You have blamed the recent wave of corporate scandals on “an almost total failure of all of our gatekeepers”–including regulators. What needs to be done and what are the obstacles to doing it? A lot needs to be done because among the gatekeepers that I feel didn’t do their job I would include the rating agencies, boards of directors, law firms, accountants, analysts, investment bankers, stock brokers, standard setters and, to some extent, regulators. I’m often asked which of those elements might have done the most to prevent Enron. The one that stands out in my mind are the standard setters–the Financial Accounting Standards Board [a private-sector organization in charge of setting U.S. accounting standards]. We were dealing with them for almost 15 year trying to establish [better] disclosure standards. But because of the business community and political pressure, they were simply unable to do it.
You tried to implement reforms as head of the SEC. Can you talk about the obstacles you faced? On almost every pro-investor initiative we considered, we faced opposition from a deregulatory Congress. With respect to the accounting issues, opposition was the most fierce. Four or five different lobbying firms hired by the accountants tried to derail our efforts and, when that seemed it would fail, they tried to suggest ways of cutting off the funding the SEC would receive to promulgate an initiative to separate auditing and consulting. It was enormously frustrating. It was infuriating. I received letters from members of Congress who didn’t begin to understand the issue.
Do you feel you should have done more? In retrospect, yes. In retrospect I should have allowed Congress to cut off our budget if that was the direction they were going [in]–to call greater public attention to an issue which I regard to be critical.
Some say you are partly to blame–that the SEC during your tenure should have spotted these problems developing. That appears to be the thrust of what my successor is saying–that he inherited a mess from me. The nature of markets is that there is always a certain amount of bad activity going on. I inherited activities that took place during my predecessor’s years. And [current SEC chairman] Harvey Pitt’s successor will inherent things from him. The problems we’re seeing result from a failure of nearly all the gatekeepers to do their jobs and we were consistently frustrated by the same people that are arguing against reforms being discussed in Congress right now.
What sort of criminal prosecutions should be pursued–will any top executives at Enron or WorldCom go to jail? They will. I think there will be executives that will go to jail, without question.
What impact will this have abroad? For years we have been trying to get emerging markets to use Wall Street as a model. Haven’t we lost some credibility? Yes, we clearly have. We had become awfully complacent about the promotion of U.S. standards, U.S. regulation, U.S. brand of capitalism. Some of those elements have developed cobwebs that clearly need rethinking. I think it’s possible the international accounting-standards board may start to lead the way toward globalized standards rather than picking up crumbs from the United States.
How likely is it that an Enron or a WorldCom situation could happen in continental Europe, considering the different accounting principles used in those places? How about Asia and Latin America? I think it’s entirely possible. As many weaknesses as we’ve seen have become part of U.S. markets, we still in my judgment are far more transparent and liquid than any other market in the world.
Could continuing corporate scandal in the United States and abroad result in a large-scale abandonment of equities? Is there any evidence already that people are rethinking 401 (k) s, moving more into property, et cetera? I think there is evidence that people are rethinking 401(k)s and I think it will take a while to rebuild that confidence. Clearly this will reverberate throughout the world.
