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Pitt was SEC Chairman from 2001-2003, during yet another tumultuous time for the U.S. financial markets, and shares his views on the short-selling ban as well as his thoughts on creating more transparency during these difficult trading times. Pitt is currently CEO of Kalorama Partners, a global business-consulting firm.
Over the years, Pitt has staunchly advocated for more transparency in the markets and voiced his concern over the ban on short-selling of financial stocks.
"I'm very much in favor of improving transparency and I think infusing capital with respect to the asset classes that are troubled is a very prudent step," says Pitt. "But I think the elimination of all short-selling in financial stocks, even though it's temporary, is unfortunate."
Pitt says he regards the decision as an excessive reaction and while he understands why the regulators did it, "I don't really believe it was necessary under the circumstances."
"The problems that we have in our current markets weren't really caused by short sellers, but they were exacerbated in some cases by short sellers," says Pitt. He says that he understands the pressure that the SEC responding to, but there are other ways to achieve results instead of banning a "legitimate form of market trading."
Going forward what can be done to aid the markets and get the financial world back on track?
Pitt says one of the most important things the industry can do now is to insist when new instruments are introduced to the market that "there be a clear understanding of not only all of the instruments that can be traded to hedge that risk but also that a clear indication of exactly who owns what at what particular point in time is provided to the marketplace."
He insists that market participants should be required to report when they reach a certain size. In addition he says it's vital to ensure the market has the information necessary to judge whether particular firms or counterparties may be at risk. "It's taken a long time to sort through where we are with respect to certain instruments and products and part of the reason for that is because there is no transparency, that is definitely what we need to overcome," explains Pitt.
He adds that a move to more exchange traded instruments in the derivatives world would then require traders to disclose positions and provide more transparency. "But obviously in ways that don't undermine proprietary trading strategies," he says. "We've been able to do that on the equities side and I don't doubt we can do it on the derivatives side."
In addition, a centralized clearing model for these instruments would also provide greater transparency. "I believe it would reduce some of the lack of information and the fear factor that has crept into our trading markets as a result of some of the positions people have amassed."
Looking back, Pitt says it would have been preferable to see private sector financing for the bailout, but that these difficult times called for immediate capital infusion. "What we really need to avoid is the impression that was created that we were doing everything on an ad-hoc basis. That contributed to some of the fears that drove the excessive trading," he explains.
Pitt thinks the markets have been very resilient over the years and that while they needed some assistance to maintain that resilience he believes the current crisis will be overcome.
"Over the long term I'm optimistic. Over the short term I think there's still going to be more fall out that we haven't yet experienced," he says. "But I think we'll weather that as well and then we'll be able to move forward from all of this a lot wiser."
