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Farewell to an era

He golfed with Greenspan, jousted with Gramm and threw the book at Tokyo Joe. Now Athur Levitt looks back on his seven years as SEC chairman.

He golfed with Greenspan, jousted with Gramm and threw the book at Tokyo Joe. Now Athur Levitt looks back on his seven years as SEC chairman.

By Hal Lux and Justin Schack
January 2001
Institutional Investor Magazine

Many 69-year-old men go to Florida to retire. Not Arthur Levitt Jr.

On November 9 the Securities and Exchange Commission chairman flew in to Boca Raton to address the brokers and fund managers assembled for the Securities Industry Association's annual convention. The occasion was perfect for a valedictory speech. The national election was up in the air, but someone was eventually going to be named the next president of the United States. And that person, whether Democrat or Republican, could be expected to name a new SEC chairman, ending Levitt's seven-and-a-half-year tenure, a record at the agency.

But Levitt, true to form, ignored the opportunity to don rose-colored glasses and indulge in a little feel-good rhetoric about the financial community that he has been a part of for four decades. Instead, Levitt delivered a tongue-lashing about the many unsatisfactory practices he saw in the brokerage and money management industries.

"I am greatly disappointed," Levitt said, before ticking off a laundry list of irritants ranging from options exchanges unprepared to trade in decimals to research analysts who tout stocks on TV without disclosing conflicts; from insufficient disclosure of mutual fund costs to questionable IPO allocations.

He had a special message for Nasdaq, which has resisted his efforts to require listed companies to secure shareholder approval for dilutive employee options plans. "Let me assure you," Levitt warned, "the commission will not stand idle if this important shareholder protection is not soon forthcoming."

Throughout his term Levitt has seemingly delighted in tweaking the constituencies he regulates, always under the rubric of investor protection, and often to their faces. In October Levitt appeared in Las Vegas at the annual meeting of the American Institute of Certified Public Accountants, which fiercely resisted his proposed new rules meant to separate the auditing and consulting functions of accounting firms.

Levitt followed up his warnings with actions. Not long after Boca, the SEC began a sweeping investigation of the way Wall Street underwriters have allocated shares in their hottest IPOs to fund managers in return for excessive trading commissions.

He may drop a few more bombshells before he departs. In a wide-ranging interview with Institutional Investor on the eve of his departure, Levitt revealed that the SEC would in the next 60 days propose new rules to streamline capital raising in U.S. markets, a revised version of the controversial proposed rules known as the "aircraft carrier." Says Levitt: "We're operating under rules and procedures that are out of date. I think that America's preeminence as the leading capital market in the world can no longer be taken for granted."

All in all, odd conduct for a lame duck -- Levitt announced officially on December 20 that he would leave office by mid-February. But Levitt's term at the SEC has been nothing but a surprise -- and a revelation -- for Wall Street and, arguably, the investing public, long without a champion of his stature.

Few expected very much from Levitt when he was appointed to the SEC by President Clinton in 1993. To many, the former chairman of the American Stock Exchange seemed an inconsequential player, past his prime. He had a multimillion-dollar fortune dating to his days at Wall Street's legendary brokerage Cogan, Berlind Weill & Levitt, but other former partners, like Citigroup CEO Sanford Weill and buyout investor Marshall Cogan, had long since outshone him. His term at the Amex was uninspired; the exchange had appeared headed for extinction when Levitt took over in 1978 and still seemed destined for the scrap heap when he left in 1989.

But Levitt turned the tables on his old compatriots, assembling an unrivaled record of activism and achievement at the SEC, winning grudging respect from Wall Street and from adversaries across political party lines. "He has had a historic chairmanship," says Roderick Hills, a Republican who served as SEC chairman from 1975 to 1977. "He's accomplished more than any chairman I can remember in modern times."

At times, to be sure, Levitt seemed out of step, not quite as dyspeptic as his old pal and golfing buddy Federal Reserve Board chairman Alan Greenspan, but equally chary of the excesses that developed during the long bull market over which he presided. Not since the Roaring 20s, when there was no SEC, has the entire nation been so fixated on the stock market. Wall Street's powerhouse firms were rarely eager to receive his admonitions, and mom-and-pop investors were too gleeful over their newfound riches; they clamored for a piece of the next hot dot-com IPO, not strict regulation and warnings about speculative excess.

Even today, as he gets ready to leave office, Levitt continues to cast a wary eye on the markets, stressing his belief that the stock markets are likely to fall further. "There were lots of natural excesses in the market, resulting from an unparalleled string of up markets," says Levitt. "We're paying a price for that today."

For most of his term, bear markets were far from everyone's mind. "It could have been an easy job," says Jack Brennan, chairman of the Vanguard Group, and an admirer of Levitt's. "There wasn't a lot of pressure to do things."

Levitt, however, turned out to be a regulator with an agenda. Moving the agency away from its long-standing focus on institutional issues and reasserting its primary role as the protector of small investors, Levitt steadily and opportunistically pursued fundamental change throughout the financial services industry. Even a partial list of his accomplishments is impressive:

* He forced municipal bond brokers to stop funding the campaigns of politicians who might later become underwriting clients, a practice known as pay for play.

* He imposed a massive democratization of trading practices on Nasdaq after a price-fixing scandal erupted.

* He pushed through the controversial fair disclosure rule, Regulation FD, that eliminates the long-accepted practice of companies' leaking material information first to favored institutional investors and sell-side analysts.

* He reaffirmed auditor independence by jawboning against "managed earnings" and wrote new rules increasing the scrutiny of companies that give consulting contracts to their auditors.

Levitt also shored up investor protection in the options market by forcing exchanges to create electronic trading links; publicized unseemly brokerage firm compensation practices such as "up-front" bonuses; and publicly harangued mutual funds to bring down their fees and increase the number of outside directors on their boards.

His term did not lack for controversy and its share of disappointments. Levitt was sometimes criticized for excessive regulation and for cutting deals behind closed doors. Nasdaq market makers argued that his new trading rules would harm liquidity in small stocks by reducing the profit in trading them. The Securities Industry Association insisted that Reg FD would dramatically increase the volatility of stock prices and result in less, not more, disclosure. And the accounting industry -- probably Levitt's fiercest critic -- lobbied against his consulting initiative in Congress, attempting to brand him an out-of-control regulator in the press.

Levitt usually advanced his agenda by threatening firms in public and cutting deals with them in private, over lunches he hosted at the SEC or in posh New York restaurants. Even as he pushed for greater transparency in corporate America, Levitt's high style and fondness for backroom negotiations came under attack. A congressional probe made him stop flying first class and staying in luxury hotels, even though he was paying for those perks out of his own pocket.

And congressmen and some securities industry officials were astounded to learn that Levitt was encouraging a small group of the largest investment banks -- Morgan Stanley Dean Witter, Goldman, Sachs & Co. and Merrill Lynch & Co. -- to draft a new structure for U.S. equities markets on their own. Their proposal, to create a consolidated limit order book, raised a firestorm of protest last year from, among others, the New York Stock Exchange and Charles Schwab Corp.

But even industry executives who have opposed him on some issues praise his overall record. "I think on a couple things he went too far," says Charles Schwab, chairman of the discount brokerage. "But I support 98 percent of the things he has done. I think he's done an exemplary job as a champion of small investors."

A deft politician, Levitt managed to outmaneuver his adversaries, helped to no small degree by a nonpartisan reputation. Before joining the SEC, the lifelong Democrat contributed to candidates from both parties. In office he managed to earn the approval of ideological antagonists, like The Wall Street Journal's ultraconservative editorial-page czar Robert Bartley, who called Levitt "a beacon of high-minded concern with public policy," and the activist Consumer Federation of America, whose investor protection director, Barbara Roper, calls him "one of the most, if not the most, pro-investor chairman in the history of the agency."

Unlike former SEC chairman John Shad, who came into office promising to extend the Reagan administration's conservative philosophy into securities regulation, Levitt wrapped himself in the relatively nonideological doctrine of investor protection. He adroitly avoided the regulatory turf battles that plagued his predecessor, Richard Breeden, refusing to be drawn into the long-standing feud between the SEC and the smaller Commodity Futures Trading Commission. Though he called an SEC merger with the CFTC sensible, he also said that it wasn't worth the time it would take to get it accomplished.

"I don't agree with many of the things he championed," says Edward Fleischman, a conservative Republican and former commissioner, now an attorney with Linklaters & Alliance. "But I have nothing bad to say about Arthur. He was a straight arrow. He came in with a philosophy, and he stuck by it. And that's what's important."

What most set Levitt's years apart was his unprecedented outreach to consumers. The chairman hosted 41 town hall meetings, from Manhattan to Fort Lauderdale, Florida, lecturing the public on the basics of investing and warning them that ultimately they would have to protect themselves against unsavory financial operators.

"No SEC chairman has ever done anything like that," says Stanley Sporkin, former U.S. District Court judge and famed SEC enforcement chief in the 1970s.

Levitt opened the first office of investor education at the SEC, put in a hot line for consumer complaints and greatly expanded the educational material the agency published for consumers. Similarly, he launched a campaign for "plain-English" prospectuses, especially for mutual funds. After persuading renowned value investor Warren Buffett to translate one example of prospectus gobbledygook into simple English, he began requiring mutual funds to include a plain-English summary of their products in the dense, legalistic prospectuses sent to investors. In hindsight, Levitt's focus on giving small investors access to basic and usable information seems practical, even obvious, but previous SEC chairmen rarely bothered with such mundane issues.

The growing national obsession with soaring stock prices compelled Levitt to take an even more dramatic step. In May 1999, with small investors rushing to open online brokerage accounts, Levitt ripped into online brokers over the advertisements they were running nonstop on financial network CNBC, not to mention during the Super Bowl. Without naming names, Levitt singled out an ad from Morgan Stanley Dean Witter's Discover Brokerage that featured a tow truck driver named Al showing pictures of a tropical island he'd purchased with his online trading winnings. Levitt's move was controversial; after all, investors were getting rich, and online brokers thought of themselves as the investors' friends, compared with traditional, full-commission brokers. Levitt saw things differently. "Some online firms' advertisements more closely resemble commercials for the lottery than anything else," he said in a May 1999 speech to the National Press Club in Washington.

As the market soared Levitt continued to be a relatively rare voice warning against euphoria and speculation. He took no steps to prevent investment banks from taking dot-com companies public -- after all, his son, a former Walt Disney Co. executive, runs a private online entertainment site called Fandango -- with no earnings or operating history but strongly implied in interviews that many would fail. Despite his efforts to correct the worst financial abuses and inequities, he continually warned investors that only they could protect themselves, with education and skepticism, against financial ruin.

On other occasions Levitt strayed beyond the legal powers of his job. When Orange County, California, filed for bankruptcy following a derivatives debacle that led to county pension fund losses, Levitt suggested in a speech that county residents remember and vote out the politicians whose lax supervision had allowed the losses. Fearing that pay for play was still being practiced by Wall Street lawyers, he started showing up at American Bar Association events to lobby the securities bar for a voluntary ban on the practice. They gave him one in February 2000.

While Levitt was rulemaking and speechifying, his enforcement division was coming down particularly hard on the emerging world of Internet securities fraud, bringing charges against such personalities as online stock promoter Yun Soo Oh Park, a.k.a. Tokyo Joe. The division also brought charges of financial reporting fraud against current and former executives at such companies as MicroStrategy and HBO & Co., now a unit of McKesson HBOC. (Tokyo Joe and the former HBO & Co. executives have denied the charges.)

This year Levitt has stepped up his efforts to level the playing field for investors. In November the SEC passed a rule requiring exchanges and brokers to disclose to retail customers the price at which they execute orders and any additional compensation they receive for selling or retaining order flow. In Boca Raton he told industry executives that the agency was devising new rules for standardized disclosure of mutual fund fees. And he raised concerns that money managers were not disclosing how they were distributing scarce shares in the most-sought-after IPOs.

"Absent disclosure, those allocation practices plainly threaten the interests of investors and fuel cynicism about the industry. Regulatory and examination scrutiny in this area should remain steadfast -- if not intensify -- and enforcement action should follow suit where egregious facts are present," said Levitt. In December major Wall Street underwriters began receiving SEC subpoenas seeking extensive information about commissions and the rosters of investors that had received IPO allocations.

To be sure, Levitt has had his failures. In 1999 he delivered a high-profile address at Columbia University warning about the threat of fragmentation in U.S. markets and urging the industry to develop a single-market structure. In his speech and in subsequent interviews, he suggested that an automated-execution facility known as a consolidated limit order book might solve the problem. Behind the scenes, at Levitt's urging, Morgan Stanley, Goldman and Merrill drafted recommendations for a new market trading structure. The initiative soon foundered as Senator Phil Gramm, the free-markets Republican from Texas who chairs the Senate Banking Committee, objected to a regulator drafting the structure of a market, and more retail-oriented firms such as Schwab criticized the CLOB proposal as unfair and self-serving. Today Levitt insists that he never endorsed a CLOB, but Wall Street executives believe that Levitt -- a careful politician -- simply abandoned the effort as its chances for success dimmed. In any event, nothing has come of the sweeping market reform envisioned in his speech.

Levitt's biggest stumble came when he helped a close aide get a job. After Richard Lindsey, the head of the SEC's division of market regulation, landed a plum job as second-in-command of Bear, Stearns & Co.'s massive clearing operations in January 1999, word leaked out that Levitt had placed a call to the firm on Lindsey's behalf. The job referral outraged some congressmen and SEC officials because Levitt made his call as the agency was conducting a high-profile investigation of Bear's culpability in clearing accounts for a brokerage that had allegedly sold worthless securities to investors. Levitt today says the call was a mistake.

The son of New York State's highly regarded comptroller, Arthur Levitt Sr., who served 24 years in office, Arthur Levitt Jr. entered Wall Street in 1963 as a high-net-worth broker for a small, struggling firm called Carter, Berlind & Weill. Levitt, who managed the firm's brokers and ran its underwriting syndicate relationships, finally tired of the firm -- and Sandy Weill -- leaving in 1978 to become chairman of the beleaguered American Stock Exchange. As Amex chairman, Levitt, a consummate networker, raised the exchange's profile but was unable to turn around its sagging fortunes by the time he resigned in 1989. He concentrated on business investments, including the Capitol Hill newspaper Roll Call, which he bought in 1986 and sold for a large profit in 1993 to K-III Communications Corp., following his nomination for SEC chairman.

Levitt certainly wanted to be SEC chairman. For years he contributed to political campaigns. He also earned a reputation as a consensus builder and an astute politician by serving with distinction on a national panel overseeing military base closings and a local committee trying to resolve heated disputes over a proposed New York City highway called Westway. After lobbying for the position, he took office declaring, "I feel like a parish priest who has been asked to become the pope."

Levitt now cringes at his choice of words, but the financial community, after years of Levitt's sermons, might consider the phrasing apt.

Levitt's last testimony

To many in the ever-optimistic financial community, Securities and Exchange Commission chairman Arthur Levitt Jr. has resembled nothing so much as the Grinch who tried to steal the bull market, always saying just the wrong thing to spoil their fun. Warnings like: Mutual fund fees are too high, or online brokerage advertising, touting windfall returns, should be toned down.

When the 69-year-old Levitt arrived for a chat at Institutional Investor's offices in mid-December, toting an armful of packages from expensive Madison Avenue boutiques like the tony watch emporium Tourneau, he looked like a man in a holiday mood. Still, his distaste for what he considers continued market excesses surfaced often during a lengthy interview with Senior Editor Hal Lux and Staff Writer Justin Schack, in which he reflects about his unprecedented seven-plus-year tenure in office and what he sees as the agency's future challenges.

Institutional Investor: As the longest-serving SEC chairman, what will be your legacy?

Levitt: I hope my legacy will be the most investor-friendly commission in history. I hope that we have made a contribution toward the empowerment of investors as a major factor in America's economic landscape. The investor has very few friends in Washington, very few allies. The markets do. Corporate America does. The brokerage firms do. The bankers do. The lawyers, the accountants do. But not the investors.

What were your greatest accomplishments?

The restructuring of Nasdaq, and part of that was the order-handling rules [which cut spreads on many stocks by one third]. Auditor independence was one hell of a fight. We've also improved investor education. Historically, investors have been protected through a combination of the commission's enforcement efforts, the SROs' [self-regulatory organizations such as the New York Stock Exchange and the National Association of Securities Dealers] efforts and private rights of action. But today there are greater risks for investors, in terms of products, techniques and strategies. You can't possibly acquire the resources to adequately protect investors against every fraud that's out there, so we've added investor education to the mix. That program of investor education is one that will be a lasting legacy.

What do you wish you would have accomplished?

Most importantly, pay parity for the agency. The new chairman has got to deliver on pay parity, because the attrition rate on the commission is totally unacceptable.


Probably the only issue that I will not have been able to make as much progress on as I anticipated was the so-called aircraft carrier.

These rules were meant to streamline corporate underwriting. What went wrong?

The aircraft carrier plan was too broad in its scope. And judgments were made that, in order to get certain changes, certain other accommodations had to be made. The present plan is more targeted. I expect that within the next 60 days we will have introduced specific modifications to the way capital is raised in this country. A lot of those changes resulted from conversations we had in conjunction with the broader plan that surfaced several years ago.

Why are the new rules important?

America's preeminence as the leading capital market in the world can no longer be taken for granted. We are under attack by markets that didn't exist before and that are unburdened by the kind of governance that burdens U.S. markets. The system involved in moving capital, the bureaucracy that surrounds it, the cost and time that it takes -- we simply have got to bring that into the next century. We're still operating under rules and procedures that are out of date and that threaten our competitive advantage in that area.

What was your most nerve-racking moment as chairman?

None of the moments I experienced matched the 1987 conversation I had with [former NYSE chairman] John Phelan when he told me [Levitt was then chairman of the American Stock Exchange] that they were going to close trading in 25 minutes, and that Bankers Trust owed Goldman Sachs $800 million and he didn't know whether they were good for it. Maybe the closest to that came when I had a call from then­secretary of the Treasury Lloyd Bentsen when the Mexican] problem built up. He said, "I'd like you to close the markets. Don't open them."

What did you say?

I said, "Well, that's a very serious step. I don't think that's a very good idea." I've always opposed closing markets. I'm not a believer in circuit breakers. But here I was, a junior chairman of an agency talking to the secretary of the Treasury, who had a long history in Washington. How was I going to stand against that? I was in the shower when the call came at about 6:00 in the morning. I called [then­National Economic Council chairman Robert] Rubin. Rubin said, "Let me think about that. It doesn't seem like a very good idea." Then I called Greenspan, and Greenspan said, "If this is really a matter of national urgency, you've got to seriously consider that." Because that's the way Bentsen put it to me: "This is in the national interest." I came to the office and spoke to Rubin again, and Rubin agreed it was not a good idea. A combination of my inexperience, the suddenness of the event, the drama of how Lloyd Bentsen postured this thing made me think about it. I never would have shut the markets down, never.

What is the most pressing issue facing U.S. capital markets today?

How the markets deal with technology. We've got to very carefully examine how we can use the Internet. A substantial portion of the population doesn't have access. So merely accepting the Internet as a satisfactory vehicle for disclosure is not enough.

Regulation FD, which forbids companies from leaking information to research analysts ahead of small investors, recently went into effect. What did you make of Wall Street's strenuously opposing it?

I want to include Reg FD among the landmark attainments of this commission. I don't know why I forgot that. I'd put that right up there. It was strenuously opposed, but not skillfully.

Why not skillfully?

The [Securities Industry Association] fulminated, and various firms wrote me letters. The SIA came in, and I said, "Give me an alternative, come up with some other ways of addressing this issue." They dropped the ball. You know, in terms of the lobbying efforts that I've been subjected to, this was not a very effective one.

How do you think Reg FD has done so far?

Well -- judging by the number of executives who have told me, "Damn it, you can't do this or can't do that." They shouldn't have been doing this or that.

There have been a lot of earnings surprises since Reg FD passed. Did you expect that?

We would have had those earnings surprises anyway. I think Reg FD brought them more clearly into public focus. I'm generally concerned about managed numbers and have been for years. From all I can see, America's investors have been surprised by numbers that have not been telling the true story. We are devoting considerable resources to try to root out managed numbers.

Are managed numbers a bigger problem in the technology industry than elsewhere?

The technology industry believes that because of very special and unique considerations, their numbers should be reported differently from the rest of American industry. I don't totally share that view.

Your reform of Nasdaq helped stimulate electronic trading, which led to fragmentation of the stock market. Do you feel responsible for those unintended consequences?

That's like saying, "Do you ever think about what's happened as a result of the combustion engine in terms of automobile accidents?" I don't have any second thoughts about the unintended dangers to America's investors triggered by our going along with, rather than resisting, electronic markets. We've been cheerleaders for electronic markets.

Online trading was a phenomenon that was going to happen with or without the SEC. What we did with the order-handling rules gives the individual investor a fairer break when trading online. I have talked to lots of investors about this. I tell them that day trading is a crap shoot and you shouldn't do it. I tell them taking hints from chat rooms is like buying securities that are recommended on the wall of a urinal. It's graffiti.

Are you still concerned about fragmentation?


There has been an awful lot of debate on that subject, but not a whole lot has happened in the way of reform.

I think that the study on the quality of Nasdaq and NYSE trading we're about to issue certainly goes to that.

The study reportedly says investors get better execution on the NYSE. Will that be damaging for Nasdaq?

They will probably regard it that way. Their economists will say that ours don't know what they're talking about. There are many questions that remain unanswered. How will markets adapt to change? How will the integration of auction and dealer and electronic markets play out? What will the impact of internalization be? Are fragmented markets bad for investors? This commission probably has been more involved in structural issues than any predecessor commission, and we've been at the heart of enormous controversy. We have somebody in Congress now who understands the issues probably better than anyone that I've ever dealt with in government, and that's [Senator] Phil Gramm. We don't agree on a large number of issues, but we sure have a dialogue.

What role will Gramm play for the next chairman?

The next chairman is going to have to deal with a Phil Gramm who wants to be even more involved in structural issues, from an economist's point of view. I suspect that he probably thinks he knows more about the markets than anybody knows. I'm not certain that he's aware of how difficult it is to be absolutely certain about a particular market structure or configuration, that there are shades and subtlety. You have to have lived in those markets and worked with them to understand that you can't deal with them with a formulaic precision. I also find that Phil Gramm as a free marketer -- and certainly this played out in the montage [an automated quotation and execution system] issue -- would have the commission be intrusive, in terms of preventing Nasdaq from doing what they wanted to do. I pointed out that this is what I would regard as a philosophical contradiction.

Phil Gramm gave you one of your rare defeats in terms of policy.

No, absolutely not. You're referring to the central limit order book [an electronic facility for automatically filling all limit orders]?


That was not at all a policy that I advocated. Even if you said to me today that we could have a central limit order book, I'm not certain that in my view that's best for the markets. At that period of time, I felt that for the commission to sit on the sidelines, after having come up with the order-handling rules, would have represented a serious systemic risk. The speech I gave at Columbia [on market structure] was one that I worked very hard on. I met with the firms over and over again to get ideas. They were all over the lot. I wanted to float as many issues as we possibly could, and the notion of a "virtual" book, as opposed to a central limit order book, was one of the ideas I floated. Without that dialogue, without the conversation and the debate that went along with it, we wouldn't be where we are today in terms of market structure. If you go back and read my speech, I said, "We should consider pulling together electronically all limit orders and quotes displayed internally in the various markets, creating a virtual limit order book." I said, "Should we consider this? The approach may offer the advantage of exposing all limit orders to the public. Should this be combined with an ability to access those orders electronically? These are controversial questions without easy answers."

But as soon as you said that, people saw you as an advocate for creating that kind of a system.

If you ask Phil Gramm whether I was an advocate, he'd say, "No, Arthur floated the issue."

But don't Morgan Stanley, Goldman and Merrill think that you encouraged them?

They came to me and said, "Arthur, you've got to do this through rulemaking." I said to them, "Gentlemen, I'm not about to do this through rulemaking. This has got to be part of the public dialogue. There are other players that have not been a party to this who must be parties to it. This is a process." They were really taken aback by that.

After you suggested the possibility of developing a central limit order book, there were some reports that Greenspan opposed you.

That's probably so. Greenspan is fairly close to Phil Gramm, and Gramm certainly didn't like the notion of a central limit order book, and I think he helped recruit Greenspan in that cause. But I was not about to regulate a CLOB any more than I would a unified regulatory mechanism. Gramm criticized me at one point -- so did [NYSE chairman] Dick Grasso -- on merging Nasdaq regulation and New York Stock Exchange regulation. I wasn't about to regulate that to come up with a rule, but it may be a damn good idea.

Should Nasdaq and NYSE merge in the next few years?

That's not for me to say. As long as they provide adequate funding for regulation and devote sufficient resources to technology, I would have no objection to that, whether it be a merger or a more modest kind of partnership.

You were criticized for making a call in 1999 to Bear, Stearns & Co. to recommend market regulation chief Richard Lindsey for a job at a time when the firm's clearing unit was under investigation by the SEC. In hindsight, do you regret that call?

Perception is the ultimate reality. To the extent that the call created even a perception of favoritism to an employee, obviously I would not have done that.

What will be your successor's most pressing challenge?

There are a number of challenges. Market structure is terribly important. It cuts a wide swath. There are issues such as the Nasdaq montage. The montage will have been addressed by then. There will be the efforts of European markets to have terminals in the U.S. There will be the issues of international accounting standards. There will be, I'm convinced, new players. You're going to see within the next five years globalized electronic markets, with U.S. markets having ownership of, and being owned by, international markets. How do you deal with that? What do you do when the London Stock Exchange says, "We'll affiliate with Nasdaq if you will allow a listing of all U.K. companies without having to meet U.S. accounting standards?"

How will the state of the market affect the next chairman's tenure?

When this market turns down, there could be a significant backlash on the part of investors against corporate America. How does the SEC deal with that? The whole issue of managed earnings and conflicts arising from auditor independence -- that's going to play back in terms of public perceptions. The chairman has got to be able to deal with that.

You talk about a backlash when the market turns down, but where do you think the stock market is today?

Closer to a high than a low.

Still closer to a high. How low is low? The market has fallen a lot in the last few months.

I don't know. But I would have said this two years ago. I think the market still has a lot of excess in it.

The listed market and Nasdaq?


Is the bull market over?

I couldn't begin to answer that question. I don't engage in calling markets -- bull or bear. I just know that there were lots of natural excesses in the market resulting from an unparalleled string of up markets. For example, an IPO market that knew only one direction. That always causes excesses. And we're paying a price for it today.

Is the securities industry ready for a decline?

The securities industry is in good shape. It has risk management tools that were never before available. I would worry somewhat less now than I would have in the early 1970s.

What about mutual fund companies?

American investment companies by and large have approached this market with prudence. Up until now, they've been able to adjust to changes in the market smoothly, and I don't see any signs of that changing in the event of prolonged decline.

As a rare cautionary voice when the market was hot, do you feel vindicated by the fact that the Internet bubble has now popped?

I don't think it's a question of vindication. There are still excesses in the market, and investors are still, in my judgment, more emotional than intellectual about how they invest.

Investment banks took hundreds of Internet companies public. Now, less than a year later, many IPOs appear to be worthless. What responsibility do those underwriters bear?

As long as the underwriter reveals the facts that the law requires them to reveal, I don't think you can fault the underwriter for being part of a periodic stage play that takes place in our markets, where it becomes fashionable to invest in certain sectors. I don't find fault with investment bankers or analysts. They pay a price for every underwriting debacle that occurs. The price that the market imposes upon them I think is sufficient.

Is "pay for play" a problem for pension funds?

That's a very, very serious matter. If you examine the number of state municipal funds where there's a single elected official as custodian for those funds and he's awarding brokerage to campaign contributors, I think that that is a scandal that is waiting to occur. What happened in Connecticut [where the former state treasurer pleaded guilty to taking kickbacks for investment work], I suspect, is not an isolated incident.

The perception is that the ex-partners from the legendary brokerage Cogan, Berlind, Weill & Levitt are not a close group. True?

It's true of almost every Wall Street partnership. That's a subject for an interesting book. I see all of them, including [earlier partner] Arthur Carter. Some I see more than others. There are some strong animosities within the group, really strong, for different reasons. I've been the object of animus on the part of different partners through the years, but at this present time, I have at least a relationship with all of them.

We thought you were the one person the others liked.

No, probably Roger Berlind would be the most popular of all of us.

There's a perception that during your tenure at the SEC, the White House didn't take much interest in what you were doing.

This White House has left me totally alone. They've allowed me to appoint anyone I saw fit to appoint. My director of enforcement, my general counsel, my spokesman, have all been Republicans, and the White House never questioned that. They never talked to me about policy issues -- any policy issues. That's different from the way my predecessors dealt with their White Houses. I don't think that's from the fact that they thought that the markets were working well. Part of it is because they have a lot of confidence in Rubin, and they knew if there was a real problem, Rubin would probably tell them. I had the first written communication I ever had from the president the other day. He wrote me a one-line letter about a piece that appeared about me. But aside from that, my contact with the president has been purely social.

Which piece was that?

It was a New York Times editorial.

Has your view of how Wall Street treats the small investor changed during your tenure?

Not much. Wall Street recognizes the value of a franchise, and they certainly cannot do anything to alienate the individual investor. Some firms have a soul, and some firms do not. Generally speaking, the firms with a soul tend to be better in terms of the way they deal with investors than the firms that are soulless.