David Stockman's Second Act

By Michael Kinsley

If the [Securities and Exchange Commission] had jurisdiction over the White House, we might have all had time for a course in remedial economics at Allenwood Penitentiary.

THAT CHOICE QUOTE IS FROM The Triumph of Politics, David Stockman's 1986 memoir of life in the Reagan Administration. As Ronald Reagan's first Budget Director, Stockman helped produce the huge deficits that followed Reagan's election on the promise of a balanced budget. Then Stockman ratted out his colleagues in a magazine interview and in his book (it seems they had made no serious attempt to cut spending) and moved to Wall Street, where he quietly got very rich and sank from history.

Stockman Rises Again End of story? Not quite. Turns out, Stockman may have time for that prison course in remedial economics after all. He was indicted a short time ago for securities fraud at an auto-parts manufacturer that he controlled. According to prosecutors, Stockman lied to banks about the firm's financial condition, inducing them to loan the company money it couldn't repay. He engaged in "round trip" transactions that involved masking loans -- which were supposed to be repaid -- as income. He exaggerated the manufacturer's prospects, knowing his claims were untrue, which led people to buy company securities that quickly became worthless. The firm filed for bankruptcy five days after Stockman was forced out in 2005. The government has taken over employee pension obligations. Just going bankrupt has cost the company more than $100 million so far. It is a magnificent debacle. The question is how much of it is Stockman's fault. He says none.

The charges are "really poppycock," says Stockman; he had been engaged in "an epic struggle for survival." Everything he told the public reflected "a realistic and balanced view of the facts as I understood them," he says, although they turned out to be wrong. He himself was buying shares throughout the period that the company was going down the toilet. He agreed with a friendly television interviewer who declared that "they" -- meaning the government -- "are criminalizing optimism."

In short, Stockman is resting on the "I'm a moron" defense. How could he be expected to notice that the entire American auto industry was collapsing around him? Don't confuse him with the facts: He was optimistic! You got a problem with optimism, you miserable government bureaucrats?

Is this starting to sound familiar? Of course, it does. It's the sound of history repeating itself, the second time as farce. It's Max Bialystock, the crooked Broadway impresario in The Producers, after getting caught ripping off old ladies with Springtime for Hitler, trying the same con behind bars with Prisoners of Love. More to the point, it's Reagan as described in Stockman's own book: sunny and optimistic and never allowing himself to be confused by the facts.

Recycling Old Tricks Stockman appears to be a serial book cooker. Even after he admitted during the Reagan Administration to playing games with how much came in and how much went out, he can't stop himself from doing it again. In The Triumph of Politics, he describes two tricks the Reaganites (including himself) used to deceive the public about the fiscal condition of the U.S. government. One was the "magic asterisk," used to bury wishful-thinking revenue assumptions in the footnotes, where it was hoped that nobody would discover them. This is essentially similar to the "round trip" loans described in Stockman's indictment last week. Then there is Rosy Scenario, a Cassandra in reverse, who gets carted out to proclaim that things are going to get better and better. Allegedly, false projections were also part of Stockman's arsenal of deceit in the auto-parts business, prosecutors charge.

The federal prosecutor who brought the charges seems to agree with Stockman that he truly believed that if he could buy a bit more time, he could turn things around. But that's no defense if you buy time by defrauding people. The pathological optimists who have controlled the federal Treasury for most of the past three decades may also be sincere, but that is also no excuse for the deficits they have produced.

As Stockman noted 20 years ago, phony accounting and disingenuous prognostication are not illegal when you are running the government. We don't hold the director of the Office of Management and Budget to the same standard that we hold the chairman of a failing automobile-parts manufacturer. That's fortunate for many here in Washington and unfortunate for the guy who probably thought that after running the government, running the parts manufacturer would be easy.