3/16/92
The Color of Money
The president's eldest son and his ties to a troubled Texas firm
By Stephen J. Hedges
George W. Bush shares more than a name with his father. The president's eldest son has followed closely in his father's footsteps, trading Yale for Texas, working his way up from the dust and dry oil wells of West Texas to carve out his own piece of the Lone Star dream. Today he runs the Texas Rangers baseball team, sits on the boards of several companies and is a rising star in the state's Republican Party. As George Bush the president glides to victory in the Texas primary this week, George Bush the son will be at center stage with his father. Some say he is the president's most influential adviser. It was George W. Bush, after all, who was called upon to tell John Sununu that powerful Republicans wanted him to resign as the White House chief of staff. Sununu was gone soon afterward.
In one important respect, however, George W. Bush has less in common with his father than with his younger brother Neil, who sat on the board of Denver's now infamous Silverado Savings & Loan. When the thrift failed in 1988, with $1 billion in losses, Neil Bush said he didn't understand Silverado's complex deals. George W. Bush has also benefited from some questionable but less well-known business associations. A U.S. News examination of one of his principal investments, in the Dallas-based Harken Energy Corp., found that:Bush sold $848,560 worth of Harken stock just one week before the company posted unusually poor quarterly earnings and Harken stock plunged sharply. Shares lost more than 60 percent of their value over six months. When Bush sold his shares, he wasa member of a company committee studying the effect of Harken's restructuring, a move to appease anxious creditors. According to documents on file with the Securities and Exchange Commission, his position on the Harken committee gave Bush detailed knowledge of the company's deteriorating financial condition. The SEC received word of Bush's trade eight months late. Bush has said he filed the notice but that it was lost. Despite Harken's small size and poor performance in recent years, it continues to provide Bush and its other directors and executives with unusually generous pay and perquisites. In 1989, for instance, Harken suffered losses of more than $12 million against revenues of $1 billion. That same year, Bush received $120,000 as a company consultant and stock options worth $131,250; other Harken executives also drew six-figure salaries and five-figure bonuses. The next year, Harken's board was equally generous, even though the company lost $40 million and shareholder equity plunged to $3 million–down from more than $70 million in 1988.Harken has been characterized by a pattern of financial deal making so burdened with debt and tangled stock swaps that its largest creditors threatened to shut the company down and oil-industry analysts have all but given up on tracking it. "It's a lot of jiggery-pokery," says analyst Barry Sahgal. "I want to be an analyst, not a speculator."
Despite repeated requests for interviews, Bush declined to discuss Harken or the reason for his stock sale, saying through an assistant that he "does not wish to read about himself." Harken executives say the company's practices are proper.
Harken Energy today is a very different company from the gutsy start-up outfits that Bush and his father once ran. In 1983, Harken was purchased by a group of investors led by Alan Quasha, an aggressive young lawyer from New York. Quasha and his colleagues transformed Harken overnight, playing the oil game like high-stakes poker. They spent money, they made money–and most recently, they have lost money. The company's annual reports now speak little of oil and gas production but volumes about share offerings and renegotiated debt.
George W. Bush arrived in the Texas oil fields in the mid-1970s. Within a few years, he had founded his own exploration company. His partner, Mike Conaway, says they "made some money and lost some money." But by 1983, the oil market was in trouble, and so was Bush Exploration. Relief came from two Cincinnati investors who had their own small oil firm, Spectrum 7. William DeWitt was the son of the former owners of the Cincinnati Reds baseball team. Mercer Reynolds was his business partner. A DeWitt family relative and old oil hand, Paul Rea, ran Spectrum 7. Rea met Bush when he first arrived in Texas. The two became friends.
By September 1984, a deal was struck. George Bush became Spectrum 7's president and received a 13.6 percent stake in the company. It seemed a good fit, but the oil market didn't cooperate. By early 1986, Spectrum itself was staring foreclosure in the eye.
Enter Quasha. The son of an affluent American lawyer in the Philippines, Alan Quasha brought Harken some impressive financial backers. They included money manager George Soros, who would come to hold a 30.4 percent stake; Harvard Management Co., which would control another 30.4 percent share, and Abdullah Taha Bakhsh, a Saudi investor with 21.4 percent. Harken bought Spectrum out in September 1986, trading stock for Spectrum assets. Bush received $600,000 in Harken shares, but his stake would actually be worth much more.
Harken is a small oil company, but it pays big-league benefits. Estimates based on company documents show that Quasha and Harken President Mikel Faulkner each received compensation worth more than $400,000 a year between 1986 and 1990, including stock options. In addition, Faulkner has borrowed $1.1 million from Harken, using stock as collateral. Quasha has borrowed $631,270 from the company, and Harken has paid his law firm $1.3 million in fees since 1988. At least three other Harken executives had six-figure compensation packages in 1990, when Harken posted its $40 million loss. Faulkner says the compensation is based on "incentives and performance." He does not consider Harken's pay excessive.
In addition to his $600,000 stake in Harken, George W. Bush has profited handsomely. As a consultant to the company for "investor relations and equity placement," Bush was paid $80,000 a year until 1989, when his salary jumped to $120,000. With the company suffering, Bush received only $50,000 last year and $42,000 this year. He also receives $2,000 for each board and committee meeting and in 1989 was granted, with other directors, options for 25,000 shares of Harken stock. Faulkner declines to say what services Bush has performed as a consultant.
Sweet deals. As is the case with many executive-compensation packages, the key to Harken's is the stock options. But very few small companies offer terms as sweet. For starters, Harken offers select executives, including Bush, eight-year loans at 5 percent interest. The loans may be used by company brass to exercise options to purchase Harken shares. Bush has borrowed $180,375. At Harken, loans are sometimes forgiven. The board forgave $72,000 in non-interest-bearing loans to employees in 1989, and $269,000 in 1990.
The deal gets sweeter still. Harken allows select executives and directors like Bush, who exercise their options, to purchase stock at a 40 percent discount; most U.S. companies allow executives to purchase their company's stock at current market value. Harken says it is because the stock is not registered and therefore cannot be traded. But in March 1990, Harken registered 1.8 million option shares. "Unusual," says Paula Todd of Towers Perrin, a compensation consulting firm, when asked about Harken compensation. "This definitely is not a cookie-cutter plan." Graef Crystal, a vocal critic of excessive executive pay, has harsher words: "This is a tremendous package for a little tiny company. Their stock has been growing at 4.9 percent per year when the market is growing at 15 percent. That is a rotten performance."
Given Harken's troubles, it might appear that owning its stock isn't much of a bargain. However, Harken's liberal option program makes it profitable. On June 22, 1990, for instance, Bush sold $848,560 worth of stock, which was trading at $4 a share. Even with a $180,375 loan to pay back, Bush realized $668,185 on the sale. He still holds an additional 105,012 Harken shares.
Harken has launched several deals involving its largest shareholders. The most complex was a major reorganization through the sale of two subsidiaries, E-Z Serve, a chain of gas stations, and Tejas Power, a natural-gas supplier.
First, companies tied to Alan Quasha and Harvard Management lent Harken $46 million. Harken used $15 million of that money to retire E-Z Serve debt. It spent $28 million more on capital improvements at E-Z Serve and Tejas. Harken kept the remaining $3 million. The company then gave its shareholders rights to buy E-Z Serve and Tejas stock. An agreement stipulated that any stock not purchased by the shareholders could be bought at a discount of at least 3 percent by two companies affiliated with Quasha and Harvard. But Quasha and Harvard Management controlled 55.6 percent of Harken stock. By not exercising the rights to buyit immediately, they effectively gave themselves the built-in discount. Harvard Management declines to discuss the deal.
There is substantial evidence to suggest that Bush knew Harken was in dire straits in the weeks before he sold the $848,560 of Harken stock. For one, Harken's board had appointed Bush and another director, E. Stuart Watson, as a "fairness committee" to determine whether the restructuring would adversely affect ordinary shareholders. The committee, which first met in May 1990, worked closely with financialadvisers from Smith Barney, Harris Upham & Co., which had concluded by that time that only drastic action could save Harken. Even before then, however, Harken's SEC filings make it clear that the company's directors knew radical steps were necessary. One informed source says Harken's creditors had threatened to foreclose on the company if substantial debt payments were not made. Harken's treasurer, Dale Brooks, strenuously denies any suggestion that creditors were poised to seize the company.
Today, Harken is letting it all ride on one all-or-nothing bet. Two years ago, it won the rights to look for oil and gas off the coast of Bahrain, a coup that shocked the industry. The first of those wells came up dry last month, giving analysts new reason to wonder if Harken itself isn't a dry hole.
For George W. Bush, however, Harken remains a good deal. He is still a director and consultant and has Harken shares worth about $400,000. A Bahrain gusher will mean all the more profit. If luck isn't with him, he has still done well with Harken.
It may be, though, that Harken has benefited most from Bush's board service. That's the view of some Texas oil people and analysts, including Phil Kendrick, the oil man who founded Harken and sold out to Quasha a decade ago. "It's obvious why they kept George Bush," Kendrick says. "Just the fact that he's there gives them credibility. He's worth $120,000 a year to them just for that."
