Most economists expect something bad to happen to the U.S. economy sometime this decade, due to the deﬁcit and debt overhang, the trade imbalance, the dependence on foreign borrowing, the sundry asset bubbles, and more. When the history of the next crash is written, President Bush's appointment of California Republican Congressman Christopher Cox to chair the Securities and Exchange Commission (SEC) during this fragile era will deserve its own chapter.
If conﬁrmed, as he almost surely will be, Cox could very well be Bush's single most destructive regulatory appointee. Financial markets are one of the very few areas where even laissez-faire types concede that a measure of regulation is necessary. But Cox is a true believer who imagines that ﬁnancial markets can police themselves. He has been a relentless foe of even the modest regulation enacted by the outgoing Republican SEC chairman, William Donaldson. The two other Republican commissioners are ideological clones of Cox, who will have a working majority to do whatever he wants. It is widely expected that he will preside over the evisceration of the commission. Says a former commissioner, “This is the worst thing to happen in the SEC's 70-year history.”
Cox is also uncommonly lucky. His nomination will come before the Senate at a time when Washington has bigger ﬁsh to fry. The scandal of his appointment has been buried in the blizzard of news during this journalistically unseasonable July.
Moreover, many Senate Democrats who would ordinarily go after an extremist Bush nominee are being prudently silent because their own Wall Street allies and benefactors are totally in support of Cox. These include liberals with Wall Street constituents (New York's Chuck Schumer and Hillary Clinton), those with Silicon Valley venture-capitalist constituents (California's Dianne Feinstein and even Barbara Boxer), and those with banking and insurance constituents (Joseph Biden of Delaware and Chris Dodd of Connecticut). Cox's critics are further disadvantaged by the fact that there are two Democratic vacancies on the commission. The White House will likely promote a deal in which Democrats can get commissioners recommended by the Senate Democratic leadership to ﬁll those slots -- but only if they go easy on Cox.
Paul Sarbanes, the Senate Banking Committee's heroic ranking Democrat, plans to ask some tough questions, but he won't have many allies. If you want to plumb the matter of just how the Democratic Party has been losing its soul, take a close look at the Cox hearings.
It is not even three years since the Sarbanes-Oxley Act and the appointment of reformer Donaldson to lead the SEC. The stabilization of ﬁnancial markets and resurgence of stock prices is due in no small part to these reforms. At the time of Sarbanes-Oxley, after the collapse of Enron and MCI WorldCom, Wall Street executives declared Hallelujah! -- the system had been saved. Republicans, who only weeks before had opposed the whole idea, lined up to support the measure.
The law basically required honest corporate books, prohibited certain conﬂicts of interest, created a new body to explicitly police accountants, and set up new systems of corporate accountability to prevent another Enron. But it was not self-executing. It required actions by the SEC, and the Wall Street support was short-lived. All of Donaldson's initiatives have been bitterly opposed by the business lobbies and their point man in Congress -- one Christopher Cox.
In 1995, Cox, then a member of the House Commerce and Finance Committee, was a leading sponsor of the Private Securities Litigation Reform Act, a measure that made it much harder for swindled investors to sue those who had misrepresented stocks. Cox's version of the bill would have protected even “reckless” misinformation. A slightly modiﬁed bill was part of Newt Gingrich's “Contract with America” and became law in 1996 over President Bill Clinton's veto. Two years later, Cox was a key sponsor of successful legislation to preempt similar suits in state courts. These two laws led directly to Enron, WorldCom, and the other scandals because they substantially weakened the threat of shareholder litigation.
All the circumstantial evidence suggests that the U.S. Chamber of Commerce, which works hand in glove with Cox, orchestrated the “June coup” in which Donaldson abruptly “resigned,” and the White House had Cox ready to go as his successor. Donaldson had told his colleagues that he planned to stay on through the end of this year. He had extended the lease through 2005 on his Washington apartment (his permanent home is in New York). Right up to the day of his sudden resignation, his press interviews and conversations with fellow commissioners suggested that he was planning to move forward with his reform agenda.
Donaldson had turned out to be quite a surprise -- and a big disappointment to Wall Street. A onetime chairman and CEO of the New York Stock Exchange, he was also a close social friend of the Bush family. After the short and disastrous reign of Donaldson's predecessor at the SEC, former accounting-industry lobbyist Harvey Pitt, observers expected that he would be a useful symbol of integrity, but no activist. However, Donaldson, then 72 and near the end of his career and not looking to call in any favors, decided that Wall Street needed reforming for real.
Working closely with Harvey Goldschmid, the Democrats' cerebral senior commissioner, Donaldson led the commission to issue one regulation after another that appalled the two other Republican commissioners and their Wall Street allies. These included measures implementing key provisions of Sarbanes-Oxley, requiring arm's-length relationships between corporations and their auditors and requiring ceos to attest personally, under penalty of perjury, to the accuracy of corporate books. In addition, Donaldson sided with the commission's two Democrats, Goldschmid and Roel Campos, in a series of 3-to-2 votes, and issued several other regulations long sought by reformers. One required the expensing of stock options. Another called for broker-dealers to give all buyers and sellers the best available stock price rather than giving better deals to insiders and favored customers.
Two other regulations, also passed by 3-to-2 votes and resisted with particular bitterness, required mutual funds to have independent (nonmanagement) chairs and mandated SEC registration of hedge funds. Financial interests challenged the former in court, and on his last day in ofﬁce, Donaldson reinstated the regulation on mutual funds after an appellate court had thrown it out, contending that the SEC had not made an adequate assessment of its impact. Donaldson ordered an impact study to be done in record time so that the regulation could be restored. This was not the action of a man who left voluntarily.
Unlike other agencies whose senior staffers have been colonized by ideologues, the SEC has largely maintained its tradition of professionalism. But Cox is not only likely to weaken most of the above measures; as chairman, he has immense power over how the SEC is run. He could replace career people with free-market allies. Enforcement decisions proposed by senior staff are approved or rejected by a majority of commissioners -- for example, whether to extract stiff ﬁnes and refer prosecutions or let swindlers off with slaps on the wrist. Wall Streeters view Cox as one of their own. He is also expected to revive a proposal that Donaldson buried, to preempt many enforcement actions by pro-consumer state attorneys general such as New York's Eliot Spitzer.
It would be one thing if the last episode of systemic failure and market meltdown had occurred in 1929, beyond most people's personal experience. But Enron, WorldCom, the disgrace of the accountants, the scandals of stock huckstering and self-dealing, the revelations of stock-option abuse and ceo larceny, the ensuing bubble and collapse -- all occurred in the past half-decade. Once again, it falls to progressives to protect capitalism from itself.
Robert Kuttner is co-editor of The American Prospect.
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