Arthur Levitt, the former chairman of the Securities and Exchange Commission, is pressing a brutal attack on his former agency and its political overseers, including the White House and Congress.
“The SEC has been grievously hurt over the past eight years,” Mr. Levitt told editors and reporters of The Washington Times on Monday. “It’s lost its best people. It’s been demoralized. It’s been humiliated [to the] point it is no longer the pride of government agencies.”
Mr. Levitt was especially critical of Congress.
The agency’s condition “is a function of perfectly terrible oversight of the SEC on the part of Congress. It’s neither a Democratic nor a Republican issue. It’s a national disgrace,” he said.
On several issues, from the $64 billion Ponzi scheme masterminded by Bernard Madoff to the failure to regulate financial derivatives, Mr. Levitt admitted his own culpability during his tenure as SEC chairman from 1993 to 2001.
“The Madoff problems” go back to the late 1980s and early 1990s. At least five SEC chairman, including himself, were at the helm when Madoff-related red flags were raised.
Mr. Levitt lauded investment manager Harry Markopolis, who tried to alert the SEC as early as 1999 to the Madoff financial chicanery. Mr. Markopolis “performed an extraordinary public service” in November 2005 when he sent the SEC a 19-page, single-spaced memo detailing the circumstances that strongly suggested Madoff was operating a Ponzi scheme.
“That letter to the commission was so poignant, so obvious, so determinative that it clearly indicated an abysmal failure of the process of the SEC,” the former chairman charged. “It’s clear that through the years, the SEC fell far short of where it should have been in terms of not only the Madoff episode but of their ability to anticipate problems and enforce them.”
In particular, Mr. Levitt cited the handling of financial derivatives, which billionaire investor Warren Buffett prophetically described in 2002 as “financial weapons of mass destruction.”
Confirming Mr. Buffett’s worst fears, complex financial derivatives played a major role in creating the current financial crisis. They caused the collapse of AIG, the multinational insurance company whose recent bonuses have ignited bipartisan fury on Capitol Hill, inside the White House and throughout the nation.
“The thought of putting any kind of transparency [in the derivatives market] was so vigorously opposed by the Congress that the chances of doing so were virtually nil,” he said.
“The very members of Congress that frustrated investor protection now sound like latter-day Elmer Gantrys, calling for regulations so extreme, so costly, so punitive that they make no sense at all,” he said.
Mr. Levitt took direct aim at recent efforts in Congress to intimidate the independent Financial Accounting Standards Board (FASB), which is responsible for setting accounting rules.
“To see key members of Congress, like Gary Ackerman [New York Democrat], threatening the FASB, calling upon them to come up with a new standard within three weeks or threatening to do it themselves - I find this to be government at its worst,” Mr. Levitt observed. “To put the standard-setter under the boot of hysterical Congress members responding to the passions of their constituents, you are violating the most fundamental tenets of our democracy.”
As a result of Congress’ fury, “private-equity firms, investment banks and financial services firms operate in an environment of terror,” Mr. Levitt said. They will be “very, very cautious” about participating in Treasury Secretary Timothy F. Geithner’s public-private partnerships to remove toxic assets from banks’ balance sheets.
“If [Mr. Geithner’s] program were unveiled before the fulminations in Congress, it would have had a better chance of succeeding,” Mr. Levitt said.
Although Mr. Levitt supports President Obama, he expressed concern that the White House hasn’t particularly shined in handling the current situation.
“Certainly, it was the country’s hope that the new administration would herald an era of cooperation and proactive thinking about change,” Mr. Levitt said. “It hasn’t quite worked out that way.”