US News and World Report
March 16, 1992
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 Start dream. Today he runs the Texas
Rangers baseball team, sits on the boards of several companies and is rising
start 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 a center
stage with his father. Some say he the president's most influential advisors.
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 $828,560 worth of Harken stock just one week before the
company stock posted unusually poor quarterly earnings and Harken
stock plunged sharply. Shares lost more than 60% of their value over 6
months. When Bush sold his shares, he was a 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
month's late. Bush has said he filed the notice but that is 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 ans
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 President 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 Cincinati investors who had their own small oil frim, 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.
Enter Quahsa. The son of an affluent American lawyer in the Phillipines,
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., who would control another 30.4
percent share, and Abduliah Taha Bakhsh, a Saudi investor with 21.4
percent. Harken bought Spectrum out in 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 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 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 companies offer terms as sweet.
For starters, Harken offers select executives, including Bush, eight year loans
at 5% interest. The loans may be used by the 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 sweater 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 companies
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% per year when the market is growing at 15 percent. That is 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 owns 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
stock. 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 controlled 55.6 percent of Harken stock.
By not exercising the rights to buy it 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 has 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 financial advisors form 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 the 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 founder 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."
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