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January 1, 1998

Levitt's Latest Foe Is Sen. Lauch Faircloth:Powerful Figure Could Hurt Levitt's SEC Renomination

By Jeffrey L. Winograd

Sen. Lauch Faircloth (R-N.C.) has come out swinging against a new derivative accounting rule proposed by the Financial Accounting Standards Board (FASB), a privately-funded independent agency.

Faircloth, head of the Senate Banking Committee's financial institutions and regulatory relief panel, has one enemy in mind the Securities and Exchange Commission. Faircloth said "the FASB has worked so closely with the SEC, this appears to be a regulatory dispute, not an accounting dispute."

That's good news for the head of the Senate Banking Committee, Sen. Phil Gramm (R-Texas), and others who oppose the rule, but possibly bad news for a staunch supporter of the proposal, SEC Chairman Arthur Levitt.

Disclosure

The proposal would require greater public disclosure by Wall Street firms dealing in derivatives, in particular the reporting of gains and losses in quarterly earnings statements.

A derivative is a financial contract whose value is derived from an underlying security. Banks are especially worried about the FASB proposal because they are heavy users of derivatives. (The FASB establishes accounting standards for publicly-traded companies.)

Some Capitol Hill insiders think Levitt's blessing may be a curse in disguise for him, ultimately hurting his chances of renomination to a second five-year term as chairman of the SEC. That's because his support of the FASB rule has annoyed critics here in Washington. And that could have implications next summer when Congress must confirm the choice of SEC chairman when Levitt's current term expires.

If Levitt is renominated the White House recently indicated it would do so the process could be derailed by pesky senators, such as Faircloth and Gramm, should the FASB proposal not be harmoniously resolved. Indeed, these Senators may be warming-up for battle. "You can't rule anything out," a source on Capitol Hill said.

The Senate must approve every presidential nomination to the SEC, and the chamber's rules allow a single senator, who customarily remains anonymous, to place a hold on a nomination.

Second-Guessing

As previously reported, Gramm last October accused Levitt of interfering in congressional business after the SEC chairman attacked Congress for "second-guessing" both the SEC and FASB.

Gramm was particularly upset when Levitt demonstrated his support of the accounting rule proposal in three separate speeches and private meetings, and attacked those who opposed the rule as attempting to scuttle the independent rule-making process instead of raising real concerns.

Faircloth stresses that he has no objections to the rule being written by the FASB. But he is upset with the involvement of the SEC, and is waging war. As a result, he introduced legislation that would delay the FASB's proposed rules in the final hours of the Senate's legislative year.

Even Federal Reserve Board Chairman Alan Greenspan is reportedly concerned about the proposed rules.

Whether Levitt has walked himself into a high-stakes political poker game with the Republican-controlled Senate remains to be seen.

It is taken for granted, inside the Beltway, that Levitt wants another five years at the helm of the SEC. Serving a full second term would make Levitt the longest-sitting chairman in the SEC's 63-year history.

Faircloth's office did not respond to several requests for comment. A White House official said it is still far too early to comment on whether President Clinton will renominate Levitt, whose term as SEC chairman expires in June.