The Waxman Report

by Henry Waxman; Joshua Green

  We realized early in Burton’s tenure that there was no point in spending all our time and staff resources responding to what he wanted to do. After the Hubbell affair, his investigations stopped gaining traction, so we devoted more and more time to addressing problems that urgently needed government attention. House precedent allots the minority one-third of the committee’s substantial budget and staff. Although I didn’t control the gavel, and therefore could not convene hearings, nothing was stopping us from conducting our own investigations of the issues we deemed important and making the findings public. While this method didn’t carry the televisual oomph of a high-profile hearing, our reports did carry the imprimatur of the U.S. Congress, and that was a pretty big deal—often enough to make the kind of impact that brings meaningful change.

  Our first report looked into the rising price of prescription drugs. Drawing on data from a number of federal agencies, the staff determined that uninsured seniors routinely had to pay more than twice as much for drugs as HMOs and other large purchasers. Tom Allen, a Maine Democrat, took a particular interest. High drug prices were a major issue for his constituents, given their proximity to Canada and its lower prices, and Allen asked if we could tailor a report to his district. We did, and it became the lead story on the local news. Democrats Jim Turner of Texas and Tom Udall of New Mexico requested reports for their districts, and got a similar reception. Word spread quickly, and soon dozens of members were asking for their own “Waxman Reports,” as they became known. District-by-district comparisons of high drug prices began showing up in newspapers across the country. Turner convinced President Clinton to include the issue in his 1999 State of the Union address, which added to the momentum. The movement to create a Medicare prescription drug benefit originated not in Washington but at the grass roots. It was partly energized, I believe, by these reports.

  The amount of attention frankly surprised us. Several members told me that nothing they had done in their career had generated as much interest as publicizing their local findings. So we decided to expand our product line.

  We were soon pumping out reports comparing U.S. drug prices to those in England and Canada, and others comparing the cost of drugs used on humans with veterinary drugs (veterinarians often used the same drugs at a dramatically lower cost). Then we branched out into reports on classroom overcrowding and nursing home abuses. Many of these studies were produced at the request of Democratic members, but we also conducted investigations for Republicans who recognized their value. We joined with Republican senator Susan Collins of Maine to examine the involuntary incarceration of mentally ill youths. Our work for Representative Steven Largent, an Oklahoma Republican, made national headlines for revealing that online file-sharing programs bombarded kids with pornography. All told, the minority staff produced more than one thousand individual reports during my tenure as ranking member.

  Through these creative and roundabout means, we managed to keep up some oversight during the twelve obstinate years that Republicans reigned over the House. But these were stopgap measures that couldn’t possibly do the job of a fully engaged and active committee, and I often longed for the day when Democrats would regain power.

  WHEN THAT DAY FINALLY ARRIVED IN JANUARY 2007, I TOOK OVER as chairman of the Oversight Committee. Having witnessed so much abuse of power and so much neglected responsibility from our days in the minority, my Democratic colleagues and I were determined to right the ship. We settled on a three-part approach. First, we would concentrate on pursuing fraud, waste, and abuse of resources. Second, we would ensure that government was working as it should be, taking particular care to examine the agencies that had declined most precipitously under President Bush, such as the Federal Emergency Management Agency—FEMA—which had performed so poorly during Hurricane Katrina. And lastly, we would once again hold the executive branch accountable for its performance, as the Constitution requires. The excesses of the Burton years and the neglect during Bush’s presidency had done plenty to harm the country, but also furnished us with a powerful model of how not to behave.

  To convey to a disillusioned country how much change we had in mind, my staff and I worked overtime as the new Congress approached so that we could get going quickly. We opened with four consecutive days of oversight hearings, each day designed to highlight one of the more egregious examples of fraud, waste, and abuse that successive Republican Congresses had ignored.

  On Tuesday, February 6, we examined an audit report from the Special Inspector General for Iraq Reconstruction that revealed that $8.8 billion—literally 363 tons in shrink-wrapped packages of $100 bills—had been flown into Iraq on 230 military cargo planes, delivered to the Coalition Provisional Authority, and had gone missing. It had been handed out to Iraqi officials with no record of who got what or where it went. The man responsible, Bush’s former CPA administrator, L. Paul Bremer, admitted that the money had simply vanished.

  On Wednesday, February 7, we looked at Blackwater USA, the private military contractor accused of profiteering by the families of four Blackwater employees who had been lynched in Fallujah and their bodies burned and dragged through the streets, a horror videotaped and broadcast worldwide. The hearing revealed that Blackwater had failed to provide armored vehicles and skirted critical safety measures, at the cost of U.S. lives. This spurred the Army to withhold $19.6 million from Halliburton, which had subcontracted with Blackwater to provide armed security guards.

  On Thursday, February 8, we held a hearing on the mismanagement of major Homeland Security Department projects outsourced to private contractors, including the Coast Guard’s Deepwater program, which had produced ships that couldn’t stay afloat. It turned out that managers of the Coast Guard’s $24 billion fleet overhaul program had covered up a Navy engineering report that showed that design flaws in the flagship cutter slated to become the cornerstone of the Coast Guard’s new fleet could cause the hull to buckle. Fixing each of the faulty vessels doubled the cost to taxpayers from $517 million to $1 billion. The report concluded that the problems had arisen from a fundamental lack of oversight.

  On Friday, February 9, we turned to drug company profiteering through systematically overcharging government health programs like Medicare, Medicaid, and the Public Health Service, at a cost of billions of dollars. By law, drug companies must offer Medicaid their lowest prices, but they had repeatedly conspired to get around this requirement. Companies including Pfizer, Schering-Plough, GlaxoSmithKline, Astra Zeneca, and Bayer had to pay billions of dollars in civil damages and criminal penalties to federal and state governments.

  Over the next two years, we returned again and again to the theme of wasteful spending, uncovering abuses that saved taxpayers billions of dollars. Having documented waste in the federal crop insurance program, we worked with the House Agriculture Committee to cut more than $3 billion in unnecessary subsidies. After we demonstrated that private insurers had overcharged the government by more than $600 million to provide workers’ compensation coverage in Iraq, we joined with the House Armed Services Committee to close the loophole.

  And this was only the beginning. Other hearings prompted further long-overdue reforms. We revealed that FEMA was housing families displaced by Hurricane Katrina in trailers with dangerous levels of formaldehyde—and that after field workers alerted the agency’s leaders in Washington they were instructed to ignore the threat, since verifying the trailers’ toxicity “would imply FEMA’s ownership of this issue.” The ensuing public outrage got the families into safer shelter. A hearing with the head of Blackwater highlighted the company’s reckless, shoot-first practices, and brought new controls on private security contractors in Iraq.

  At the same time, we were seeking to make top government officials accountable. Lurita Doan, head of the General Services Administration, had tried to divert agency resources to help elect Republicans in close races, and Howard Krongard, the State Department’s inspector general, had stymied an investigation into Blackwater, on whose advi
sory board his own brother served (which he denied under oath). Both officials were forced from office. We also established, and let the country know, that dozens of top White House staffers were evading the requirements of the Presidential Records Act and shielding their e-mail from scrutiny by using outside accounts. And in two of the highest-profile hearings of the Bush presidency, we laid out how senior White House officials had revealed the identity of a covert CIA agent, Valerie Plame, and investigated why the Army sought to keep from the public and the family of Pat Tillman—the football hero turned Army Ranger after 9/11—that he had been killed by friendly fire while serving in Afghanistan.

  THE OVERSIGHT COMMITTEE’S JURISDICTION IS NOT LIMITED TO government, extending to almost any area, including the private sector. Early in my chairmanship, we became deeply involved in investigating what would become the frightening collapse of the U.S. economy in the autumn of 2008.

  What first caught our attention, well before the recession, was the issue of CEO pay. By the time I took over in 2007, the skyrocketing amounts being paid to executives of the nation’s largest companies had begun to worry me, because it raised important questions about corporate governance: Not merely that the size of these payouts gave offense—some ranged higher than $100 million—but that they had become so enormous that they were skewing the way businesses operated.

  In the 1980s, the CEOs of the nation’s largest companies were paid forty times more than the average employee. By 2007 they were making about six hundred times more. At a typical company, a staggering 10 percent of corporate profits went to paying top executives. Many academic experts, financial analysts, and investors had come to regard this trend as the index of a fundamentally broken way of running a company. As Warren Buffett remarked, “In judging whether corporate America is serious about reforming itself, CEO pay remains the acid test.” There seemed to be no serious signs of reform.

  To get a better handle on what was happening, the committee staff conducted a broad survey of how the 250 largest companies established executive pay. They turned out to rely heavily on independent consultants specializing in executive compensation who routinely had a major conflict of interest—namely, that the bulk of their income derived from consulting for the very same executives whose salaries they set. Our report found that on average these supposedly disinterested consultants earned $200,000 to advise a company about executive pay and another $2 million to provide other services to the same company. So the bulk of the consultants’ income depended upon the goodwill of the very CEOs they were being paid to overpay, an arrangement often hidden from shareholders. They were anything but “independent.”

  In December, we held a hearing to highlight the report’s findings and examine this troubling practice. As a result of this, and of ensuing shareholder outcry, many companies announced that they would only hire consultants free of such conflicts.

  But problems of corporate governance did not disappear. Early 2008 brought the subprime mortgage meltdown that eventually drove the American economy into collapse. To the disgust of people everywhere, the CEOs of some of the companies directly responsible for the mortgage mess received payouts of hundreds of millions of dollars, even as their firms lost billions. Here was a glaring example of lack of accountability, whose effects wound up touching nearly every American.

  In March, we convened a hearing and invited three of them to testify: Charles O. Prince III, formerly chairman and CEO of Citigroup; Stanley O’Neal, formerly chairman and CEO of Merrill Lynch; and Angelo Mozilo, the founder and CEO of Countrywide Financial Corporation. Soon after the hearing was announced, I got a sense of just how influential these men were. Countrywide’s headquarters is located in my district, and though I’d never met Angelo Mozilo, calls began to pour in from important people in California who tried to change my mind about having Mozilo testify or suggested that I postpone the hearing. Nancy Pelosi, the speaker of the house, was subjected to a similar barrage, but agreed that we should go forward.

  The hearing sought to answer the question, How can a few executives do so well when their companies do so poorly? In 2007, the companies had lost a combined $20 billion, yet Mozilo collected $120 million; O’Neal $161 million; and Prince, who was actually fired, was still awarded $68 million and millions more in perquisites like a car and driver. Though each executive defended his pay, the hearing illustrated the massive lack of accountability on Wall Street and how its system of compensation contributed to the mortgage boom, while giving executives huge incentives to take the risks that eventually caused the mortgage market to implode.

  By the time Congress returned from summer break, the economy was falling apart and Wall Street was being ravaged. By September, the Federal Reserve and the Treasury Department had narrowly averted a Bear Stearns bankruptcy, bailed out the insurance giant AIG for $85 billion, and let Lehman Brothers fail, freezing credit markets worldwide and necessitating the emergency $700 billion bailout known as the Troubled Asset Relief Program. Speaker Pelosi charged Barney Frank of Massachusetts, chairman of the House Financial Services Committee, with putting together a bailout package, and asked me to conduct a series of hearings to find out how we had arrived at such a calamitous point. In October, as the global economy teetered on the verge of collapse, we held four high-profile hearings, each examining a different component of the disaster.

  Our purpose was to find out why the financial system fell apart, where it broke down, and why regulators had been unable to warn us or stop it from happening. We began on October 6 and 7 with hearings that included Lehman Brothers CEO Richard Fuld, who had just presided over the largest bankruptcy in U.S. history, and Robert Willumstad and Martin Sullivan, the former CEOs of AIG, whose reckless trading in credit default swaps had put the entire U.S. economy at risk. Though Fuld refused to accept responsibility, blaming Lehman’s failure on “a litany of destabilizing factors” beyond his control, the thousands of pages of internal documents that our investigators examined portrayed a culture where huge bonuses and the lack of any consequence for failure encouraged reckless, highly leveraged bets with billions of borrowed dollars that wiped the company out when housing prices started to drop. Even after destroying his firm, Fuld departed a rich man, having “earned” more than $500 million.

  Like Lehman Brothers, AIG had grown mighty by taking excessive risks, in this case insuring other companies’ investments by issuing “credit default swaps”—an unregulated $62 trillion market that AIG had pioneered—that it could not pay off when these investments went bad. And like Lehman Brothers, AIG’s top executives earned hundreds of millions of dollars. In fact, the man most directly responsible for destroying the company, Joseph Cassano, head of its financial products division, received $280 million—and then, after being fired, was awarded $34 million in unvested bonuses and placed on a $1 million-a-month retainer. Why would AIG keep him on the payroll? To subject him to a noncompete clause, the CEOs explained, so that he could not go to work for a competing firm.

  This infuriating Wonderland logic was trumped only by the executives’ arrogant refusal to change their ways. The week after the government had to give it $85 billion, AIG sponsored a lavish retreat at a San Diego spa. An alert constituent spotted an announcement in a local newspaper and called Karen Light-foot, a committee staffer. Our investigators obtained billing invoices from the resort showing that AIG had spent $440,000 to house its executives in presidential suites at more than $1,000 per night, including $150,000 on food and $230,000 on spa treatments—all while being propped up on taxpayer dollars. News of the retreat dominated the next day’s hearing and, for many Americans, crystallized the attitude of reckless entitlement that suffused Wall Street and led directly to the financial collapse.

  Our hearings then broadened to the credit rating agencies that had vouched for the toxic mortgage bonds and to the government regulators who enabled the speculation. On October 22, the CEOs of Moody’s, Fitch, and Standard & Poor’s, the firms that acted as gatekeepers by assigni
ng quality ratings to bonds, appeared before the committee. Like the finance executives before them, they pleaded their innocence, claiming that, as Moody’s CEO Ray McDaniel put it, “virtually no one… anticipated what is occurring.” That turned out to be false.

  Witnesses unhappy about testifying pursue a number of tactics to thwart our investigators. The ratings agencies tried to bury us in paper. A request for internal documents brought hundreds of thousands of pages just before the hearing, apparently in the hope that damning evidence would be impossible to find amid all the detritus. To meet this challenge, staff from every part of the committee dropped what they were doing to embark on an emergency document-reviewing marathon—an exercise that paid off.

  To Ray McDaniel at the witness table, we were able to show that someone had indeed anticipated exactly what was occurring as the subprime bubble inflated: McDaniel himself. In a confidential presentation in October 2007, he had warned his board of directors that in their unbridled pursuit of revenue, the ratings agencies were competing to give high ratings to risky bonds, sacrificing standards for money. This “dilemma,” McDaniel had warned, posed a “very tough problem” for the company. “Unchecked, competition on this basis can place the entire financial system at risk.” And indeed, it did. As another Moody’s executive put it, “We sold our soul to the devil for revenue.”