Here in New York City yesterday, the press couldn’t get enough of Governor Eliot Spitzer’s fall from grace, as reports of his involvement with a prostitution ring circulated like wildfire. I’m not one generally to comment upon such intrigues – sex scandals really are the most boring stories on the planet – but Mr. Spitzer’s case marks an exception. His career to this point has been that of a reformer who campaigned explicitly on a platform of restoring ethics, transparency, and accountability to New York state government, so his self-destruction in this manner is notable.
Initial reports from Wall Street captured the New York financial community’s animus toward their former tormentor: “There is a God,” one trader was quoted as saying, although if Mr. Spitzer sought to bring knowledge of the Transcendent to godless Wall Street, I doubt very much this was his plan to do so.
It is Mr. Spitzer’s relationship with Wall Street that is most interesting. As New York state’s attorney general, he aggressively investigated wrongdoing on the Street, first uncovering the blatant conflicts of interest inside of investment banks during the dot-com era, when analysts pumped crummy stocks so that their IPO-underwriting buddies could reap large returns (the settlement with investment banks totaled $1.4 billion). From there Spitzer uncovered widespread illegal trading by hedge funds and mutual fund companies, and then he investigated shenanigans at Marsh, a large insurance concern, regarding kickbacks and bid-rigging.
In considering Mr. Spitzer’s time as New York’s attorney general, the question that always comes up concerns his motivations in the aforementioned investigations – was Mr. Spitzer a fire-in-the-belly crusader, or merely a spotlight-hogging, self-aggrandizing opportunist? And then there’s the more difficult question: is it possible to be both at the same time?
In getting at these questions, one must review what actually happened in the early part of this decade. The first item for review concerns the very notion of the state attorney general investigating financial firms on Wall Street. By aggressively pursuing Wall Street, Mr. Spitzer broke with years of precedent, whereby the Securities and Exchange Commission (SEC) was left alone to police the Street. Mr. Spitzer’s actions not only made enemies in high places; he also left a bad taste in the mouth of the SEC, which felt its prerogative was encroached upon and its own enforcement actions upstaged.
Further, the manner in which Mr. Spitzer carried out his investigations was the real rub for Wall Street. Mr. Spitzer didn’t play the game as it had been played; he was unremitting and public in his criticisms; his tone was arrogant and holier-than-thou, or at least, so thought his targets on the Street. It is quite natural for accused to feel themselves maltreated in this way, but Mr. Spitzer’s manner did open him up to charges of self-serving political grandstanding, and given his quick ascension up the ladder of state politics, it is a charge not easily put away. After all, if you were in Mr. Spitzer’s shoes, why not allow the SEC to take the lead in prosecuting cases? Why not swap out shotgun shells for honey when trying to attract Wall Street’s bears?
The proof, for me, is in the pudding, and the pudding in this case is the actual reforms brought about by Mr. Spitzer’s dogged pursuit of the bankers. There is no doubt that the behavior of Wall Street during the dot-com bubble demonstrated the contempt with which it views Main Street. The level of corruption was simply stunning, but for all the malfeasance on the Street, what did Mr. Spitzer actually accomplish? What could he accomplish as New York state AG? Did he prosecute the wrongdoers to the fullest extent of the law? And, finally, did the SEC allow him to prosecute to the fullest extent?
On all of these questions, in my view, the results are somewhat less than the effort exerted to get them. The $1.4 billion settlement of 2003 represented but 7% of the Street’s profits for the previous year, a pittance really when you consider the profits collected via corrupt practices. Supposedly, one aim of the settlement was to produce enough evidence for investors to seek their own remedy through private litigation, but estimates vary as to how successful investors have been in recouping losses via litigation. Further, in settling the cases the banks neither admitted nor denied the allegations, following precedent in resolving such disputes with the SEC. In other words, for all of Mr. Spitzer’s bluster, he couldn’t even secure the guilty verdict. In sum, when you review what was actually accomplished through the litigation, there really wasn’t much at the end of the day but a little hand-wringing and a few fines.
In one important aspect – and one for which Mr. Spitzer cannot be blamed in his role as AG – there is very little that the litigation could accomplish. In its overview of the 2003 settlement, the New York Times quoted one CEO at a small research firm on the persistent nature of the problem at hand:
“What they have imposed is a solution where they will try to regulate behavior, ethics and business practices,” said Scott Cleland, the chief executive of Precursor Group and a member of a coalition of small research firms without ties to investment banks that have been seeking broader changes. “What they didn't do is address the conflict at its source – the commingling of trading, research and banking commissions.
“The analogy is that if this were an operating room, they disinfected everything but the scalpel,” Mr. Cleland said. “The scalpel is left dirty.”
And so now the scalpel is dirty on a whole different level, much to the woe of those who felt Mr. Spitzer represented an opportunity for real change in Albany. Instead, the cancer at the heart of New York state government – the special interests, graft, corruption, and fiscal maladies – all remain in place.
For me the Spitzer affair is dark, very dark. I was not a fan of Eliot Spitzer, if by “fan” we mean to say an ardent supporter who shilled for the governor, but I was hopeful that he might be an agent for change. What Mr. Spitzer’s fall demonstrates for us is that, perhaps, when Savonarola ignites his Bonfire of the Vanities, he, too, must ultimately be consumed by the flames. This affair is not about one man’s fall from grace, but rather, the pervasive and seemingly ineradicable cancer at the heart of the body politic that delights in such sleaze and sport. It is a dark day indeed.
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