Harvey Pitt’s belated resignation as chairman of the Securities and Exchange Commission poses an explicit test of the principles of the Bush administration and the new Republican majority in Congress.
Do they favor economic efficiency and market economies? Or do they just support big businesses that write out fat campaign contribution checks? How they respond to this test is important to most U.S. families.
Our economy is balanced on a knife-edge now. It’s not growing but it’s not shrinking. Labor markets continue to stagnate and the holiday shopping season probably will be the slowest in half a decade. Stock prices have risen from lows set in early fall, but remain highly volatile. Uncertainty about war in Iraq continues to cast a pall on consumer and investor confidence.
The efficiency and productivity of markets in general depends on a belief by participants that the rules are basically fair and will be enforced. Such trust is doubly important in capital markets. We have very efficient stock, bond and money markets that move capital from savers to borrowers at low cost.
Small and large businesses in the United States have access to the cheapest capital in the world. That is crucial for continued growth of output and improvements in productivity. But capital markets break down when savers fear the deck is stacked against them.
Companies such as Enron, Tyco, Qwest, Imclone, Global Crossing and U.S. Technologies have given the public ample evidence that this is true. Fraudulent accounting and financial reporting by businesses, wink-and-nod auditing by public accountants, and bend-the-law advice from law firms and investment banks are widespread, although not universal.
Until this mess gets cleaned up — and the general public is convinced that it is — prudent households will not risk their savings in capital markets. The Oxley-Sarbanes bill passed by Congress and signed by President Bush is a good first step. But any boost it might have given to public confidence was offset by the repeated missteps of Pitt, who gave the word “hapless” a depth and richness it never had before.
Once the new Congress is sworn in, there no longer will be any split responsibility for reform. Either the president and congressional Republicans carry it out or they will be blamed for their failure.
At least three things have to happen:
First, William Webster must resign the appointment to the accounting standards oversight board that finally doomed Harvey Pitt. If Webster had good sense, he would have refused when first approached. He can serve his country by quickly stepping back now. If he does not, the lawsuits against U.S. Technologies, the company on whose board and audit committee he served, will keep his mistakes firmly in public view and will poison public confidence in change.
Second, Bush has to choose a new SEC chair who clearly is interested in representing the interests of the general public rather than those of accountants or investment firms. John Biggs, the head of TIAA-CREF, who reportedly was considered for the position that Webster was ultimately given, would be a good choice.
Biggs knows capital markets and their problems as well as anyone. But he would be anathema to accounting firms and to some investment firms. That is precisely why he would be a good choice to head the SEC.
Though Bush signed Oxley-Sarbanes, he has shown little interest in true reform.
He could correct that by appointing Biggs in a “Nixon goes to China” move that would disappoint the more venal members of his own party.
That brings us to the third challenge facing the GOP. Mike Oxley, the Illinois Republican who heads the House Financial Services Committee, has a reputation as the willing tool of big accounting and investment firms.
Arthur Levitt, Pitt’s predecessor at the SEC and the most pro-market, pro-consumer chair the commission ever had, is kind to Oxley in his recent book, “Taking on the Street.”
“Oxley was among the House members who opposed me on a number of SEC initiatives, especially auditor independence,” Levitt comments dryly.
Other observers are less charitable. One Washington-based economist, a Republican, says, “Oxley has carried so much water for the big accounting firms that it is a wonder his arms are not paralyzed from repetitive stress disorder.”
Republicans would do well for their own party by moving this guy along to some other committee where he can still rake in hefty campaign contributions but no longer harm the U.S. economy.
If he is not removed he will become a whipping boy for Democratic attacks on the GOP in 2004.
With Republicans back in control of the Senate and the retirement of Texan Phil Gramm, Sen. Richard Shelby of Alabama is the most likely replacement for Democrat Paul Sarbanes as head of the Senate Banking Committee. Shelby has less experience in financial regulation issues than Sarbanes, Gramm or Oxley, but he was a federal judge and has a reputation for integrity.
If they are smart, congressional Republicans will make Shelby their point man on accounting and investment reform and park Oxley somewhere out of sight.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.