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.