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Has Spitzer Saved Wall Street?

Hello, Iím Ben Wattenberg.

Enron, Worldcom, Tyco, Adelphia Ė these companies and many others are now synonymous with corporate scandal, with greed and corruption. Many Americans have looked to the government to bring Wall Street to heel, and one man has been seen as the most important anti-corporate crusader in the nationĖ New York State Attorney General Eliot Spitzer. He is an aggressive prosecutor who has taken on some of the business worldís biggest tycoons. He has also been criticized for using the power of his office to gain publicity for himself and to run for governor of New York state. Surprise. Is Eliot Spitzer bringing law and order to Wall Street? Or has he overstepped the role of Attorney General? To find out, Think Tank is joined this week by Brooke Masters, The Wall Street correspondent for one of Americaís great newspapers The Washington Post. She is author of the new book 'Spoiling for a Fight: The Rise of Eliot Spitzer.' The Topic Before the House: Has Spitzer Saved Wall Street? This Week on Think Tank.

WATTENBERG: Brooke Masters, you are the Wall Street correspondent for a great metropolitan newspaper, The Washington Post. Welcome to Think Tank.
MASTERS: Thanks for having me.
WATTENBERG: As we normally do, we begin by asking our guests to tell them something about themselves. So why donít you give a us a brief bio.
MASTERS: Iím a reporter for The Washington Post, and I have been for the last 17 years. Since 2002, Iíve been in New York covering mostly white collar crime and corporate scandal. So I had a front row seat for Martha Stewartís trial, and I sat through the trial of the WorldCom CEO.
WATTENBERG: Let me interrupt. Donít they sort of pick on well-known people to make an example?
MASTERS: They do occasionally. I mean, Little Kim would be another example. She went to jail for obstruction. Sheís a rapper in New York, and her case came up about a year later.
On the other hand, I covered a local court in Virginia, and I saw people go to jail for obstruction at least a couple times a year. Itís not that unusual. You canít go to a Grand Jury and lie to them.
WATTENBERG: Okay. Continue, please. Where were you born?
MASTERS: I was born in New York and grew up on Manhattanís Upper East Side and went off to Boston for school.
MASTERS: I went to Harvard. And then later on I got a Masterís degree from the London School of Economics.
WATTENBERG: Thatís pretty good.
MASTERS: Was pretty fun.
MASTERS: And I started working for The Washington Post right after college; covered a lot of different things -- local government, local schools, you know, politics, and then got into criminal justice and courts.
And then when WorldCom and Enron blew up in 2002, they realized the business section was going to need somebody who really understood courts, and so they added me to the staff.
WATTENBERG: Do you like it?
MASTERS: Love it.
WATTENBERG: Itís very interesting. I used to be able to get about two paragraphs into the story about interest rates go up when this broke down, and now I get into three paragraphs, but Iím learning.
MASTERS: Yeah, itís interesting. I always think about it -- my job is to write for real people who donít, in fact, want to hear about the machination. My competitors at The Wall Street Journal or The New York Times write for people on Wall Street --
MASTERS: -- who live and breathe the stuff.
MASTERS: I write for people who donít have time, you know. I figure my job is to tell you the things you really need to know before you go out and get a mortgage, what you really need to know when youíre picking your kidsí college education money, what should you do with it. And so I do a lot of that.
And I also cover how you can get ripped off, and thatís how I ended up covering white collar crime and Eliot Spitzer.
WATTENBERG: It is said of Eliot Spitzer, who can be characterized as a rich kid --
MASTERS: Oh, absolutely.
WATTENBERG: Yeah. He grew up in Riverdale, up in a very swanky neighborhood, and went to private schools -- that he is anti-Wall Street and anti-capitalist. Do you believe that?
MASTERS: I think he is much more in the Progressive tradition and by which I mean capital P, Progressive from the early part of the 20th century.
WATTENBERG: Theodore Roosevelt.
MASTERS: Theodore Roosevelt. Iím not saying heís Theodore Roosevelt --
WATTENBERG: No, I understand.
MASTERS: Iím saying in that tradition which, generally, the Progressives believed in capitalism, and they believed in banks, and they believed in a monetary system that worked and allowed free enterprise.
But they also believed that part of governmentís job was to sort of rein in the excesses, particularly when there was a power imbalance between, say, a big company and small investors or a big company and its workers.
WATTENBERG: You make the point in your book -- and a very interesting one it is -- that Louis Brandeis, who later became a Supreme Court Justice, was in that tradition and so, of course, was Rudy Giuliani, who did a heck of a job, but was criticized for the perp walk and you know, three guys in handcuffs and having the press before they were even indicted.
MASTERS: Yeah. Well, I think thatís true. I mean, Spitzer gets the same criticism, and Eliot Spitzerís big criticism is that he gets out and he holds these press conferences and says, you know, 'I have discovered wrongdoing' and tells the media about it and uses public shaming as a way to get companies to change their ways.
MASTERS: And there are many people who feel thatís inappropriate. They prefer the way the SEC, under Harvey Pitt and some of the more conciliatory regulators, operated. If you believe in that view of the world, when the SEC finds wrongdoing, they sit down with the industry or with the company and say, you know, 'We found wrongdoing. Letís agree on a settlement, and weíll go to the world and say we fixed it.'
Spitzerís view of the world generally has been 'Iíve found wrongdoing. Iím going to embarrass you, and then Iím going to make you pay.' And there are ups and downs and pluses and minuses to both approaches.
And one, you get a lot more headlines, which is nice for Eliot Spitzer, if you publicly embarrass people. You also make it a lot clearer to the small investor or the consumer exactly what was wrong.
WATTENBERG: Yeah, but, I mean, if you havenít even been indicted, let alone tried and convicted, you are presumed innocent under our code of justice.
MASTERS: It should be known that Spitzer has never ever brought criminal charges against a company, unlike the Justice Department which put Arthur Andersen out of business.
Spitzer believes firmly that you deal with companies in the civil arena. And so weíre not talking about convicting people of a crime. Weíre generally talking about companies that have been accused of civil wrongdoing and civil fraud, which is a different way of dealing with them.
And civil fraud cases often involve years and years of litigation and back forth, so itís not quite so unusual.
WATTENBERG: Do you think that Eliot Spitzer is doing what he is doing in part to gain publicity which would help him in his run for Governor of New York State, which has in the past, traditionally, been a launching pad for the presidency?
MASTERS: I think --
WATTENBERG: Heís got that jaw --
MASTERS: Heís got that jutting jaw, doesnít he? He stands up there.
WATTENBERG: Yeah, heís a take charge type guy.
MASTERS: He is. I think itís complicated with him because I think heís wildly ambitious, but ambitious for an idea in some ways; not just 'Iím Eliot Spitzer. I want to be famous,' but more, 'Iím Eliot Spitzer. I think I can make the world a better place. My vision of the world is a good one.'
And so I think everything he does is aimed at sort of hoisting his vision of the world on Wall Street, on the way our country regulates pollution, on the labor markets. Heís done a lot of minimum wage enforcement.
And so heís not your classic self-promoter in that he just wants to be famous. I think he really does think his vision of the world is a better one.
And what you think of Eliot Spitzer is largely dependent on whether you share his vision. If you do share his vision, I think most of his sins are pretty forgivable. If you donít like his vision, heís not a very nice person, you know, and heís kind of scary.
WATTENBERG: What is the Martin Act, which is something that I had not heard of before?
MASTERS: The Martin Act is a 1921 securities fraud
act --
WATTENBERG: New York State.
MASTERS: -- in New York State.
MASTERS: It is a part of collection of laws known as the Blue Sky Laws that were passed in the teens and twenties in every state in this country, and they basically say you canít commit securities fraud.
In most states, they have sort of been subsumed by the Federal 1934 Act that created the Securities and Exchange Commission and set the standards for Federal securities fraud.
In New York, the law still exists, and the other statesí laws still exist, but New Yorkís law is unusual, the Martin Act, because its definition of fraud is very broad. It basically -- unlike the Federal statutes and most states, you donít have to prove that the person who committed the fraud actually intended to defraud. They just did something deceptive, whether or not they meant to. So it gives a lot of power to law enforcement in New York.
WATTENBERG: But Federal law would trump that?
MASTERS: Not in the state case. See, thatís Eliot Spitzerís power is he can bring a case and probably win it under the Martin Act when the SEC could not bring a case and Federal prosecutors could not bring a case.
Also, under the Martin Act, as itís been amended through the years, the Attorney General can start an investigation and start filing pieces of paper and make public his evidence without saying, 'I intend to go criminal. I intend to bring a civil case.'
And that gives him a lot of power over things like a public company because if he threatens a criminal investigation, even if he ends up doing just a civil investigation, the idea that you might face a corporate crime is always hanging over. Itís sort of this looming threat.
WATTENBERG: Do you invest? And when you do, do you state, you know, caveat, 'I own some shares of it'?
MASTERS: The way weíve worked it -- because my husband works on Wall Street and I cover Wall Street for The Washington Post is we have almost all of our money in whatís known as a discretionary account where the broker has control over it, and he does stuff. And I get notifications afterwards.
But I donít want to know what heís doing because I donít want to have any possibility that what I know is improper inside information. And similarly, my husband has the same problem because he works on deals.
WATTENBERG: Can you point to a case where Eliot Spitzer, who, after all, is only the Attorney General of one state, be it a big one, has sort of set up a new standard operating procedure that holds sway throughout the country?
MASTERS: Absolutely. The research analyst case, where in April of 2003, he made public all of these emails of a stock analyst who worked for Merrill Lynch, named Henry Blodget had written.
Blodget was a very -- heís actually a high school schoolmate of mine -- is a very attractive, well-spoken, bright guy who was on TV all the time because he was perfect on TV. And he would talk about Internet stocks and say, you know, 'This one weíre rating a buy; this one weíre rating a sell.'
And his reports often would rate a company a buy, and then his emails privately would refer to the company as a dog or a piece of --
MASTERS: And legally, actually, when you actually look at it, his reports are probably defensible. But Spitzer made public all these emails, and it looked awful. And the result was Merrill Lynch started losing market cap. People started selling its stock.
And Spitzer had joined forces with the SEC and the NAC, which is the industry regulator, and together they worked together to create this global settlement that affected 12 of the largest investment banks and has changed the way they do research.
WATTENBERG: Did Eliot Spitzer give you interviews for this book?
MASTERS: Absolutely. I think I did 13 or 14 with him, and I had already interviewed him when I was covering for The Post.
MASTERS: Heís really charming.
WATTENBERG: But very intense, I would assume?
MASTERS: Very intense. I mean, from what I learned of his upbringing, he grew up in an extremely intense household. His aides used to refer to him as having a metabolism of a hummingbird. Heís just always moving.
But heís the kind of guy who in every interview we wasted, from my point of view, talking about my kids because he actually does do retail politics. I mean, he likes talking to people. He likes chatting about whatever he thinks might interest them.
Itís very interesting. Heís very different one-on-one than he is behind that podium giving one of his threatening press conferences.
WATTENBERG: The Securities and Exchange Commission has an interesting history. I know Arthur Levitt sounded the alarm about the so-called emerging markets, and I think he turned out to be right.
MASTERS: Uh-huh.
WATTENBERG: I personally think the only markets worthwhile to investors other than the United States is probably India, but there are some complicated reasons.
Do they, in your judgment, overstep their authority?
MASTERS: I think the SEC was caught flat-footed by Spitzer and by all these collapsing companies. At the time, they were understaffed. They had lost a lot of people because during the boom times every lawyer who was really -- not every lawyer, but many lawyers who were very good left for private practice.
And then they jumped up and tried and to a large extent, succeeded in responding to the crises by building cases and passing new regulations.
I always take complaints of over-stepped authority with a grain of salt because itís never fun to have the rules change. And Wall Street got used to kind of a fast and easy way of dealing with the SEC; of sort of saying, 'Well, yeah, yeah, yeah, whatever you say.'
And suddenly in 2002 Ď03, the hammer came back down again. So these rules are real and you have to abide by them. And until things shake out, itís hard to tell whatís overstepping and what was simply just reestablishing rules that needed to be reestablished.
WATTENBERG: So, now, Spitzer functions under a state umbrella.
MASTERS: Uh-huh.
WATTENBERG: But has what he has done impacted the Federal code?
MASTERS: Not so much the Federal code I would say --
WATTENBERG: Federal --
MASTERS: -- but more Federal employees, absolutely, because he kept finding these cases; first, the stock analyst, like Henry Blodget, and then in mutual funds, he found the mutual fund companies were offering secret deals to big investors that ended up hurting small investors.
It was very embarrassing for the SEC that Spitzer had found these cases on their watch. And so they have become much more aggressive and tried to be more thoughtful about spotting problems before they come problems. I think theyíve really been reinvigorated.
WATTENBERG: Letís get back to Eliot Spitzer. Has he announced yet for the governorship, did you say?
MASTERS: Oh, yes.
WATTENBERG: And is there some real or covert committee to raise some so-called exploratory funds for a run for the presidency in 2008?
MASTERS: There doesnít seem to be a committee right now, but he has a lot of money he could obviously roll over into something else. Heís got -- I think the last reports I saw -- were $19-million on hand.
MASTERS: Yeah, which for a governorís race where his primary opponent is polling in the single digits and his Republican opponent is polling 50 points behind him, he doesnít need to spend all that. So heís going to have a lot of cash. Plus, his family is wealthy.
WATTENBERG: And then under the rules of this Buckley-Vallejo thing, he could self-finance his presidential race?
MASTERS: Itís a little complicated for him because the money in the Spitzer family is in Bernard Spitzerís hands. Thatís the father. And I forget what the Federal rule is on that.
It actually got him into trouble when he ran for Attorney General. In New York State, a father canít finance a son. And so Spitzer, Eliot Spitzer, did a series of complicated loans in 1994 and 1998 which essentially meant his father loaned him money so that he could run. And that almost cost him the election in 1998. When it was revealed that thatís how he had done it, there was a lot of unhappiness.
And so Iím not clear how that would play in the Federal election.
WATTENBERG: Has The Wall Street Journal, which is sort of the Bible of the street, have they displayed a particular antagonism toward Eliot Spitzer and vice-versa?
MASTERS: The Wall Street Journalís editorial page absolutely hates him. I mean, they run the ugliest cartoons of him you have ever seen. And they routinely write editorials, 'Mr. Spitzer is basically the worst thing that ever happened to Wall Street. Heís trying to kill the American Dream.'
He basically -- he really gets their goat because not only does he stand for regulation, which they generally oppose because theyíre free marketeers, he has turned one of their beloved principles on its head because they are big advocates of the principle of federalism; that the Federal Government should get out of things and allow states to experiment and do their own thing.
And Spitzer said, 'Well, if youíre going to let states do their own thing, my version of do your own thing is to get involved and do heavy enforcement. So you have opened the door to me.' And so itís incredibly cheeky and it really annoys them.
WATTENBERG: Now, I want to ask you about a very fascinating New York politician. Itís not Hillary Clinton, but Senator Charles Schumer.
Now, it said on the Hill -- and Iíve seen evidence of it -- that never get between Chuck Schumer and a television camera. He is the --
MASTERS: Those Sunday afternoon press conferences.
WATTENBERG: Right. He does good work, but he is a publicity hound of the first order in my judgment and the judgment of many others.
Now, it is said -- and we have always have that nice fudge phrase, it is said -- that he would have liked to have run for Governor because thatís a better launching pad for national office than a senator, but that Eliot Spitzer was so powerful that he stayed out. Is that the buck youíve heard?
MASTERS: There was a scrum sort of late last year --
WATTENBERG: Thatís a good rugby phrase, yeah.
MASTERS: Absolutely -- where Schumer was making noises about running. And interestingly, Spitzer declared for Governor a year ago or more than a year ago, a year-and-a-half ago, which is incredibly early in New York politics. But most people think that was partly as sort of a marker session where 'I will not stand down. If you want to
run' --
WATTENBERG: Schumer said that?
MASTERS: No. Spitzer --
WATTENBERG: Oh, Spitzer, right.
MASTERS: -- is saying to Schumer early on, 'Iím going to run for Governor. If you want to run for Governor, youíre going to have to take me on in the primary, and itís going to be brutal.'
WATTENBERG: How old is Spitzer?
MASTERS: He is 47.
WATTENBERG: So he would be 49 in 2008.
MASTERS: The election is this year. If he wins --
MASTERS: In í06, and he will be Governor --
WATTENBERG: Forty-nine in 2008?
WATTENBERG: Which is six years older than John Kennedy was when he ran for President.
WATTENBERG: So, in theory, as Hillary Clinton said, they ran the first time just to see what it was like. And thereís a good record that unless you run once, you donít really know how the game is played.
WATTENBERG: Now, it said that Eliot Spitzer is presidential material, and New Mexico Governor Richardson, who himself has some presidential or vice presidential ambitions, says heís the future of the Democratic Party, which has come very close in recent years, but close but no cigar.
And Iím even still a registered Democrat because I live in the District and I like to vote in those primaries. Is he, as they say, in your judgment, presidential timber?
MASTERS: I think heís probably somebody who needs to go be Governor first.
WATTENBERG: Oh, yeah, no question.
MASTERS: I think heís got potential. His appeal for Democrats is that he polls better among men than women which is completely different than your average Democrat.
He also sort of has the 'tough on crime' prosecutor image which counters another one of the Democratic Partyís historic weaknesses.
The down side, of course, is heís from the northeast.
MASTERS: Heís Jewish; culturally Jewish rather than particularly observant, but thatís probably not going to help him in red states. So itís hard to know what -- I think itís tough to make a judgment whether heís presidential material yet.
WATTENBERG: Itís very interesting. They did some polling on Joe Lieberman in the South, and itís a different situation. He is observant, and he turned out to run very well among Evangelicals and Fundamental Christians because he believes in something.
MASTERS: Right, and I donít think that works for Spitzer --
WATTENBERG: -- not that works for Spitzer.
MASTERS: Heís a guy raised culturally Jewish, married to a Christian. His wife is relatively observant, I think, as a Protestant.
WATTENBERG: Brooke, if you can, in total, how much has he gathered in settlements?
MASTERS: Let me see if I can do the math.
WATTENBERG: Does he have convictions or just out of court settlements?
MASTERS: The vast majority of his cases are civil. So they are always money judgments --
MASTERS: -- not sending people to jail.
MASTERS: Thereís the $1.3 trillion -- billion -- sorry -- global settlement with the research banks. Thereís about four billion in mutual fund money, and then you add the insurance stuff. Now weíre pushing six-eight -- between six and eight billion here if you add up the insurance, the research and --
WATTENBERG: And that goes to the State Treasury?
MASTERS: No. The research analyst money was divided up, and New York got a couple hundred million of it, and that went to State Treasury. A lot of the research analyst money went to investor restitution that the SEC handled.
In the mutual fund cases, almost all of the money goes straight to investor restitution. What the funds promised was they would put money back into their funds, the fund companies put money back in their funds that went to investors. And they also promised to lower fees for investors. So thatís money for investors. Doesnít go near the Treasury.
In the insurance cases, thereís some portion -- itís usually about a third -- that it goes to the State, but the State was a victim in the AIG case because one of the allegations was that AIG failed to pay workersí compensation premiums or taxes on workersí compensation premiums.
WATTENBERG: there was this case of the insurance company, AIG --
MASTERS: Uh-huh.
WATTENBERG: -- and a guy named Hank Greenberg, not the --
MASTERS: Still going.
WATTENBERG: -- Detroit Tiger slugger. And he was, what, indicted and convicted or --
WATTENBERG: -- indicted --
WATTENBERG: -- or not --
MASTERS: Not even indicted. Heís controversial. He was the Chairman of AIG --
MASTERS: -- which is an enormous insurance company.
MASTERS: He was personally involved in a transaction with another insurance company called General Re --
WATTENBERG: Right, or they are a reinsurance
company --
MASTERS: Itís a reinsurance company where basically they bought reinsurance. And according to a pending indictment, not of Mr. Greenberg, whoís never been touched, but of the other guy in the transaction, the CEO of General Re, they structured a deal that was accounting fraud.
They basically said, 'We will loan you this amount of money and weíll pretend itís insurance so your bottom line looks better.'
WATTENBERG: Do you think he understood that, that it was violating the law, when he did it?
MASTERS: Greenberg has only been charged with civil fraud which suggests that the prosecutors and the regulators themselves arenít sure yet; at least they donít have the evidence right now.
Whatís clear is that Greenberg and Ron Ferguson, who ran General Re, had a conversation about structuring a transaction and that General Reís folks then went off and did something that a bunch of them have pled guilty to crimes for.
WATTENBERG: On balance, has Eliot Spitzer been successful in reforming Wall Street?
MASTERS: I think he and the revitalized SEC have made people more aware that there are consequences for breaking the rules. And I think that serves as sort of a temporary stop sign.
He himself likens it -- and I think this is a good analogy -- to when youíre driving down the interstate and you see a policeman and you slow down.
WATTENBERG: Uh-huh. Yeah, that makes sense.
MASTERS: And your first thought is, oh, my goodness, I better slow down. Your second thought is, boy, Iím glad it wasnít me. And your third thought is heís over there; now I can go fast again.
And he himself would predict -- and Iíve seen him do it -- that in a couple of years, people will have forgotten. And once again, the people who want to break the rules or at least bend them will gain more power than the people who say 'These are the rules; you have to stick with them.'
And thatís why he would argue you need an active, energetic regulatory state that gets in there and reminds people periodically there are rules and you have to stick with them.
WATTENBERG: Brooke Masters, weíre going to have to leave it here. Thank you very much for joining us on Think Tank, and thank you for joining us. Please donít forget to send us your comments via email. We think it makes our program better.
For Think Tank, Iím Ben Wattenberg.

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