Investors of the world, unite!

Former chairman of the SEC Arthur Levitt declares the time is ripe for fighting back against Wall Street.

By Farhad Manjoo

Sep 25, 2002 | As chairman of the Securities and Exchange Commission from 1993 to 2000, Arthur Levitt knows better than most people just how hard lobbyists for big business fight to evade government scrutiny and regulation. The battles during his tenure were furious, and more often than not, Levitt, who believed strongly in more oversight and accountability, was the loser.

His new book, "Take on the Street: What Wall Street and Corporate America Don't Want You to Know," is intended mainly as a guide for investors who worry about putting their money in a market fraught with scandal. But the book could also make a handy voting guide this November, as it gives a good sense of where various politicians stood on regulatory issues before recent scandals came to light.

Want to know what Billy Tauzin -- the Louisiana Republican who, as head of the House Energy and Commerce Committee, has been a recent, relentlessly fierce critic of Enron -- was doing for investors in flusher times?

Levitt provides a damning account. "When the cameras aren't on, Tauzin doesn't always carry the investor torch," he writes. "In the spring and summer of 2000, when our auditor independence rules were being debated, Tauzin was relentless. He sent three separate letters warning the SEC to back down ... While I can't prove that [one of Tauzin's letters] was written by lobbyists from the Big Five accounting firms, it strains credulity that Tauzin or his staff could have written such a detailed letter on their own ... Tauzin's strategy was obvious: any delay would push the process past the November election, and a George W. Bush win would likely mean the demise of our rule."

Levitt did ultimately manage to push through some new accounting rules before Bush came into office. He prohibited accounting firms from providing many "non-audit services" -- such as serving as human resource manager or stockbroker -- to companies they audit. But Levitt concedes that the pressure from lobbyists prevented him from going "far enough," especially from enacting rules to prevent accounting firms from providing consulting services to their clients.

"Take on the Street," co-written with BusinessWeek editor Paula Dwyer, is a history of such tough fights, of battles with moneyed lobbyists and compromised lawmakers decrying his every move. In response to almost everything he proposed at the SEC, business interests mobilized: "With laser-like precision, groups representing Wall Street firms, mutual fund companies, accounting firms, or corporate managers would quickly set about to defeat even minor threats," he writes.

Prominent politicians in both parties often joined in -- and sometimes, as in his 1993 effort to force companies to account for stock options as an expense, he had no choice but to back down. "I regard this as the single biggest mistake during my years of service," he writes of his failure to get strong stock-option rules enacted. (Helpfully, Levitt reprints many of the critical letters he received from CEOs and congressional representatives. One from former Enron CEO Kenneth Lay "respectfully urges" Levitt to re-think his pro-regulation designs, saying that current rules have been beneficial to his company.)

In a telephone interview with Salon from his office in New York, Levitt said that he's pleased that corporate scandals seem to have changed the mood in Washington. But the only way the changes will last, he says, is if investors form their own powerful political bloc to oppose the moves of corporations.

Did you start writing this book before or after the latest corporate scandals?

Oh, I started it long before. Most of it's in reaction to what I saw happening in America, which was a deterioration of ethical values that generally follows a runaway bull market.

You believe that's inevitable in a bull market?

Yes, I do think that's inevitable with a bull market. People begin to believe their own infallibility. Brokers think that every stock they recommend goes up. Analysts believe that their recommendations are right. Politicians believe that the market obviates the need for regulation. And investors believe that it is their innate wisdom that has made money for them on every stock they picked, and they invest emotionally rather than intellectually. The notion of asking questions goes up in smoke.

So since the scandals broke, has enough been done to fix that?

I believe that humiliation and embarrassment has already begun the process of changing societal behavior. I think that regulation and legislation may prolong the impact of that societal change. But in and of itself regulation doesn't usually change behavior.

The investors have fled the market. Instead of buying stocks at a thousand times nothing, they've gotten out of the market and those stocks that were selling at a thousand times nothing are now selling for nothing. That, I think, is good. The market is reaching a level it probably always should have been at.

Next Page: Stock options are the root of all evil

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