Q & A: Former SEC Chairman Sees Financial Reform as Changes on the Margins
Arthur Levitt, the former head of the Securities and Exchange Commission, discusses his view that Congress’ financial reform legislation does little to protect investors. And he says consumer protection measures are not as strong as they should be.
After a 20-hour, all-night session, Senate and House negotiators agreed last Friday on a compromise financial reform bill meant to prevent future economic meltdowns. Just before the bill was being finalized, former SEC Chairman Arthur Levitt wrote a scathing op-ed in The Wall Street Journal, saying the bill was "bled dry of nearly every meaningful protection of investors." Levitt headed the SEC from 1993 to 2001, leaving just before the accounting scandals of Enron and WorldCom erupted, and is now an adviser to Goldman Sachs and the Carlyle Group, a private equity firm.
As the dust settled last Friday, we checked in with Levitt to understand just why he believes the bill, as he says, "totally left investors in the dust." Here are his thoughts on the topic:
On reports that this is the biggest financial reform since the Great Depression ...
"I think that's ridiculous. Whatever changes were made were made at the margins."
On the most important omission from the bill ...
"The issue that was most important to investors for 25 years was shareholder access to the proxy, [which would make it easier for shareholders to nominate candidates for a company's board of directors]. As the system has been structured, shareholders have no say in the management of the company except in very, very unusual circumstances. By having shareholder access, you are developing a measure of oversight that does not exist in any other form."
On the best parts of the bill ...
"I suppose consumer protection was a useful step, but it's unfortunate that it wasn't an independent agency and is housed in the Federal Reserve, which is conflicted because their mission is to protect the safety and the soundness of the system, and that creates a tension with protecting investors and protecting consumers. The safety and soundness of the banks is often at odds with what's best for consumers. I think that by housing it in the Federal Reserve, they really put chains on that agency.
"I think another constructive change was the power given to the CFTC [the Commodities Futures Trading Commission, which will now regulate derivatives], whose chairman presently is a very pro-investor chairman. They will be given rule-making power to deal with abuses that no bill could possibly contemplate. I think both opponents and proponents of the various measures dealing with derivatives didn't totally understand their implications and how they will fit into the system in the future. I don't think the Congress has the skills to deal with the intricacy of derivative regulation; it was a good move giving that power to the chairman of the CFTC."
On regrets from his time in the SEC ...
"We didn't have the kinds of derivatives that have developed since that time, but clearly I would regret not having called for regulation and oversight of the derivatives market that we had at that period. [Check out our story on the politics behind squashing derivative oversight.] But the need for it today is vastly greater than it was then. We probably wouldn't have been where we are today had I taken a different position. And it's unlikely that I would have won the battle against the Treasury and the Federal Reserve, but nevertheless, I certainly could have done more than I did."
On the proposal to make the SEC self-funded, which supporters say would increase its independence and resources ...
"I think that the reason for cutting out the SEC funding proposal [to make it self-funded] was because the appropriators right now are able to raise money from both sides of every issue that comes before them. If they gave the SEC self-funding, they would lose the leverage that they currently have as a major tool to raise campaign funding, and they basically don't want to do that. Five different SEC chairs tried to persuade Congress to do this, and the issue goes back almost 25 years. I just think it's a cash cow that Congress characteristically resents giving up."
On who will pay for the reforms ...
"The business community in America is very good at adjusting to regulatory changes. I think that investors and consumers and businesses will absorb some [costs], and the firms that aren't skillful at adapting to change will absorb more."
As big banks return their TARP money, Fannie Mae and Freddie Mac continue to be a drain.
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