Being Street Smart
Pitt Will Go But Problem Will Remain
By Sy Harding, editor
Street Smart Report Online
The
trouble SEC chairman Harvey Pitt finds himself in is another
reminder of the long history of the cozy relationship between
Wall Street and the watchdogs that are supposed to keep securities
industry greed under control.
Congress established
the Securities & Exchange Commission in 1934 after investigations
following the devastating 1929-32 bear market revealed the conniving
activities used by Wall Street to defraud public investors during
the excitement of the 1920's bull market. The nation was shocked
when President Roosevelt appointed Joseph P. Kennedy as the SEC's
first chairman. Kennedy had been a major participant in syndicates
and insider pools that had manipulated the market to move the
public's money into their own pockets. Of Kennedy's appointment,
John T. Flynn, a Wall Street columnist at the time wrote, "I
say it isn't true. It is impossible. It could not happen."
But it did, and it
was the beginning of the ongoing cozy relationship between regulators
and the regulated. Kennedy's first action was to call in the
nervous leaders of Wall Street firms, who would be guilty of
fraud under the new securities regulations, and inform them that
the SEC would not be investigating their previous actions, but
would move forward. It was a decision that obviously avoided
embarrassing problems for Kennedy as well. He also informed them
that the SEC would not be directly policing the securities industry.
It would only be setting the regulations and guidelines by which
the industry would regulate itself. Thus did the securities industry
become a self-regulated industry, its members supposedly policing
each other.
What followed was a
long-time friendly corridor between the SEC and Wall Street,
with a door that swings both ways. Vacancies on the Securities
& Exchange Commission are almost always filled by the appointment
of Wall Street executives. SEC staff members and investigators
almost always are appointed to lucrative positions with Wall
Street firms upon leaving their employment at the SEC.
Every once in awhile
a plunge in the stock market is large enough to destroy the confidence
of public investors, which hurts Wall Street itself, and results
in investigations. Congress and regulators invariably express
shock that Wall Street firms have not policed themselves, but
have continued their self-serving, sometimes fraudulent agenda.
The immediate reaction is to initiate highly publicized efforts
to convince the public that changes are being made that will
allow investors to again have confidence and trust in the system.
Investigations after
the 1929-32 bear market, the 1973-74 bear market, 1987 crash,
the collapse of junk-bonds, the limited-partnership frauds of
the major brokerage firms in the 1980s, etc., all resulted in
reforms designed to return public confidence and trust.
Harvey Pitt finds himself chairman of the SEC at an unfortunate time. He will certainly have to go. The more important question is what was he doing there in the first place?
As was well known prior to his appointment, Harvey Pitt was a very wealthy and prominent Wall Street attorney, who at one time or another, had represented all the major accounting and investment firms, the stock exchanges themselves, and many large public corporations, including fraud-ridden Enron, and the disgraced accounting firm of Arthur Anderson. It would be almost impossible to find a candidate to head the SEC with more conflicts of interest, or closer ties to those over which he was to be the head watchdog. And indeed, in his first ten months in the position he had to abstain from voting 29 times because the cases involved former clients.
Critics point out that didn't stop him from meeting privately with executives of former client companies that came under investigation, including accounting firm KPMG, under investigation for improprieties in its audits of Xerox, and Goldman Sachs, also a former client now under investigation.
His latest problem stems from the revelation that in selecting the head of the SEC's new Public Company Accounting Oversight Board, charged with cleaning up the epidemic of corporate-accounting scandals, Pitt named William Webster, possibly about to be embroiled in such a scandal himself. Webster is a former board member and head of the audit committee of U.S. Technologies, which allegedly fired auditors that had raised questions about the firm's accounting practices. U.S. Technologies is now virtually bankrupt and facing multi-million dollar investor-fraud charges. Pitt reportedly withheld that information about his candidate from other SEC commissioners and the White House.
The man has to go. But why was he there in the first place?
The cycle of investor abuse will not be ended in any kind of permanent way by once again finding and punishing a few obvious offenders, when the cause of the age-old problem continues to be the appointment of friends of the industry to the regulatory agencies that are the watchdogs, and to the committees set up to bring about reform.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy, Suite 11, Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 15th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225.
Mr. Harding has consistently ranked in the Top Ten Timers by Timer Digest for years. In 1999, he authored the book, Riding the Bear How to Prosper in the Coming Bear Market, $12.95 (the Dow topped out just 9 months later). In Riding The Bear, Mr. Harding explains not only bear markets, but how bull and bear markets get started and end; how public investors can break their pattern of only becoming interested in bull markets in their final stage, get killed, and then are too scared when the next bull market begins. He explains in plain English how the market reacts, how cycles work, and how to take advantage of them to hold onto your bull market profits and actually increase them during a bear market. Harding also explains the Seasonal Timing System in detail. This highly recommended book is FREE as a bonus with a subscription to Sy Harding's Street Smart Report.
