Corporate Governance to 401 (k)’s A Grab Bag of Worldly Wisdom

Take On the Street , by Arthur Levitt. Pantheon, 338 pages, $24.95.

A protean man, Arthur Levitt has written a protean book. Take On the Street is by turns bureaucratic memoir, discussion paper, apologia, policy prescription, treatise on regulatory politics, polemic, political tract and investment guide-a formidable load for 338 pages of type accessible to elderly readers. It feels as though Mr. Levitt were unburdening himself of the unfinished agenda of his tenure as the Securities and Exchange Commission chairman, leaving it to the reader to pick and choose among a broad range of works-in-progress-with practical nuggets thrown in for the self-motivated middle-class investor.

The good parts-discussions of corporate-governance issues, descriptions of the regulatory lobbying process or the work of an audit committee-are excellent. Unfortunately, the book is disjointed. It’s difficult to imagine that the investment neophytes at whom a comprehensive but basic discussion of 401(k)’s is aimed will be enthralled by a 20-page appendix of bland Congressional inquiry letters. Similarly, the sophisticated, interrelated concepts of corporate financial analysis for the would-be investor are laden with grossly oversimplified benchmarks as to how they should be interpreted.

A charming man with a genial, distinguished manner, a willingness to confront opponents and the tough-mindedness to name some names, Mr. Levitt rose through an unconventional, moderately hardscrabble Wall Street route. Feed-lot tax-shelter salesman, broker, partner and investment banker at a cobbled-together, aggressive (when that was not a complimentary term) newcomer, chairman for over a decade of the ever-colorful American Stock Exchange, Mr. Levitt’s was not the standard résumé of the Wall Street great and good in either the 1960’s or the 1980’s. Nevertheless, he did well early on. “Every Monday morning [in the mid-1960’s],” he tells us, “I stared, terrified, at an empty calendar page, worrying how I was going to generate a

respectable $5,000 in sales [commissions].” That level of commissions for a principal in a small firm at the time would have generated roughly the equivalent (adjusted for inflation

and rising real incomes) of a million- dollar income. Not bad for a terrified neophyte in his early 30’s.

Mr. Levitt wasn’t without connections: His father was an iconic New York State Comptroller for 24 years. And Mr. Levitt’s own political instincts seem finely honed. After leaving the American Stock Exchange, he acquired and developed Roll Call , a newspaper devoted to covering Capitol Hill. An active Democrat, he attributes his unsolicited 1992 nomination as S.E.C. chairman to the $750,000 he raised that year for the Clinton campaign, as well as his long background in the industry. He’s a Democrat by conviction as well as by inheritance: He supports government regulation as a tool for the redress of abuses against the less powerful. He’s less upset by the array of influential corporate, labor and other lobbies than by the lack of a retail-investor voice of the same kind.

Mr. Levitt has developed his own power network. He refers in this book to many Wall Street figures, including four past chairmen of the Securities Industry Association, as close friends, and mentions that he has served on many corporate boards both before and after his tenure at the S.E.C. While he’s combative towards some institutions and practices that require reform, he’s silent on other, arguably more urgent matters.

Every S.E.C. chairman has to pick a limited number of issues on which to concentrate. Mr. Levitt arrived at the S.E.C. with the goal of helping retail investors through the reform of various mutual-fund practices. He believed that better disclosure and practices would result in massive savings in the $30 billion to $40 billion that investors now spend annually. But an early effort to improve brokerage sales practices largely stalled. Later, the Levitt agenda concentrated on improving corporate financial reporting, auditor independence and reinforcing the fiduciary role of independent boards of directors of public corporations.

When he’s really rolling through these topics, Mr. Levitt is at his best: an informed, opinionated and feisty raconteur explaining regulatory and enforcement battles over arcane but important matters. He names names (blasting the likes of Linda Wachner of Warnaco on corporate performance and self-interested transactions) and shoots in the occasional partisan elbow (a dig, for instance, at Billy Tauzin, a Republican Congressional nemesis). Mr. Levitt comes across as engaged and focused on the key issues of the day. Remarkably, however, the late-90’s boom-and the wild and wonderful hypes, frauds, scams and abuses it spawned-figure little in these pages, except for a foray into the backwater issue of analysts’ independence.

For all the virtues of his book, there are limits to how far Mr. Levitt will actually “take on the Street.”

Although he mentions “suitability” and the “know your customer” rule, he doesn’t discuss the fact that these key concepts were widely abandoned in the 90’s. Similarly, there is no discussion of the spread of “benchmarking” as a standard of investment performance-which supplanted avoidance of absolute loss as a measure of investment prudence.

The 90’s boom was largely made possible by a series of gradual industry developments: the incorporation of brokers; the blurring of the distinction between wire houses (whose clients were the retail public buying securities) and investment-banking houses (which represented corporations selling securities); public ownership of large, vertically integrated investment houses; a “free agent” mentality on the part of securities-industry professionals; the evolution of investment management from a business model based on professional partnerships to one of corporations with an obsession with growth; and the increase in principal investments by investment-banking firms, which contributed to the decline of the fiduciary ethos at those firms. The combination of these and other practices created massive, asymmetrical rewards versus risks for securities-industry professionals. Basically, the attitude became: Make a lot of money and be gone before the loss, if any, hits.

During the boom, no one cared. If there was a chain letter, all anyone asked was to get a piece of it. Now $7 trillion has been lost from the market’s peak. What was collaborative is now seen as conspiratorial, and what was creative is now criminal. On the structural issues-which resulted in numerous debacles, some of them during his tenure, at leading firms run by his Wall Street friends-Mr. Levitt has little to prescribe or even to say, though these problems are intrinsic to the crisis of confidence currently afflicting the financial community.

Paul J. Isaac is the chief investment officer of Cadogan Management, a private investment-management and research firm specializing in multi-manager hedge funds. Corporate Governance to 401 (k)’s A Grab Bag of Worldly Wisdom