By Robert Kuttner It has been less than three years since the enactment of the Sarbanes-Oxley Act and the appointment of William H. Donaldson as Securities & Exchange Commission chairman combined to help restore investor confidence in U.S. financial markets. That's why President George W. Bush's choice of Representative Christopher Cox (R-Calif.) to replace Donaldson is such a shocker. A conservative critic of aggressive market regulation, Cox seems likely to undo Donaldson's reforms even as still-fragile financial markets struggle with the debt overhang, rising interest rates, a possible housing bubble, and the growing U.S. dependence on foreign capital. The gutting of the SEC certainly would make Wall Street insiders happy, but how can the White House be so reckless about something so critical?
Ironically, Donaldson wasn't supposed to be a tough regulator. When Bush tapped him in 2003, he picked an Old School Wall Street insider who had founded his own firm and gone on to head the New York Stock Exchange. But corporate leaders who expected Donaldson to be a mere symbol of rectitude were aghast when Donaldson turned out to be rectitude itself. At 72, knowing the Street all too well, Donaldson decided to play it straight and leave a legacy of honest markets.
WORKING CLOSELY WITH Democratic Commissioner Harvey J. Goldschmid, Donaldson crafted regulations that carried out the spirit as well as the letter of Sarbanes-Oxley -- often winning by 3-2 votes, with Republican Donaldson and the two Democrats opposed by the commission's other Republicans. These included rules requiring the expensing of stock options; mandating that broker-dealers give all buyers and sellers the best available stock price; requiring registration of hedge funds; insisting mutual funds have nonmanagement chairmen; and mandating that companies have adequate internal accounting controls and arm's-length relationships with auditors. All these reforms were in response to explicit and systemic abuses -- and all were vigorously opposed by the industries whose conflicts of interest they sought to limit.
Donaldson's legacy is restoring honor, accuracy, and credibility to America's financial markets. But as a ranking member of the House Financial Services Committee, Cox vehemently resisted this entire approach. Instead, he repeatedly expressed the belief -- in the face of recent scandals -- that financial markets can monitor themselves. He was lead House sponsor of the Private Securities Litigation Reform Act, which in 1995 created obstacles to shareholder litigation, making accountants and executives far less liable for cooking corporate books. That law directly invited the abuses that led to Enron and MCI/Worldcom. His original version, denying relief even to investors "recklessly" defrauded by corporate executives, was more extreme than the one that became law. Later, Cox successfully sponsored legislation preempting most shareholder suits in state courts.
As chairman, Cox will join two other far-right GOP commissioners who have bitterly fought Donaldson's handiwork. The SEC tradition of having professionals, not ideologues, in senior staff roles could be weakened. And enforcement decisions could be undermined (decisions to approve or block probes or set penalties will be made in closed meetings at the discretion of the three GOP members).
Few close to the situation believe that Donaldson chose to resign. He had recently extended the lease on his D.C. apartment and told colleagues he expected to serve out the year. Days before his surprise resignation, Donaldson gave an extensive interview to CQ Weekly on his plans, with no hint of stepping down. It's also odd that the White House, which often takes months to fill key posts, had Cox ready to step in immediately. Donaldson had long been targeted by the U.S. Chamber of Commerce, the Business Roundtable, and other business lobbies. Until recently, he was protected by his longstanding personal relationship with the Bush family. But the sudden turn of events suggests Donaldson didn't jump; he was pushed.
Cox's appointment represents a dangerous current in contemporary Republican thought: that it's anti-business to be pro-investor.
Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.