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As the Enron, Worldcom and related corporate crime scandals of 2001 near their second anniversary, most of the promised reforms are still on the drawing board or awaiting full implementation.

Last year, the Securities and Exchange Commission botched the birth of the Public Company Accounting Oversight Board-the centerpiece of the Congressionally-enacted reforms. The first chairman of the Oversight Board-William Webster-resigned after questions erupted about his own conduct on a corporate audit committee and the manner in which he was selected for the chairmanship. Before the episode was over, SEC Chairman Harvey Pitt, who had handpicked Webster and bull-dogged his selection forward in a ham-handed secretive manner, was forced to resign.

Now, SEC has a new chairman, William Donaldson and the Commission has at long last returned to its responsibility to get the vastly overpaid Oversight Board fully up and running as the chief cop over the accounting industry.

As a first step, the Donaldson-led SEC has named William McDonough, a long-time banker and more recently a Federal Reserve official as Chairman of the Oversight Board.. The Oversight Board’s job description calls for a Chairman who can be an aggressive regulator which will set tough rules for auditors, enforce them vigorously and discipline those who ignore the standards. It is a critical role in assuring the public’s confidence in the governance and integrity of corporations and the handling of its money, A headline in the Wall Street Journal labeled McDonough a “tough cop” and the New York Times followed the next day with editorial approval of the appointment. Similarly, news stories carried favorable mention from a bipartisan scattering of commentators.

But, there was little in depth analysis of McDonough’s background or regulatory philosophy. Most of McDonough’s career has been in the rarified air of the top executive suites of a big bank holding company, First Chicago Corporation (now merged with BancOne) and more recently as President of the New York Federal Reserve Bank.

Essentially, McDonough has been a “financial insider.” His 22 years in banking was with a multi-billion corporation-one of those “too big to fail” corporations whose federal regulators operate more as friendly consultants than as tough objective enforcers. First Chicago, like most commercial banks, has enjoyed free taxpayer-backed deposit insurance in recent years and some of its riskier loans are guaranteed in whole or part by government. Banking-at least big banking-exists in a largely government guaranteed fail-safe world, and attitudes, as a consequence, are different.

Ten years ago, McDonough left his job as Chief Financial Officer of First Chicago and took the presidency of the Federal Reserve Bank of New York. Although the New York Times described him as a “respected bank regulator,” the primary concern of the Federal Reserve and its top officials is monetary policy and the big economic picture, not the nitty-gritty of regulation. This is particularly true at the New York Federal Reserve which is the nerve center of the System’s open market operations that control the nation’s money supply through the buying and selling of securities in the market every day.

McDonough’s big moment in the sun and in the national headlines came in September of 1998 when he engineered (with the active support of Federal Reserve Chairman Alan Greenspan) a controversial $3.5 billion bailout of the Long Term Capital Management (LTCM) and its wealthy shareholders which included one of Wall Street’s most celebrated traders, John Meriwether, formerly of Salomon Brothers, two Nobel-prize winning economists and David Mullins, former vice chairman of the Federal Reserve Board.

Under McDonough’s direction, the New York Federal Reserve sponsored an extraordinary meeting of Wall Street firms and commercial banks, including Bankers Trust and Chase, both state member banks under direct supervision of the Federal Reserve, to put together $3.5 billion to prop up Long Term Capital Management.

Representative James Leach, then Chairman of the House Financial Services Committee who seldom finds any fault with the Federal Reserve, was incensed by the secret negotiations that led to the bailout and warned that the “application of the too ‘big to fail doctrine’ for the first time beyond a depository institutions raises troubling public policy questions.”

“From a social perspective, it is not clear that Long Term Capital, or any other hedge fund, serves a sufficient purpose to warrant government-directed protection,” Leach told the House of Representatives in his usual understated rhetoric. “The LTCM saga is fraught with ironies related to moral authority as well as moral hazard. The Fed’s intervention comes at a time when our government has been preaching to foreign governments, particularly Asian ones, that the way to modernize is to let weak institutions fail and to rely on market mechanisms, rather than insider bailouts.”

McDonough and the Federal Reserve, of course, defended the intervention as fear of “systemic risk” if the hedge fund had been allowed to go under-a familiar rationale for most government bailouts of big companies-“too big to fail.” Somehow, this doesn’t seem to fit the “tough cop” label that the Wall Street Journal headline credited to the new chairman of the Oversight Board.

Let’s hope that McDonough has put the soft “too big to fail” philosophy behind him and can lead the Public Company Accounting Oversight Board in an aggressive campaign to reform the accounting industry and restore some credibility and confidence in the nation’s economic system. It is critically important that he actually becomes the “tough cop.” At an annual salary of $560,000 (nearly four times the salary of Federal Reserve Board Chairman Alan Greenspan) that’s the least the public should expect of the Chairman of the Accounting Oversight Board.