{"id":7897,"date":"2014-12-15T17:45:30","date_gmt":"2014-12-15T17:45:30","guid":{"rendered":"http:\/\/www.vanderbilt.edu\/magazines\/vanderbilt-business\/?p=7897"},"modified":"2015-06-08T14:39:49","modified_gmt":"2015-06-08T14:39:49","slug":"the-chief-economist-returns","status":"publish","type":"post","link":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/the-chief-economist-returns\/","title":{"rendered":"The Chief Economist Returns"},"content":{"rendered":"

 <\/p>\n

\"SEC<\/a><\/em><\/em><\/p>\n

 <\/p>\n

Craig Lewis<\/a> had been the Securities and Exchange Commission\u2019s\u00a0chief economist for just two months when a federal appeals court threw out an SEC rule that would have given investors more power to oust corporate directors. Lewis had spent 18 months at the SEC as a visiting academic fellow, and knew such a ruling was possible, but the July 2011 ruling was nevertheless a watershed moment. <\/em><\/em><\/p>\n

The court issued what The Wall Street Journal <\/em>called \u201ca harsh rebuke\u201d to the agency, essentially saying its analysis was inadequate and short-sighted.<\/p>\n

\"Craig<\/a>
Craig Lewis<\/figcaption><\/figure>\n

\u201cThat helped set the tone for my tenure,\u201d Lewis says of the so-called proxy-access rule. \u201cIt was the catalyst for beginning to rethink the role economists needed to play in rule-making, to get them involved early and make economic analysis an integral part of the process.\u201d<\/p>\n

Lewis served three years as the SEC chief economist before returning to Vanderbilt in July. Lewis, Owen\u2019s Madison S. Wigginton Professor of Management, can look back\u00a0on a tenure that shifted significant power and enhanced participation in SEC rule-making to a dramatically beefed-up staff\u00a0of economists.<\/p>\n

\u201cI had to effectively certify whether the economic analysis was up to snuff and we were able to significantly contribute to the process. That has led to a number of big wins for the agency,\u201d he says. \u201cWhile I was chief economist, there was never a rule that was successfully challenged on the basis of the economic analysis, and the rules that are still coming out today are very robust in their economics.\u201d<\/p>\n

The experience, says Lewis, \u201cwill benefit both my research program and my classroom teaching in a number of important ways.\u201d<\/p>\n

The SEC kept calling<\/h2>\n

His wide-ranging research interests include corporate financial policy, capital formation and asset pricing, as well as convertible debt financing, stock market volatility and herding by equity analysts. But the catalyst for his tenure on the SEC was a paper he\u2019d written on shareholder reaction to class action litigation. SEC economists invited him to present his research, then asked if he might be interested \u201cin coming to visit for a year or two.\u201d With two children in high school, he declined, telling them \u201cit might be interesting\u201d when he and his wife, Tari, became empty nesters in two years.<\/p>\n

\u201cTwo years later they called to see if I was still interested,\u201d he says. He presented another paper and this time accepted their invitation to join as an economic fellow. In that role, beginning in January 2010, he served as an adviser on policy issues and brought analytic tools to bear on the derivatives market and violations of securities laws. In May 2011, SEC Chairman Mary Schapiro offered him the post as chief economist and director of the Division of Risk, Strategy, and Financial Innovation, a think tank and the SEC\u2019s first new division in 37 years.<\/p>\n

Calling him \u201ca distinguished economist with a clear understanding of the complexities of financial markets,\u201d Schapiro said at the time that Lewis would \u201chelp to inject strong data-driven analysis into the SEC\u2019s decision-making process.\u201d<\/p>\n

\"Craig
At the end of his D.C. tenure, Lewis\u2019 colleagues and staff honored him with a farewell reception. Above, Lewis with his boss, SEC Chair Mary Jo White.<\/figcaption><\/figure>\n

His job, overseeing the area that performs the economic analysis that accompanies all SEC rule-making, \u201clooked a lot like that of the dean of a business school,\u201d he says. \u201cIt was one of managing business processes and project flow, and making sure we were hitting our deadlines and meeting our obligations.\u201d The work was \u201call-consuming. The hours were massive,\u201d he says, something he attributes to his own competitive nature as much as the task itself. \u201cI worked a lot because I wanted to be successful. I\u2019m hypercompetitive.\u201d<\/p>\n

Much of that work had to do with SEC implementation of the 2010 Dodd-Frank Act, which gave the federal government enhanced regulatory power over the financial industry in the wake of the financial turmoil that followed the 2007-08 subprime mortgage crisis.<\/p>\n

In addition, under the 2002 Sarbanes-Oxley Act, the SEC is mandated to review corporate 10-K reports, the annual disclosure forms filed with the SEC. Lewis brought textual analysis to bear on the process of determining whether firms found to be fraudulent \u201cuse different vocabularies than nonfraud firms\u201d in the management discussion and analysis sections of those reports.<\/p>\n

\u201cWe do find evidence,\u201d he says of work he did with Gerard Hoberg of the University of Southern California, \u201cthat there\u2019s something of a verbal shell game going on where you talk about certain elements in an attempt to deflect attention from other problems the firm might be experiencing. They tend to overemphasize benign elements in their annual reports and underemphasize things that are probably causing the problems that motivate them to engage in some kind of accounting shenanigans.\u201d<\/p>\n

Proving the power of data<\/h2>\n

The credit default database is one manifestation of the efforts he led to incorporate more rigorous analytical techniques into the rule-making process. \u201cIt\u2019s an example of a data analytic initiative the division took on that turned out to be very influential in the way various rules were drafted. That was one of the first times people in some of the rule-making divisions saw the power of data,\u201d he says. \u201cWe were able to offer financial thresholds for rules that were significantly different from what was proposed but were completely reasonable once you actually saw the data.\u201d<\/p>\n

Analysts, for example, determined a dollar figure for the amount of annual transactions that would qualify someone as a dealer in the credit default swaps space. \u201cDelivering real, meaningful analysis that fundamentally changed rules was really quite a big step forward for the agency,\u201d he says.<\/p>\n

\"Students
Students in Lewis\u2019 Derivatives Market class were the first beneficiaries of his SEC knowledge.<\/figcaption><\/figure>\n

All of this took a great deal of manpower. Congress, determined that Dodd-Frank would lead to change, \u201cput pressure on the agency to hire additional economists,\u201d according to Lewis. During his tenure, the number of employees in the division increased from 60 to nearly 120 and the division itself was renamed the Division of Economic and Risk Analysis.<\/p>\n

Janet S. Schmautz worked with Lewis as his confidential assistant during his time as chief economist. \u201cOthers can attest to how Craig Lewis built the division based on technical ability. As his confidential assistant, I can attest to how he developed the division using interpersonal skills,\u201d she says. \u201cHe brought everyone along with a sense of camaraderie and good will, gaining him universal respect and admiration.\u201d<\/span><\/p>\n

A certified public accountant who work-ed early in his career for Arthur Young & Company, Lewis earned his master\u2019s and doctoral degrees from the University of Wisconsin\u00ad\u2013Madison. He joined the Vanderbilt business faculty in 1986 and has won a number of awards for teaching excellence. A frequent speaker and guest lecturer at industry and academic events around the world, he is an expert on corporate financial policy and asset pricing.<\/p>\n

Front-row seat<\/h2>\n

His SEC experience gave him new knowledge about his field and himself.<\/p>\n

\u201cOne of the great things about being there is the rate at which you learn,\u201d he says. \u201cI would argue it is very similar to that first year when you\u2019re in your Ph.D. program. I have a much better sense of what\u2019s going on in the financial world. You think that after spending 20-plus years as a finance professor you have a fairly good idea of how markets work and the subject matter that you teach in class. I was quickly disabused of that notion. I realized that there is a lot more that I didn\u2019t know than I knew.\u201d<\/p>\n

The increased knowledge and contacts will have a direct effect on his teaching.<\/p>\n

\"Craig
As head of the SEC\u2019s Division of Economic and Risk Analysis, Lewis oversaw the reorganization and expansion of the division as the breadth and complexity of its activities increased.<\/figcaption><\/figure>\n

\u201cI had a front-row seat to a lot of important events right after the financial crisis,\u201d he says. \u201cI\u2019ve had conversations with folks who are newsmakers\u2014Ben Bernanke, Jack Lew, all the principals of the large federal regulatory bodies\u2014and those experiences were quite interesting and fun. I think the students will enjoy just a little bit of color around how financial regulators implement the Dodd-Frank Act, for example. All of those things, and the ability to bring in new types of guest speakers to the classroom, are a direct benefit of that experience.\u201d<\/p>\n

Lewis also can continue to watch his SEC accomplishments play out. In July, for instance, the SEC adopted amendments to rules governing money market mutual funds, making structural and operational reforms.<\/p>\n

\u201cAt the time, it was almost a guarantee that somebody was going to challenge that rule. We\u2019re still waiting, but it looks like it is not going to be challenged in court, and that the industry is going to accept the rule as is,\u201d he says. \u201cThat, to me, is in large part a vindication of economic analysis, because the economics changed that rule in a very fundamental way.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

Craig Lewis’ tenure at the SEC delivered meaningful economic analysis that changed the agency and its rule-making.<\/p>\n","protected":false},"author":369,"featured_media":8367,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15,64],"tags":[21],"class_list":["post-7897","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-features","category-homepage-highlights","tag-submain"],"_links":{"self":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/7897","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/users\/369"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/comments?post=7897"}],"version-history":[{"count":3,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/7897\/revisions"}],"predecessor-version":[{"id":8371,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/7897\/revisions\/8371"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/media\/8367"}],"wp:attachment":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/media?parent=7897"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/categories?post=7897"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/tags?post=7897"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}