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Eliot Spitzer: Cleaning Up Capitalism

Eliot Spitzer: Cleaning Up Capitalism

Eliot Spitzer became New York state's 63rd attorney general on January 1, 1999. Since that time, he has advanced initiatives to make New York a national leader in investor protection, environmental stewardship, labor rights, personal privacy, public safety, and criminal law enforcement.

I know it's been a long afternoon, but if your mind wanders even a little, you will get a subpoena on your way out. We have our ways of knowing. I was on Day One a skeptic of starting the magazine. I told Bill back then that when I walk past the newsstand 90% of the stuff is pornography. How can you compete with that stuff? Eight years down the road, you really have changed the quality of business. I'm not allowed to do product placements. But they didn't tell me that I couldn't wear a T-shirt.

I want to talk about three different issues. The first issue I want to talk about is federalism. The second issue is corporate governance writ large. And the third issue is the Wall Street settlement.

What is federalism? If you want to see one thread that's run through the last few decades, it's a new federalism that changes the relationship between the federal government and the states. When I was in law school, there was a new vision of the relationship between states and the federal government. At first, all power went to the nation. Then people wanted power to devolve back to the states. At first, I thought that was a bad idea. Nobody cared what I thought about the new federalism back then.

We all know what happened. The new federalism won. We lost. There has been a constraint imposed on the federal government over the last 15 years. That has been the unifying theme for the Rehnquist court. Put Bush v. Gore aside, and this is the defining feature.

Power is a zero sum game. If they're turning it down, who's not going to take it on? Whoever would have thought that the state AG's could take on the tobacco industry and win? We did. Who would have thought that we could take on the energy companies? They're going to install state-of-the-art scrubbers on eight smokestacks because the state of New York sued them -- and won.

Here's the conceptual problem I have with the new federalist world view. They think there's an excessive concentration of power in the federal government. They talk the game of giving power back to the states, but as soon as someone starts to take it, they put handcuffs on us to restrict us. What's really going on is that they're against government intervention regardless of where it comes from. And now that they control the White House, they've since decided that they want power back in the venues that they control. They're taking power back from the states. That's the backdrop of federalism, which I give you solely to tell you why you find state AG's on your radar screen.

Issue Two is corporate governance. Understand something about the decline we've seen on Wall Street. It's touched every sector of our society. It's touched our government. It's touched nonprofits. It's touched our media. Our media is going through a phase of self-examination itself. It's obviously touched the private sector. The only person I know who's written something smart about this is Patrick Moynihan. He wrote something about crime. Over time we can stop prosecuting the low-level crimes because we don't have the resources. What happens to that is that our societal expectations for behavior disappear. We confronted this in the criminal justice system with the broken windows theory.

Reinforcing our values by prosecuting petty offenses changed the dynamic of how we approach our values. The same thing needs to happen in terms of corporate crime. CEOs were beginning to feel like they were beyond the reach of what is going on. Richard Nixon was the imperial president. The imperial presidency occurred because Congress and the Senate failed to take responsibility for their mandate. The same thing happened in the business world. Everyone failed to live up to their mandate.

What's been happening over the last two or three years now is that we've been ignoring the links in the chain. If you go down through each of these decision makers, everything is being resuscitated and laws are being rewritten. The one we're going to have the hardest time rewriting is institutional shareholders. Equity brings responsibility. It's hard to figure out how to get institutional shareholders to wake up. Think about the trilogy of words: Passive institutional shareholders. We have to work very hard to change that culture.

The third piece is our Wall Street settlement. First, I began this effort with a trilogy of objectives: structural reform, restitution, and getting individual wrongdoers to pay the penalty. The entire business model of the financial sector was wrong. We had woven a sector with tremendous conflicts of interest. No one wanted to do anything about it because a lot of money was being made. The only people who were left out of it were the small investors. What used to be viewed as a conflict of interest is now viewed as a synergy.

Before I announced any of this I went to the regulators and said I didn't know if my office had the stature to handle this. No one else wanted to help. These guys were simply asleep at the switch. The first thing we have to address is the relationship between analysts and investment banks. We need to sever that relationship. Also, it's not as though CEO's were not being well compensated during this period. Don't you think spinning can somehow be eliminated as one of the perks given to CEO's when they report to the capital markets?

We have a choice. This is rough justice. We understand the need to restore some sanity to the marketplace. Signing this deal created a paradigm that could work, and we could move on. The week before we filed the Merrill Lynch case, someone called me up and said, "Eliot, I have to warn you. We have some very powerful friends." That's one of the worst negotiating strategies I've ever heard of. We took the case to them. At the end of the day, the only defense they had is that everyone else is doing it.

How about I ask myself some questions and then answer them for you? OK. Here goes. Why was it only worth $1.4 billion? Restitution will not come from the $1.4 billion. That is a message to the banks that they screwed up and we really mean it. The real money will come from the class-action suits and other judicial processes. Shouldn't people go to jail? Yes, they should go to jail. In the end analysis, we needed to ask whether we wanted to destroy these banks. The answer is no. I would contrast our approach with what the DOJ did to Arthur Andersen. I think that indicting Arthur Andersen was the wrong thing to do. Do they get it? The Wall Street Journal even had an article that asked if they get it. Nominating Sandy Weill to the New York Stock Exchange as the public voice was completely idiotic. And the article about how we're regulating risk out of the system was dead wrong. I think he knows what the difference is between fraud and risk. Then there's Phil Purcell who made some ill-timed comments about Morgan Stanley's position on the settlement. Do they get it? Time will tell.

Let me give you two pieces of advice. One is practical. And one is more theoretical. Never talk when you can nod. And never write when you can talk. My only addendum is never put it in an email. The other piece advice I would give is that I don't think you can teach ethics. You can teach it by behavior. By the time someone's in business school, if they're not going to get it, it's just a risk-reward analysis to them. The one way we're going to bring people back into the system is shame. The shame of being smeared across the headlines will work. Shame. And when you hire someone, buy them a copy of "Bonfire of the Vanities." It makes the point that nobody is beyond reproach. Everybody can be subjected to that. That's incredibly important.

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