December 08, 2005
Eliot Spitzer and His Critics
Posted by Matt Bodie

I've never quite gotten a handle on what conservatives such as Larry Ribstein and Stephen Bainbridge have against New York A.G. Eliot Spitzer.  Spitzer has brought changes to the markets unrivaled by any other financial regulator in a generation.  He radically changed the internal structure of the ten biggest investment firms through a Global Settlement that required a separation of market research and investment banking.   He cracked down on the mutual fund industry for cheating: funds were cutting special deals allowing late-day and market-timing trades.  And in another creative settlement that got less press, Spitzer got roughly 200 city greengrocers to agree to pay their immigrant employees the minimum wage, to give the employees limited vacation and sick days, and to permit a monitor to have access to their records to ensure complance.  (I've written about the Greengrocer Agreement here.)  All of these accomplishments took creative application of the laws, as well as the settlement process, to bring systemic changes to entire industries.

Now, apparently it makes one a naif to believe that Spitzer has improved things.  But really, what is so controversial about what he has done?  Who was in favor of the gross conflicts of interests at play in analysts' recommendations, so luridly displayed in emails?  Who thought the rigged bidding in the mutual fund industry was a practice to be encouraged?  Really, where's the problem?

In this column, Stephen Bainbridge attacks Spitzer's negotiated settlement which got Alliance Capital to cut its fees by 20 percent.  Bainbridge argues that Spitzer overstepped his role and went beyond his proper authority.  But Alliance agreed to the cut, and arguably, such a cut was linked to Spitzer's overall mission: a fairer deal for mutual fund customers.  If, as Bainbridge acknowledges, "the SEC admittedly seems to have been asleep at the switch" in regulating mutual funds, then why is it wrong to Spitzer to step in and engineer a creative settlement to which Alliance voluntarily agreed?

In a post a couple of weeks ago, the good professor presented more of a laundry list of Spitzer's sins.  The list seems a combination of, oddly, lack of prosecutorial success ("losing the Wall Street cases he actually takes to trial") with allegations of too much success.  Some of the criticism seems to be that he is effective in using the Martin Act in curbing corporate abuses.  (See here and here.)  Yes, he has amassed a lot more power than most attorneys general.  But that doesn't mean it was ill-gotten, or that he is not using it properly.  Some of the criticism seems to be that people appreciate what he does and, therefore, he gets a lot of publicity.  But getting publicity, in itself, is no crime -- in fact, sometimes it's just a side effect of a job well done.  In other situations, getting publicity is part and parcel of getting the job done -- publicity helps to inform the public and deter bad conduct.  The allegations of political influence don't really seem that powerful -- really, is it so bad to take money from wrongdoers and give it to charities and schools?  There's a conflict of interest charge that seems like a serious allegation, but it's made in a letter to the editor in Business Insurance magazine.  Any more substantiation for what, it appears, should be matters of public record?  Finally, there are declarations of abuse of prosecutorial power.  Suddenly, conservatives are anti-states' rights and are big fans of the APA.  But it's hard to say that the particular practices that Spitzer attacked were not worthy of prosecution.  I don't see many arguments for defending Henry Blodget's research or for Canary Capital's inside deals.  And, wonder of wonders, he works primarily through settlements, so he has achieved these results through voluntary action.  (And yes, he was threatening prosecution to get those settlements.  But a threat of prosecution is not a gun to the head -- it is a threat of legal action that varies in effectiveness depending on the credibility of the threat.)

Before carrying on this debate in the weeks to come, especially as the New York gubernatorial race heats up, I make a request for edification.  What is the worst substantive change he has wrought?  How has he messed up the markets?  Why is he so dangerous?  And, even if you have to say it through gritted teeth, hasn't he actually done a lot of good?

UPDATE:  Along with these helpful comments, Stephen Bainbridge has responded here, and Tom Kirkendall of Houston's Clear Thinkers writes here.  In the main, it seems like the commenters believe that Spitzer has done some good, but has caused too much collateral damage along the way.  There's a lot to consider to here, and I appreciate the responses.  I look forward to carrying on the debate over at Prawfsblawg.  By the way, the most surprising thing: the assertion that Larry Ribstein is not a conservative.  Isn't a free-market, laissez-faire, anti-regulation perspective still considered "conservative"?

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Comments (8)

1. Posted by Shag from Brookline on December 9, 2005 @ 5:06 | Permalink

Spitzer has done the job that the federal authorities should have addressed, as they have greater resources. Spitzer demonstrated the principle of federalism at its best. Why were the feds so reluctant to face these issues? Could it have something to do with campaign financing?


2. Posted by Anonymous on December 9, 2005 @ 10:45 | Permalink

I'll take a stab:

You can't just look at Spitzer's successes.

It's really an overdeterrence issue. Spitzer arguably goes well beyond the optimal level of enforcement, chilling otherwise legitimate and socially productive business behavior.

Would we laud police for breaking up the occasional large-scale drug cartel if they only made the bust because a new program of no-cause house-to-house searches? Constitutional issues aside, Spitzer's the same way, and his ability to find the occasional acorn tends to blind us to the fact that he's leaving a huge mess behind him as goes.

History does has not been kind to J. Edgar Hoover's prosecutorial paranoia, but he undeniably had his share of sucesses too.


3. Posted by geoff manne on December 9, 2005 @ 11:10 | Permalink

Are you really assessing Spitzer's results in a vacuum, discounting the dynamic consequences of his scatter-shot prosecutions and investigations? There's more to be said about the substance of Spitzer's "results," which Bainbridge and Ribstein have certainly done, but I'd think at the very least Anonymous' point is an obvious one: Spitzer may stumble into a narrowly "good" result once in a while (very rarely, though, as the Profs discuss), but assessing its desirability surely requires a gander at the costs, no? If, as Bainbridge and Ribstein pretty clearly claim, Spitzer's actions (and threats) are a burden on otherwise-efficient market institutions, it's at best an empirical question whether the few "successes" merit the cost. Bainbridge and Ribstein have gone a long way toward pointing out those costs. I just don't see what you're confused about.

By the way, I doubt Larry describes himself as a conservative: certainly not the brand of conservative you might expect to support Spitzer, anyway. That, too, should be obvious.


4. Posted by Someone, Somewhere on December 9, 2005 @ 11:16 | Permalink

Four words:

Spitzer is a Democrat.

Thats it.

Is it any surprise that anything he does is treated with suspicion by those on the right? That the worst interpretation is constantly put forward for his actions?

Compare with Bush; conservatives frequently try to associate the very best motives with his policies and his governance.

Notice that I have not stated my personal inclination as to whether Spitzer's actions are good or bad, nor have I passed judgment on Bush's policies and politics.

I have not even stated that I think people are insincere in their opinions. I believe that Prof. Bainbridge (for example) is completely sincere in his opinions.

However, in the poisonous atmosphere of contemporary politics, it is customary to associate only the best motives with your side and only the worst motives with the other. As almost any action can be interpreted both positively and negatively, this leads to the "so-and-so is doing almost everything right" by one side and "so-and-so is doing almost everything wrong" by the other side.


5. Posted by Anonymous on December 9, 2005 @ 12:25 | Permalink

It isn't that simple, Someone,Somewhere. I am one of several Democrats in my office (ranging from moderate Dems to follow-Howard-Dean-into-Hell Democratic Party activists) who find Spitzer's antics excessive. I'm sure Republicans hate him more, and your broader point is useful, but it's perfectly possible to agree with Ribstein/Bainbridge on Spitzer and pull the lever for (other)Democrats every November.


6. Posted by ziemer on December 10, 2005 @ 8:17 | Permalink

actually, it is very easy to say that the practices he prosecuted were not worthy of prosecution.

they were worthy of change, via prospective regulation, but not criminal prosecution.

you don't commence criminal prosecutions for actions that are not illegal.

market timing in mutual funds, for example, is clearly bad for long-term fund investors, and funds should do what they can to prevent it, but its not a crime (save for a few cases in which firm insiders were actually abetting the practice).


7. Posted by save_the_rustbelt on December 10, 2005 @ 16:09 | Permalink

Honesty is like such a drag.

Wall Street only stole $5 trillion, so what's the big deal?

But really, the federal prosecutors in NYC could only find two crimes in the whole bubble, Stewart and Quatrone. Most of the $5 trillion was just good only screw-the-little guy capitalism - right?

I'm a Repub, and Dubya seems to have given amnesty to most of Wall Street - and what should we expect from such a goofball.


8. Posted by ziemer on December 10, 2005 @ 20:58 | Permalink

good lord, rustbelt, calm youself.

spitzer hasn't gone after any of the criminals who stole millions.

he's made his name by attacking conflicts of interest and accounting practices that were widely known and tolerated within the industries.

should an insurer give incentives for referrals? even if we answer no, then the proper response is a regulation or statute prohibiting them IN THE FUTURE -- not a criminal prosecution for actions that were accepted industry practice.

spitzer has acknowledged as much, by foregoing the criminal prosecution of greenberg.

the fact remains it never should have been brought in the first place.

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