Financial Reform: Ex-SEC Boss Arthur Levitt Tells it Like it Ain't

Last Updated Jun 24, 2010 1:54 PM EDT

Add former SEC chief Arthur Levitt to the ranks of those dismissive of Washington's tentative approach to financial reform. But don't take his words at face value quite yet:
The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors.

Ironically, the authors of this bill are the same Democrats who normally would have opposed many of its features if they were in the minority. Now in the majority, these politicians are investor advocates in their press releases alone.

The Democrats had the chance to do this bill the right way. They should have been motivated by Congress's previous failure to adopt meaningful reform, which left investors unprepared for the crisis.

Tough talk. OK, so it might carry more weight if Levitt wasn't currently working as an adviser to Goldman Sachs (GS) and private equity firm Carlyle Group, neither of which have to my knowledge ever shown much interest in investor rights.

And wags might be tempted to note that his tenure as SEC chief, from 1993 to 2001, happened to coincide with a large financial bubble caused in no small part by a government campaign of deregulation. Indeed, in the late-90s, following huge derivatives-related losses earlier in the decade, Levitt joined with shareholder advocates such as Alan Greenspan and then Treasury Secretary and man about Wall Street Robert Rubin to squash efforts to crack down on derivatives.

A downright rude person might even trot out this 1997 speech Levitt gave before the Securities Industry Association, a textbook case of regulatory capture:

We continue to press for an overhaul of the outdated rules that govern our financial services industry. These antiquated restrictions have limited competition among banks, insurance companies, and securities firms, and have handicapped U.S. firms competing abroad. Legislation now pending in Congress would go some distance toward achieving these goals.
Well, nobody's perfect. Or even all he's cracked up to be. Levitt does make a few valid points in criticizing Washington's current reform effort. For example, he notes that Democratic leaders in Congress have failed to champion strong shareholder voting rights in corporate proxies. He's also correct in saying the legislation punts on what to do about Fannie Mae (FNM) and Freddie Mac (FRE).

Yet Levitt is up to something here. One clue is the venue for his critique -- the WSJ's op-ed page, which wouldn't ordinarily be confused with Mother Jones. In pinning any perceived failure of financial reform on the Democrats, he conveniently obscures the role of Republicans, who as a party have fought the process every step of the way.

Then there's the sleight-of-hand. Note Levitt's allusion to "Congress's previous failure to adopt meaningful reform." Yes, lawmakers blew it -- not so much by "failing" to enact new financial rules as spending the last 30 years filling the existing ones with buckshot. But isn't he leaving something out here? Ah, yes -- bankers. Bizarrely, they're nowhere to be seen. In fact, in a piece purportedly sticking up for shareholders, Levitt makes zero reference to the banking industry or to Wall Street. Abracadabra!

Instead, Levitt fingers Fannie and Freddie. "The central role played by these two organizations in the financial crisis is indisputable," he declares, riding that shopworn Republican hobby-horse for all it's worth.

As recent events flush down the memory-hole, history is furiously being written, then scratched out and written again. One narrative, popular with conservative think-tankers and certain rotund, beady-eyed radio hosts, is that the two government-sponsored enterprises caused the subprime bust. False.

Fannie and Freddie no doubt had a part in the affair. But suggesting that home prices wouldn't have cratered if not for the companies issuing loans to poor people is to pin the tail on the wrong donkey. As subprime lending was peaking between 2004-06, Fannie and Freddie were largely forced out of the market by Wall Street banks. The GSEs' share of secondary subprime loans fell sharply during that period, while the issuance of private mortgage-backed securities went through the roof. The companies no more caused the financial crisis than FEMA whipped up Hurricane Katrina -- both just made the situation worse.

There are legitimate grounds for bashing financial reform; this isn't one of them.

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