Eliot Spitzer

The Sheriff of Wall Street

VTR Date: July 13, 2004

Attorney General of New York Eliot Spitzer discusses financial regulations.


GUEST: Eliot Spitzer, Esq.
VTR: 07/13/2004

I’m Richard Heffner, your host on The Open Mind. And though on reflection, I couldn’t help but think it quite intriguing, I’ll admit I was surprised when New Republic Editor-in-Chief Martin Peretz wrote that HIS choice for Vice President on John F. Kerry’s Democratic ticket had been my guest today, Eliot Spitzer, Attorney General of New York, who, Peretz wrote, reminds him of Theodore Roosevelt.

“Not the TR of bluster”, he noted, “but the TR of remedy and of vision.”

“Our basic problem in the twentieth century,” Roosevelt [had] argued, “is to see that the marvelously augmented powers of production bequeathed to us … be made to administer to the needs of the many rather than be exploited for the profit of the few.'”

And now in the twenty first century, with a mind that “cuts sharp and runs deep”… with “liberalism…of the muscular sort”, Peretz could see my guest as Vice President of the United States, or, as many others do, perhaps as Governor of New York, as TR was on his way to the White House.

Interestingly enough, even before reading of Peretz’ choice, I had myself wondered about the parallels between my guest’s expressed philosophy of government and the extraordinary Commonwealth Club speech of still another New York Governor on his way to the Presidency … Franklin D. Roosevelt.

Now that’s awfully heavy, of course, but so are the titles the media have bestowed on my guest.

FORTUNE has labeled him “The Enforcer”; TIME has dubbed him “Crusader of the Year”; 60 MINUTES, “Sheriff of Wall Street.”

And I suppose I ought to begin our program today by asking Eliot Spitzer just how he’s holding up under all of this.

SPITZER: Well, I hold up I think most readily by recognizing that there is an alternative view that is less complimentary and therefore I don’t let any of it go to my head and begin to swell what some might think would already be an inflated ego.

The National Review called me the “Most Destructive Politician in America”. So there is an array of perspectives here and I like to see both and I enjoy one more than the other, needless to say, but try always to keep the baring … my moral bearings and also my governmental bearings focused on what I think we in government should be doing in my job as Attorney General.

I think TR really is the individual whom I would emulate most. He came closest to capturing what I think is the theory of government that underlies what we’ve been doing. But if you just focus on those issues of what government should be doing in the marketplace and why challenge yourself on a regular basis to hold yourself to that standard, then I … hold up and I think we’ve gotten it right most of the time; made an occasional mistake, but gotten it right most of the time.

HEFFNER: It’s interesting, you talk about government’s obligations. That hasn’t been the talk …


HEFFNER: … in recent times.

SPITZER: And, actually an article in The New Republic and maybe this is where Marty first saw that there was a larger philosophy underlying the, the individual cases that when you mold them together, look for the common threads, I hope those threads weave some sort of pattern that makes sense. But in the article I tried to create a counterpoint to what has been the sort of dominant philosophy of the past 15 or 20 years, the deregulatory spasm, driven by the Chicago School … which … of Economics … and a world view of “let the marketplace by itself solve all problems.”

And there’s much to be said for it. You know, I believe deeply in the market, which is why I think Marty Peretz referred to my vision as “muscular Liberalism” not one that is just government encroaching on all decision-making.

But we’ve tried to create a framework to argue that when it comes to enforcing the rules of integrity and transparency in the marketplace, only government can do that.

When it comes to enforcing certain common values that are defined statutorily, whether it’s prohibitions on discrimination or minimum wage, only government can do that. And when it comes to capturing and pushing the market because there are what economists call “externalities”, the sort of consequences of economic behavior that are not captured in individual pricing determinations, such as pollution. Only government can do that. So there’s a theoretical argument there for government in a very measured responsible way to play a role that I think was forgotten by the pure Chicago School theorists.

HEFFNER: But now let me ask you this question. If Peretz is right to any degree, and that there will be a march upward by my guest today, what are you going to find at the ballot box, although it isn’t a ballot box anymore … at the computer … god help us.

What are you going to find among most Americans when you set forth this notion of governmental responsibilities.

SPITZER: I think it depends how one articulates it. And the reason I say that it, it’s not not to suggest that this is a question of marketing, but I think it’s to suggest that if you explain what government’s role is and government’s role is “over here” and these are our sets of responsibilities. The marketplace has the larger, vastly larger set of responsibilities, but the two have to interact. And the two have to produce a society that we’re proud of.

We have been focusing so exclusively on the market that I think we deregulated so much, in a way that generated energy crises and scandals, Wall Street scandals, S&L scandals, and I’m not say there’s direct causation between de-regulation and scandal, but we have to do it properly and not lose sight of the symbiotic relationship between the marketplace and market forces that generate wealth and dominate the capital flows and the creativity that creates jobs. And the function of government to lay out the rules and enforce the roles.

And so look, since I’m in government now, I’m more focused on defining the parameters of what we do and trying to do it in a way that fits into a coherent philosophy. I think the public understands it. And if it’s expressed properly will respond very affirmatively to it.

HEFFNER: That’s interesting that you say that because my sense of it has been that the public responds better and more, more enthusiastically to those who wave the flag of marketplace. You said you didn’t want to market …


HEFFNER: … the ideas that you were expressing. But we live in an era of marketing …

SPITZER: Yes. But … and, and here …


SPITZER: … we’re going back to their statement that the public responds more affirmatively to the, the mere reference to the market place … is the determinant, evolved decision-making.

The fact of the matter is after an era that some would call “The Era of the Crisis of Accountability” where we have had scandal after scandal in the marketplace and also in the media and also in government and also in our religious denominations and the not-for-profit sector … so every sector has been touched by it.

I think what the public is looking for is some notion of accountability and rules that bespeak fairness and within that set of rules, then we want people and the market to compete. But the rules themselves are defined by the laws that government enforces. And that is why, I think, when the public sees somebody or an entity or an organization that is willing to say, “yes, we want you to compete and we want capital to be nimble and aggressive and self-serving”, which it is, but we want you to do it with transparency and fairness and some sense of ethics.

The public will say to those who want to impose that set of rules, “yes, we support what you’re doing”.

HEFFNER: If that is the case, if you’re right, what will happen this November?

SPITZER: Well, I have no crystal ball better than anybody else’s. I can tell you what I want to have happen; what I think should happen, but that’s non-responsive.

I, I think it’s too early to predict what will happen. It was Bill Safire, not long ago, who had an article in which he said, “Let’s stop make predictions because exogenous factors … somehow will intervene. The unpredictably will occur”.

Now I’m obviously not referring to a terror strike or something calamitous, it could be that the economy picks up, the economy turns down … something good or ill happens in foreign affairs, there’s so many variables.

I think it is, it is true that the nation is essentially evenly split at a visceral level between John Kerry and George Bush. I think on the social issues, which George Bush seems to want to roll out whenever his poll numbers slip to the low forties, he invokes, you now, gay marriage and guns and, you know, this other litany of social values that he says, “oh, we stand up for righteousness” and he invokes those. I don’t know which those cut.

The economy has been handled in a way that is … that demonstrates flagrant disregard for economic principles. And even, you know, Pete Petersen, Commerce Secretary under President Nixon, lambastes George Bush and the Republicans all the time for their disregard of sound economic principles.

So I think those issues certainly help John Kerry. Where things will be in Iraq and in other international arenas come November, who knows. So I think these issues will, will determine what happens on November 2nd, I guess it is.

HEFFNER: In looking back at your own record, I can’t help but wonder, not in a puzzled way, but very much interested where these values that you have just expressed and that have been expressed in everything you’ve done …


HEFFNER: … as Attorney General … and before then. Where do they come from, what are their origins?

SPITZER: I’ll give you an answer that sounds a little pat and trite, perhaps, but I think it’s true. It comes from my parents as I think so much of what we do emanates from what we’re taught. Obviously school … I … you know, got a spectacular education at high school and college and law school at great institutions. But I think what I took from the history and economics and philosophy courses that I pursued at those locations was dependent upon what my parents taught me at a younger age.

And my Dad is really the classic American dream story. He began, grew up on the lower East Side with, with two nickels to rub together at most. When to Townsend Harris, a great New York City public high school, went to CCNY, got an engineering degree and by dint of hard work and lots of it and an enormous intellect, succeeded. Likewise with my Mom who went to Brooklyn College.

And yet from their success what they took was the very simple notion that if they were given the education and the tools with which to compete and a playing field of certain decency, they could succeed. And so my notion is simply that’s what we should provide to, to everybody else … the opportunity. No, no guarantee of results, none at all. But the opportunity which is why education and a level playing field, in terms of honesty and transparency in the marketplace … it’s, it’s really very simple, it’s not, not so complicated.

HEFFNER: Where do we find that level playing field today? When I referred before to FDR’s commonwealth speech …


HEFFNER: … I was reading it earlier today, re-reading it, I couldn’t help but think he was describing our own times.


HEFFNER: … he was describing many of the things that you’ve described.


HEFFNER: And ahh, what comes of it?

SPITZER: I’m not sure there is a level playing field. And I’m not sure there ever will be a purely level playing field, but it is an aspiration. In other words, some parents will always be in a position to give their children access to more, or something different. And that’s, that’s fine; and those are the just rewards of hard work so that my parents can confer something to me and I to my children.

But what we want to do is come close to saying to any child, no matter where he or she is born and raised, “you will be given access to a school that can educate you and then an economy that will give you that range of opportunities for you to test yourself”. And we can get a lot closer than we have been over the last few years. And I … see … you know, to come back to your opening, where you said, you know, quoted some very complimentary articles that, that said nice things about what I’ve done …there … as I said there’s an alternative view.

The Wall Street Journal editorial page, and these are very bright folks, I disagree with them, but their world view, I think is shaped by a much more static world view. Hesitancy to permit the actual competition brought by those who don’t yet have access to, to their world, and hence they’re more tolerant of the deal-making among the limited few.

Give you a concrete example. When they objected to the cases we made against the major investment houses, whose research was fundamentally flawed, fraudulent and knowingly so, in one of the most corrupt enterprises you can imagine, the investment houses telling Americans to buy stock when they knew these were lousy investments. Now, The Wall Street’s Journal’s response to that was, “Well nobody trusted that research anyway.” Because they said everybody is sophisticated enough to know that this research is all gamesmanship. Well, the people in their little circle may have known that. But Joe Smith in Utica or in Buffalo, New York, who has been enticed into the marketplace by the investment banks, didn’t know that this was all a game and in good faith relied upon what the investment bank said. And so I said, “Create a level playing field. Honesty. That’s all we ask.” But the Wall Street Journal, with its static view said, “Well, let them absorb that risk, that’s their problem.” I said, “No, some core integrity would be a good thing here.”

HEFFNER: Well, do you think that there’s any truth to the notion that your regulatory bent …


HEFFNER: … may do the opposite, may not foster …


HEFFNER: … but, indeed, put a lid on American enterprise.

SPITZER: Let me re-state it. First, I wouldn’t use the world “regulatory bent”, I, I would … because what I think I have is an enforcement regime to insure integrity in the marketplace.

HEFFNER: Well, wait, wait, wait a minute … you have yourself written …


HEFFNER: … that not just about enforcement …


HEFFNER: … but about regulation, not just about …


HEFFNER: … enforcing the laws, or the moral code that you wish …


HEFFNER: … to live by and wish us to live by …


HEFFNER: … and wish business …


HEFFNER: … to live by, but you’re talking about, as FDR did …


HEFFNER: … in the Commonwealth Club speech and TR did …


HEFFNER: … “the great regulator” …

SPITZER: Right. Right.

HEFFNER: … ah, you’re talking about something different than just enforcing law.

SPITZER: Well, maybe this is where marketing comes in. Because I shy away from the word “regulatory” because it then leads to … but, but I’ll accept your premise for a second, just so we can … I can answer the larger question, which you pose and which is a very important one … does … do you begin to stifle the creativity of the marketplace, if you over regulate? The answer to that is … without any doubt … yes. Which is why calibration and limitation on what government does is just as important as knowing when to intercede. There is no question that the unintended consequences of what one does in the marketplace can sometimes be just as negative or have just as ill consequences as what you’re trying to regulate or do away with in the first instance.

And I’ll give you a classic example. Stock options. You want proof of the law of unintended consequences. Fifteen years ago or so, everybody said, “CEOs are acting in a way that is designed to promote self-interest and not the interest of the shareholder.” How better to bring the two into alignment, everybody said, than stock options, give CEOs the same shares and interest in the long term value of the company that shareholders have and everybody will move in one direction.

What we now know that the gamesmanship with options has been a disaster. And so, yes, one form of regulation or imposition of rules or enforcement actions can very easily take us off in a direction and also, just inhibit the creativity and the risk-taking that we want to promote. Which is why enormous care needs to be taken in what we do.

Now, having said that, the mere invocation of that argument should not excuse the sort of wrong-doing that we, as enforcers or regulators have to stamp out. And as we heard, I heard from all the investment bankers, two, three years ago, “you can’t do that, we won’t take risks.” It was hooey … it was just a pile of hooey, they were trying to justify their fraud because they made a lot of money doing it. And wanted to keep playing the same games. I said, “We’re going to stamp out that fraud. We’ll do it the best way we can and hope that there are not unintended consequences.”

HEFFNER: You know, I’m fascinated by your facility with words …


HEFFNER: … and I noticed that when I talked about “regulation”, you said that “there’s not question that over-regulation …


HEFFNER: … is negative.” I wasn’t talking about over-regulation, I am talking about the argument that says, “If you don’t leave us alone …


HEFFNER: … we are, by definition, not going to be able to produce the great goods we have produced …


HEFFNER: … in the past. You don’t accept that?

SPITZER: No. I don’t … if you … again, assume for a moment we’re talking about reasoned regulation. To take, take … take the examples we’ve, we’ve dealt with in the cases we’ve made where when it comes to the mutual fund sector, another area where we’ve uncovered massive, rampant fraud. The mutual fund companies were fleecing the investor. And, you know, the industry got upset when I said they were fleecing them, and to which I said, “well, wait a minute, you’ve already returned two and a half billion dollars, your fees are egregiously high, there’s no competition, if that isn’t fleecing, I don’t know what is.”

But what we’ve said to the mutual fund industry is no late trading, in other words, the illegal trading after 4 o’clock; no “timing” which is the mechanism by which they dilute the return to their long-term shareholder to whom they owe a fiduciary duty by permitting “in-and-out”, by permitting some traders to take advantage of, of the arbitrage value that comes … is a consequence of improper pricing.

Now, does either of those rules diminish their capacity to allocate capital properly or effectively or efficiently. No. It’s simply a set of rules that says, honesty, integrity and live up to your fiduciary duty. So I don’t see any trade-off between the appropriate types of rules that we have been making and the dynamism of the marketplace. None what so ever.

HEFFNER: You couldn’t as a debater find an argument on the other side?

SPITZER: Oh, as a debater, of course I could. I’m a lawyer …


SPITZER: I was trained to do that. But you asked …

HEFFNER: Where, where is the argument?

SPITZER: … me what I actually think …

HEFFNER: But where is the argument on the other side?

SPITZER: The argument on the other side … I think the best argument and this, this is why … maybe it’s a linguistic game, but I said “over-regulation”. I think if you probably calibrate where you create those rules of behavior and have rules of behavior that are proper.

I’ll give you your best example Sarbanes-Oxley … where the costs of compliance have driven up the threshold for access to capital markets. What do I mean by that? Small company, interested in doing an IPO, accessing the capital markets, needs to figure out what will the costs be of incurring the obligations of making ourselves subject to all the rules and regulations of the public capital markets. Because Sarbanes-Oxley increased that overhead, there’s no question it did, some companies inevitably, an economist would say this, some companies will look at that cost/benefit analysis and say, the return of accessing the capital markets isn’t warranted and hence there’s some companies that will remain private rather than going public and that loss of capital might have some consequences down the road. That is, I think, your best example. And I’ve heard that from a number of folks and I credit what they say.

Does that mean Sarbanes-Oxley was wrong in creating these costs to insure the integrity? I don’t think it means it was wrong, but think that is where you do, perhaps, see some trade-off between creating a regulatory regime and some economic activity that would otherwise occur.

HEFFNER: It’s fascinating to me in one of your comments, earlier, not on the program, that in talking about regulation you indicated that you didn’t want, as a young man growing up …


HEFFNER: … to have in the hands of local governments, state governments the enforcement of civil rights …


HEFFNER: … actions. Today, you’re saying you’re willing to let them do it, if they’ll do it.


HEFFNER: But you don’t think the states can be trusted? Do you?

SPITZER: Well, let me temper that comment a little bit. I think it depends who’s there. I, I was leery of, of this shift of power back to the states and was very hesitant about it back in the 80s when President Regan began to articulate it, because I saw it as a wolf in sheep’s clothing. I thought it was really an effort to re-create state’s rights, which, of course, evokes the imagery of Jim Crow and all the rest …

HEFFNER: Don’t you still feel that way?

SPITZER: Sure. Absolutely.


SPITZER: And, and consequently I said, I’d rather have muscular … to use Marty Peretz’s word enforcement at the federal level which is reasoned and not overgrown. And I think the federalist society, when it wanted to shift power back to the states did so essentially because it believed the states wouldn’t flex their muscles and would let enforcement drift off and nobody would do anything which would have been fine by them.

We have begun to act aggressively, generating a predictable response on the other side, they don’t want us to do that. But also reinforcing my underlying concerns from 20 years ago that sometimes these states won’t know what they’re doing. And I say that is, you know, the AG of New York who’s sometimes held out as the epitome of state activism. There are times when there are some of my colleagues who like to kind of look at what they’re doing, and say, “I’m not so sure we want to empower them to do all that.”

HEFFNER: Activism, that doesn’t bother you … that phrase.

SPITZER: Activism … maybe I’m more result-oriented. Activism is wonderful if you use it for the right causes and temper it and know what you’re doing with it. But activism itself is fine. It depends who’s there.

HEFFNER: So government isn’t really the problem.

SPITZER: It can be the problem, but it isn’t. I, I think government is not the problem any more than, than the private sector is “the” problem. Improper understanding of what government can or should do is the problem. Improper behavior in the private sector is the problem; a lack of living up to Senate ethical mandates is the problem. But there is a synergy between the private sector and government that will permit us to form a society that is the one we want to live in.

Each has its own sphere. Misunderstanding that sphere or abusing the power within either one, that is the problem.

HEFFNER: Where do you want to go with these ideas?

SPITZER: I love the job I’ve got, it’s been more rewarding in terms of what we’ve been able to do, what we’ve been able to try to do. I’ve got two more years in this term. I think eight years as Attorney General is all that I desire. Because I think somebody else with new ideas, new creativity should be given a shot. And I will have exhausted perhaps what I can do. You know I’ll toy with running for Governor; toy with the idea of … thinking about it and see if I think there is something I can contribute there.

HEFFNER: What do you mean “toy”?

SPITZER: Intellectually. I’ll, I’ll think through the implications, what are the issues a Governor would have to deal with and confront. Do I think that I will have some answers to those problems? Do I think I, in my tenure as Attorney General, will have created a record so I could argue to the public here’s a record of some success such that you would have the confidence that you think if you voted for me for Governor, I could perform appropriately.

HEFFNER: What do you think?

SPITZER: I can’t tell you that.

HEFFNER: It’s going to happen? You can’t tell me yet?

SPITZER: Maybe I could, but I won’t. [Laughter]

HEFFNER: That’s a fair, a fair answer. You know, at some point, whether you’ll sit still today or not, I would like to do another program with you and pursue further, not this question of what are your immediate political interests …


HEFFNER: That’s, that’s dirty pool …


HEFFNER: … and I knew it as I was asking. But, what else could I do? But I hope you will come back …

SPITZER: Of course I will.

HEFFNER: … and talk about some of the sources of your ideas and where you think this country can go with them.

SPITZER: I would love to. Be a pleasure.

HEFFNER: Meanwhile, Mr. Attorney General, thank you very much for joining me today, Eliot Spitzer.

SPITZER: Thank you.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time, and if you would like a transcript of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.

Meanwhile, as an old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.