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.