As Texas Goes... (6 page)

Meanwhile, Gramm was a major player in writing the Commodity Futures Modernization Act of 2000, which would modernize commodities trading so thoroughly that by 2008 the nation’s major banks were able to trade fiercely and unregulatedly in credit default swaps and other financial instruments so exotic that even their CEOs did not understand them. These major banks were much larger, much more too-big-to-fail than they had been in the 1980s, when the government had encouraged them to acquire failed savings and loans, some of which were, of course, in Texas.

And Gramm was also the Gramm of the Gramm–Leach–Bliley Act, which dismantled the Depression-era regulations that kept a wall between commercial and investment banks. This law was blamed by many for ushering in the crazed trading by commercial banks that led to the economic collapse of 2008. To be fair, Gramm–Leach–Etc. was the work of half of Washington. Gramm at one point even
threatened to destroy
the whole project because he was angry over the section of the act that required banks to make loans in poor communities, some perhaps clotted with struggling widows trying to cope with a semi-delinquent son who failed ninth grade.

In the end, Gramm did help write the bill, which was a regulatory nightmare that split up the job of watching what the newly liberated banks were doing among different agencies, creating so many loopholes and untended corners that the traders themselves could not have done it much better. That could not have been a mistake, since Gramm had made it a practice to
reject requests
by the Securities and Exchange Commission for more money to make sure Wall Street was obeying the law. “
We have learned
government is not the answer,” Gramm intoned as he shepherded the massive bill through the Senate and out into the world, where it would prove that unfettered markets were definitely not the answer either.

“Oh, yuck”

And then . . . (drum roll) . . . there was the Enron meltdown.
Gramm had a soft spot
in his heart for the Houston-based firm, possibly because he admired CEO Ken Lay, a soul mate who, the senator enthused, was “as comfortable talking about the ancient Greeks as he is the competitive selling of electric power.” Those chats about the ancient Greeks were undoubtedly a bonding factor, although there was also the thing about Enron being a very big donor to Phil Gramm campaigns.

When the helping of Enron began, the company was already well on its way to being a business of the twenty-first century—that is, a place that creates nothing whatsoever, but devotes all its time to taking stuff that other people make and putting it in various financial packages, which are then traded back and forth until their value loses all relationship to reality. “
Enron’s business model
was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant,” said the watchdog organization Public Citizen in a devastating report on the Gramm connection.

But to really get the trading going full speed, Enron needed to be out from under the thumb of federal oversight, unbridled and free to trot about the plateaus of online energy auctioneering, creating markets and perhaps, every now and then, withholding energy from the market entirely in order to make its price rise at a convenient moment. Happily for Enron, Gramm’s wife, Wendy, was serving during the George H. W. Bush administration as the chair of the federal Commodity Futures Trading Commission.

Wendy Gramm, like her husband, has a doctorate in economics. (What is it about the mixture of economics degrees and Texas? Dick Armey has one, too.) Wendy often told the story of how, when she was being recruited for a job in Phil’s college economics department, he told her, “
As a single
of the faculty I’d be very interested in having you come to Texas A & M,” and she in return said, “Oh, yuck.” However, the Gramms apparently found accord in their mutual passion for capitalism unbound. (In a
confidential e-mail
while she was chair of the CFTC, Wendy Gramm told a correspondent at Enron that she was unpopular, nay
hated
, in some quarters in Washington because “I’m too free-market.”)

When Bill Clinton was elected president, Wendy Gramm understood that her days were numbered. In January of 1993, six days before Clinton took the oath of office, she produced the rule change desired by Enron, eliminating her own commission’s ability to oversee energy derivatives contracts and interest rate swaps. (The investors in these trades did not need protection, she reasoned, because they were “
large sophisticated
commercial entities,” not “real people.”) At the time,
two of the five
commission seats were vacant. The three sitting members approved the plan 2–1. Mission accomplished, Wendy resigned. A few weeks later, she was appointed to the Enron board of directors, where she served on the audit committee, which did such a swell job of making sure the bankruptcy-bound corporation’s accounting was accurate and that its financial reports were on the up-and-up. For those services, Public Citizen reported, she was paid “
between $915,000
and $1.85 million in salary, attendance fees, stock option sales, and dividends from 1993 to 2001.”

Who would have imagined that joining the Texas A & M faculty could have turned out to be so lucrative?

“I happen to think Gramm did not
know what he was doing”

At the tail end of 2000, when Bill Clinton was preparing to leave office, the Supreme Court was preparing to hand the presidency to George W. Bush, and Congress was preparing to have one of its frequent meltdowns, Phil Gramm struck again. This time, he
inserted an amendment
into a federal budget resolution that the House and Senate were struggling mightily to get passed. It mirrored a bill he had championed earlier in the year, deregulating certain kinds of futures trading—like the swaps that we came to hear so much more about in 2008. The bill appeared to be dead until Gramm successfully attached it as a 262-page amendment to the budget resolution.

Michael Greenberger
, a former director of the CFTC division of trading and markets, told
Mother Jones
writer David Corn in 2008 that the deregulation of the swaps market under the Gramm amendment was at “the heart of the subprime meltdown.” But, Greenberger added, “I happen to think Gramm did not know what he was doing. I don’t think a single member in Congress had read the 262-page bill or had thought of the cataclysm it would cause.” Gramm, who never admits not knowing anything, seems to feel that his amendment made things better.

The last-minute stuck-in-the-budget amendment also included deregulation of energy futures, the very thing that Enron was hoping to make its twenty-first-century career manipulating. Energy futures were an issue of concern at the time—in fact, a special White House advisory group had just spent a great deal of time looking into it, concluding that it was very important that the future price of energy should not be deregulated in any way, never, nohow. If you did, who knew what might happen? Unprincipled people in the power market might even start manufacturing artificial shortages just to increase the cost of power.

Gramm later claimed
the language, which came to be known as the “Enron loophole,” did not come from him, although it was, you know, his amendment.

Soon thereafter, California, which had been having energy troubles of a serious but not desperate nature, began imploding. Rolling blackout followed rolling blackout as utilities found it impossible to get their hands on enough energy to power the state. Enron, however, was having a terrific time. “
Wholesale services
” revenue—which would include the profits from its energy auctions—went from $12 billion in the first quarter of 2000 to $48.4 billion for the same period in 2001.

All the fun ended in the summer of 2001, when the pressure on Washington to do something became too great to resist. The Federal Energy Regulatory Commission imposed price controls in eleven western states, ruining the Enron auction system. And shortly thereafter, the company was bankrupt. Thousands of Texans lost their jobs, their health care plan, and frequently their retirement accounts.
Other firms
around the country that had tried to duplicate Enron’s energy trading strategy saw their stocks crater. Congress passed the Sarbanes-Oxley Act, a tough new set of accounting standards, by a near-unanimous vote. (By the 2012 presidential race, conservatives would be denouncing it as a massive bureaucratic burden on the cost of doing business.) And of course, California was still nursing its wounds.

I’m sure you’ll be happy to know that Phil Gramm bounced right back. He announced that he would not seek reelection and took a job as a highly paid investment banker and lobbyist for the Swiss bank UBS, continuing to urge his friends in Congress to avoid the temptation to regulate predatory lenders. (
Gramm became vice president
of the UBS investment banking arm—a limb that would not have existed had the Gramm–Leach–Bliley Act not made it possible for the bank to buy Paine Webber two years earlier.) When the crash came, he was unmoved by critics of his performance as the free-market guru of Capitol Hill.
The fault, he said
, lay with others, including “predatory borrowers” who took out loans they couldn’t afford to pay. In 2008, he became the economic adviser to John McCain’s presidential campaign and blamed the meltdown panic on the fact that the country had become “
a nation of whiners
.”

5

No Child Left Behind

“The worst educational system
you could possibly have”

T
he story of how Texas came to set the education agenda of the nation is more emotionally complicated than the one about financial regulation. Not many of us have conflicted feelings about Phil Gramm’s efforts to deregulate swaps or give Enron the green light on its electricity futures trading schemes. Bad news for the bottom 99 percent. However, reforming education is another deal altogether. Let me warn you in advance that it’s going to be filled with people who were trying to do the right thing—along, of course, with a passel of special interests.

This is also going to be a story about how Texas gave us a new vision of public education that involved unprecedented levels of federal oversight of local schools.
Texas!
Amazing, right? Even today there are Texas politicians who shake their head in stunned befuddlement at what they’ve wrought.

The very idea of Texas being at the center of a national education reform movement is counterintuitive. Nothing in its history suggests this is the place where the Lone Star State should wind up. Look at the Alamo, and you can instantly imagine a series of Texas politicians going to Washington and starting wars. On energy, you can intuit the connection. Even taxes. But Texas had not traditionally been the first, second, or twentieth name that came to mind when the subject was quality education. Back in 1920, in a cry that would be repeated throughout most of the state’s modern history, the Campaign for Better Schools pushed for more funding with a
flyer
that read:

TEXAS

First
in Size

First
in Agricultural Products

First
in Production of Oil

Seventh
in Wealth

Thirty-Ninth
in Education

When World War Two began
, 23 percent of the young men being drafted or recruited from Texas were too badly educated to qualify for the military—twice the national average. After the war ended, Texas still only required that teachers have a high school education, and rural districts routinely shut down when it was time to plant or harvest the crops. “
We had the worst
educational system . . . that you could possibly have,” recalled former House Speaker Reuben Senterfitt, who helped get the schools their first infusion of state funding. Decades later, many Texas policy-makers still believed that all you needed to make it in their state was sweat and savvy, not book learning. “When I first came to the legislature you had to have arguments with a lot of people about whether it was necessary to graduate high school,” said Representative Scott Hochberg, who was first elected in 1992.

Nevertheless, Texas had joined the rest of the nation in wondering if its schools were up to snuff. The Reagan administration—not normally known to be a den of worrywarts when it came to the quality of domestic government programs—had issued a widely influential report, “A Nation at Risk,” in 1983, which said that the world was becoming one large economic village, in which products of the American educational system were at a disadvantage. The hawkish White House warned ominously that the country had been “
committing an act
of unthinking, unilateral educational disarmament,” and the more Americans looked around, the more it did seem as if other countries—particularly rather obscure Nordic countries—were doing way better at teaching reading and math, not to mention science and geography. What did Finland know that we didn’t? The debate raged endlessly, as did the promises for change. The first President Bush vowed to be the “education president,” to little discernible effect. And Bill Clinton ran, in part, on his pro-education record as governor of Arkansas.

Then came the 2000 election. During the campaign, George W. Bush couldn’t stop talking about education. “
It’s important
to have standards,” he’d say, holding up his hand to indicate the setting of a bar—a gesture that seemed to indicate the standards he had in mind were about five feet high. During one of the primary debates, he got a little sulky when John McCain was asked about schools while he got a question on gun control. “
Not about education
, but go ahead,” he said unhappily. As a presidential candidate, George W. Bush wasn’t just issuing general promises to improve the schools. He claimed to have the secret recipe. “
We think we know
how to do it. Governor Bush has done it in Texas,” Dick Cheney told America in the vice presidential debate.

This came up all the time. Bush, it was said, had presided over “the Texas Miracle” that turned public schools around, sent test scores soaring, and dramatically narrowed the gap between middle-class white kids and poor, black, and Hispanic students. On the presidential press buses, reporters kept asking the Texas journalists whether the state’s schools had improved as dramatically as the campaign claimed. Frequently, the response was something along the line of “I guess so.” Political reporters tend to shy away from in-depth analysis of education, which invariably requires a discussion of the relative value of the Texas Assessment of Academic Skills versus the National Assessment of Educational Progress.

But it really did appear that something good had happened.

“One of our better right-wing billionaires”

We need to examine the Texas Miracle, because the way you interpret the saga of how Texas pulled its schools up—and how far the pulling went—will have a lot to do with how favorably you look upon the legacy it gave the nation. When the Reagan White House started ringing the warning bell about international competition in the 1980s, Texas was still close to the bottom of the barrel when it came to the quality of education.
Beginning public school teachers
were paid $4,100 a year. Administrative costs were high, in part because Texas had 1,031 independent school districts, nearly 400 of which had fewer than 500 students. (In a huge lift, reformers in the late 1940s got the number down from over 2,000. Further merging was regarded as politically impossible; cynics blamed the existing districts’ determination to protect the identity of their high school football teams.)
Funding was wildly inequitable
. The wealthiest district in the state had more than $14 million in assessed property value to tax for each child in the local public schools, while the poorest district had $20,000.

The first serious effort to change things came in the mid-1980s from Governor Mark White, a Democrat who was once described by an opponent as “
one of the first nerds
in Texas.” White wanted to improve education as a tribute to his mother, an overworked teacher. “
I’ve got pictures
of her classroom in the first grade with thirty-four kids in it,” he told reporters. To figure out what to do, he appointed the inevitable blue-ribbon commission, with Ross Perot as chairman.

Perot, a short, big-eared man with a squeaky voice, was a billionaire businessman who would later run for president as a third-party candidate, destroying the reelection hopes of George H. W. Bush in 1992. (As a candidate, Perot’s big issue was the federal debt. As a businessman, he got his big break when he snared huge government contracts to handle Medicare data processing. This would make him one of the many, many rich Texans who were deeply opposed to Washington spending money on things that did not involve them.)
Before his presidential adventures
, he was best known for having financed a commando raid on Iran to rescue some employees who had been jailed during the fall of the shah’s government. He also once dispatched an attorney to go to England and buy an original copy of the Magna Carta. After the lawyer shelled out $1.5 million for the historic document and requested instructions on how to safely transport it home, Perot said: “Just stick it in your briefcase.” Deferring to the man with the checkbook, the lawyer did just that.

Perot was, in short, a man who knew what he wanted. And the education task force was one of his finest hours. “They traveled around the state and he was smart enough and wealthy enough and peculiar enough that he would say absolutely what was on his mind,” said David Anderson, a former state education official who now lobbies the legislature on education and other issues. Besides
spending an enormous amount
of time on the project, Perot also spent $500,000 of his own money on consultants. “
H. Ross took off
like an unguided missile,” the iconic Texas columnist Molly Ivins wrote. “I keep having to explain to foreigners that some loopy right-wing Dallas billionaires are a lot better than others, and H. Ross happens to be one of our better right-wing billionaires. This is assuming you don’t make him so mad that he goes out and buys an army and invades your country with it.”

The commission report will be remembered forever in Texas for its wildly controversial “no pass, no play” recommendation, which held that students who were failing in their classes should not be allowed to take part in sports or other extracurricular activities. (“It wasn’t just football,” said Anderson. “Perot told a great story of a west Texas boy missing forty-four days of school showing his chicken at the various agricultural competitions.”) A new
bumper sticker
appeared on Texas cars: “I Don’t Brake for H. Ross Perot.”

Less colorfully but more centrally, the commission recommended smaller classes, better teacher pay and pre-kindergarten for poor youngsters—all of which Perot personally paid lobbyists to push through the state legislature, along with a companion $4.8 billion tax bill. “
In some respects
we didn’t move the ball very far,” admitted then-Lieutenant Governor Bill Hobby, who got the legislation through the senate in an acrimonious session in 1984. “In the end, Texas still had the shortest school year of all the states, and our students spent fewer hours in class than students in other states.” But it was definitely a start. And the football players did have to get passing grades.

The really big lift came in 1993, after the exasperated Texas Supreme Court threatened to close down every public school in the state if the legislature didn’t find a constitutional way to equalize education funding, pronto. The resolution, a formula so stupendously complicated that only about five people actually understood it, arrived at the last possible moment, twenty-four hours short of an educational Alamo. “
We have had three
school finance plans that have been struck down since 1989,” said Governor Ann Richards. “We pray that this fourth time will produce the charm.”

The bill that averted disaster also created the Texas Miracle we would hear so much about in the 2000 presidential campaign. It did two major things. First of all, it gave the schools a lot of money. “Everybody got more,” said Bill Ratliff, the Republican who was head of the state senate’s Education Committee at the time. Ratliff was one of the five people who understood how the new formula for school funding worked. Most of his colleagues didn’t care—they just wanted to look at the printouts that showed how much money each district would receive. “That was the famous line: ‘Where’s my printout?’ ” Ratliff reminisced. “You have to raise all boats. You just raise some more.” And while everybody got something, the boats being raised the most were exactly the ones whose passengers were several years behind their grade level in reading and math.

Second, to convince people—particularly the business community—that the additional investment would be worthwhile, the school finance bill created an “accountability” system based on a series of statewide tests. This is the part that would, in the future, become the basis of President George W. Bush’s No Child Left Behind law. Some of its authors are downright horrified at what they’ve unleashed. But we’ll get to that in a minute.

During the last half of the 1990s, Texas schools did get better. It was very, very hard to figure out exactly how much better, given the amount of conflicting data floating around, but some observers were wowed by how well the students were testing. (“I couldn’t believe it,” said David Grissmer, who wrote or co-wrote several important education studies on the state.) Some were just prepared to thank God for small favors. (Molly Ivins called it the “
story on how our schools
rocketed from abysmal to only slightly below average in a mere thirty years.”) The doubters would be empowered later, when reporters discovered that in some places, the results had been, shall we say, rigged.

Whether the lift was huge or modest, it had very little to do with George W. Bush, whose role as governor was to arrive at the party after the refreshments had been served and the orchestra had finished its first set. Bush was supportive, but as happened so frequently in the W. saga, his main role was that of cheerleader. “His contribution to education was to argue that it was necessary,” said Scott Hochberg, the legislator who had the debates with his fellow lawmakers about whether a high school diploma was important. “And the people who needed to hear that message trusted him.”

You will remember that there were two pieces to the big Texas school reform—getting more resources, especially for the poor districts, and testing/accountability. As a presidential candidate, Bush fixated on one of them. We will pause here while everyone guesses which.

“But it’s not a business!”

“
Testing is the cornerstone
of reform. You know how I know? Because it’s the cornerstone of reform in Texas,” W. said in one of his debates with Al Gore. His opponent, he said, only had a wishy-washy commitment. (“You may claim you’ve got mandatory testing but you don’t, Mr. Vice President.”)

While there’s absolutely no reason to doubt that Bush’s interest in education was genuine, you sometimes wondered how deep his focus went. (During the presidential campaign, a high school student in Beaufort, SC, asked what could be done to push up her state’s terrible college board scores, and Bush answered, “
Write your governor
.”) He did promise to increase federal aid to education, although by less than half of what Gore was targeting. But money, he argued, paled next to the importance of his
plan—
based on tests, accountability, and giving parents the right to move their children out of failing schools. “
What’s more important
is reform,” Bush told Diane Sawyer. “You know, why pour money into a system that’s not reformed?”