Arthur Levitt entered the SEC as an industry insider, someone who could be trusted by Wall Street to understand its special problems. He understood all too well, which is why there were few wet eyes in the securities industry when he left the SEC after a tenure marked by a concern for the small investor and transparency that was almost revolutionary.
Levitt disclaims any suggestion that he was a sleeper who kept his views quiet and only sprang into action when he took office. On the contrary, he tells Investor Relations magazine: ‘I think people who really knew me well, knew that I have some fairly firm convictions.’ But he understands why people might have thought otherwise: ‘Sometimes my soft-spoken demeanor and mild manner may cover up my purpose, which is fairly energetic and fairly focused,’ he suggests. ‘I knew precisely what I was going to try to do with the Commission even though I did not anticipate some of the problems I would have pursuing that agenda.’
While his voice may be soft, the tone of his new book is far from gentle, as indicated by its title: Take on the Street: What Wall Street and corporate America don’t want you to know, and what you can do to fight back. The title also reflects the book’s hybrid vigor. It is an intriguing cross between a self-help manual for investors and a political insider’s revelations.
‘I think the how-to part is more important than the reminiscences,’ is Levitt’s own assessment. However, investors reading his book might get the impression that the best thing to do with their money is to bury it somewhere safe in the backyard where the finance industry and its denizens can’t get their hands on it.
Self-correcting markets
In fact, Levitt is more sanguine about their prospects, and a great believer in the role of financial markets in American prosperity. ‘The other side of the coin is that markets tend to be self-correcting and there is a recognition of what has happened on the part of corporate America and all who serve in it. They’re doing everything they can to restore public confidence. Many practitioners are doing things they otherwise would not have done. They are telling it as it is and audit committees are functioning in a more rigorous way, boards are chosen more carefully, and compensation committee decisions are being made with an eye towards the press. Legislators are thinking of rules they may never have thought of before.’
He admits that his former colleagues have not all been appreciative of his literary efforts. ‘A number have taken a pretty sharp approach to it, while others recognize that I have generally been reasonably and fairly outspoken and not irresponsible,’ he says, smiling as he recalls that a wife of one his subjects did call to complain. ‘But I did not go out of my way to hurt anyone.’
That is small consolation for people in the securities industry, accountancy and politics whose venal and self-serving practices he exposes and denounces. As for the shock troops of corporate equity, the IROs, how complicit were they in all of this?
Levitt weighs his words carefully: ‘I would say that just about everyone who was tasked with the responsibility of guiding investors simply did not do their jobs. This has been part of an extraordinary period, where we’ve seen the corrosion of ethical values on the part of so many corporate leaders and so many others.’
He distinguishes between, on the one hand, ‘the lawyers and the investment bankers and the brokers,’ who directly benefited; and others, ‘the rating agencies and standard-setters and maybe some others who had a less purposeful kind of venality,’ on the other hand. By this, he explains, he means that they opted to go along with the flow rather than actually taking part in the looting themselves.
In his book Levitt mentions the support he enjoyed from Niri’s Lou Thompson for some of his measures, such as Reg FD. But he tells Investor Relations magazine that Niri wasn’t fierce enough on fair disclosure, although he accepts this may have resulted from opposition among the membership.
An erroneous assumption
Much of Levitt’s work at the Commission was designed to give retail investors a level playing field with institutions; he rebuts as ‘an erroneous assumption’ the idea that they can be taken for granted. ‘The retail investor does not necessarily buy and hold and probably needs more attention than a pro. After all, it’s the retail investor who left the market, and it’s important he returns to it if we are to have markets that are liquid and reliable.’ Levitt points out that even as he was making it mandatory to give retail holders equal access to corporate information, the new technology of webcasts and e-mails made it possible to do so ‘in a fashion that could never occur before.’
One of Levitt’s suggestions that would have been unthinkable a few years ago – but may become less so under present pressures – is an independent equities research body which would do for shares what S&P and Moody’s do for bonds. ‘I think a lot of brokers’ firms would like to have a coordinated research operation. If they are afraid to go it alone, they want the others to join in with them. It’s not likely to happen but it would fly if firms wanted it to. The major investment banking firms recognize their reputations have been grievously hurt. They would love to be able to shed their research in favor of a coordinated operation that would be funded by all the major firms.’
While visionary, Levitt is clearly not starry-eyed. He doubts the staying power of the current bout of chest beating and reformism in the markets. ‘Whether this cultural change in America’s boardrooms endures depends a lot on the public level of gullibility, and whether the press continues to latch onto these issues. But then the public gets caught up in the bull market hype again and the press encourages them, and then we’ll have a repetition of what we had in the past. But for the time being I think we will see better behavior.’
He also welcomes some signs that the regulatory agencies may get more resources for enforcement capabilities, but cautions, ‘They also will have to use them more wisely and, above all, be lucky, because many of these cases came about from leaks and whistle-blowers. It’s not an FBI kind of operation where SEC employees are out scouring for scraps of paper and wisps of hair; it’s much more basic than that. If a company is going to misrepresent their numbers fraudulently it is very difficult to determine in the casual inspection of the filing. Filing is fairly formulaic.’
In fact, he continues to agitate about accountancy standards; and he suspects that foreign investors and corporate executives may now be more dubious about US Gaap. ‘European standards are much more principle-based than formula-based and I think we have to take a healthy look at them.’
The bubble really began with the dot-coms, which inflated stock prices while throwing ‘the fundamentals’ overboard. Levitt says he talked to Alan Greenspan about reducing margins to calm the speculative fever. ‘I thought it would be useful, not overwhelmingly useful, but it was clearly something I would have done had I been in the position to do so. Alan and I talked about it, but he simply did not feel that raising margins would do anything.’
Some may remember Levitt’s tenure best for his plain English initiative, but he thinks his greatest achievement was ‘the landmark collusion case against the NASD causing the narrowing of spreads and transfer of billions of dollars a year from the pockets of the brokers into the pockets of investors.’ Plus he says, ‘I would add Regulation Fair Disclosure.’
On missed opportunities, he is clear. First, he should have fought harder to have stock options expensed in the accounts, and, ‘I would have not called on the stock exchanges to address the issue of analysts; I would have done it myself.’
Always the gentleman, when asked to rate the brief tenure of his successor, Harvey Pitt, he says, ‘I don’t think it’s my place to do that.’ But he does think that Pitt’s departure will slow down implementation of Sarbanes-Oxley. And as William Donaldson is appointed Pitt’s successor, he adds magnanimously, ‘If any of my successors care to talk to me about the post, I would be glad to do that.’
