16:59 10Jan2002 RSF-WRAPUP 1-Enron called Bush Cabinet officers before bankruptcy

    By Arshad Mohammed
    WASHINGTON, Jan 10 (Reuters) - The collapse of Enron Corp. <ENE.N> entangled the Bush administration on Thursday as the White House said two Cabinet officers were warned of its looming bankruptcy and Attorney General John Ashcroft recused himself from the criminal investigation into the company.
    Trying to inoculate himself from the political fallout, President George W. Bush ordered a review headed by Treasury Secretary Paul O'Neill of U.S. pension and corporate disclosure rules to avoid a repeat of the energy trading firm's collapse, in which thousands of employees lost their pension savings.
    In a series of stunning disclosures that followed Wednesday's announcement of a criminal probe into Enron, the energy firm's auditor, Andersen, said its employees had destroyed documents related to the former energy giant's balance sheet.
    Bush's team has close ties to Enron and its chairman, Kenneth Lay, a major Bush campaign contributor who last autumn called O'Neill and Commerce Secretary Don Evans, Bush's 2000 campaign manager, to warn them of the impending bankruptcy.
    The White House said O'Neill and Evans opted to do nothing about Lay's calls, which appeared to hint at the possibility of a private bailout like the one orchestrated by the New York Federal Reserve in 1998 for hedge fund Long Term Capital Management.
    A senior U.S. official, however, said that Lay "did not ask for anything" in the telephone calls.
    The Justice Department on Wednesday announced it had opened a criminal investigation into the energy trading company, whose December bankruptcy threw thousands out of work, devastated investors and wiped out the pension plans of many employees when its stock price plunged.
    Ashcroft removed himself from the investigation, which is expected to focus on whether the firm misled investors about its accounts, because Enron gave him political contributions for his run for a U.S. Senate in his home state of Missouri.
    DOCUMENTS DESTROYED
    Anderson, the Big Five accounting firm that served as the company's auditor, on Thursday said its employees had deleted documents related to its review of the company's finances and congressional sources said thousands were destroyed.
    Rep. Henry Waxman, a California Democrat who has already been seeking information about contacts between the White House and Enron, questioned whether the Bush administration could have done more to help the company and its employees.
    "The White House had knowledge that Enron was likely to collapse but did nothing to try to protect innocent employees and shareholders who ultimately lost their life savings," he said in a statement. "I am deeply troubled that the White House stood by and let this happen to thousands of families."
    Bush, who worked in the oil industry and has known Enron's chairman since he was governor of Texas, appeared to distance himself from Lay, saying he never discussed Enron's financial difficulties with him and last met the executive last spring.
    "I have never discussed with Mr. Lay the financial problems of the company," Bush said, adding that the last time he had seen Lay was last spring at a literacy fund-raising event organized by his mother, former first lady Barbara Bush.
    PHONE CALLS
    White House House spokesman Ari Fleischer disclosed on Thursday that Lay telephoned O'Neill and Evans last autumn saying his company might not be able to meet its obligations.
    Fleischer said Lay suggested the possibility of using the case of Long Term Capital Management (LTCM), a hedge fund which benefited from a private bailout orchestrated by the New York Federal Reserve in September 1998, as model for his company.
    After studying the matter and concluding that Enron's problems would not have the kind of systemic effects on the economy that were feared in LTCM's case, O'Neill and Evans decided against taking any action.
    "They both agreed no action should be taken to intervene," Fleischer said, adding that Bush was not informed of the decision but believes O'Neill and Evans acted "wisely."
    At his daily briefing, the spokesman fended off questions about why Bush was not informed of the decision, the propriety and timing of Enron contacting top government officials about its problems, and whether Evans and O'Neill acted properly.
    "Communication is not a wrong-doing. What took place here was they received phone calls and took no action," Fleischer said. "The charge has been did the government take any action, and the answer from these two officials is no."
    Treasury spokeswoman Michele Davis said Lay called O'Neill on Oct. 28 and Nov. 8  -- after Enron's key Oct. 16 disclosure that it was taking huge charges related to its partnerships, which provided the first hint of its spectacular unraveling.
    Speaking to reporters after meeting with economic advisers on Thursday, Bush placed the emphasis on workers and investors who suffered as a result of Enron's troubles and ordered two reviews to recommend how to better protect them in the future.
    He said the first review, by the Treasury, Commerce and Labor departments, would analyze pension and 401(k) rules and recommend ways to reform them so that "people are not exposed to losing their life savings as a result of a bankruptcy."
    The review of disclosure rules would be conducted by the Presidential Working Group on Financial Markets, which includes the Treasury Department, Securities and Exchange Commission, Federal Reserve and Commodity Futures Trading Commission.
    Once the world's largest energy trader, Enron slid in mere weeks last year from Wall Street stardom to the largest bankruptcy filing in U.S. history on Dec. 2. Its downfall, after withdrawal of a rescue takeover bid by rival Dynegy Inc. <DYN.N>, threw thousands out of work and hammered investors.
    The episode sapped the life savings of many Enron employees who held large amounts of company stock in their 401(k) retirement plans, while top executives allegedly pocketed fat profits by selling before a plunge in Enron's share price.
    "I have great concerns for ... (those) who put their life savings aside and, for whatever reason, based upon some rule or regulation, got trapped in this awful bankruptcy and have lost life savings," Bush told reporters at the White House, saying the groups would take a "good hard look" at the matter.
 ((Washington newsroom 202 898-8300, fax 202 898 8383, email Washington.bureau.newsroom@reuters.com))
    
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