Former SEC Chairman Arthur Levitt lambastes the Street.

In the wake of former Securities and Exchange Commission Chairman Harvey Pitt's embarrassingly brief tenure regulating the nation's securities markets, it has become fashionable to lionize and eulogize his predecessor, Arthur Levitt, who held the position longer than any one else. But while Levitt may look like the regulator from Olympus next to the portly Pitt, the one-time Wall Street broker who got his start selling cattle futures more than 40 years ago wasn't always as effective as many now believe.

Good thing Levitt's book has an extensive index. That's because the high and mighty of Wall Street and Capitol Hill will want to find out immediately how badly this respected former chairman of the Securities and Exchange Commission has skewered them. And the angry Levitt does hammer the big shots of the securities business, along with the pols who he charges are their enablers.

Levitt's anger-and the usually suave chairman doesn't look like a happy camper on the book jacket-goes back through a career in public service and the securities industry of more than four decades. It is actually a family matter. Levitt's father's was a longtime controller of the state of New York, a Republican liberal with a spotless record. But that, fumes Levitt, didn't stop one prominent Big Apple politico from roughing him up during the city's persistent fiscal woes in the mid and late 1970s.

New York City Mayor Ed Koch, Levitt writes, in 1978 demanded his father use state pension funds to save the city from yet another potential fiscal crisis that the city seems to go through at least once every 20 years. Levitt's father refused Koch's demand. The mayor didn't think that was the right answer. Mayor Koch, Levitt recounts, screamed that, if the city went bankrupt, the responsibility would be the controller's. (Why is it never the fault of elected officials? This is something that no one has ever explained to the groaning taxpayers. Levitt, whose forte seems to be sniffing out accounting and securities flim flams, never says anything about that either. But he does complain that his father was abused.)

"This confrontation upset my father so much that, moments later, he suffered a minor stroke, which left him unable to speak for several hours," writes Levitt, who uses the book to set many scores straight. Luckily, Levitt's dad recovered. But the incident obviously left young Levitt with a scar. He was learning a painful lesson: Politicians, especially when money and power are at stake, are not nice people. Levitt is just warming up at this point in the book.

This-and Levitt's feral frankness-has made this book a page-turner on Wall Street. Levitt names some of the biggest names in the business. Among those bloodied are Nasdaq's Hardwick Simmons, Merrill's Dan Tully and Citigroup's Sandy Weill. Weill and Levitt were partners in a brokerage firm in the 1960s. Levitt believes many of the laws that regulate these firms were and, in many cases, remain a joke, and that the average retail investor is rooked. For example, Levitt railed against various practices in the 1970s in a speech called "Profits and Professionalism."

In the speech, Levitt asked, "How can a broker view himself as a professional-as a counselor who considers his client's interest before his own-when his livelihood is dependent upon him taking an action which may not be appropriate or timely to take?" Levitt's speech drew much criticism, especially from his partners at his firm.

"This is ridiculous. I can't stop you from doing this, but I certainly don't agree," Levitt quotes Weill, then his partner. Simmons, at that time the firm's marketing manager, tells Levitt that he doesn't understand the business.

Levitt obviously smarts from this incident and one wonders what he thinks of Weill's current predicament. So some two decades later, as SEC chairman, he set out to transform the securities industry with a report that he hoped would expose its inherent conflicts of interest and lead to a miraculous transformation. Unfortunately, as with many reformers who think their reports and their administrations can changes decades of customs and traditions with a few strokes of the pen, Levitt found that this industry can't be changed overnight.

Levitt viewed his report was a landmark achievement. He says the industry finally documented and acknowledged the conflicts of interest in selling products that it originated.

The Tully Commission, headed by Dan Tully, then Merrill's chief executive officer, detailed bad business practices. Levitt says the most important accomplishment of the commission "was getting industry leaders to acknowledge the existence of conflicts." However, Levitt seems to fail to understand that revolutionary reform wasn't going to happen because of one report by a well-meaning SEC chairman.

A few years after the commission's "best practices" recommendations were made, they were ignored by many of the biggest firms, Levitt acknowledges. The biggest securities firms, for example, continued to pay their reps more for selling proprietary products than outside ones, contrary to the Tully Commission's recommendations. They were not going to change their practices to please Levitt, especially Dean Witter, which, by the late 1990s, was recording 75% of its fund sales in proprietary products.

"Surprisingly," Levitt writes, "Merrill Lynch was also one of the resisters." Levitt complains of the quality of Dean Witter funds, which tended to turn in poor performances. But maybe, just maybe, all of Levitt's best practices weren't the best, after all.

Levitt doesn't mention that Merrill Lynch funds, in the 1990s, had a good reputation; supposedly the best of the wirehouse funds. No matter how expensive proprietary funds usually are, not all proprietary funds are the same. Indeed, some investors are willing to pay more for these funds, even though there are plenty of no-load funds available. That's because effective reps provide advice along with the sale.

Is this is a good deal for the investor? Maybe yes, maybe no. But it's up to her to decide with the aid of full disclosure.

But possibly the greatest example of regulatory problems came soon after Levitt took over at the SEC. There were rumors of a Nasdaq price-fixing scandal. Here Levitt and his minions must take some criticism, too. He concedes the SEC initially ignored the rumors of Nasdaq skullduggery. "At first," he writes, "some of the staff at the Division of Market Regulation, which is the part of the SEC that oversees exchanges, didn't want to believe the allegations."

Levitt here touches on the eternal problem of regulation: The regulators, who sometimes previously worked in the industry or will be involved in it after they leave the government, often are so close to the industry that they virtually become part of it. "We had let ourselves," Levitt continues, "as regulators, get too cozy with the stock market we were supposed to be watching over."

Agreed! And his successor, Harvey Pitt, would take the concept of coziness to even greater heights. When Levitt, summing up the situation, says new rules were later put in to ensure a bid-rigging scandal would never happen again, he means well, but it's an open question whether he, or any other regulator, should make these guarantees. After some of the scandals involving IPOs of high-flying Internet stocks, the problem of rigging the trading markets resurfaced with a vengeance while some of the Nasdaq traders were still on probation.

The reader at some point must wonder why the solution to these breakdowns of market regulation inevitably is, well, a call for more of the same. Let's have more regulators and regulations to correct the problem of prior regulators and regulations!

One even wonders if these "cozy" regulators even understand what is going on. The SEC, in cleaning up the bid-rigging scandal, acted on the study of two academics, not the findings of the SEC's staff.

According to academics, dealers were penalizing other dealers who weren't part of the price-fixing cartel. Day traders, who weren't part of the fix, were practically persecuted by NASD disciplinary committees. Levitt tells the reader that Nasdaq market makers were conspiring to keep spreads fat. Levitt views the behavior as shameful and shocking.

On the subject of disclosing conflicts of interest, the usually candid Levitt fails on one point. He never addresses the possibility that he may have breached the highest ethical standards with his own actions three years ago. Levitt, at a time when the SEC was investigating Bear Stearns, made a phone call to the same firm, recommending one of his former department chiefs for a senior managing director position in the firm's scandal-plagued clearing division, which tried to accept no responsibility for its sleazy bucket-shop correspondents like A.R. Baron & Co.

This former official, Richard Lindsay, had been the SEC's head of the market regulation division. He ended up working for Bear Stearns. A spokesman for the firm would say of the Lindsay hire, "We consider Richard Lindsay a tremendous asset to the firm." No doubt he was.

Some on Capitol Hill charged that Levitt's phone call was inappropriate. Levitt, at the time, said he checked with the SEC's lawyers, and they said it was fine. Levitt should be reminded of what people like him constantly tell people in the securities business: Even things that are not conflicts of interest can have the appearance of conflict. That can be almost as bad as an actual conflict of interest.

Still, what is most disappointing is that this episode never makes it into the book. Yet it is an important issue. So many regulators end up working for the organizations they once oversaw. While Levitt clearly understood the problem better than his bungling successor, even he blundered on occasion.

Indeed, one good point of this book is that Levitt is quite thorough in detailing the conflicts of interest of his successor, Harvey Pitt-before Pitt resigned as SEC chairman. Pitt's 15-month tenure was marked by and endless string of controversies that boiled over following his handling of the appointment of former FBI and CIA director William Webster to head a new board mandated by Congress to clean up the accounting industry.

Levitt, citing Pitt's connections to the accounting industry, contends that he hurt efforts to reform beancounters' bad practices. Levitt intimates that Pitt's prior connections to the American Institute of Certified Public Accountants (AICPA) should have disqualified him from heading the SEC. Levitt argues that Pitt, as an accounting industry lawyer, was ready to soften rules that would reformed the practice of accounting firms offering both auditing and consulting services to the same client.

"Even after becoming the agency's chairman," Levitt writes, "Pitt continued to hold the view that the growth of consulting does not interfere with auditor independence. To him, the solution to the industry's problems are new rules that require companies to disclose more information, and more frequently than once a quarter, about their operations and strategic plans."

Pitt, who represented the AICPA through his law firm, was indeed ready to water down needed reforms through the creation of an accounting industry standards board, according to Levitt. Pitt concludes that the ISB would be unlikely to establish effective auditor standards. Only the SEC could do that, complained Pitt, and look who would be heading the SEC after he departed: A member of the industry. So, once again, an industry insider would be in charge; the fox would be given the policing power over the chickens. Levitt made a very effective case against Pitt, but actually in subtle and unintended ways, he does more: He makes a case against the entire system of self-regulation.

Levitt also criticizes many of the federal lawmakers, who he believes tried to intimidate him to curry favors with big contributors. He charges that they were attempting to restrain or delay his efforts to reform the securities industry before it imploded. Levitt even criticizes himself, which speaks well of the author. Nevertheless, there are several problems with Levitt's Prometheus, "I tried to save the world but was chained by the bad guys" view.

First, Levitt is right that many wirehouses usually favor themselves over the individual investor and give institutions better treatment. But he acts as though the average investor will never learn this and there are no alternatives to their conflict-of-interest model.

But there are plenty of Vanguards in the investing world. And many investors want to go it alone or find an independent advisor free from obvious conflicts of interest. It is becoming ever easier for the average person-if he or she takes a little time and does a wee bit of research-to find the right advisor or no advisor. More than a few investors are smarter than Levitt assumes.

Second, there is a question about the regulatory saviors. Does the system of regulation work, even when the best of regulators is running the show? Going through Levitt's litany of complaints one starts asking: Why couldn't the sagacious Levitt and his staff do better? He was chairman of the SEC throughout most of the 1990s. He was a smart regulator who knew all the games that were being played.

In his book, he claims he saw most of the reporting and accounting scandals coming. So why didn't he scream bloody murder? He might have had little influence with the self-serving porkbarrelers on Capitol Hill, but some of the media would have been delighted to hear his complaints.

Arthur Levitt is not a happy man. One has a sense that this book is almost a form of therapy for a frustrated former regulator. Throughout the book-as Levitt listed this incredible litany of what he believed to be shady practices carried out in the industry he worked in and later regulated, or tried to regulate-a profound sense of frustration keeps resurfacing.

Despite his best efforts, the scandals exploded just after he left office. His ill-starred successor coddled many who greased the bubble's wheels and makes an inviting target. So blame it on the shady securities business. Blame it on anyone or everyone. Blame it on Rio, but don't blame me, Levitt seems to be saying. But most of the shenanigans occurred on his watch.

But, one is obliged to ask, why weren't there louder public outcries from Levitt about accounting hijinks? And why, given his long record as a player in the securities industry, couldn't he make a more effective case with the pols on Capitol Hill, so many of whom seemed to have been antagonistic to Levitt and his call for reforms? Why couldn't this veteran of the political wars build a constituency among the pols?

This book is a call for reform. But it is also the chronicle of disappointment-of a regulator jaded by the securities business.

Levitt has done too good a job with this book. Yes, he's wounded a lot of those in the securities and political worlds. He's exposed some of the seedy practices of the business. But he's also unintentionally wounded the system of regulation by chronicling his own failures. Maybe in the end, the forces of human nature like greed and fear are simply too powerful for legalistic regulations to totally resolve.