March 31, 2001 Forced to Divest, Bush Aides Lose Money in a Bear Market By LESLIE WAYNE
falling stock market is spelling trouble for a number of wealthy Bush administration officials who are selling their multimillion-dollar investment portfolios — and taking some losses in the process — to comply with government ethics rules.
The timing could not be worse. The stock market ended the 2001 first quarter yesterday at lows not seen in two years, part of an accelerated slide that began just as the Bush administration assumed office. And many cabinet officials had made big bets on the market, especially in the hard-hit technology sector.
Take Secretary of State Colin L. Powell. His portfolio, which is valued at between $18 million and $65 million, is chock full of high-tech stocks. For instance, he has holdings in the $500,000 to $1 million range in such companies as Cisco Systems, EMC Corporation and JDS Uniphase, all of which have lost up to 70 percent of their value since before the election.
[Chairman of the Joint Chiefs of Staff must pay better than I thought.]
For the moment, Mr. Powell is divesting himself of 31 stocks and one limited partnership that had a market value of between $8 million and $24 million in January, when Mr. Powell filed his financial disclosure statement with government regulators, who value investments in broad ranges.
Like other cabinet officials, Mr. Powell has agreed to divest stocks that could present a financial conflict of interest within a 90-day period that ends in mid-April.
Commerce Secretary Donald L. Evans and Mitchell E. Daniels Jr., director of the Office of Management and Budget, are in a similar position. They are now selling stock holdings, in the five- and six-digit range, in such companies as Pfizer, Sprint, Merck, Intel and Oracle — all of which have tumbled since President Bush took office.
The exception among cabinet officials is one of the group's wealthiest members, Treasury Secretary Paul H. O'Neill, the former chief executive of Alcoa Inc. He initially balked at selling his Alcoa holdings, which were valued at $100 million at the end of last year, after joining the Bush team, but abruptly changed his mind earlier this week.
To Mr. O'Neill's good fortune, Alcoa's stock is one of the few to have bucked the overall downward pull of the stock market and is trading at prices higher than before the November election. In fact, his Alcoa holdings are now worth $43 million more than on Election Day.
Not so lucky is someone equally wealthy, Defense Secretary Donald H. Rumsfeld, whose stock portfolio is valued at between $50 million and $210 million. His situation is perhaps the most extreme, since nearly half his portfolio consists of highly complex and illiquid private investment partnerships that are turning out to be difficult to sell, even with four law firms, an investment adviser and an accounting firm working on his behalf to find buyers.
"I can tell you that Rumsfeld's net worth will go down substantially," said a person who spoke with the permission of the Pentagon. "It will go down substantially in dollar terms and as a percentage. And if things don't change quickly, Rumsfeld is going to get massacred in some of the illiquid investment he is required to divest. These are distressed properties and we are forced to sell in a distressed market. How can you stack the deck any higher for the secretary?"
The predicament of Mr. Rumsfeld and others does not elicit sympathy in all quarters.
"Pardon me if I don't get out my handkerchief," said Charles Lewis, executive director of the Center for Public Integrity, a Washington nonprofit.
Selling their holdings is appropriate, he said, adding, "It is a great honor and a privilege to serve at the highest level of government and it is a free country. These guys don't have to do it."
All these key cabinet officers have made agreements with the government to rid themselves of any stocks that could conflict with their cabinet duties. As a practical matter, since their duties are so broad, the divestitures represent the vast majority of the non-real-estate investments that they own — with the stocks numbering in the hundreds and the dollars reaching into the millions.
In deciding to sell, they rejected the alternative of putting their holdings into a blind trust, largely because such trusts are cumbersome and expensive and mean they would lose control of their assets. In addition, there are tax benefits that allow these cabinet members to defer paying capital gains taxes depending on how the divestiture is structured. Once the assets are sold, the proceeds can be reinvested, as long as the new investments do not represent a conflict of interest.
Treasury Secretary O'Neill may have a larger portfolio than most other cabinet officers, but his financial situation is much simpler. Rather than owning many stocks, he is almost exclusively invested in one, Alcoa. On Election Day, Alcoa traded for $29 a share; today, it traded for just under $36 a share — making the 6.2 million shares and options that Mr. O'Neill owned worth $43 million more than on Nov. 7.
Others, with a more widely diversified portfolio, are finding misery everywhere they look.
"You can imagine what has happened," said Chris Ullman, a spokesman for Mr. Daniels, the budget director and a former senior vice president at Eli Lilly & Company, the pharmaceutical giant. "Mr. Daniels took a huge hit."
Mr. Daniels recently sold his single biggest holding — 463,500 shares of Lilly stock — at $82 a share. This gave him $38 million, a nice sum by any measure, but $12 million less than the value of Lilly shares before the November election, when they had reached a high of $108 a share.
To help soften the blow, Lilly, on the day before the inauguration, accelerated the vesting period on some $1.4 million in Lilly stock options, to allow Mr. Daniels to exercise the options immediately. Had Lilly not acted, Mr. Daniels would have had to give them up when he left the company to join the government.
In the case of Mr. Rumsfeld, the "easy stuff," according to his financial adviser, has pretty much all been sold — a laundry list of stocks in companies that could potentially do business with the defense department.
Now, his advisers are focusing on the 40 percent of his portfolio devoted to private equity investments — a highly sophisticated array of investments in hedge funds, buyout funds, venture capital funds and distressed debt funds. While the funds may have different investment objectives, they all have the same basic characteristic: as private investments, there is no place to sell them except in a private transaction to another buyer. And, since there is no public market to set the value of these investments, it is extremely difficult to put a dollar figure on how much Mr. Rumsfeld's stake in any of these funds is worth.
In negotiating Mr. Rumsfeld's exit from these funds, his financial adviser said the defense secretary is being cut no slack by Wall Street brokers. And, he said the fees he is paying for the lawyers and accountants will easily exceed Mr. Rumsfeld's $161,200 annual government salary.
But his situation may not be as dire as portrayed by his financial adviser. Given the array of his funds, Mr. Rumsfeld probably will not suffer a "massacre," said David Snow, editor in chief of PrivateEquityCentral.Net, a trade publication. Besides, he added, Mr. Rumsfeld's position as a top member of the Bush administration may help him in trying to find buyers for his holdings.
Mr. Rumsfelds's private equity portfolio is remarkable for its size, its breadth and the firms he has invested with — some of the best- known names in the business. It also includes some unusual investments — for instance, a limited partnership formed to invest in the cheerleading industry and another that invests in reproductions of art work.
"Mr. Rumsfeld's portfolio shows that he is extremely well-connected to private equity," Mr. Snow said. "He's made some savvy investments."
As for Commerce Secretary Evans, all of his holdings in Tom Brown Inc., a Denver-based energy company he headed, are being sold, along with shares in some 60 other companies. Mr. Evans valued his Tom Brown shares at between $5 million and $25 million on his government financial disclosure statement.
Mr. Evans's former employer also gave him a sweet going-away gift: a one-time severance payment of $1.5 million and the acceleration and immediate vesting of some $3.8 million in stock options that would have lapsed had the company not approved the immediate vesting.
Copyright 2001 The New York Times Company