Why SEC Chairman Harvey Pitt has failed.

Why SEC Chairman Harvey Pitt has failed.

Why SEC Chairman Harvey Pitt has failed.

Moneybox
Commentary about business and finance.
Nov. 1 2002 4:45 PM

The Pitt

Why SEC Chairman Harvey Pitt has failed.

Will Securities and Exchange Commission Chairman Harvey Pitt survive the weekend? Almost no one in Washington—at least no one in Washington who's not a member of the Bush administration—thinks he should. Pitt, who has been whistling through the corporate scandals, has now thoroughly and spectacularly botched the nomination of William Webster to head the new accounting oversight agency. Pitt apparently failed to tell his fellow commissioners that Webster had chaired the audit committee of a company facing an accounting scandal.

How did somebody widely regarded as both smart and savvy make such a hash of his job?

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As always, blame the lawyers. There's a case to be made that Pitt, who is neither corrupt nor stupid, was condemned to failure by his experience as a D.C. lawyer and lobbyist. He has stumbled because he is behaving like a corporate lawyer in a political job, and because he still suffers from a major occupational illness of corporate lawyers: deep insecurity about his place in the business world.

Pitt, who spent nearly a quarter century representing the accounting industry and securities firms, had a few strikes against his credibility when he entered office—as would any prominent Washington lawyer-lobbyist. He represented his share of clients with dismal reputations.

But more than a year into his tenure, however, it's clear that Pitt doesn't quite grasp that he now represents a different set of people. Sure, the head of the SEC has to serve many constituents—from mutual funds to public companies, from stock exchanges to individual investors. But the constituency that should matter most—and above all others—is the growing throng of individual investors. About 50 percent of U.S. households invest. Unlike all other SEC stakeholders, individual investors lack trade organizations or corporate entities to lobby on their behalf. The SEC chairman is essentially a pro bono assignment—"the investor's advocate," as William O. Douglas put it back in the 1930s. Pitt's predecessor Arthur Levitt Jr. understood this, as this story suggests.

Pitt's early statement about making the SEC a "kinder and gentler place" toward accountants was telling and damaging. Accountants have a role in the capital markets, to be sure. But their treatment should concern an SEC chairman only to the extent it affects the experience of investors. However Pitt has consistently thought about his old clients before thinking about his new ones.

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Pitt's contempt for individual investors was evident in his failure to carry through on the offer to appoint former TIAA-CREF Chairman John Biggs to head the new accounting oversight agency. (Biggs says he was offered the job, Pitt says he wasn't.) TIAA-CREF, with $249 billion in assets, is one of the largest institutional investors. Biggs was responsible for shepherding the retirement savings of more than 2.5 million Americans and has compiled an outstanding record of serving unsophisticated investors. That record, and his well-known views on accounting reform, should have made him a natural for the post. But somehow Pitt came to believe—as (by some coincidence?) did his former clients in the accounting industry—that Biggs' record rendered him too radical for the post.

Biggs posed another problem for a lifetime lawyer like Pitt. Biggs had been a CEO. And as such, he had far more stature on Wall Street and among investors than any corporate lawyer ever will. The dirty secret about corporate lawyers is that they are essentially high-paid servants: on call, beholden to clients, fungible, solicitous, and yet privately jealous of the people who pay their bills. Bit players in corporate dramas, they operate on the clock and in the shadows. The covers of Fortune and Forbes and the glories of stock options are foreign to them. Even the most accomplished lawyers lack the public respect, power, and compensation of CEOs. As chairman of the accounting board, Biggs would easily have outshined Pitt.

Pitt's larger disinclination to speak truth to power might also be traced to his profession.Levitt never hesitated to stick it to his former colleagues on Wall Street. But as a rule, partners at law firms don't tell their clients to stuff it—it's bad business. After he assumed office, when former clients like KPMG Chairman Eugene O'Kelley asked to meet with him, Pitt agreed, despite the appearance problem it created.

Pitt lacks the attribute most beneficial to a businessperson turned government official: go-to-hell money. In the private sector, having enough cash in the bank tends to liberate you to speak your mind. Levitt has go-to-hell money. Mayor Michael Bloomberg and Sen. Jon Corzine have it. So do Defense Secretary Donald Rumsfeld and Treasury Secretary Paul O'Neill, the two most free-speaking Cabinet members of the current administration. Sure, Pitt may have made $3 million a year as a partner at his old law firm. But that's not big money. Like most senior attorneys, if Pitt wants to grow old and prosper, he needs to maintain his viability in the system.

Of all Pitt's transgressions, none has been more pathetic than his self-pitying denunciations of "guilt by occupation." From the outset, Pitt has made it seem as his critics were persecuting him for selflessly defending unpopular causes, as though he had been an ACLU lawyer. But Pitt is no Clarence Darrow. In the 1980s, Pitt chose to represent Ivan Boesky, when any of a thousand lawyers would have eagerly done so. In the 1990s, Pitt chose to represent the accountants when they wanted to stymie Levitt's efforts to separate auditing and consulting. He accepted seedy clients not out of principle, but because he wanted to be a player, and because he wanted the money and publicity such assignments generated.

Pitt hasn't helped his cause by dismissing any legitimate criticism as partisan. (Never mind that the Wall Street Journal editorial page has been one of his most consistent critics.) After he rammed through the Webster appointment on what he knew would be a party-line vote, he declared,"I am fiercely independent and beholden to no one"—as though anyone who questioned the Webster decision was acting political, while Pitt himself was snow-white pure.

Republican members of Congress and the Bush administration have protected Pitt with a dismaying vigor. They value loyalty over competence. Republicans, after all, have the most to gain from a restoration of faith in the capital markets. Recovering markets will do everything from generate more capital gains revenues to buttress their case for privatizing Social Security. But no Republicans have had the temerity to call for Pitt's head. And don't look for any to do so soon. The only people in Washington who seem less likely to cop to a mistake than Pitt are his overlords at the White House.