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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