It's not very often that one finds the editorial page of The Wall Street Journal in agreement with Common Cause, the liberal watchdog organization that claims to promote the public's interest. So when both these diverse groups issue statements sharply critical of Securities and Exchange Commission Chairman Harvey Pitt, it's natural to wonder what's up.
In early May, The Journal complained loudly that Pitt's cozy relationships with former clients and other corporate and financial bigwigs undercut his own credibility as the nation's chief securities regulator. Days later, Common Cause went one step further and called on Pitt to resign.
Pitt's tenure as SEC chairman didn't start out in such an unpromising fashion.
Some commentators noted that he probably knows the nation's securities laws better than anyone else in the land. Unconfirmed rumors circulated that Pitt was considering a wholesale rewrite of those laws to bring them into the 21st Century, and some suggested he was just the person to do it.
Nothing has worked out the way Pitt or the Bush administration planned. Months before the Bush administration took office, the future SEC chairman was instrumental in helping the accounting profession lobby Congress on behalf of relaxing regulations and lightening penalties for any transgressions.
Following former SEC Chairman Arthur Levitt's failed attempt in the late 1990s to force accounting firms to separate their auditing and consulting units, the Big Few, as the Big Four or Five are now known, proposed their own solution: Move the accounting profession out from under the purview of the SEC and allow it to regulate itself.
Pitt probably could not have anticipated the wave of accounting irregularities that destabilized the financial markets in 2001. But his predecessor was hardly alone in complaining that financial reporting standards were deteriorating and accounting creativity was enjoying an age of limitless new possibilities rivaling the potential of Internet stocks.
After the Enron-Arthur Andersen debacle surfaced, Pitt embraced a lukewarm scheme submitted by the Big Few to tighten standards. But the accounting giants, now on their way to becoming the Final Four, themselves sensed the growing crisis of confidence. Some volunteered to separate their accounting and consulting businesses. Pitt, on the other hand, seemed viscerally compelled to follow rather than lead as events kept unfolding.
From their reaction, both the Justice Department and Pitt seemed more intent on finding a sacrificial lamb-Arthur Andersen fit that role perfectly-than on addressing the problems. The decision to give Andersen the death penalty supposedly proved that the government has everything under control, even if most Andersen employees had nothing to do with Enron and the accounting profession's problems were partly the result of insufficient competition.
As fast as Pitt kept backpedaling, events overwhelmed him. His meeting with the new head of
KPMG, Eugene O'Kelly, proved a major embarrassment. Pitt contended that they didn't discuss the SEC's investigation into KPMG's role in Xerox allegedly inflating its profits by a measly $3 billion, although O'Kelly claimed they did talk about it.
As this news surfaced, Pitt found himself being upstaged by New York's attorney general, Eliot Spitzer, whose investigation of Merrill Lynch and other giant investment banks exposed the tawdriest side of Wall Street research and its servitude to investment banking. For several years, Wall Street research had been engaged in a furious race with Big Accounting to see who could erode their own credibility faster.
While all this was unfolding, I was attending a Fidelity Institutional Brokerage Group conference where one of the speakers, George Will, spoke about the Enron affair. Its significance, Will said, was that it had virtually nothing to do with politics. The real problem with Enron, Xerox, Lucent, Boston Chicken, Waste Management and Internet-stock touting was not the misdeeds of a few rotten apples. It was the total breakdown of all the checks and balances of the best free-market system in the world. At a time like this, the nation's chief securities regulator needs to show he places the public interest ahead of old professional relationships.
As The Journal put it bluntly, Pitt hardly is restoring trust in American capitalism. Several financial advisors have complained that not once in all the talk about this mushrooming crisis has anyone ever mentioned the fiduciary responsibility of the key players. Some of those players, in fact, have successfully lobbied the SEC to diminish that responsibility.
For years, I've often wondered why dispute resolution in America often devolves to plaintiffs' lawyers and juries rather than more responsible, disinterested professionals. Unfortunately, it's becoming increasingly clear.