ANNOUNCER: From our studios in New York, Bill Moyers and David Brancaccio.
MOYERS: Welcome to NOW. It was just three years ago this week, believe it or not, that once-mighty Enron, the colossus of the naughty 90s boom-boom-and-bust capitalism, threw in the towel and filed for bankruptcy. You remember Enron. Run by Kenny "good old boy" Lay, bosom buddy of a budding President, brought to his knees, and maybe to jail, by that old-time religion concocted of high-flying hubris and downright greed.
They cooked the books at Enron after marinating them in snake oil and left thousands of shareholders and employees to feed on the scraps.
That was just the beginning. From telecom giants to huge hospital chains, from stock brokerages to mutual funds, you could have thought American capitalism had become vast conspiracy to con investors. You could also have thought the lords and captains of the master class had learned their lesson, along with a little humility. Not so.
Look at this editorial in Thursday's USA TODAY. Seems the U.S. Chamber of Commerce, the business roundtable and individual firms are doing everything they can to rollback the reforms passed in the wake of Enron.
So the animal spirits are back, to borrow Lord Keynes' famous phrase, and if the wolves have their way, the lambs had better get ready for another predator's ball.
BRANCACCIO: Of course, government can't help much. These days government is not supposed to crack down, it's supposed to get ever smaller.
The idea of tougher regulation seems so passe in this era of government as meddling nuisance not as protector when it comes to business. But at least one man doesn't buy into that. He's been called the most powerful politician outside of Washington. Why? Because he's applying the rule of law to corporate behavior.
Producer William Brangham and I take a look.
BRANCACCIO: It doesn't start out looking all that terrifying. A cramped room near Wall Street. Reporters squeeze in. State officials mill about. But this man is about to scare the pinstripes off of some very powerful business leaders.
SPITZER: I thank you for coming down on this nice bright sunny day.
BRANCACCIO: This is Eliot Spitzer. He's the Attorney General for the state of New York. But make no mistake: what he's doing here will affect people all over the country.
On this day, Spitzer is telling the world that he believes the biggest insurance broker in the world, Marsh and McLennan, has been rigging insurance bids and taking kickbacks and thereby defrauding its customers.
SPITZER: It is disappointing for what it once again reveals about the craven disregard for ethics and the law in some of our largest corporations…
BRANCACCIO: It's not the first time he's gone on the attack.
CNBC ANCHOR: Hurricane Eliot today hits the insurance industry…
BROKAW [NBC Nightly News]: Attorney General Eliot Spitzer has charged…
CNBC ANCHOR: The industry, now in the crosshairs of corruption-hunter Eliot Spitzer…
BRANCACCIO: Over the last six years, Spitzer has uncovered what he sees as corrupt practices in some of the country's biggest industries: investment banks, drug companies, mutual funds.
SPITZER: This investigation is broad and deep and it is disappointing...
BRANCACCIO: His threats of prosecution have led to fines in the hundreds of millions of dollars. Just the announcement of a Spitzer investigation is enough to send a company's stock down a hole. But Spitzer has had an impact far beyond a company's stock price: virtually all of the industries he's targeted have been forced to change the way they operate, affecting long into the future the way they do business with millions of Americans.
But what exactly is Wall Street's top cop trying to enforce? He says it's the rules that make capitalism work.
BRANCACCIO: You've written that the role of the government as it applies to the markets is not one of passive spectator. You also said it wasn't one of lion tamer. I think the phrase was "market facilitator," you came up with.
SPITZER: Right, right.
BRANCACCIO: What do you mean by that?
SPITZER: Well, I begin with where I think most of us would begin which is to be fundamentally dedicated to the market economy. The free market works if it is properly bounded by a set of rules. The free market creates jobs, moves capital, creates wealth. I don't think there's any doubt it is the system that we believe in, support and want to encourage and ensure its survival. But those pieces will work only if there is integrity, transparency and a core honesty in the system that sometimes the market itself cannot guarantee. Government must guarantee that integrity, transparency and fair dealing.
BRANCACCIO: The argument is provocative: regulation doesn't stand in the way of markets. Rather, Spitzer's view is that following ground rules that are crystal clear actually helps business by increasing consumer confidence, making people more likely to spend and invest.
SPITZER: Today I'm announcing the preliminary results of a 10 month investigation of one of the nation' s most prominent Wall Street firms.
BRANCACCIO: Spitzer first got the attention of investors around the country in 2002 when he revealed that stock analysts for some of the country's biggest financial players were lying to their customers.
Take Merrill Lynch: their star internet analyst Henry Blodget was saying enthusiastic things about stocks in certain companies, including one called Infospace. But Spitzer found internal emails showing Blodget actually thought Infospace stock was a bad bet, "a piece of junk,"a "powder keg."
Why promote a stock you think is garbage? Spitzer alleged it was to suck up to Infospace and maybe then they would give some lucrative investment banking business to Merrill Lynch.
In 2003, Spitzer turned his attention to the mutual fund industry.
SPITZER: Today what we're doing is beginning to focus on mutual funds.
BRANCACCIO: Spitzer's team showed that dozens of companies were illegally letting their richest clients profit at the expense of smaller investors. Many on Wall Street were privately furious, but Spitzer had them by the horns.
SPITZER: I've been met with this push-back virtually every time we've made a major case. Somebody says, "Well, you shouldn't need to intervene. The market will solve the problem." Well, the market doesn't solve the problem if people are committing fraud and getting away with it. And that's why I said when the business model was consistent and flawed, we needed to step in and say, "No, your ethical violations need to be confronted."
BRANCACCIO: Daniel Gross has been tracking Spitzer's career for years. He writes a financial column for the online magazine SLATE.
GROSS: One of the things that distinguishes Spitzer from many other prosecutors is that he's really a creature of the world that many Wall Street executives inhabit.
BRANCACCIO: Gross says that New York's Attorney General has a lived a life that makes him especially suited to tangling with the titans of industry. Spitzer's family made it big in real estate. He's a child of privilege who's been a big Wall Street investor himself.
GROSS: That, I think, has given him a unique vantage point from which to assess what's wrong with these industries, figure out how to correct them. And when he's in the room with these executives at these very big companies, he knows how to speak to them.
BRANCACCIO: Spitzer's high-profile investigations have made him enemies, though few in the financial community risk expressing their distaste for him on camera. But there's one Wall Street insider who has no problem talking about Spitzer. James Cramer co-hosts a show on the financial channel CNBC. He used to work at Goldman Sachs then he ran one of the country's most successful hedge funds. And one of his investors was his friend and Harvard Law School classmate, Eliot Spitzer.
BRANCACCIO: You're a man who has long experience hanging out with captains of industry, people in the business community. What do they tell you when the name Eliot Spitzer comes up in conversation?
CRAMER: If they're in a group, they'll tell me that he's the Anti-Christ. If they're individual and we're alone at a bar, best thing. Best thing that ever happened. Because for the most part people want to be good, but whole cultures have flourished where the people who are honest don't do as well as the people who are dishonest. I think that Eliot is changing the calculus back to where the honesty is rewarded and the dishonest is out of favor again. Most people want to be honest.
BRANCACCIO: So this is an okay role for government?
CRAMER: I think it's a great role. It's a great role. We de-regulated to the point in this country where thrown bids are commonplace, where corrupt research is accepted, and where a lot of people, where you'll be in the room and everyone will say, "Look, so what? So the client doesn't know."
SPITZER: We have asked ourselves how do we confront those problems.
BRANCACCIO: Cramer says that a lot of the things Spitzer uncovered in his investigations were really open secrets on Wall Street. The in-crowd knew all along that investment banking research was corrupted by conflicts of interest or that mutual fund managers gave a key perk to their richest clients.
GROSS: In the '90s, we were in a bull market the entire decade. And a bull market covers up all kinds of sins. Nobody asked any questions when they were making money. Who was gonna rock the boat?
CRAMER: If it were just the so-called "few bad apples," then Eliot would be overstepping. But these are just whole orchards of corruption. And when I look at what the mutual funds did where they basically just stole from Mom and Pop, and it's almost every mutual fund did it. And everybody accepted it? I mean, institutionalized chicanery at a level that I find almost… You want to take a shower after you read this stuff.
BRANCACCIO: The problems on Wall Street came after of decades of Democrats and Republicans championing the idea of de-regulation.
At the same time, the watchdogs in Washington had the muzzles clamped on. The Securities and Exchange Commission the agency that's supposed to oversee investment banks and mutual funds had seen its budgets and staff squeezed for at least ten years.
Then in 2001, President Bush appointed Harvey Pitt to the SEC's top job. Pitt was a Washington lawyer who'd represented or lobbied for many of the same firms he was now supposed to watch over.
GROSS: So at precisely the time when a bulldog, a well-funded bulldog was needed in Washington, 2001, when Enron and then WorldCom and all these scandals broke, there was no leadership in Washington. The SEC was underfunded and it was poorly led. That created the vacuum for Spitzer to step in.
SPITZER: Washington, when it went through its spasm of deregulation, decided just to step back from enforcing even the most fundamental basic rules of integrity in the marketplace. The SEC went through a period and I think it's better now. But it went through a period where it really pulled back. It was pressured to pull back from addressing some of these core issues.
BRANCACCIO: But you clearly don't buy the argument that the best way for the markets to operate is for the good companies pleasing their customers more. They'll get the business. They will win. And the sleazy companies will ultimately be punished by their customers and they will lose.
SPITZER: Right. It didn't work is the simple answer. Every time we have found fundamental impropriety, whether it was the analysts, mutual funds, insurance, pharmaceuticals. And nobody in those sectors, not once, has any industry voice before we found the impropriety, has any self-regulatory body stood up and said, "Wait a minute, guys, we've gotta problem. Stop."
BRANCACCIO: To see how Eliot Spitzer operates, take a look at his most recent investigation into the insurance broker Marsh and McLennan. The case started out like many of his do: a couple of tips came into Spitzer's office suggesting he look into the relationship between insurance brokers and insurance companies.
SPITZER: We began asking questions of the most senior management at this company about a theoretical problem.
CRAMER: Every single one of these attacks that he makes starts like this. He goes into the insurance business and says, "Look, I think you guys are taking kickbacks." And some gray beard in the insurance industry or their lawyer will say to him, "You know, you don't really understand the insurance industry."
SPITZER: They came into my office and they said, "Eliot, you don't understand the insurance industry."
CRAMER: About three months later the lawyer then goes into the client on the defense side and says, "Hey listen, you know, Spitzer, actually, he's done a lot of homework." "No, no, no. He's just gunning for Governor. That's all he's about." Then another three months go by and the lawyer comes in and says, "Look, you know, I think that if we got in front of a jury, I think we're gonna go down." "Well, how much money do we have to pay?" "No, I mean, I think, I think you might go to jail." "Oh."
SPITZER: I said, "You're right. I don't understand the insurance industry. But I understand fraud and bid rigging."
BRANCACCIO: Fraud and bid rigging are pretty frank terms, but that's exactly what Spitzer accused Marsh of doing. Spitzer also alleged there were problems throughout the commercial insurance industry in America. His complaint also named industry heavyweights AIG, Ace, Hartford and Munich-American.
Here's how it works: let's say you start a company that makes wheelbarrows, and you want an insurance policy. You pay Marsh and in return, they're supposed to gather competing bids from different insurance companies. Say, insurance companies Tom, Dick and Harry and Marsh then helps your wheelbarrow company pick the best policy.
But Spitzer's investigation alleged that Marsh and others had the system rigged so that while it would appear that you were getting competitive bids, in fact, Marsh had already determined which insurer would get your business…in this case, Harry. Why Harry? Not only were you paying Marsh, but Harry was paying them too. The industry calls payments like this "contingent commissions" and says they've disclosed them for years. Spitzer alleges they're nothing more than kickbacks that were not at all clear to clients.
SPITZER: We learned very quickly that the claim of adequate disclosure was simply false. The disclosures that are made were not only grossly inadequate, they were often misleading. And indeed the companies and I say that plural intentionally make it difficult for their clients to find out because they do not want that information to be made available.
COFFEE: He objected to Marsh & McLennan's practice of receiving commissions from both the insurance company and from the customer.
BRANCACCIO: John Coffee studies white collar crime. He runs the Center on Corporate Governance at Columbia University Law School.
COFFEE: The industry said, "This is innocuous. This is a well established, long standing practice." And you could debate that. But he pushed a little harder than anyone else had. And he found that because of these contingent commissions, you actually had brokers rigging bids, because they wanted to determine which particular insurance company would win the auction because they knew they were going to get a bigger commission from one than the other.
BRANCACCIO: Rigging bids? It turns out insurance companies Tom and Dick were playing along too, submitting fake bids to give the appearance of competition. The reason? So Marsh would steer business to them next time.
COFFEE: Once you start rigging bids, then it's clear the system has moved into truly felonious behavior that is a per se violation of the anti-trust laws. And that's it. He was able the show not simply a conflict of interest, which people were well aware of, but that that conflict of interest had caused what I'll call clear cut smoking gun criminality.
BRANCACCIO: So how did the staid insurance industry become consumed in scandal, even outright criminality? The first thing you need to know is that there's no federal agency oversight into this nearly trillion dollar industry. The Federal Trade Commission used to have some authority, but Congress got rid of that back in 1980. So this powerful industry is regulated piecemeal on a state-by-state basis.
In New York state, Eliot Spitzer has become the scourge of the big insurance companies. And here's the part of the story that is trademark Spitzer. Not only did he denounce certain practices in the industry, not only did he strongly hint that Marsh replace its top leadership (which it did), but he told the industry how they had to change the way they do business.
For Marsh and McLennan, there's no more double dipping. By losing those commissions from insurers, Marsh is losing a big chunk of its annual income that was nearly 800 million dollars last year.
SPITZER: I've said to them, "Fellas, if you don't want me or people like me to be coming in bringing these prosecutions, stop the behavior before we find it. Stop it on your own and change the way you're doing business. And then you might get a remedy that you think is better from your perspective. But once I find this impropriety, we're gonna be in the position where we say, 'Here's how you gotta solve it.'"
BRANCACCIO: And that's one area where you to some extent in your office has been, I don't know, revolutionary. You don't necessarily go after the few bad apples. You often push quite hard for systematic change.
SPITZER: We do, and I'm attacked for it by some who say, "It's not your job." But on the other hand, where we see lines of business, entire sectors, where the way they're doing business is designed to capitalize upon a conflict of interest, for instance, if the entire sector seems to be based upon that type of relationship, then I say to myself "Simply picking out one or two individuals and using them as examples is almost counter-productive, because it sends a message to everybody else, "You can get away with it."
BRANCACCIO: It's just so wild though the top law enforcement official of a state having a comment on a business model of an entire industry. I mean, you don't have an MBA, do you?
BRANCACCIO: You have a law degree, as I understand.
SPITZER: I do have a law degree, the last time I checked. You're right. I mean I don't pretend to understand their businesses as well as they do. I think I understand them pretty well, quite frankly. By the time we're done investigating, I think I understand the larger structures of investment banking or the mutual fund industry or now the insurance sector well enough to know where things are broken. So you're right, I don't have an MBA. But we do, when we see criminal wrong-doing that cuts to the core and is central to the way business is being done, I feel that we've got an obligation to address the larger issue, rather than just the one manifestation of the problem.
BRANCACCIO: Marsh and McLennan has been hit hard by Spitzer's investigation: its stock has plummeted by nearly 38%, taking with it the value of thousands of pension plans of Marsh employees…and lots of jobs.
BRANCACCIO: I can understand the attractiveness of fighting for ethical behavior. But real life is complicated. When you fight for ethical behavior, one of the costs, in the case of the current insurance case, is that Marsh & McLennan... about 3,000 layoffs. That's 3,000 families, presumably. Does that ever get to you? Do you reflect on that?
SPITZER: Absolutely. It is very painful when you see regular families, good people, losing jobs, losing money in their portfolio because valuations drop. We have tried to cushion that in every way possible. We also have to enforce the rule of law. We have to ensure that there's integrity. And these are tough judgment calls, very tough judgment calls.
BRANCACCIO: Because implicit in this is the idea of collective responsibility. They're people losing their jobs who really didn't have a direct hand in it.
SPITZER: No question about it. There are people who lost their job at Marsh who were not involved in the wrongdoing. When we went to Marsh and said you have a problem here, because there's an underlying fraud, that is, that is leading to a revenue of 800 million dollars, they knew because they were going to have give up that revenue stream they had to downsize. That downsizing is not because we brought the cause of action against them. It's because their business model relied upon fraud and impropriety. They couldn't do it anymore.
BRANCACCIO: It strikes me that it takes a certain dark view of humanity to be Attorney General. What is it about your upbringing that left you with such a lack of trust?
SPITZER: No, no. Well, you see, I hope you're wrong about that. I mean I think it takes an affirmative view that we can be saved. You know, I don't want people taking that the wrong way. But you see, if I were essentially a pessimist, I'd throw up my hands and say, "Well, I'll go out there and play the game and just do well for myself and not care." It is the optimism and the notion that we can get people to play by the rules, if we are thoughtful in the way we enforce the law that keeps me going with this endeavor.
BRANCACCIO: The rap in some quarters about Eliot Spitzer is that you use these cases to get headlines because you seek higher office. Perhaps in fact the governorship of New York. How do you respond when you hear that?
SPITZER: Well, I guess what I would say is that I don't write the headlines. I don't determine what goes on what page of the newspaper. We make cases. We announce cases. So if these issues get attention, it's because the issues merit attention. If it is the case that I'm… and I've said this before, I'm considering running for governor of the state of New York, it's because of what we have done in this office, what I've tried to do. And we've been right in these cases. And I will not apologize for that. If we have revealed improprieties and wrongdoing, and the public will then pass judgment whether that is wise or not. That is the nature of our political process.
BRANCACCIO: If you do ultimately run, how are you gonna raise money from these big companies that you've been hassling for all these years?
SPITZER: I probably won't. And, you know, that's great. People should only be supportive if they agree with you. If they don't agree with me, they shouldn't give.
BRANCACCIO: Maybe you can raise money from these big companies who want you to become governor so you get out of their hair as Attorney General.
BRANCACCIO: Maybe that's a fundraising strategy.
SPITZER: Yea, I'll try it on them. I'm not sure it will work. But I'll tell them it came from you and I'll see. If it does, I'll let you know.