Arthur Levitt 10/10/2012

Arthur Levitt, Westport resident for the last 50 years, gave an overview of the state of the economy and in particular it’s impact on the everyday investor. Levitt was the longest serving chairman of the SEC. He currently works for the Carlyle Group, which is one of the largest equity investment firms.

He started by talking about the present SEC environment. When President Roosevelt created the SEC, its charter was to place the interests of the everyday investor above all others. Over the last 13 years that objective has been severely damaged. It started with New York Attorney General (AG) Eliot Spitzer bringing security fraud cases against various companies that the SEC should have initiated. Soon other state AGs followed suit resulting in a diminished reputation of the SEC. At the same time congress, through the influence of wealthy lobbyists, cut back on SEC funding and actually started to harass the SEC as being too regulatory. Today, if a company is being accused of a wrong doing by the SEC, the company goes directly to their senators and congressmen to stifle the SEC’s efforts. As a result the interests of the everyday investor has taken a back seat to the corporate and banking interests. The consequences are that appropriate and needed regulations are not passed.

Levitt went on to talk about problems with the current US stock exchanges. Today the metric for economic wellbeing seems to be the number of listings on the NYSE. As a result many small companies have been added that were exempt from fiscal oversight, resulting in many investors getting burned due to exaggerated or false corporate P&L statements.

The exchanges have been plagued by unexplained computer glitches that have spooked investors. Also high frequency trading, sometimes in and out in milliseconds, has given a bigger control of the market to institutional investors. As a result of these and other concerns, the individual investor has been leaving the market in droves. He feels that the only way to get them back is to have an activist SEC and 6 months of a rising market. He admitted that even with good regulations in place the SEC has failed to identify many fraudulent investors and corporations. These include Enron, Madoff, Worldcom, etc. His claim was that it is very difficult to find these bad actors before they commit their frauds, only afterwards. There is a vast difference in resources between the regulated and regulators, and the regulated are always two steps ahead. There are 6000 dedicated employees in the SEC and the average salary is $110,000. Contrast this with the thousands of corporate lawyers and finance people making millions of dollars. The present SEC chairwoman has been put through “hell” by the divisiveness in congress and will probably resign soon. As a result of this Levitt concluded that investing today is a professional game. For the individual investor he recommends low cost “index funds”.

During Q&A the following points were made:

  1. Due to lack of transparency a money market fund fell below $1 due to risky investments and had to be bailed out by the taxpayers. The SEC has proposed regulations that will make money market funds mark to the market. Congress voted against it which according to Levitt was an outrageous decision. The Financial Stability Oversight Council established by the Dodd Frank bill will address the issue and he hopes it will pass.
  2. International accounting standards have been adopted by more and more countries and will gradually be followed by all as their investment mechanisms become more sophisticated.
  3. The reason Clinton eliminated Glass Steagle was that the Federal Reserve hardly ever utilized it. They became more of a protector and less a regulator of banks. In retrospect Levitt regrets that he voted to eliminate it. It would have prevented the mass speculation in the mortgage market which almost brought the whole system down. However, he feels that we can’t go back and favors the Volker rule even though it falls short of what Glass Steagle intended.
  4. For everyday investors he recommends low cost index funds. Also consider the funds management, their risk ratio, and whether or not you are comfortable with their investment philosophy.
  5. In order to change the current system where everything is run by “big money” we need to choose the right candidates and push for campaign finance reform. Individual investors should be the strongest lobbyists in Washington.
  6. With respect to the upcoming fiscal cliff, he doesn’t think it will happen but he also thinks it will not be resolved right now. It will be delayed until next year sometime.
  7. He doesn’t think interest rates will rise for at least two years.
  8. In terms of balancing the budget, he thinks Simpson Bowles made the most sense and hopes it will be resurrected.
  9. Madoff wasn’t caught due to the fact that the SEC failed to get complaints to the right people. The SEC blew it badly. He stated that no agency catches wrong doers before they do their dirty work.
  10. He is very concerned about algorithmic trading where firms are making trades in milliseconds. He believes they are manipulating the market and regulations are needed to stop it. The regulators are way behind the regulated.

Thank you Brian for another outstanding speaker!