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Take On The Street
Take On The Street
Levitt's Rules of the Game (Post, Nov. 17)
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Column: The Color of Money
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The Color of Money Book Club: Special Guest Arthur Levitt
with Michelle Singletary
Post Business Columnist

Wednesday, Nov. 20, 2002; 1 p.m. ET

This month's book selection is "Take on the Street: What Wall Street and Corporate America Don't Want You to Know" by Arthur Levitt.

Levitt, former chairman of the Securities and Exchange Commission, was fighting for the rights of small investors long before it was politically correct. "This book is intended to give investors a guide to avoiding pitfalls they never knew existed," he says in the introduction.

Michelle Singletary
Michelle Singletary
Join Michelle Singletary and former SEC chairman Arthur Levitt on Wednesday, Nov. 20 at 1 p.m. ET to talk about his book.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

washingtonpost.com: Below is the list of winners for this month's Color of Money Book Club selection:

National Winners:

Adriane Louie, Jackson, MS
Anita Hairston, Winston-Salem, NC
Charles Axthelm, Springfield, VA
Chris Kuhn, Land O Lake, Fla.
Greg Davis, East Amherst, NY
Gwendolyn Green, Upper Malboro, MD
Henry Healy, Pleasant Prairie, WI
J. Theresa McRae, Norfolk, VA
John Alan & Bernice Comstock, Albuquerque, NM
John Flint, Atlanta, GA
Laura Caples, Jonesboro, AR
M. A. Lesniak, Chevy Chase, MD
Maureen Kuebler, Elyria, OH
Nancy Maguire, Castro Valley, CA
Onecia Ribeiro, Stamford, CT
Yolandra A. Plummer, Washington, DC

Michelle Singletary: Good afternoon. I'm so excited to have Mr. Levitt join me for today's chat. I've heard so much from readers regarding this month's book selection. In fact, you should see the winners of Mr. Levitt's book. This is such a perfect time to be discussing this book and the fears and concerns many of us have about Wall Street. So let's get going.

Annandale, Va,: I agree that systemic changes could be made to make the markets work better. But I do not believe truly efficient markets are possible. There will always be inside information and those willing to profit from it. If a bank is trading ahead of the market but the market still goes up, I improve my long-term economic position. Am I just foolish to accept that they will do better than I and to be happy to be better off than I would be without the market?

Michelle Singletary: I really think ths is an excellent question. Can regular folks even hope to do as well as the big players? Should we be satisfied with just "good" returns that keep our money earning just a little bit better than inflation?

Arthur Levitt: I agree with you that there is no such thing as a perfect market. Markets depend upon information that some people have and others don't but our system of whole and fair disclosure is intended to level the playing field. I believe the combination of regulations, media scrutiny and informed self interest gives investors a better chance than any other system I know of.

Bethesda, Md.: Mr. Levitt,

Let me first compliment you on your outstanding tenure as head of the S.E.C. I would like to know your take on the recent resignations at that agency. Do you believe that they will prompt a real change in the over-all regulatory philosophy at the SEC, or do you believe that with the new make-up in Congress that it will be business as usual at the SEC?

Arthur Levitt: I believe that the commission staff through the years has been characterized by the kind of intelligence and integrity that transcends frequent changes at the top. I would expect that the present climate of holding feet of the business community to the fire will assure an independent and proactive regulator.

Robards, Ky: I have been investing on my own for 6 yrs. I went to clases, read alot of books & picked good well know stocks. Also thought that one should buy & hold.
The way things are now, believe I have been wrong. I buy small amounts of stock like 20 shares etc. I would seam costly to buy & sell. So what to do.?
I'm female, 69 yrs old. Have a small business that my husband & I work.

I did buy your book & so found like it. thanks. ginny

Arthur Levitt: I will be in Louisville, Kentucky this afternoon but I want you to know that I really believe you would do well to buy an index fund rather than trying to pick stocks and be sure it is a low cost index fund such as Vanguard.

Mt. Lebanon, Pa.: From today's Washington Post: "Pitt Wants Special Audits to Find Fraud". My question: who in the world possibly gives a damn what Harvey Pitt wants? He's a failed, flawed, foolish, soon-to-be-forgotten nobody. More importantly, what are the ethical requirements of the next SEC chairman, assuming ethics suddenly becomes a top priority in the future selection of Bush administration general officers? Thanks much. HLB

Arthur Levitt: The chairman of the SEC should be tough, experienced, understand markets, a good communicator and a first rate administrator. Hopefully, he should not be identified as a political activist.

Lyme, Ct.: What do you think of the criticisms that accounting has become so advanced that it has lost its effectiveness? In other words, we can now handle and verify so much data that accountants can scrutinize books and records at great detail over much time. Yet, there are less people going into the field verifying there really is a company with actual inventory there. Indeed, with high tech companies, there often is no inventory to verify. Hasn't this new era of investment opportunities made investing riskier, and regulating these companies (or vitual companies) more difficult?

Arthur Levitt: Yes the tons of new products available in the market today increase leverage and increase the penalties for mistakes as well as the time to correct those mistakes. This does make regulation more difficult. I think we have to take a fresh look at both accounting and auditing standards to address loss of public confidence as well as some of the legitimate concerns by the accounting profession about some of the issues you raise.

Michelle Singletary: Already so many people are scared of losing their hard-earned money in the stock market that they are pulling back on their contributions to their 401 (k) plans and other investments. Do you think your book might scared these folks and others away from investing?

Arthur Levitt: My book did not intend to discourage you from investing into 401Ks. For most investors, this is the best vehicle to use but you must become an informed investor -- understanding in how many years you wish to retire and what is the minimum income you can get by on in your retirement years. The key issue that you must deal with is asset allocation and here is one useful formula. Subtract your age from 100 and put whatever the answer is into stocks -- so that if you are 35 you would put 65% into stocks and 35 into bonds. This is a rough guide and you must take into account your tolerance for risk. Focus on the long term even if your 401K is not performing as well as you would like today. Saving for your retirement is a marathon and not a 40 yard dash.

Michelle Singletary: You say that the new SEC chief shouldn't be a political actvist but won't it take a lot of political savvy to get thu reforms that will fix what is broken in the market. In fact, didn't you lament in your book that you weren't able to get more done because of all the opposition from certain members of Congress? So, wouldn't the new SEC chairman have to be someone with a lot of political clout?

Arthur Levitt: Perhaps instead of activist, I should have said the new chief should not be known primarily as a practicing politician. Clearly, political skills are needed but those very often are quiet skills and the chairman should be recognized for qualities of independence, intelligence and most importantly as a protector of investor rights.

Anyone who sees the history of successful chairmans can see that chairmans will be remembered for having placed investor interest above all others and those that had other priorities are mostly forgotten in the waste baskets of history.

Reston VA: We plan to put money into index funds at Vanguard. I have been reading conflicting recommendations about how to diversify within these funds. Specifically, some folks say you need international funds; others say you really don't. Some say include REIT index funds; others say don't bother. Do you have some thoughts on diversification?

Arthur Levitt: I think that diversification is important but I think you should recognized that industry specific funds have greater risk than funds such as the russell or standard and poors.

Washington, DC: Good Afternoon...
I just wanted to let you know how much I loved your book. I have recommenneded it to several people and they will be going out to purchase it. I would like to know if you are currently working on any other books? I would like to have some of my teenage relatives to start learning about the market now, but may find your book overwhelming at first..

Arthur Levitt: Thank you so much, you've made my day! I really believe that there are chapters of my book that would have great relevance for teenage readers, particularly the introduction , Chapt. 1 and most importantly, the appendix. Otherwise, I would urge them to become readers of the Washington Post financial pages as well as the Wall Street Journal.

Des Moines IA: I'm curious why Mr. Levitt resigned prior to the end of his term. Also, is there any logical reason for the White House not wanting to fund the SEC as it committed to in July? It seems a pro-capitalist administration would not allow the SEC to be in such turmoil.

Arthur Levitt: I resigned prior to the end of my term but after almost 8 years in the job because I felt that I had stayed a sufficient period of time to address issues that I felt were vitally important to individual investors. There was much more to be done but our political system benefits from having new people from the private sector bring in fresh ideas and different agendas.

Utopia, USA: Isn't it clear that we really need principle-based accounting instead of rule-based accounting?

And maybe H. Pitt did get one thing right - why not require a Certified Fraud Examiner (or something similar) on all audit committees? That will provide the proper incentive for these companies' management to follow the spirit of the law, not just the "letter of the law."

Arthur Levitt: You bring up a good point. In the past, I might have answered this question differently. But today, I believe that standard setters have to take a hard look at certain principle based standards. No longer can we rely exclusively on a formulaic system. Harvey Pitt got many things right including his suggestion about audit committees.

Fairfax, Virginia: Do you agree with Harvey Pitt's recent comments that there should be periodic forensic audits given that current auditing standards are lax regarding the responsibility to detect material instances of fraud?

Arthur Levitt: Yes I do agree with this excellent suggestion made by Harvey Pitt for periodic forensic audits.

New York, NY: The "Fair Disclosure" rule has made it impossible for analysts to get questions answered by the companies they cover. Now, as intended, everyone gets acceess to the same information - which is virtually none, and in the form of a press release. How does this reduced information flow benefit securities consumers?

Arthur Levitt: I believe that analysts who do a much more comprehensive job, will continue to get answers to their questions. I do not believe that we have seen a diminished flow of information and the quality of the information has been substantially improved.

Arlington, Va.: Mr. Levitt: As former President of the AMEX and former chair of the SEC, how much farther does corporate America have to go to get its house in order? thanks for serving.

Arthur Levitt: It is corporate America rather than regulators or legislators who will help restore public confidence. They will do this by committing more to the public interest in the form of public/private partnerships which will do more than any regulations I can think of. And they do have a long way to go.

Atlanta, GA: What are the positives and negatives for the investor community if a Democrat was named SEC Chairman in the Bush administration, and what would you say is the probability of that happening?

Arthur Levitt: I think it most unlikely and I don't see any particular postives or negatives if the individual is recognized for personal intelligence and integrity.

Wheaton, Md.: In the long run, are 401Ks still a safe investment?

Arthur Levitt: Yes I believe that 401Ks represent sound investments.

Alexandria, Va.: I am wondering whether I need to diversify my mutual funds across multiple mutual fund companies.

Are large mutual funds run by huge companies (e.g., Vanguard, Fidelity, T. Rowe Price, etc.) likely to be safe from fraud and gross mismanagement?

Arthur Levitt: Depending upon the size of your investments, diversification does make sense.

Michelle Singletary: Can you go back to the recent suggestion by Pitt to have forensic audits. Shouldn't outside auditors being doing that anyway. Honestly, from the scandals it seems that too many accounting firms were just taking the company's word that profits were real, receivables were being received and debt wasn't off the books to make things look better. I mean what are they paying them to do? Won't this be like setting up two sets of books. The one we think could be right and the one that really is right!

Arthur Levitt: Outside auditors probably will be doing this in the future and the accounting firms were seduced by management. But I believe that media attention and private rights of action as well as the new muscularity of audit committees will change that culture.

Michelle Singletary: Do you think it was a good idea for the new audit oversight board to meet in private for its very first meeting? Should every meeting be open to the public?

Arthur Levitt: I think that many if not most audit oversight board meetings should be open to the public but I would give them some space for some organizational details initially.

Pfafftown, N.C.: Mr. Levitt, I read your book and I'm even more wary of investing in stocks. Thank you for pushing through Reg FD.

My question is this: If I write a letter to corporate board members with a suggestion or concern, what are the chances that it will be read by the board member? I did this recently to four board members of US Airways. I received one acknowledgement letter by a staff person in the company. It made me wonder if board members actually read their mail.

Thank you.

Arthur Levitt: This is a very interesting question and I commend you for taking such action. I would say that your chances are outstanding that the letter will be read. I am less certain that your letter will be responded to. In this environment, board members most certainly do read their mail.

Harrisburg, Pa.: The stock market is one of the best investment tools available. Indeed, as it represents the wealth of America and as most of the rest of the economic systems, from banks to insurance companies, rely on the market for their earnings, the market almost by definition has to be the leader in economic growth. Fortunately, throughout history, the market has had greater earnings potentials than other investment options. Yet, people fail to realize that not every stock is guaranteed. Have you found that too many individual big losers in the markets did not realize the important of diversificaiton?

Arthur Levitt: I agree that many individual losers not only fail to recognize the importance of diversification but simply fail to be skeptical investors. Investors themselves were caught up in the hype and euphoria in a market that suspended disbelief and they share a portion of blame with the accountants, boards of directors and other gatekeepers.

Washington, D.C.: How do you feel recent corporate governance concerns are affecting strategic operations at companies?

Arthur Levitt: America's obsession with corporate governance today has some downside risk. Board members that become intrusive in terms of micromanaging can definitely affect company moral and operations.

new rochelle ny: Mr. L: I have your book and intend to read it over Thanksgiving. Can't wait. Are the BODs at Enron ever going to be held accountable? I would prefer massive fines and even some jail time for these crooks. Thanks

Arthur Levitt: I believe that in this present climate the attitude of prosecutors, judges and juries make it certain that some of corporate wrongdoers will go to jail. It is extremely difficult under present legal standards to bring cases against directors. Nevertheless, the present climate will almost see these cases develop -- fewer than you and I might hope for but more than we've seen in the past.

Hartford CT: The Sarbanes Act imposed limitations on the kinds of non-audit work that could be done by the auditors of publicly traded companies. Should any of those limitations be imposed on the auditors of some non-public companies, such as, large privately held companies or large non-profits? Which ones and why?

Arthur Levitt: You raise an interesting point in that recent focus on wrongdoing has motivated non public boards to embrace similar standards of conduct. Because our securities laws cover publicly owned companies, these changes will have to come about internally rather than be imposed from above.

Washington, DC: I would be curious to hear your thoughts on the Sarbanes-Oxley Bill and if you think it will be effective enough to straighten out the accounting industry. Many believe that ultimately the market will have to fix itself to fully reform in a meaningful way. Also, with regards to the creation of a new Accounting Oversight Board, do you think this is just a token move to make it appear as though the SEC has become strengthened? Or do you think the selected panel will actually be able to oversee significant changes?

Arthur Levitt: I supported this bill knowing that it would have unintended consequences but feeling that it was the best and most effective way to address public horror at business abuses. Some aspects of the bill are less problematic than others. Funding the independence of the FASB is critical, the accounting oversight board if led by an independent tough minded person is much more than theatrical. Properly focused, it can redo audit standards, improve the process of peer review and help restore the sanctity of reported numbers. It is possible that this job could be done over the next several years and the board morph into some kind of self regulatory structure.

Belmont, California: With all the disclosures that have
occurred regarding analyst conflicts and
misleading Wall Street research, why
have we seen so little action taken
against individual analysts? For
example, Henry Blodget was caught
privately bad-mouthing stocks that he
was recommending to the public, but
neither the SEC nor the NASD has fined
or censured him. Doesn't that lack of
action send the wrong message to
analysts and investors?

Arthur Levitt: The analyst cases take much longer to bring than most people realize and there's little question in my mind that Blodget and others will eventually be penalized.

Bethesda, Md: The regulation of financial markets seems right now to be in disarray-- no leadership and intense pressure from the powers that be to avoid any action that could really change the status quo. What (short of financial meltdown) do you think it would take to change the situation?

Arthur Levitt: I do not believe that the regulation of our financial markets are in disarray just because the leadership of the agency has come into question. The professionals that ran the divisions during my term of office are still in place and are the most capable, tough-minded, investor oriented individuals that I have ever known. Rest assured, the agency continues to do its job and to do it well.

Chicago, Ill.: Mr. Levitt:

Should something like Standard and Poor's accounting definition of "core earnings" be required of public corporation filings to show quarter-to-quarter strength in operating income that cannot be disguised by other accounting tricks?

Arthur Levitt: I think the definition of core earnings put forth by Standard and Poor's is a standard that should be carefully considered. I personally believe this might add some clarity for investors.

Chicago, Ill.: Mr. Levitt:

Do you support requiring public corporations to be audited by a different accounting firm every year, or even, for those few public corporations under SEC scrutiny, every quarter?

Arthur Levitt: No, I think changing auditors every year is too expensive and would hurt the company by losing the advantage of experience. Auditor rotation should be considered in terms of a 5 or 7 year time span.

Alexandria, VA: I am an auditor, and I'm constantly amazed by the lack of knowledge of accounting and finance of the individuals who make up audit committees. It's not as though I feel that they all should have worked as an auditor, but oftentimes, they don't even understand basic financial statements or terms. It's difficult to get them to understand what's happening in their companies when they have such a lack of knowledge.

Michelle Singletary: This really scares me! But I'm not surprised given so many of these board members (who are often highly compensated) claimed they didn't know what was going on in the companies they were supposed to be watching over.

Arthur Levitt: You are absolutely right. I have sat on audit committees where members sat still as stones when auditors made their presentations. Part of this is a function of the calibar of individual chosen to serve on such committees. Clearly in today's environment, a different kind of committee is already taking shape and the question in my mind is whether we will be able to recruit such people to fill these slots. I sense your frustration as well as the unfairness of laying total blame at the doors of the accountants when passive committee members were certainly asleep at the switch.

alexandria: Not a question, just a statement: Mr. Levitt, you rule. Can't even tell ya how much I wish you were still the head of the SEC, and it's not JUST that Pitt was godawful. You really were on top of things, and were leading the Commission in a noble direction.

Arthur Levitt: You are awefully kind. In fairness I must say that the great markets that I experienced helped make regulators look smarter than they are.

Rockville, MD: You mentioned in your book to "fire your broker and get a financial advisor. What would be the main criteria in selecting a financial advisor?

Arthur Levitt: The best way to go is to find an advisor willing to work on an hourly basis. Also, depending on the size of your investment or your willingness to interview a number of advisors, you might make use of a low expense index fund. I would base my choice of an advisor on recommendations, experience and a personal face to face meeting for you to determine if the chemistry is right.

Camp Springs, MD: Everyone I talk to is disappointed in their 401K accounts. Every advisor I talk to say raise your contribution to the max. I have lost money already. If I raise the amount won't I just lose more money? What are the benefits of increasing the amount?

Arthur Levitt: Unless your fund is overly committed to your own company's securities, advice to stay the course is the best way for you to go.

San Francisco, CA: You made some remarkable statements
a few years ago about the "dysfunctional
web" of analysts, companies, and
underwriters who were distorting the
markets in ways that were harmful to
individual investors. The securities
industry's self-regulatory body, the NASD,
seems to have been singularly
unsuccessful in untangling this web. Is
there a need to rethink the amount of
responsibility that's assigned to a
self-regulatory body?

Arthur Levitt: You're right. I probably didn't adequately recognize, and I should have, the conflicts of interest endured by self regulating organizations such as the NASD and the NY Stock Exchange. Their primary allegiance is to the listed companies and brokerage firms that bring them business which makes them sometimes reluctant reformers. Available resources make it essential that self regulation work with private rights of action and SEC enforcement to give investors the maximum protection possible.

Arlington, VA: Mutual Fund managers seem to have been sublimely oblivious to the governance and accounting issues at companies in which they held substantial interests. Haven't those managers failed in the performance of their fiduciary responsibilities to their investors?

Arthur Levitt: Yes you are correct. I think to have meaningful longterm improvement of governance and accounting issues, institutional America is going to have to change their passive ways.

Bethesda, Maryland: So many SEC complaints end up with the person accused of violations merely giving the money back while making no admission of guilt. Sometimes there are cases where the money isn't even given back and violators are allowed to profit from their illegal activity. Do you think there needs to be stronger laws and more criminal prosecution of those who violate securities laws?

Arthur Levitt: I do think there needs to be stronger laws. Particularly with respect to the inability of lawyers and accountants accused of aiding and abetting fraud to be subject to private rights of action. Criminal violations are beyond the scope of the SEC and must be handled by the Dept. of Justice.

San Jose, CA: Dear Mr. Levitt:

Reg FD was a brilliant move, and it forced many analysts to do homework for the first time instead of relying on company whispers.

My question is about your views about the recent proposals to reduce the conflicts between banking and research at the brokerages by them buying independent research and distributing them to their clients.

It seems to me that this proposal would run counter to the spirit of Reg FD.

Reg FD implicitly rewards analysts who do their own independent research.

If research is really good, it ought to be worth hard cash, rather than being paid for in soft dollars or distributed free.

By buying it and distributing it in bulk, are we not undermining the independence of the "independent" research industry?

Does "independent" research, in this context, just mask other prejudices of the researchers?

Arthur Levitt: Good question. I am not convinced that these proposals might not be too cumbersome and complex. But I don't think they would necessarily run counter to the spirt of Reg FD. I do agree that there is something canned and bureacratic about buying bulk research. I am not sure however that rather than run counter to FD, the result might be a marketplace rejection of such mandated research.

Washington, DC: There has been some rumors that Michael Chertoff (head of the Criminal Division of DOJ) could be tapped to head the SEC. Any opinion on him?

Arthur Levitt: He appears to have superb credentials for the job but apparently is not interested.

Omaha, NE: I've enjoyed your book so far - still reading it. How does the smaller investor find the right type of financial advice.

I have had five jobs since graduating from college and my money is here, there and everywhere and I am just not knowledgeable in this area. I've committed through the book club to educating myself and I save well, but my eyes gloss over whenever anyone starts talking about the stock market, etc.



Michelle Singletary: I'm just thrilled that you have joined the Color of Money Book Club. I do hope that with this current selection and future book selections you won't feel so lost. Listen, I get confused myself. This stuff can be complicated and mind numbing. But the first step is to educate yourself.

Arthur Levitt: You are in Warren Buffet's home city and hopefully his wisdom may radiate into every residence. Seriously, I know that much of this may seem overwhelming but there is no substitute that I know of to skeptical investors who make the effort to educate themselves. I urge you to stay the course, read the Business pages, find the book and you will be the better for it.

This is one of the unique opportunities you have to access a book club focused towards your specific needs.

Michelle Singletary: Well Mr. Levitt has to run and catch a plane. I'm so sorry if we didn't get to your question but Mr. Levitt said he is willing to come back and answer more of your questions in the future. Again, thanks for joining me today. I'm so pleased so many people have joined the Color of Money book club. I'm elated that so many publishers have given me free books to give out to readers. I'll be letting you know soon about the next selection (if you have any suggestions for future books for club please e-mail me at singletarym@washpost.com. Thanks again for your participation see you in two weeks.

washingtonpost.com: That wraps up today's show. Thanks to everyone who joined the discussion.

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