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U.S.: Resignation Of Securities Official Could Stall Economic Recovery

  • Andrew Tully

Washington, 11 November 2002 (RFE/RL) -- Some economists say U.S. President George W. Bush must act quickly to appoint a successor to the government agency that oversees the nation's stock and bond trading. Any delay, they say, might stall a global economic recovery.

The focus of the problem is Harvey Pitt, who resigned last week (5 November) as chairman of the Securities and Exchange Commission, or SEC. He had endured months of criticism and resisted demands that he step down -- or that Bush fire him.

During 14 months as the commission's chairman, Pitt made many mistakes that were seen as harming investor confidence during a weak economy -- and at a time when the public already was viewing corporations skeptically because of scandals.

First, Pitt spoke of dealing with accounting firms with what he called "respect and cooperation." Many critics said he should have spoken of bringing them under harsh scrutiny, and they noted that Pitt had previously done legal work for the nation's five leading accounting firms.

As the accounting scandals grew, Pitt's mistakes multiplied.

Recently Pitt nominated William Webster to run an accounting oversight panel created by Congress specifically to restore faith in corporate America. Webster is a man with an unimpeachable record, having served as director of both the Federal Bureau of Investigation and the Central Intelligence Agency. His appointment was approved by Pitt and the SEC's four commissioners.

But Pitt did not tell the White House or the SEC that, since returning to private life, Webster had been the chairman of the audit committee of a company with its own accounting problems. Had this been known, Webster almost certainly would not have been approved.

That was Pitt's last mistake as a government official. Last week, the White House announced it was accepting Pitt's resignation. There was no immediate word when a replacement might be made.

Meanwhile, Webster's status with the government also is in doubt. There is no evidence that he is guilty of any wrongdoing, but he was Pitt's choice for the position, ahead of other candidates who are widely seen as more qualified for the post.

On 7 November, Bush was asked about Pitt's departure, and the president sought to speak highly of him. "Harvey Pitt did some very good things at the SEC, and it's important for the American people to know that." In particular, Bush said, Pitt was instrumental in restoring the nation's stock and bond trading after the terrorist attacks of 11 September 2001. The center of such trading in America is only a few blocks from the New York attacks. Bush said he would act quickly to replace Pitt, but offered no timetable.

Many observers say the White House must act without delay because a new SEC chairman must be questioned by the Senate, approved, and installed in office before he can name a successor to Webster, if Webster resigns.

One economist, Margaret Blair of the Brookings Institution, a private Washington policy center, said the process can be time-consuming. "If he [Webster] does step down, you lose whatever momentum the oversight board had. So what it does is it just postpones for another two, three, four, five, six months whatever it takes to straighten this mess out."

Blair tells RFE/RL that this could have a bad effect on the U.S. economy. Already it is sluggish, and the American people -- investors, consumers, and corporate executives -- are awaiting government action in a time of uncertainty.

According to Blair, the best action for the government to take is to get the accounting oversight board working as soon as possible. This alone, she said, may be able to restore investor confidence that the companies whose stocks they buy are worth the investment. "Investor confidence may help increase stock prices. As it drives prices up, that can improve the overall confidence level in the economy. Consumer activity will pick up, business investment will pick up, and the [economic] engine will go forward."

Peter Locke agrees. Locke is a professor of finance at George Washington University in Washington. He said it is important to remember that there are many uncertain aspects to business, and it is important for the government to eliminate the illegal risk factors, like artificially inflating a company's earnings in an effort to keep stock prices high. "Generally, stocks have risks. The idea of the SEC and an accounting oversight board is to make sure that the only risk that we should see is the natural risk of business, not any sort of risk associated with any shenanigans that are going on."

In fact, he says any action by a government -- whether good or bad -- often helps the investment climate because it simply removes uncertainties about the direction of the country.

Once these decisions are made, Locke told RFE/RL, a company has a better perception of the market, and investors have a better idea about that company's performance in that market -- and therefore the value of its stock. "[Investors say:] 'It doesn't really matter where you go with a decision, it's [important] just [to] get rid of the uncertainty because as long as that uncertainty's there, we don't know how to [value a given stock]. We don't know if you're going to increase our capital gains tax. What are you going to do with oil taxes? Are you going to go to war?' All these things are hanging over, and they're uncertainties as far as how people should invest. Now we have the accounting uncertainty."

Locke says fast action by Bush to resolve the trouble at the SEC could have a similarly beneficial impact on the economies of Europe and the rest of the world. He cited the much-used economic axiom about the world's economic dependence on the United States: that when America sneezes, the world gets a cold.

According to Locke, that is not only because Americans buy so many goods from Europe and Asia, but also because Europeans and Asians buy so many American goods. And, he noted, Europe and America together also buy a considerable amount of oil from the Middle East. "There's just a tremendous amount of integration. The problem is, when you get that level of integration, then you have some sort of short-term dependency."

Locke said this "short-term dependency" means that an economic slump in the United States tends to be contagious to other nations. Now, he says, it is time for the American government to start treating the condition in hopes that improved health will be just as contagious around the world.