0.cached.png
By Newsweek Editors
0
Share
Newsweek is a Trust Project member
See more of our trusted coverage when you search.Prefer Newsweek on Googleto see more of our trusted coverage when you search.
This week, under intense pressure, Securities and Exchange Commission chairman Harvey Pitt gave up the post he'd held for just 15 months. In a letter to President George W. Bush, Pitt said the turmoil surrounding his chairmanship had made it difficult to perform his job.
The resignation followed a string of increasingly embarrassing missteps that culminated with last week's admission that Pitt knew the man he'd recommended to lead the new accounting-industry-oversight board, William Webster, had led the auditing committee of a company facing shareholder lawsuits alleging fraud. Worse, Pitt had not shared that information with SEC commissioners before the vote. Though Pitt is now gone, the recent controversy has tainted the credibility of the SEC and the new accounting oversight board at a time when investor confidence is already in the doldrums. NEWSWEEK's Jennifer Barrett spoke with former SEC chairman Arthur Levitt, whose new book is "Take On the Street: What Wall Street and Corporate America Don't Want You to Know" (Pantheon Books), about what it will take to restore the public's confidence.
NEWSWEEK: There have been calls for William Webster to step down. Do you think he should?
Read More on News
Arthur Levitt: I can't comment on that. Harvey Pitt split the commission vote [the two Democratic commissioners out of five voted against Webster] on whoever was chosen to head the oversight body by giving that body such an action [recommending Webster]. Only a united--a unanimous--commission vote would remove the taint of politicization, which is the death knell of a commission intended to ensure the public of its independence, its integrity and its freedom from political influence.
Can the accounting-oversight board be truly effective with Webster at the helm?
So much of public confidence is a question of appearance. You need people on the board who really are recognized for their professionalism and independence and total freedom from being viewed as political choices. A body like this can have maximum effectiveness by restoring public confidence in the way accounting firms report their numbers. If the board is successful over the next several years in diminishing the environment of distrust that currently exists, it may well be able to phase itself out of business.
Critics had called for Harvey Pitt to step down sooner than he did from the SEC. Should he have done so?
I am very reluctant to talk publicly about Harvey Pitt. It just is unseemly for me to be dancing on his tomb.
Who would you pick to replace him?
There are a lot of good candidates out there: [former SEC chairman] Richard Breedon, [former Nasdaq chairman] Frank Zarb.
Who might actually be picked? Mary Schapiro, head of National Association of Securities Dealers' (NASD) regulatory arm, has also been mentioned.
I have no idea. Zarb or Breedon would be preferable to Schapiro. I personally believe that a new chairman at the SEC can easily restore the confidence of the staff--or restore the morale of the staff--which is the most important priority now for an effective agency.
New York Attorney General Eliot Spitzer, who has launched numerous investigations into conflicts of interest and alleged abuses on Wall Street over the past year, has said that inertia at the SEC prompted him to act. Do you think that's a fair statement? And why has he been able to accomplish things that the SEC has not been able to do?
I don't know. He is very aggressive and he is very creative, and he had one thing to focus on. The SEC had many, many things to focus on, as well as having to contend with a Congress that was a deregulatory Congress. Spitzer was clearly very, very creative in how he went after this and he's embarrassed the SEC.
You write that you met resistance "at every turn" when you pursued a number of attempts at reforming Wall Street as SEC chair. Did you feel you were limited in what the SEC could accomplish?
We were extraordinarily productive, and we made do with limited resources. No government agency can undo all wrongdoing, but by the symbolism of what they do and how they do it, they can reassure the public and discourage wrongdoing.
But with just about every initiative I introduced, I was frustrated by a deregulatory Congress that made us less productive in many instances than we could have been--especially in relation the accounting industry. And in terms of research-analysis conflicts, we could have done much more with it than we did. I gave several speeches about it, and I wrote letters to the NASD and to the stock exchanges to go through a rule-making process to correct the issue. They didn't do anything for two years.
But the SEC could have moved forward without the exchanges and the NASD.
We could have done it without them. We could have done what Spitzer is now doing [going after individual investment firms]. But I did not do it because I was entangled in a massive political fight with Congress on accounting issues and on market-structure issues. The SEC deals with things as varied as brokerage firms, members of the accounting and legal profession, and market structure, which is hugely complex. The attorney general has a discreet number of issues to focus on.
You have been calling for a separation of brokerage and investment-research operations for awhile. Regulators and the 10 biggest securities firms, including Merrill Lynch and Citigroup, are now negotiating a settlement to resolve the issue. Do you think we'll finally see a true separation?
I don't think it's going to be cut and dry. I think it's going to be a series of steps, and I believe we are likely to see the emergence of independent research firms competing against sell-side [investment firm] analysis, which has lost virtually all credibility.
Is Wall Street more receptive to reform now, or is it just reacting to the current public and regulatory pressure?
I think a combination of a punishing bear market, the investigations and political consequences of public anger will focus investment banks toward the priority of putting investor interests above their own economic interests. That was simply lost during the bull market. Companies underwrote enterprises they knew made no economic sense, wrote research reports without foundation and took advantage of a gullible investor community in shameless ways.
Are those firms paying for their past actions now?
The private rights of action, plus the focus of state regulators and federal regulators, plus the reputational cost, which is greater than any of the dollar amounts we're talking about, have cost the firms dearly. We have not seen the end of that yet.
If you'd had your way, what else would you have liked to accomplish as SEC chair?
I would have done more on [research] analysis--the independence of that process--and more with respect to the independence of mutual fund boards and investment company boards ... And, most importantly, I would have moved toward restructuring the accounting standards-setting process. That process is flawed; it simply is not geared to keeping up with new instruments and new financing techniques. I would have moved toward restructuring and reconsidering how accounting standards are set.
Do you think some of these reforms might be enacted now?
Yes, I absolutely do think we'll see them. I see it happening now. Standards-setting is clearly going to be reviewed, and we are moving toward international accounting standards.
Has the public become more savvy since the late 1990s bull market?
Yes, scandal and market calamity brings a clarity of thinking that was totally obscured by a runaway bull market in the late 1990s. I believe that American investors--the most potentially powerful politically force in the country--were virtually disenfranchised by their lack of organizational savvy and by their lack of knowledge of factors working strongly against them, in the markets and in the Congress, and the failure of traditional gatekeepers to protect them as they should have been protected.
I hope that my book will help energize that investor community to organize, which they can do in fairly easy fashion ... The stock exchanges and brokerage firms and the lawyers and accountants all have lobbyists on Capitol Hill now, investors have none.
What kind of reaction have you gotten to your book?
It's mixed. Certainly some members of Congress I wrote about expressed displeasure. Other people I wrote about affirmatively have thanked me. And I have people who stop me in airports and thank me--investors--and that is really gratifying.
View 0 Comments
Submit Correction
View Editorial & AI Guidelines