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Thomas Ferguson: Why Spitzer’s Return Terrifies Big Finance

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By Thomas Ferguson, Professor of Political Science at the University of Massachusetts, in Boston and a Senior Fellow at the Roosevelt Institute

You didn’t have to be in New York to feel the shudder on Wall Street when Eliot Spitzer announced that he was running for New York City Comptroller. It was enough to read between the lines of just about any financial paper in the world.

Suddenly, the Masters of the Universe were staring at their worst nightmare: the prospect of a comeback by the only major politician in the U.S. whose deeds — and not simply words —prove that he does not think corporate titans are too big to jail.

Who, when the Justice Department, Congress, and the Securities and Exchange Commission all defaulted in the wake of a tidal wave of financial frauds, creatively used New York State’s Martin Act to go where they wouldn’t and subpoena emails and corporate records of the malefactors of great wealth, winning convictions and big settlements.

Who in 2005, as New York State Attorney General, actually sued AIG instead of thinking up ways to hand it billions of dollars of taxpayers’ money.

Who brought a suit over the Gilded Age compensation package Stock Exchange head Richard Grasso had been awarded by his chums on the board.

And who in 2013 with business as usual once again the order of the day, is promising to review how the Comptroller’s Office, which controls New York City’s vast pension funds, does business with Wall Street and corporate America. With his incisive questions about Wall Street’s fee structures and criticism of the passive stances most pension funds take to skyrocketing executive compensation in the companies they invest in, Eliot Spitzer is the last person on earth Wall Street wants to see in that slot.

Not surprisingly, the result has been a wave of high decibel attacks in the major media. Many concentrate on the events surrounding his sensational exit from the New York State Governor’s office. But others actually put forward substantive reasons why New Yorkers should prefer the status quo.

Some of these are ludicrous. A piece in the New York Times, for example, seriously advanced the idea that Spitzer had to be stopped because of an allegedly “out of control ego.” This, of course, is laughable, given that anyone with even a nodding familiarity with American politicians quickly realizes that elected officials in both political parties carry on like peacocks, strutting about with a sense of self-righteous importance that frequently borders on the grotesque.

Another claim the article advanced, about Spitzer’s alleged “combative, go it alone style” is simply a smokescreen. In our money-driven political system there is no way – just none – that any serious check on financial excess is going to emerge from cooperation with officials of either major party or most of the regulators they appoint. Just look at how the Treasury, the Fed, the SEC, and Congress responded to 2008, or the stunning revelations since about the gangster-like activities of HSBC, UBS, and other banks.

A post by John Carney on CNBC advanced a line of thought that is less obviously silly but also tough to credit: That “investors” should fear Spitzer because he would transform the City pension funds into activist investing units. Citing some academic studies, Carney suggested that gains reaped by activist investors come mostly at the expense of other investors.

The argument is so hypothetical that it is hard to evaluate. The reference to “activism” that triggered Carney’s comment on Spitzer derives from an extraordinary situation. When Congress stalemated once again over gun control in the wake of the shootings in Connecticut and other states, Spitzer and many other observers suggested that possibly having pension funds exert pressure on the private equity firm Cerberus Capital, which had a powerful position within the gun industry, might provide a way forward. The truth is that given the colossal toll that gun-related violence exacts on Americans, many New Yorkers are unlikely to disagree with Spitzer’s proposal. But it’s such a special case that it hardly justifies the broad jump Carney then makes to academic studies critical of general shareholder activism, while his further strictures against union pension funds are entirely irrelevant if they are true at all, which is a question too big to consider here.

The real point is this. None of the considerations the CNBC piece adduces are very relevant to evaluating what would make sense for the Comptroller to do and they are not seriously considered in the academic studies he cites. The office is not a union. Nor is it easy to understand why Carney is troubled at the prospect that targeted activism might indeed raise rates of return for the city’s pension funds. Since when were pension funds supposed to yield up returns for the benefit of other investors? Why should the little people earn less on their investments than the 1 percent?

The compelling case for activism in the Comptroller’s Office by somebody of Spitzer’s intelligence, knowledge, and experience rests mostly on quite different grounds. As Spitzer has observed, most pension funds put up little or no resistance to management’s soaring claims for compensation. These come massively at the expense of investors as a group; pushing back would benefit investors in general and, obviously, beneficiaries of City pension funds. At a time when the air is filled with sometimes dubious claims of pension fund inadequacies, increasing returns to the City pension funds would be a real triumph. You can be sure, however, that the threat to ever-escalating executive salaries fuels a lot of the animus to Spitzer within much of big business and finance.

No less important, though, is another reality to which Spitzer has alluded to from time to time. Wall Street overcharges for financial advice and pension funds often find it expedient to tolerate this, rather than shop vigorously around. Studies of pension funds returns routinely note the frequency with which high fees accompany relatively shoddy performance, often over many years. It is high time attention was focused on this situation; Spitzer would likely do that.

A final point is closely related: Somehow, public pension funds only infrequently take steps that are normal in the world of big finance to protect the interests of the people they supposedly represent. The most vivid demonstration of this towering reality is perhaps the rarity of public pension fund suits to recover losses inflicted on them during the financial crisis of 2008. Wall Street sold all kinds of junk to publicly held funds, including pension funds. Many of these so-called structured financial products inflicted gigantic losses on the public. But while private funds often went back to the sellers and either threatened or actually sued to be compensated, most state and local funds have done little. A few states, notably North Carolina, have moved vigorously to defend the interests of their clients and citizens, but most have sat on their hands, even ignoring the outrageous London Interbank Offered Rate (LIBOR) revelations that plainly cost funds controlled by cities and states truly enormous sums.

Recent polls suggest that many citizens sense that the public’s watchdogs have been behaving like pampered pussycats and that they are sick and tired of it. Despite the propaganda onslaught, surveys suggest that a plurality of New Yorkers — including women voters who understand losses unregulated finance inflicts on women and ways pension systems often shortchange them — are favorable to Spitzer’s bid. But make no mistake, his presence in the New York City Comptroller’s Office would be a direct threat to the interests that have consistently blocked financial reform while mulcting the public. The Comptroller’s Office has subpoena power.

If there is anything we have learned from the long, mostly unsuccessful effort to effectively reregulate finance, it is the enduring political power of big finance and its long reach in the media and apparently unconnected community organizations. I do not doubt stories that various Wall Street titans are considering unrolling their might bankrolls yet again for “independent expenditures” against Spitzer or that a mighty new effort is shortly to get underway on behalf of “family values” financed by billionaires whose private lives often would not bear scrutiny. I regret to say also that you can confidently expect that some parts of organized labor will join the effort to snuff out the possibility that somebody who is not working for Wall Street will occupy the Comptoller’s Office.

But do not be misled. The interests at stake are about as clearly defined as any of us will ever see.

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78 comments

  1. Gerard Pierce

    There used to be an old story about hitting a mule between the eyes with a 2×4 – the idea being that before you can get anyhing done you have to get his attention.

    I have a daydream – a RICO suit aimed at the banks, politicians and newspapers who will be trying to take Spitzer out.

    It would be worth the price of admission to read the responses where they allege to the court and the public that they are not racketeers and are not corrupt.

    The case would instantly be thrown out of every court except the court of public opinion.

    I can hear an echo from out of the past: “I am not a crook”. But I shouldn’t pick on the ghost of Nixon. This is a bipartisan deal.

    All we need is a few individuals who have already lost everything but have not yet filed bankrupcy.

  2. F. Beard

    Wow! The system must be frightened that it is willing to offer human sacrifices.

    We should not be satisfied till the system itself is fundamentally reformed.

  3. Paula DeAngelis

    By all means, yes! Elect Eliot Spitzer comptroller (or controller if you prefer).

    Let’s make New York City even MORE friendly to business and commerce than it already is! Not only will businesses have the incentive to run the gauntlet of the nation’s most byzantine regulatory and tax regimes, they can cower in overwhelming fear that their actions might offend the whims of an egocentric (and arguably unstable) sex addict who will use his public platform to eviscerate them personally and professionally without regard to any fact-based reallity.

    Ha! Yes! Absolutely!!! Support Eliot Spitzer! After all, what are these businesses gonna do?

    Move????

    1. Aussie F

      “After all, what are these businesses gonna do? Move?”

      We live in hope. Let’s send the finanical parasites packing and have them engage in their rent seeking elsewhere. After all, there’s lots of room in Asia, and one day we may even enjoy the amusing spectacle of the bankers demanding a bailout from Singapore and likely recieving some exemplary sentences instead.

      1. Bill

        :0)

        Maybe we could outsource TBTF to China.
        Think China now has the death penalty of large finacial fraud at least if you are not too connected to prosecute.

    2. diptherio

      You know, you sound just like the NPR reporters who covered this story the other day. Spitzer wants back into public life, but he had sex with hookers, what’s he thinking?!? Also, he’s got an ego [gasp]. And he must not have much support since he’s having to fund his own campaign (never mind gathering twice the signatures needed to get on the ballot in a very short period of time).

      Just the fact that the bankers hate him should be enough to get everybody else in NY to vote for him. A few hookers vs. globe-spanning, economy-destroying, life-wrecking fraud…hmmm, give me the “sex addict” any day.

      (oh, and by the bye, a little birdy told me that Blankfien, Dimon, Stampf, et al. regularly make use of NY’s women-of-negotiable-affection…really).

      1. F. Beard

        Wait? I though our society was sexually liberated? So only homosexual sex outside marriage is OK?

        Jesus had nothing to say against prostitutes other than “Go and sin no more” (after forgiving their sins) but he gave the money-loving Pharisees an earful – so much so that they plotted to kill Him.

      2. Emma

        One might conclude that when it comes to matters related to sex and money in the US, there are far more morals surrounding sex than money.
        It makes crowd psychology in the Sahara a whole lot easier to understand…..

    3. petridish

      Paula De…,

      You’re KIDDING, right? “Egotistical?” “SEX ADDICT?”

      Don’t bother answering, your comment has got to be a joke.

    4. charles sereno

      @ Paula DeAngelis
      I infer that your serious concern about Eliot Spitzer boils down to this. You think he is an egocentric (and arguably unstable) sex addict. That by itself doesn’t seem to be an insuperable obstacle. The real danger comes from such a character having whims which are easily offended, sending businesses cowering in overwhelming fear of being personally and professionally eviscerated. A professional evisceration itself, presumably, is not necessarily a bad thing — only when it is conducted publicly “without regard to any fact-based reallity (sic).” Ha! Mr. Spitzer may be qualified, but he malciously refuses to face facts on the ground in New York City.

    5. Massinissa

      If he is an egotistcal sex addict, but he still makes the financial markets cower in clear fear, then frankly my dear, I dont give a damn.

      Some flaws can be overshadowed by certain merits.

      And quite frankly, someone needs a strong ego when they stand up to financial powers. Such a game is not for the meek or faint of heart.

      And anyway, so he has plenty of sex. What exactly is the problem? This isnt the 1950s. Folks can have as much consensual sex as they want, and its really none of my business. As long as, you know, they dont do it in public places ^_^

  4. Clive

    I’d be willing to volunteer to start a newspeak glossary for NC, translating how the stock phrases trotted out by the mainstream media should be read in context when fighting the vested financial and political interests is discussed.

    A starter-for-ten:

    “radical” = proposing anything which impinges on TBTF profiteering
    “untested” = proposing to reintroduce some regulation which used to work just fine, got rescinded, now needs to be implemented again
    “isolated” = an individual who speaks out against TBTF vested interests
    “conspiring” = a group such as MMT economists who, say, writes collectively on a subject which dares to question what the concept of money is actually all about
    “socialist” = any suggestion that corporations can’t just make out like bandits
    “communist” = any suggestion that corporations engaged in fraud might just be held to account
    “anti-business” = a proposal involving consumer protection of some sort
    “pro-business” = a proposal involving the reduction of consumer protection

    No wonder the Japanese distrust the written language.

    1. F. Beard

      Yep. People keep refusing to do what’s fundamentally needed which is to euthanize the banks and establish ethical money creation instead.

      “The issue which has swept down the centuries and which will have to be fought sooner or later is The People vs. The Banks.” – Lord Acton, Historian, 1834 – 1902

      Shame on any generation that allows them to continue their trouble making! I guess some people have no concern for their children or grandchildren.

      1. Massinissa

        Republican = See Sociopath.

        Fixed it for you. Since we all know all politicians are sociopaths.

        If A = B, and B = C, then A = C, yeah?

    2. diptherio

      I seem to recall a Taoist story about priests at a temple deciding to write down the laws on the sides of the cauldrons where people came to make their sacrifices (the laws being oral up till then) so that the people would become familiar with them. A Taoist sage protested, however, that once the laws were written down, people would simply argue over the precise meanings of the words, and thus not come any closer to understanding but only spiral downwards into legalism and confusion.

      The sage was accused of being “anti-business” and “radical” and driven from the premises.

      1. Gerard Pierce

        That was around the time when the Taoist wise man suggested that the superior man should leave the common people to find their own way without guidance.

        “If the superior man chooses gold, the common people will knock themselves out frantically trying to acquire wealth. If the superior man chooses wisdom, the common people will knock themselves out pretending to be wise”.

        1. F. Beard

          There’s no need to pretend to be wise (at least for Christians):

          But if any of you lacks wisdom, let him ask of God, who gives to all generously and without reproach, and it will be given to him. James 1:5

  5. Bill

    Wall Street will use any means including corrupt national security agencies to stop Spitzer.
    Anyone recall anyone else mentioned in the escort “investigation”
    Dispatching political rivals or those who can not be bought.One of the oldest uses of spying.
    I will donate to his campaign.

  6. Jackrabbit

    Its hilarious that Spitzer’s opportunity came about because TPTB decided to support Weiner’s return and political rehabilitation.

    And, apparantly Spitzer has had an effect on the mayoral race also (Weiner has lost ground, I believe).

  7. middle seaman

    Let the sex taboo be lifted from politics and capable individuals will be able to work for the people. Let politicians have sex with mules; why should we care?

    1. Massinissa

      How do we know the mule is consenting?

      But anyway, as long as the mule isnt harmed, I suppose its none of my business?

      But wait, how do we measure whether or not the mule is harmed?

      1. Jim Haygood

        After a session with Barbara Boxer, mules typically search for an electric fence to fling themselves upon and end the horror.

        1. Jess

          LOL! She is, unfortunately, one of my senators, the other being DiFi. Talk about a choice between dying by fire and dying by drowning!

      2. charles sereno

        I don’t presume to speak for mules, but many donkeys have achieved high office (they presently comprise a majority in our Senate). There is precedent for this in antiquity. The noble equine Incitatus, e.g., was purportedly nominated to be Consul by Little Boot. Even then, though, the Executive held the reins, as has now transpired in transition from Republic to Empire.

        1. Hugo Stiglitz

          The town of Nederland CO once elected the late mayor’s dog to his former office. Both the dog and it’s departed owner were much beloved by town residents.

      3. evodevo

        Believe me, if the mule wasn’t in the mood, you would know it REEAllllly quick. As in, broken bones, crushed chest, kicked for 20 feet quick.

  8. polistra

    I wonder if the media realize that they’re basically providing a how-to manual for public servants who want to be truly effective.

    Spitzer was honeytrapped = he was effective

    Spitzer has a huge ego = he was effective

    Spitzer is a ‘cowboy’ = he was effective

    Spitzer used sneaky and unexpected tricks = he was effective

    If you want to be effective, you have to do (or expect) those things.

  9. marcos

    Fortunately, NYC, parts of Staten Island excepted, has not yet been domesticated to the extent that it is laden with the prudishness prevalent in so much of the rest of the country, although this is not for lack of effort on the part of Wall Street to remake the urban fabric in a safer, more docile frame.

    1. Ms G

      ” … not for lack of effort on the part of Wall Street to remake the urban fabric in a safer, more docile frame.”

      Let’s not omit agency when it is known.

      ” … not for lack of effort by Mayor Bloomberg on the part of Wall Street — for 12 Years — to remake the urban fabric in a more compliant, degraded mode.”

      Fixed it for ya!

  10. Ms G

    I don’t believe that the NYC Comptroller has an subpoena power. At least in its auditing function. Perhaps it’s different in the pension oversight role?

    1. Ms G

      Thank you for the link to the article pointing out the Admin Code provision that gives the OOC subpoena power. An eye opener. I don’t think I’ve *ever* heard of the Comptroller using that significant power in any meaningful way. Not even John Liu.

      Yet another regulatory weapon that has lain dormant to the great advantage of the looting class that profits from city money and assets.

  11. Susan the other

    Does NY Comptroller have any supervision over the property taxes of NYC? Could Spitzer subpoena MERS? Or better yet expose the whole fraud behind destroying titles? That would be very kewl.

  12. Texascynic

    Yeah, Wall St. is really terrified. I read that when Spitz got that $8B
    settlement out of several ‘Street banks in the Enron era,
    Merrill Lynch’s part amounted to 3 DAYS worth of profit.
    That settlement was a wet noodle flaying of the ‘Street for the
    misdemeanors in order to create a lot of noise to conceal the felonies,
    which agreement Spitzer rode to the govenors mansion (check his
    contributors list).
    I can’t believe people are buying the faux war between the two camps.

    1. Massinissa

      Agreed.

      Ultimately its just two camps of the bourgeoisie having a hissing fight. Neither of them are ultimately on our side.

  13. Kathryn M. Tominey

    Spitzer is the closest we have to a modern Ferdinand Pecaro, “The Hell Hound of Wall Street” from the 30′s. I don’t live in New York City but will support his candidacy because it will ultimately benefit the state of Washington & every other state.

  14. BondsOfSteel

    Spitzer enjoyed screwing prostitutes. The other bank friendly politicians enjoy screwing us.

    1. OMF

      If Spitzer cleans up the finance industry in new York, he’ll have earned the right to screw whoever he wants.

  15. Jess

    Okay, let’s not get too delusional and reverential here. Yes, Spitzer did more than others, but the fact is, he, too, was a sellout. For all his big talk, notice that he never even tried to put any of the bigwigs in jail and never issued criminal indictments. For example, he let Sandy Weill retire gracefully with his mega-millions rather than make him face a jury. Instead, Spitzer preferred to settle for (IMO, relatively paltry) financial penalties. His stated rationale was that it was more important to make whole the losses for investors. (Which, in fact, I believe the financial settlements did NOT do.)

    My theory at the time was that with his eye on higher jobs, eventually the White House, he was going to be careful to not offend potential contributors TOO MUCH. And he also wanted to be in a position where he could pull an “Obama” — talk populist but privately convey that we it was all a smokescreen and that once he got into the ultimate office — the Oval one — he would appoint a Holder type lapdog.

    After being bushwhacked with the hooker scandal maybe now he’s out for blood revenge, but I’d had to see it to believe it and I personally will have to wait until (if?) he leverages his comeback into a position with real prosecutorial power to see the proof.

      1. MRW

        Spitzer is miles smarter than Clinton and 10X more moral when it comes to the public purpose, and what public service is for.

    1. Hugo Stiglitz

      It might also be the case that Spitzer calculated that putting them in jail was not feasible for a host of reasons. I’m not ready to dismiss out of hand that his intentions are good.

      1. MRW

        He was about to put a slew in jail when he got caught in the DC hotel room. I remember the shot of Wall Streeters (on MSNBC) with champagne the day he got caught. They celebrated his demise, and their escape into the night.

  16. Aintnorep

    Good point, Mr Ferguson, about the egos of politicians, and yeah of course Spitzer is an entitled asshole, but so are many/most of them. “Employing” these jerks in the ontological sense is what electoral politics is for. The point about Spitzer is that he’s also a practicing lawyer, who specialty as he sees it, is busting out-of control-Finance and the malefactors of great wealth.
    —I say, elect this asshole!

  17. Ray Phenicie

    “the Justice Department, Congress, and the Securities and Exchange Commission all defaulted in the wake of a tidal wave of financial frauds.”

    That statement succinctly addresses the issue of government of the thugs, by the thugs and for the thugs. Thugs, otherwise known as the larger players in the financial and insurance sector, who are basically rent takers and contribute very little of value, or overcharge for services that may be valuable.

  18. Kim Kaufman

    He can afford bodyguards. I hope he gets some.

    Also, and unfortunately, Spitzer believes that Social Security benefits need to be cut. He’s not all there in terms of being “progressive.” Wonder what he thinks about privatized education.

    Otherwise, I hope he wins and let the games begin.

  19. casino implosion

    Spitzer’s term as Governor, for which I had highish hopes, was anticlimactic in the worst way, so I’m going to reserve judgement, although I will vote for him.

    These CEO fellows spend so much time trying to figure out how to cut our wages. Let them sweat the possibility of getting their own pay cut for a while.

    1. Hugo Stiglitz

      Personally, I’d prefer to see them sweat about keeping their heads attached to their bodies.

  20. Doug Kelley

    A post by John Carney on CNBC advanced a line of thought that is less obviously silly but also tough to credit: That “investors” should fear Spitzer because he would transform the City pension funds into activist investing units. Citing some academic studies, Carney suggested that gains reaped by activist investors come mostly at the expense of other investors.

    A small point, but perhaps would clarify a few things — don’t _all_ investment gains come at the expense of others? Or is it only bad if they come at the expense of our Financial Overlords?

  21. Gul

    So he tough on Wall Street. Lousy on unions I hear. But who isn’t.

    Another egoist and rich child. But that’s who runs the country now.

    1. Emma

      Sadly agree on the egoism and money thing. I would also add that prostitution is clearly the opiate of politicians, f***ing their cerebral circuitry and blowing an inherently destructive world apart. When you combine it with the lack of resistance shown by the voting public to these dicks, there is little room to demand a better standard in politics, is there?

  22. OMF

    There is one good argument against Spitzer running. There is a possibility that the finance industry has more material with which to blackmail him out of office. Unless Spitzer is willing to bear the brunt of such a risk, his term could end up being very damaging for reform. I imagine his last resignation made a lot of potential imitators think twice about taking on the banks.

    I get the impression that Eliot Spitzer is a man who is ready to take the flak head on. For the sake of New York — and the world in general — I hope this is more than an impression.

  23. C

    Another claim the article advanced, about Spitzer’s alleged “combative, go it alone style” is simply a smokescreen. In our money-driven political system there is no way – just none – that any serious check on financial excess is going to emerge from cooperation with officials of either major party or most of the regulators they appoint.

    You know this may be less about regulators than parties. Political parties after all are essentially commercial enterprises that keep party hacks employed based upon constant donations most of which come from large wealthy groups. In taking on those same groups Spitzer is going it alone against other regulators but also going it alone where the party fears to tread.

    Contrast this with Wendy Davis who took on a party approved fight seemingly alone and is now the talk of the town and a new major fundraising agent.

    I think that the loyal dems fear Spitzer like the fear Elizabeth Warren, someone whose dedidaction to doing their jobs outweighs their party loyalty.

    Why oh why can’s Spitzer and Warren be like Carl Levin, spend a long career helping the party and then pay attention to tax fraud once they retire. Do a nice Ring and Run that can then be ignored later.

  24. Conscience of a Conservative

    It feels to me that there’s been a great deal more vitriol with regard to Spitzer’s return to politics than Wiener’s. My own take is that the reason for the stronger attacks against the former is that there are interests that are clearly worried about a Spitzer return to power.

    As a governor Spitzer was a disaster, but as an AG he was very effective. The role as comptroller is a step-back from both but closer to his role as AG than Governor. He coul add a great deal of value to the city in that position.

  25. ChrisPacific

    Why does Spitzer terrify Big Finance? I would have thought it was obvious: they probably can’t do anything to him that they haven’t done already.

    He was supposed to stay dead and buried, but here he is threatening to rise from the grave to haunt them. There is room for only one type of undead revenant in the USA, and that is TBTF banks. They don’t like competition.

    For my part, I think that setting a zombie to catch a zombie is a fine idea.

    1. Emma

      Valid point.
      Wasn’t it Mao who said that revolutionaries must live among the people like fish in water?

    2. Hugo Stiglitz

      But when you think of who he is/would be up against, do they really need to have anything on him? They can simply manufacture something. Truth is irrelevant if you own enough people in the right places.

  26. Hayek's Heelbiter

    Don’t forget that the powers-that-be were willing to go to the lengths and spend as much money entrapping Spitzer in his rather trivial dalliance as they do fighting the Mexican cartels. How much more are they willing to spend to prevent him gettting anywhere NEAR the levers of power?

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