Magazine article Newsweek

Tough Beat; William Donaldson Is Wall Street's Top Cop, Facing the Nearly Impossible Task of Policing a Sprawling, Fast-Moving Financial System. but Is He Fighting the Right Battles?

Magazine article Newsweek

Tough Beat; William Donaldson Is Wall Street's Top Cop, Facing the Nearly Impossible Task of Policing a Sprawling, Fast-Moving Financial System. but Is He Fighting the Right Battles?

Article excerpt

Byline: Charles Gasparino

It was a tough job to fill. Who could possibly be recruited two years ago to take over the Securities and Exchange Commission, and rescue it from several tumultuous years? The SEC, after all, had become a punch line for missing big corporate scandals during the bubble, and the chairman who was on his way out, Harvey Pitt, had been pilloried for his close ties to the accounting industry. Morale was horrible, and top investigators were leaving for jobs on Wall Street. Even New York's attorney general, Eliot Spitzer, who had led investigations into sleazy practices involving Wall Street research and mutual funds, was taking victory laps at the SEC's expense, saying the agency wasn't able to protect small investors. "I wouldn't let the SEC's lawyers do a house closing for me," Spitzer quipped at a business conference last year.

But President George W. Bush seemed to find a sure-fire winner in William Donaldson. For one, Donaldson was unlikely to turn the president down, given Donaldson's long history with the Bush family--he was in Yale's Skull and Bones secret society with Bush's uncle. And Donaldson had tons of experience in both Washington and Wall Street. He had founded the securities firm Donaldson, Lufkin & Jenrette; worked in the Nixon administration under Secretary of State Henry Kissinger; run the New York Stock Exchange, and was the CEO of Aetna. If anyone had the chops to get the SEC back on track, surely it was Donaldson. In a speech in February 2003, Donaldson mused that the president had indeed chosen him for his long and varied career. "I've been around almost as long as the SEC," he joked. He pledged to help the agency "pull up our socks" and restore confidence in the nation's financial watchdog.

But almost two years into the job, there are growing questions about whether Donaldson has lost his touch. Though he has improved the agency's morale and expanded its staff and budget, he's been stymied in his push to enact his reformist agenda. There is even talk in Washington that because Donaldson, a Republican, has alienated so many in his own party, he'll likely be out of a job regardless of who wins the election. His opponents include Federal Reserve chairman Alan Greenspan, who's come out against his proposed rules for hedge funds. Business groups have criticized his plan to give investors more say in naming directors to corporate boards (of the four other SEC commissioners, only two back Donaldson on these issues, and they're Democrats). What once appeared as ambitious goals looks increasingly like wasted political capital and resources that could have been spent better on its mission of protecting small investors from fraud. "The commission has a history of missing easy cases, so it's hard to imagine that expanding into more complex areas will bring success," says Jacob Zamansky, a prominent investors' attorney. "These guys shouldn't be biting off more than they can chew."

In an interview with NEWSWEEK, Donaldson, 73, says the criticism has taken its toll, and balancing work and his personal life (his wife and 14-year-old son live in New York) is not easy. "I could become frustrated by the whole thing," he says. "I don't lust after this job." He adds: "I serve at the pleasure of the president. Equally important to me, I serve at my own pleasure."

Pleasure is a tall order, given that the beat he walks as Wall Street's top cop grows more complex, with firms like Citigroup with investment and commercial banking and a brokerage under one roof. (Citigroup has agreed to pay about $3 billion in fines and settlements over the past two years for conflicts of interest; Donaldson recently met with Citigroup CEO Chuck Prince to discuss some of the company's regulatory problems). Such behemoths, Donaldson admits, can create regulatory gridlock; the SEC regulates investment banks and brokerages, while the Federal Reserve oversees commercial banks. …

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