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Week of 4.4.08

Regulators Fail Investors An interview with Arthur Levitt

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As regulators are grilled on Capital Hill about the Bear Stearns collapse, David Brancaccio talks to former SEC head Arthur Levitt, about the problems plaguing Wall Street.

Interview Excerpts

"I think the Paulson plan speaks to the almost total failure of present U.S. regulatory institutions to address the needs of a globalized market."

"At almost every level of government in recent years, we've seen a de-emphasis on investor protection."

"The bank regulators, rather than being regulators have been cheerleaders for the bank ... Indeed they encouraged banks using leverage in ways which put them in the precarious situation that they are today."

"If you just consider the enormous amount of impact that the use of the products that were unheard of ten years ago, such as the derivatives market. Trillions of dollars that impact nearly every investment that can be made today and these investments are non-transparent, they're non-regulated."

About Arthur Levitt

Arthur Levitt served as chairman of the Securities and Exchange Commission (SEC) from 1993 to 2001. He was appointed by President Clinton, and went on to become the longest serving leader of the SEC. Before joining the SEC, Levitt served as chairman of the New York City Economic Development Corporation and as chairman of the American Stock Exchange. He is now a senior advisor to the Carlyle Group, a global investment firm.



Transcript

FEMALE ANNOUNCER: Welcome to NOW on the News, our audio interview and podcast from NOW on PBS, that explores timely issues behind the headlines. You can find these interviews and other current events insight at www.pbs.org/now. Here's David Brancaccio.

BRANCACCIO: Will our children's children ask this in 50 years? "What was it like to live through the financial crisis of 2008, grandpa?" Well, possibly. Mortgage markets ran wild, leading to an economic downturn, if not something worse. Now, oceans of homes are in foreclosure; jobs are being axed. A new government report says it'll be a big year for food stamps.

You saw the U.S. Treasury Secretary thinks a radical overhaul is in order for the way the government supervises our financial system. But the rejoinder from Wall Street is already sustained and loud. They're saying, "let's not go overboard here." That tepid reaction to talk of change makes one famous market player quite concerned. Arthur Levitt is now a senior advisor with the investment group, Carlisle. During much of the Clinton Administration, however, he was the chairman of the Securities and Exchange Commission. Well, Arthur Levitt, thanks for doing this.

LEVITT: I'm delighted to be here.

BRANCACCIO: So, the treasury secretary has a plan that, I think, it is fair to say—would revolutionize the way we regulate capital markets. Do you see the plight that the markets are in right now as a result of a failure of regulation?

LEVITT: I think it's a failure of a lot of factors. But clearly, our regulating apparatus is broken. I think it's a failure of our accounting standard setters to create the sort of transparency investors need to make decisions.

I think it's a failure of our rating agencies, who are compromised very often in the process of establishing ratings that investors base their investing decisions on. I think it's a failure of our legislators to recognize the dangers that were around in a market that is totally over-leveraged and under-regulated.

We've seen an under-regulated market, which has deprived the SEC of necessar—and—other agencies, of necessary funds to do their job appropriately. We've seen an SEC that has gone slow on regulation—by establishing new standards for bringing cases.

So that, at almost every level of government in the rec—in recent years, we've seen a de-emphasis on investor protection. And investors have been sorely, grievously hurt. And our system has been seriously endangered. This is more severe than the period surrounding Enron and WorldCom. And is—

BRANCACCIO: It's worse than that?

LEVITT: Oh, it's substantially worse than that.

BRANCACCIO: Been talking a bit about securities here. What about the bank regulators? Could they have done a better job?

LEVITT: The bank regulators, rather than being regulators, have been cheerleaders for the bank. And I think it's unfortunate that they simply didn't act as regulators should act. Indeed, they encouraged banks using leverage in ways which put them in the precarious—position that they're in today. Doing anything about the banks, regulating them in any fashion, was something that—the leadership of the Federal Reserve board tended to discourage. If you just consider the enormous amount of impact that the use of products that were unheard of ten years ago, such as the derivatives market, trillions of dollars that impact nearly every investment that can be made today, and these investments are non-transparent. They're non-regulated. They're not overseen.

BRANCACCIO: When I talk to people, what I hear is, "oh, they're going to over-regulate us. The reaction to what's happened is gonna throw out the baby with the bath water; kill the golden goose." Fill in the metaphor. That's what the biggest concern seems to be.

LEVITT: I think the Paulison plan speaks to the issue of the almost total failure of present us regulatory institutions to address the needs of a globalized market that we're operating in. And to the extent to which it is a call for new institutions, new thinking, new responsibility, and new lines of command, I think he's right on.

BRANCACCIO: Back when you were chairman of the Securities and Exchange Commission, the big legislative initiative that really dominated the 1990s were efforts to deregulate. Banking and financial services, investment houses, insurance. The repeal of depression-era laws that kept these institutions out of each other's business. Was that, in retrospect, a mistake?

LEVITT: While I supported the Gramm-Leach-Bliley Act at that time, I had reservations about the impact that that would have on the deregulatory pulse that was already beating. But I was motivated to support it because the banks had already usurped that authority. Citibank, at that time, was already doing what the law prohibited them from doing.

So, in effect, what was done at that point, was to—give regulatory and legislative legitimacy to a practice that was really—being violated on a daily basis. Yes, we've had a systematic deterioration of standards in terms of—the oversight of our banking institutions.

And we're paying a price for that today. The bands have become one-stop shopping centers for every financial service. And not all of them are up to that job. And, as a result of that, transparency, leverage, these are the—the—the qualities that, I think, have brought us to the point we're in today.

BRANCACCIO: We have a presidential campaign going on in the midst of this financial crisis. What do you want to see from the candidates on this issue?

LEVITT: Probably silence.

BRANCACCIO: Really? Stay out of this for a while.

LEVITT: Because—I don't think they understand it adequately to—be able to do more than be cheerleaders for investors, which, I think, would be fine. I think, in the push-pull between the interests of business and the interests of investors, I'd rather see our politicians coming down on the side of investors. Because that's ultimately where our markets (thump) will be going. Aside from that, for them to get into the details of a blueprint, which is purposely vague, would be a mistake and just distort the arguments that are already clouded over with misperceptions and confusion.

BRANCACCIO: But whoever wins, who he or she is, will play a major role once they're in. What do you want to see from them once they're in office?

LEVITT: I would like to see them make a commitment to giving the resources to the regulatory bodies that will enable them to protect public investors. I would like to see them working with the two critical agencies of government in the house and the senate that oversee our major financial institutions. I would like to see our president embrace—a movement toward internationalizing regulations and standards so that we can no longer be involved in what has become regulatory arbitrage. Of dealers using less regulated domiciles to transact business on behalf of us investors. Which, I think, does a great disservice to them.

BRANCACCIO: Well, Arthur Levitt, thank you very much.

FEMALE ANNOUNCER: Thanks for listening to our NOW on the News interview, from NOW on PBS. Visit pbs.org/now, to see our full archive of interviews and video investigative reports on issues that matter to you.

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