Insider Could Be a Blessing to SEC
In 1934, President Roosevelt tapped Joseph P. Kennedy, who had operated some of the most speculative investment pools of the Roaring ‘20s, to head the new Securities and Exchange Commission.
An immediate outcry arose over the president’s choice. How, after all, could this man who had wheeled and dealed on Wall Street be the one to curb the abuses of the day?
That episode was brought to mind Tuesday when President Bush nominated another ultimate insider, William H. Donaldson, to head the SEC.
No one is suggesting that Donaldson -- lead name of investment banking firm Donaldson, Lufkin & Jenrette -- has committed any wrongdoing. Indeed, the 71-year-old is seen by many as a model statesman.
Yet his best-known roles -- as an investment banker and chairman of the New York Stock Exchange -- raise a legitimate question: Can anyone who may naturally have loyalties to old Wall Street friends be a stern and unfettered regulator?
Bush was still parading Donaldson before the television cameras Tuesday when some prominent investors and others began voicing doubts.
“How often does it happen that someone who was an intimate member of an industry is really the right person to clear it up?” asked Charles Munger, vice chairman of Berkshire Hathaway Inc.
Robert Shiller, a professor of economics at Yale University (where Donaldson once served as dean of the school of management), wondered whether Bush’s nominee was the right pick at a time when small investors need someone to protect them from unscrupulous elements on the Street.
Bush might have been better off finding “someone who could represent the little guy,” Shiller said.
“It looks like a plutocracy.”
Rep. Brad Sherman (D-Sherman Oaks), a member of the House Banking and Financial Services Committee, expressed concern that Donaldson hasn’t done enough before now to decry the scandals plaguing the U.S. business and financial communities.
“As a former chairman of the New York Stock Exchange, this man could have had a platform bigger than J. Lo’s to speak out about what was going on,” Sherman said. “He has been silent.”
To most people, the SEC may seem remote. But its regulation of corporate accounting and disclosure to shareholders is vital. More than half the households in the U.S. invest in securities directly or indirectly through mutual funds and pension accounts. And even those who don’t have a 401(k) depend on the honest workings of the financial markets to keep the economy prosperous.
During the last two years, of course, the people’s faith in this system has been badly damaged. Widespread evidence of accounting fraud across corporate America, coupled with the documentation of dishonest practices on Wall Street, has made ordinary investors think the game is rigged.
Efforts to restore trust often have ended in shambles. SEC Chairman Harvey L. Pitt, a former corporate lawyer, resigned last month under fire for being too close to accounting and financial firms.
It’s doubtful that Donaldson, who hasn’t been active on Wall Street for years, will run into the same sorts of problems that his predecessor did. Still, it’s clear that he must take pains to separate himself from his past as a creature of the Street.
“The challenge is to find a leader who leaves client interests at the door, understands the regulatory process ... and can work well with Congress and the White House,” says Joel Seligman, dean of the law school at Washington University in St. Louis and author of the definitive history of the SEC, “The Transformation of Wall Street.”
As did others, Seligman saw Bush’s pledge Tuesday to double the SEC’s budget to more than $800 million by 2004 to be the most important sign that Donaldson could accomplish the daunting task before him.
As Donaldson begins to direct those resources, he has a chance to prove that what some see as the curse of being an insider is really a blessing because of his knowledge and experience.
“The nature of public service today as it relates to regulation of business and the financial markets demands that you be both an outsider and an insider,” says Jeffrey Garten, dean of the Yale Graduate School of Management and a former U.S. undersecretary of Commerce.
“It’s not possible to be effective -- given congressional and public expectations -- if you have to do on-the-job training.”
In the end, it’s up to Donaldson to prove, by being an aggressive watchdog, that he isn’t beholden to the world of high finance and big business.
And he just might do that. It has happened before: Joe Kennedy (father of President John F.) overcame the firestorm that surrounded his appointment 68 years ago to go down as a highly efficient securities regulator, one who brought the newborn SEC some real respect.
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James Flanigan can be reached at jim.flanigan@la times.com.
