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INTERVIEW: Arthur Levitt

Chairman of the SEC from 1993 to 2000, Levitt says the Enron scandal is “symptomatic of a breakdown of the ethical values of business over a period of perhaps 20 years.” He is very critical of what he calls “accounting hocus-pocus” or how companies have become more creative in their interpretations of accounting standards. In this interview, he describes the political heat he took during the three big accounting battles of the 1990s, and calls for an independent agency with subpoena power to oversee the accounting industry. This interview was conducted by FRONTLINE correspondent Hedrick Smith on March 12, 2002.

http://www.pbs.org/wgbh/pages/frontline/shows/regulation/interviews/levitt.html

You’ve been talking a lot about distortions of reality. Is the failure to expense stock options a distortion? Does that distort company income?

Yes. Investors should care deeply about expensing stock options, because those options represent a distortion of the earnings of the company. Right now, options are treated as a footnote, but that’s not good enough. Those options represent a claim on the company, and a claim that may very well and has been exercised.

So what you’re saying is stock options are a cost of doing business that businesses don’t show their shareholders?

Stock options are a cost of doing business that is not clear to many American investors.

[Prior to the Gingrich Revolution, what happened in the Senate regarding the FASB rule?]

The Senate passed a [resolution] about the proposal of the standard setter to expense stock options. Why did they do it? There was no question in my mind that campaign contributions played the determinative role in that Senate activity. Corporate America waged the most aggressive lobbying campaign I think that they had ever put together on behalf of this issue. And the Congress was responsive to that.

You have Sen. Joe Lieberman of Connecticut leading the charge. Why?

I don’t know. I honestly don’t know. Sen. Lieberman is my own home senator, and I have great regard and respect for him. I’ve spoken to him about this issue a number of times. And I simply do not understand where he’s coming from.

What were his arguments?

The arguments were the arguments being used by the business community: that this was a break on entrepreneurship; that this would keep companies from being able to hire good people; that this would destroy companies; that this would distort their earnings. All the arguments used by the business community were the ones set forth by Senator Lieberman in his opposition. …

If you’re talking about the Federal Housing Enterprise Regulatory Reform Act of 2005 (or 2006 if you’re John McCain,) I was wondering how much was that actually an effort to exempt the GSE’s of SEC oversight and to move all regulation to the executive branch (instead of the house).

By the way, the Dems didn’t have the resources to “shoot it down.” They were in the minority and the bill cleared the committee.

http://www.lewrockwell.com/dilorenzo/dilorenzo144.html

Hamilton was the leading advocate of a constitutional convention to “amend” the nation’s first constitution, the Articles of Confederation. He lobbied for seven years to have such a convention convened, constantly complaining to George Washington and anyone else who would listen that “we need a government of more energy.” Patrick Henry opposed Hamilton by sagely pointing out that the Articles of Confederation had created a government powerful enough to raise and equip an army that defeated the British empire, and that that seemed sufficient to him.

At the convention, which scrapped rather than amended the Articles of Confederation, as had been promised, Hamilton laid out his grand plan: A permanent president who would appoint the governors of each state, and who would, through his state-level puppets, have veto power over all state legislation. A national government with the president given essentially the powers of a king is what he advocated. It was all rejected, of course, when the convention spurned Hamilton’s nationalism and adopted a federal system of government instead, with only a few powers delegated to the central government by the sovereign states, mostly for foreign affairs. Hamilton subsequently denounced the new constitution as “a frail and worthless fabric.”

He and his political compatriots, such as Senator Rufus King of Massachusetts, and John Marshall of Virginia, then set about to sabotage the new Constitution by “reinterpreting” the document as something very different from what was clearly written in black and white. His purpose, wrote Cornell University historian Clinton Rossiter in his book, Alexander Hamilton and the Constitution, was to build “the foundations of a new empire.”

Between 1937 and 1995, not a single federal law was ruled unconstitutional by the U.S. Supreme Court. Hamilton’s “rubber stamp” constitution was firmly in place.

But I think that team consists almost completely of Cox and his Republican co-commissioner Paul Atkins.

Those guys gutted the SEC through ethnic cleansing (eliminated 174 positions in the Enforcement Division in less than 4 years !) and suspension of any functioning rules. But they did have a sense of humor – they assigned only one SEC employee to be in charge of risk management analysis for all investment banks (you can’t make this stuff up).

The SEC has traditionally had first class, and generally ideologically-neutral, leadership. And attracted a hard-working, dedicated, and responsive staff.

But Cox and his team (collectively the Harriet Meyers of financial regulation) let lazy acceptance of a primitive political ideology trump common sense and their clear duty to their country.

I know it isn’t, but it smells a lot like, treason.

`Orderly Market'

The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an “orderly market,'' rather than a hypothetical forced liquidation. The value doesn't necessarily reflect what the securities would fetch if Maiden Lane tried to sell today.

When the Fed agreed to the Bear Stearns transaction on March 16, policy makers also opened lending to other securities firms. That facility, and a $13 billion temporary loan to Bear Stearns after it warned it faced bankruptcy, constituted the first Fed credit to nonbanks since the Great Depression.

The Fed's loan carries the rate charged to commercial banks at the discount window, currently 2.25 percent.

The debt in March included commercial mortgage-backed securities, home loans and collateralized bond obligations, the central bank said in April. None of the securities were rated lower than BBB- by any of the three largest credit-rating companies, the New York Fed said April 3. Debt rated below BBB- has non-investment grade, or junk, status.

Market `Deterioration'

Today's valuation probably reflects “ongoing deterioration in these markets,'' said Sack of Macroeconomic Advisers. In addition, it may reflect more-extensive research into the securities' values, he said.

The central bank has declined to provide details on the securities and isn't planning to disclose changes in the makeup of the portfolio. The asset mix may change to include securities that weren't in the original pool.

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Now, story number two from the report at http://finance.senate.gov/press/Gpress/2008/prg092608i.pdf

Ooops, it's not really a pdf file and not searchable, but it is a nice big photocopy; guess they don't want people like me copying and pasting due diligence efforts relating to public information. This is obviously just a private matter between Paulson, Cox, Bernanke, Bear, JPM, Blackrock and all the people that want a few Trillion in socialized tax dollars, so they can get back to Aspen for XMAS!

I'll still look it over real fast, but I wondered why the doc was so huge! Boring, corrupt and pointless.

If this commenter had bothered to read Minsky, he’d know that Minsky was an institutionalist, who believed in strong regulation, but regulation carefully tailored to suit evolving economic-institutional contexts. Minsky blasted the “shock therapy” program imposed upon Russia, correctly pointing out that none of the institutional conditions existed, by which it could possibly at all work.

Oct. 7 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Christopher Cox's regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency's inspector general.
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“People can judge for themselves, but it sure looks like the SEC didn't want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,'' the Iowa Republican said in an e-mailed statement.
http://www.bloomberg.com/apps/news?pid=20601109&sid=av2fpp3blAgY