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March/April 2003 - By Loren Singer

Arthur Levitt's Trenchant Analysis of Capitalism in Operation

Book Review: Take On The Street; What Wall Street and Corporate America Don’t Want You To Know; What You Can Do to Fight Back; By Arthur Levitt, 338 Pages, Appendix, Glossary, Index; Pantheon Books, 2002.

The garish jacket embossed in Florentine gold is the only part of this book that one might criticize. That treatment is better suited to a self-serving autobiography of a Wall Street hero recently released from a medium security correctional unit. Mr. Levitt’s work certainly doesn’t need it. In his book even the appendix and the glossary are enlightening.

Any layman, reading along will absorb as much sound investment advice as one might want, but there is far more to be learned than how not to squander money on certain—even legitimate—common investments without looking into their costs. Mr. Levitt does examine these and demonstrates their effect on an investor’s principal and income over time. This is done clearly enough to inspire at the very least a rueful shake of the head, or a gasp of pain at a thrust to the pocketbook unknown until now:

He notes that the way mutual funds fees "are automatically deducted from a fund’s returns…makes them all but invisible. If you invest $10,000 in a domestic stock fund with an expense ratio of 2 percent and a sales load of 3 percent, and you get annual returns of 7.5 percent for twenty years, your money would almost triple to $27,508. But you would also have lost $14,970 in fees and foregone earnings over the twenty years. Most American families would spend less than that for utilities over twenty years."

There are numbers of other examples of exactly how this great mass of 79 million American capitalists fares along the way from the workplace toward retirement and beyond in dealing with those who operate, regulate and govern this vast financial bazaar. It is beset, certainly, but there are ways to survive, and Mr. Levitt points out some paths that are open to all. At the same time he closes some avenues that he considers a waste of time—spending hours watching the market tapes for one, and leaping in and out of shares in an attempt to catch a stock on the rise or before a fall.

A survey of capitalism

The real value of this book, however, is not in its advisory content, wise, valid, and pertinent as it is. Its importance is as a survey of capitalism in operation, from the founding of the New York Stock Exchange (NYSE) on May 17, 1792 "when twenty-four commodities merchants and traders signed a pact to trade securities, at fixed commissions, under a buttonwood tree facing 68 Wall Street."

At this point, the NYSE daily share volume averages 1.2 billion a day—less than the "brash young upstart," the NASDAQ, averaging 1.7 billion shares. As of 2002, companies on the latter exchange were capitalized at $2.7 trillion; at the NYSE, $12 trillion.

Such sums are not an element, of course, in any other enterprise but a national government—and of those only the U.S. has the dynamism to support the activity. With so much power to move huge sums the system has established its dominance over business activity everywhere in the world. And with so much money to be made and sometimes lost in the trade, a whole culture of winkling out some obscure corner that will yield profits—in pennies if nothing more is possible—in millions or billions—if the opportunity should appear.

SEC Chairman

It is these elements of the culture and the "professionals" that serve them that is the nexus of Mr. Levitt’s work. However tenuously, all have a connection with each other, common channels of communication, means of financing, avenues of sales and self-promotion. There is a pattern, and it is set down here by a man of character, and most fortunately wide experience in the very areas he regulated during his term as Chairman of the Securities and Exchange Commission from 1993 until March 2001.

This pattern—perhaps not so much pattern as an armature—is a confederation of disparate elements, individuals, corporations, communities, government entities each with its own ability to seek its own ends, whether profits, influence, or power, or some proportion of each.

Nevertheless any pressure upon one sector calls forth immediate and strong reaction from the others, from executive offices and board rooms, to brokerage and banking houses, suppliers, professional associations and vendors of services, and not least by members of Congress:

"In the spring and summer of 2000, when our auditor independence rules were being hotly debated, Tauzin [Billy Tauzin, Chairman of the House Energy and Commerce Committee] was relentless. He sent three separate letters warning the SEC to back down. One five page letter…demanded the answers to sixteen questions on such matters as the SEC’s statutory authority to issue the rules, the empirical evidence that rules were necessary, and whether SEC employees were subject to the same stock-owning restrictions as accountants."

Mr. Levitt noted, "While I can’t prove that the letter was written by lobbyists from the Big Five accounting firms, it strains credulity that Tauzin or his staff could have written such a detailed letter on their own."

Ironically, it was Tauzin who held the most aggressive investigation into Enron’s collapse and showed the most indignation at its officials, and those from Arthur Andersen, that he called to appear before his panel for a harsh and thorough wigging.

Other self-proclaimed consumer protectors—Senators Schumer, Bayh, Torricelli, and Lieberman—urged that the SEC back down on auditor independence rules.

In addition to irony, paradox, anomaly, and misalliance are endemic in the finance emporium. A number of mutual funds, brokerage houses, corporations, accounting firms, and a hotel chain often settled charges with the SEC in a somewhat murky way. They paid fines, some as high as seven figures "without admitting or denying guilt," while agreeing to injunctions that "prohibited future misdeeds."

If charges filed actually resulted in indictments for fraud or other transgressions, the concerted rush to judgment took place only after years of delay. While the Sunbeam CEO was removed "by his board because of a major accounting scandal in 1998, it would be May 2001 before the SEC would bring charges of accounting fraud against him, four other officers…and the company itself."

An action against Waste Management required three years "to piece together the evidence to bring a case that would hold up in court." These are common occurrences in any legal confrontation, a minuet accepted by both parties to a conflict. But what is striking is the dogged refusal of any self-regulatory group to apply themselves to eliminate some of the most injurious practices long after they have been identified.

It took years for example, to put Regulation FD—for Fair Disclosure—in place. This required that detailed corporate information that could influence markets be released publicly and not merely to a few selected analysts and the brokerage firms they worked for. The agency was inundated with comments—more than six thousand in all. "The industry comments were almost uniformly negative while the public comments were almost uniformly positive."

Again, in December of 2000 when the National Association of Securities Dealers was supposed to issue a new code of conduct for analysts, the members did not have "a consensus on what to do." The stock exchanges—which oversee the conduct of brokers, analysts and investment bankers—"refused to get the ball rolling" earlier in that year. To Mr. Levitt, "Their reluctance to clean up their own backyards shows a serious failure of self-regulation."

Even in less significant areas like a continuing attempt to provide information inside and outside the turgidly foot-noted annual reports that can not be easily understood, the SEC has only made headway after a long campaign.

Translation required

When Mr. Levitt asked Warren Buffett for a translation of a mutual fund’s prospectus, a phrase read: "The maturity structure of the portfolio is adjusted in anticipation of cyclical interest rate changes."

Buffett: "When we have no strong opinion, we will generally hold intermediate-term bonds."

It is one of the few lighter moments in the narrative, a tone that is certainly understandable under the circumstances. Mr. Levitt worked as a broker, looked for underwriting business, and "learned the ins and outs of building a Wall Street firm." Eventually he became president of Shearson Hayden Stone; in 1978 it was one of the nation’s largest brokerages, and he and three partners sold the firm to the corporation that became Citigroup. That company’s present chairman, Sanford Weill, was one of his partners.

As SEC chairman, however, he was philosophically on the other side of what became a battleground that convulsed a remarkably profitable business community, destroyed reputations, demolished corporations, and roused investors to pursue not only punishment for their losses, but vengeance. Not all of them were blameless either; they had done their share of preening and self-congratulation at their investing skill during the lengthy good times, seriously debating whether Social Security assets be invested in the stock market.

Surveying the scene—still greatly unsettled in the aftermath—must have had its effect on Mr. Levitt as well as those who opposed him. But it was he who was aware, more than any of the wounded or their corporate structures, that much of the damage could have been avoided or lessened if audit committees and board members had behaved responsibly. If analysts had accepted their obligations to analyze and not to promote the products of their employers. If accounting firms had reported their figures according to the terms their own professional organizations had required. If too many politicians had not placed their own need to win re-election above the well-being of their own constituents.

It was a dismal time, and pictures of businessmen in handcuffs are no cause for celebration. In a few years no one will remember their names and certainly not the details of their arcane dealings. There was an abundance of riches and an avoidance of ethics.

Loren Singer is Book Review Editor of ethikos. He can be contacted at
Reprinted from the March/April 2003 issue of ethikos
© 2004 Ethikos, Inc. All rights reserved.

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