Damn The Conflicts: Arthur Levitt Still Won’t Shut Up

The piece reprinted below was posted back in March, 2009 at The Huffington Post. I’ve put it up here again because of the heightened interest in Mr. Levitt. He wrote a recent Op-Ed piece for the New York Times defending “high frequency trading.”  As you can see, the conflicts for Mr. Levitt, especially now that he is also advising Goldman Sachs (also a PwC client) and Getco, are numerous.

Mr. Levitt is 78 years old.  Isn’t it time for him to go fishing? Why don’t the numerous media outlets he works/writes for insist that he disclose his conflicts? The perception the rest of us have is that he’s using the New York Times, Bloomberg, the Washington Post, the Wall Street Journal, and others in the interest of promoting his clients’ interests.  Used to be you could count on Mr. Levitt to be an advocate for the average investor.  Now he’s much more “Zelig-like,” representing the interests of whichever client is paying for the podium he’s constantly being given. Is he getting paid double – by his clients and those hiring him to write and commentate?

I had a long, very winding, totally spontaneous conversation on Twitter last Saturday the 15th with Heidi Moore, the former Wall Street Journal and The Deal, now freelance, journalist   We were talking about journalists as subject matter experts and the difference between conflicts of interest for journalists versus bloggers.  Heidi and I have very different perspectives on most of what we discussed – mostly because I am a subject matter expert who blogs and she is a freelance journalist who has developed subject matter expertise in the areas she has written about most frequently.  We were converging on some type middle ground of “journalistic” approach and ethical conduct but coming from two different directions and with 15 years of experience separating us.

Arthur Levitt is no journalist, no matter how many columns he writes, Op-Eds he pens, or business news shows he appears on.  He is a subject matter expert, a lobbyist, being treated as if he has an independent, objective, sage-like opinion on everything finance- and markets- related when he does not.  He makes money the old fashioned-way – clients pay him.

The story below should be read alongside a recent story on Lynn Turner.  If these two sell out the shareholder and the ideals of the accounting profession in all of the mess of the financial crisis, who’s left?

Huffington Post, March 25, 2009, “Arthur Levitt Should Just Shut Up About AIG”:

The esteemed Arthur Levitt Jr. was the longest tenured SEC Chairman (1993-2001). He’s an adviser to the Carlyle Group, board member of Bloomberg LP, and a board member of RiskMetrics Group, a public company that serves 70 of the 100 largest investment managers, 34 of the 50 largest mutual fund companies, 41 of the 50 largest hedge funds and each of the 10 largest global investment banks.

Bloomberg LP journalists have quoted Mr. Levitt constantly during the last six months. He’s featured on Bloomberg TV, in on line podcasts, and in print in almost every article about Madoff, the financial crisis, and mark-to-market accounting. And now he’s used as an expert on AIG and incentive compensation.

That’s for sure.

Arthur Levitt Calls AIG Bonus Tax `Extreme’
March 20th Bloomberg Surveillance
Arthur Levitt talks with Bloomberg’s Tom Keene and Ken Prewitt about the U.S. government’s proposed taxes of the bonuses American International Group Inc.

Re: the AIG Bonus Issue March 17th, Bloomberg “If these were contracts drawn with employees, no matter how unreasonable they may seem, those contracts should be honored, in my opinion.”

Indeed.

However, I didn’t think Levitt came off so well when he was interviewed recently in the New York Times Magazine “Questions For…” column by Deborah Solomon.

Money Manager Interview by Deborah Solomon January 22, 2009 Excerpt: Solomon:Frankly, I can’t understand why the S.E.C. culls its leaders from the world of high-stakes investment. What about what economists call the “capture theory,” whereby regulators become co-opted by the industries they regulate? 
 Levitt: The 4,100 people who worked for me at the S.E.C. were as patriotic as anyone I served with in the U.S. Air Force or the several government commissions I’ve served on, and I’ve worked for four presidents. Solomon: That’s just boosterism. You’re not answering the question. 
 Levitt: The European system of gray bureaucrats running government agencies forever is far less effective than the refreshing American system of re-potting private-sector talent to bring in new ideas.

It wasn’t the image of populist, investor protection Viking he had worked so hard to cultivate over the years. It may be hard to remember that much of that reputation was well deserved. Back in June of 2002, a Frontline segment entitled “Bigger Than Enron” described the battles Levitt had with the accounting industry, and in particular Price Waterhouse (legacy firm of today’s PwC), over changes in rules about auditor independence that he supported.

Frontline: What kind of clout does the accounting industry have on Capitol Hill?

Levitt: I guess I learned over coming months that they had enormous clout; that their contributions to members of Congress who never thought about an accounting issue or an accountant and suddenly picked up the cudgels for the profession; where my own congressman was led into the belief that this was an effort that might have been worthwhile and signed on to a letter which he later retracted on the floor of the Congress; where a close friend of mine who I’d climbed eight mountains in Colorado with while he was head of the Outward Bound School signed on to another letter that he later retracted on the floor of the Congress. 
This was a broad-ranging campaign that was well-financed, well-structured, and extremely vigorously fought. 


Frontline: Well, speaking of letters, I have a letter that you got in April. What is this letter?

Levitt: This is a letter from the overseers of the SEC, the congressional committee that oversees the SEC that has a choke hold on the existence of the SEC, that can block SEC funding, that can block SEC rule making, that can create a constant pressure in terms of hearings and challenges and public statements, that can absolutely make life miserable for the commission. 
And here the three leaders, Tom Bliley, the chairman, Mike Oxley, the head of the subcommittee, and Billy Tauzin, the chairman of another subcommittee, were directing me to go slow on this issue, to go through a process…

 

The legislation that Levitt was pursuing to prohibit auditors from also acting as consultants for their audit clients was eventually incorporated in the Sarbanes-Oxley legislation of 2002.

In May of 2008, Tom Nierop, chief editor of de Accountant, interviewed Levitt in New York. This Dutch publication focuses on the accounting industry and the interview was mostly about the future of the accounting firms. However, Levitt made some additional comments about the subprime crisis and AIG. His mention of AIG by name at that particular time is quite surprising, given that he had been recently under contract to AIG to help them become a better governed, more transparent company.

Nierop: This influence [they were speaking of the influence of activist investor coalitions] is already visible in the discussion on compensation and bonuses for top management. Levitt:“The only way I can think of to address those issues is public embarrassment. The media is quite important there. And the strengthening of independent boards, compensation committees, and organizations like ISS, of which I am a director. [ISS was acquired by RiskMetrics where Levitt is a board member.] And there are other organizations that will have an affirmative impact. It is not something you simply can address by a rule.”Nierop: Why is an extra financial incentive, next to regular compensation, necessary at this level of management?
Levitt: “Because a board is fraternal board rather than a skeptical board. Compensation committees lack the backbone to do something about it. But the boards are becoming more skeptical because they don’t want to see their names in the papers.

Nierop: Can we really avoid a next financial crisis without fundamentally assuring some sort of ‘ownership at the top’ for the proper systemic functioning of the markets? 
Levitt: “The lines of responsibility should be more clearly defined. I don’t believe in principles based regulation, I believe in enforcement based regulation. Except as to when it deals with systemic risk. Systemic risk is so evasive that I think you need the flexibility of some sort of prudential oversight. But certainly not with respect to certain kinds of market structures.

And what role a central banker should play in this, remains to be seen. Their failure has been profound. Every step of the way. Yet if they are providing the money to bail out investment banks, they clearly have to have had some responsibility in overseeing them.”

Nierop: As to the effects of the present credit crisis: have we had the worst? 
Levitt: “No, I think it will continue for a while. Real estate values will continue to decline. I think we will see some bank problems, clearly more corporate problems similar to AIG.”

 

Why did Levitt go to work for AIG again in 2007 after his stint there in 2005? Why did he help paper over their decision at the end of 2007 to re-appoint PricewaterhouseCoopers as their auditor, even after all of the messes PwC has presided over, been sued over and settled over, looked the other way on, and acted on only when forced by threat of more litigation?

Arthur Levitt and his AIG auditor selection committee didn’t fire incorrigible but complicit PwC at the end of 2007. They reappointed them so PwC could stay close and no other firm get closer once the investigations for 2007 activities started. It wasn’t long before the Department of Justice asked the SEC to turn over evidence as part of a criminal investigation of whether the material weaknesses in internal control cited by PwC in February 2008 were part of a fraud, one that their auditors didn’t “detect” until the subprime crisis heat was on.

PricewaterhouseCoopers earned over $120 million dollars as AIG’s auditor and tax advisor in 2007. Why is there no outrage by Mr. Levitt and the press over that outrageous waste of shareholders money? How could Matt Taibbi write an eight page article in Rolling Stone magazine this past week detailing the history of AIG’s issues and never once mention their external auditor, PricewaterhouseCoopers, by name? 

Is it because PwC is impotent and potentially complicit in this situation, neither identifying the problems at AIG and warning shareholders and investors of them strongly enough, nor acting to mitigate them soon enough? At least the shareholders are trying to sue them. But why doesn’t the AIG Board of Directors support the shareholders?

The Chairman of the Audit Committee of AIG’s Board of Directors, the committee that manages the company’s relationship with the external auditors, and their designated “financial expert,” is one of Mr. Levitt’s protégés during his years at the SEC, Michael Sutton. Sutton is a former Deloitte senior partner prior to his time as Chief Accountant at the SEC under Levitt. Even though he’s not a PwC alumni, we all know how those Big 4 guys stick together. What is it about PwC that has seduced Levitt and Sutton and the rest? Is it that it’s better to keep those who know where the bodies are buried on the inside, with as much to lose by having the worst of it come out as anyone else?

Well, we know why PwC stays in this abusive relationship. 
There are more than $120 million reasons.

But why is Mr. Levitt is still defending AIG and, therefore, PwC? Remember, Mr. Levitt is the guy who said, “the only way I can think of to address those issues [i.e. executive compensation excesses] is public embarrassment.” Why isn’t Mr. Levitt embarrassed that he was paid by AIG to improve their corporate governance and transparency to regulators and one of the worst corporate governance failures imaginable is the result?

Can Levitt still believe, as he told the International Herald Tribune barely a year ago, “They took just about every recommendation I made,” says Arthur Levitt Jr., a former Securities and Exchange Commission chairman who began advising AIG’s board after it ousted Greenberg. “In terms of process and governance, now it is about as good as a board can get.”

Maybe it’s time to put a sock in it, Mr. Levitt.