than a million truck drivers saw their wages plummet.

This
work to reduce regulation brought Snow into contact with Hays T. Watkins, the chief executive of the railroad company that
became CSX. Its properties included the Baltimore & Ohio Railroad, now best known as a square on the Monopoly board
game. The B&O was also the first common carrier in America, its history going back to 1827, when mechanized transit began
on this continent. Watkins was the driving force in shaping legislation that changed the rules on railroad regulation, another set of
rules sold under the phony heading of deregulation.

Watkins hired Snow to be his chief
lobbyist. Snow rose quickly as Hays groomed him to be his successor. Snow took on major operational control in 1981. He
became head of the railroad division in 1985 and chief executive of CSX in 1989. Snow was not a railroad guy with knowledge of
how to make the trains run on time, but a fellow who knew how to read numbers and schmooze government
officials.

Watkins and Snow explained how they worked the government for profit in an
interview when Watkins won an award from
IndustryWeek
magazine in 1982. Their
comments showed that the real work they did was less running a railroad than manipulating government to serve their
interests.

Once every two weeks, Watkins would drive his Oldsmobile Toronado the 105 miles
from Richmond, Virginia, to Washington. Snow shared the driving. Watkins told the magazine that he was not a superstar at
government relations like Reginald Jones of General Electric or Irving Shapiro of DuPont, who were previous winners of the
magazine's award for excellence in government relations. Watkins said he hardly knew President Reagan because he spent most
of his time with the representatives and senators, and their staffs, who set railroad policy, making 300 such visits in 18 months. The
magazine descried him as a habitué of the Transportation Department, as well as of the Interstate Commerce Commission and the
Federal Trade Commission. That is, it said he spent his time where he could really influence what mattered to CSX.

Snow explained, “Hays has sensitized this entire corporation to government relations—right down to the
engineer on a train. He has institutionalized it. If he were to leave the company, his approach would endure.”

As Snow rose, he saw to it that government relations remained central. These skills were on display when he
worked to prevent the sale of Conrail, the dominant freight line in the Northeast, which the government put together after the
bankruptcy of the old Penn Central. The Consolidated Rail Corporation had more than 13,000 miles of track. The taxpayers had
poured about $7 billion into keeping it going because it was so vital to the national economy.

The executive who ran Conrail, Stanley Crane, wanted an initial public offering so the market would set the
price for Conrail, including its valuable rights of way and contracts to haul freight. That would mean more competition, which in
turn could mean lower prices and demands for more capital investment to deliver freight faster and more reliably.

Snow wanted government to intervene in the market, exactly what his doctoral thesis—and his professors at
the University of Virginia—opposed. Snow's most important ally was the federal government's Transportation secretary, Elizabeth
Dole, the wife of Senator Bob Dole of Kansas and now a senator in her own right from North Carolina. Dole decided to let CSX and
a competitor, Norfolk Southern, carve Conrail up to their mutual strategic advantage.

Under
Snow, CSX budgets for maintenance and for inspection were cut and cut and cut. In the nineties, CSX spent less money on
maintenance per mile of track than any other railroad. After a spate of crashes that killed 19 and injured more than a hundred
people, a federal report said that CSX “employees were not reporting injuries due to fear of reprisals, such as formal hearings or
harsh discipline for minor unsafe acts or mistakes.”

Still, the safety cuts paid off. CSX made a
dime per share in 1992, the year after Palank was killed. Five years later, long before the court found negligence, it earned $4.17 a
share.

Little outside attention was paid to how CSX slashed maintenance and inspection
crews, saying that mechanization and increased productivity reduced the need for many repair and inspection workers. A federal
report found that half the CSX safety workers had been cut.

Congress was also cutting,
reducing the number of Federal Railroad Administration inspectors. The agency has only 400 inspectors divided into five
specialties to check up on 200,000 miles of track, 250,000 or so employees, and 20,000 locomotives that pull 12 million freight
cars.

CSX also regarded the federal inspectors not as hard-nosed cops looking out for the
public, but as friends. Consider the visit in 1997 by James T. Schultz, associate administrator for safety at the Federal Railroad
Administration. The taxpayers paid to send Schultz to talk about persistent safety problems. CSX saw an opportunity to recruit
Schultz. It hired him on the spot as chief safety officer, a job that also carried the title of vice president and a big pay raise. The
move was so sudden that it raised some eyebrows and prompted an inquiry by the Transportation Department inspector general,
who is supposed to be the official watchdog for the taxpayers. The inspector general concluded that there was “no evidence that
Schultz violated any criminal conflict of interest statute.”

This was just the kind of intimate
connection between government and business that Adam Smith warned about. Markets that operate on official favors were not
what Smith had in mind when he wrote of the invisible hand of the market. Putting a thumb on the scale is not productive in Smith's
reasoning, though it may in the short run benefit the cheater.

Even so, the railroad had little to
worry about. Federal law kept the fines modest, no more than $20,000 per incident, even if many people died and property damage
ran into the billions of dollars. Measured against annual profits, the penalties were mere parking tickets.

When it came to paying Snow there was no stringency.

Snow made
much of his plan to require everyone working for CSX to buy company stock. This was supposed to align the interest of employees
with shareholders. As the price of shares soared in the early nineties, it seemed like a smart move. Then the stock price fell. Snow
had borrowed from the company to buy his shares. The CSX board forgave the loans Snow had taken out to buy his shares and he
gave them back, suffering no loss, unlike common shareholders. Company disclosures indicated the loans totaled $24 million. CSX
said that number was in error, but would not provide what it considered an accurate figure. But what the loans and their
forgiveness showed was that Snow had no skin in this game, bore no risk, had no alignment of his interests with those of
shareholders.

Though legal at the time, Congress in 2001 made such loan forgiveness for
executives illegal. When President Bush nominated Snow to become his second Treasury secretary, the White House was asked
about the loan forgiveness. “Anything that was a common practice that was lawful is not, in the president's judgment, a
disqualification,” said Ari Fleischer, the White House press secretary.

The falling stock price
did not align with Snow's salary, bonus, and other compensation, either. In the five years from 1997 through 2002, shares of CSX
lost more than half their value. Snow's pay, however, soared by 69 percent. He made $6 million in 1997, but $10.1 million in 2001
and another $10 million in 2002.

Snow also benefited from an unusual pension deal that federal
law allows. Most workers, if they get a pension at all, count only their base salary and the number of years they worked for the
company. Snow got to count his base pay, his bonus, and 250,000 shares of stock the company gave him. And on top of this he
received credit for 44 years of service even though he only worked at CSX for 25 years. Congress could, if it wanted, end such
favoritism to executives by changing the rules. It could require that all pensions be based on the same formula as a condition for
the payments to be tax deductible.

When Snow resigned to become Treasury secretary his pay
for the first two months of 2003 plus his cash-out payments totaled $72 million. Meanwhile, 41 CSX retirees who had worked at the
railroad's Greenbrier hotel and country club in West Virginia sued, saying they were deprived of life insurance benefits. James
Hilton, a retired food storage supervisor, said that the life insurance benefit was routinely paid until October 2001. Then, he said,
“out of the blue, CSX sent us this self-contradictory letter that says, ‘We know you thought you had this life insurance benefit, but
really you did not.'” One policy on the executive floor, another on the shop floor.

Snow's
appointment was even too much for
Forbes
, which noted that at CSX “his
performance was middling at best,” while his pay was the highest in the history of the railroads.

As Treasury secretary, Snow promoted retirement savings and financial literacy (and anything else banal that
the White House asked him to say). He did not practice what he preached. Snow's investment adviser bought almost $11 million in
bonds sold by major players in the mortgage market: Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It was improper
for Snow to have such investments. Snow said he was not aware of the purchases because for more than a year he said he did not
look at his own financial statements, as he told others they should. The impropriety came to light when a Treasury Department
ethics official raised questions about the investments. A spokesman said Snow considered these investments “regrettable” and
said they were sold at a loss of almost a half million dollars.