Wall Street celebrates Spitzer’s possible fall

By Kathleen Pender

Published 4:00 am, Tuesday, March 11, 2008

Cheers went up on the floor of the New York Stock Exchange Monday in response to news that New York Gov. Eliot Spitzer might resign over his alleged involvement with a prostitute.

It’s hard to think of a man who engendered more hatred on Wall Street – or more qualified admiration from investor advocates – than Spitzer.

In his last five years as New York’s attorney general, he went after investment banks for issuing conflicted stock analyst research and nailed mutual fund companies for letting favored clients engage in late trading and market timing. He caused or contributed to the downfalls of former New York Stock Exchange Chairman Richard Grasso, former AIG Chairman Maurice “Hank” Greenberg and Greenberg’s son Maurice Greenberg, former chief executive of insurer Marsh & McLennan.

It wasn’t just what Spitzer did, but the way he did it that angered people. Adversaries have described him as mean and vindictive. Former Goldman Sachs Chairman John Whitehead alleged that Spitzer once threatened him.Even some allies have tussled with Spitzer. When Bill Lockyer was California’s attorney general, he prosecuted several cases with Spitzer, a fellow Democrat.

Yet at a meeting of state attorneys general in Southern California in 2002, the two almost came to blows in a heated, well-publicized spat over how to spend extra money left over from the tobacco settlement. (Spitzer wanted it spent on health care; most of the other attorneys general wanted to spend it on a new nonprofit organization to support the training of their staffs.)

Critics say Spitzer cared more about furthering his political career than protecting investors.

But to fans, allies and many journalists, Spitzer was a populist crime fighter willing to attack powerful interests on his home turf – an image that carried him into the New York governor’s mansion last year.

Like him or not, many people were shocked to hear him publicly apologize for acting “in a way that that violates my obligations to my family and violates my, or any, sense of right and wrong.” He did not say what he did, but news reports say Spitzer, who prosecuted prostitution rings as attorney general, allegedly engaged an expensive call girl in Washington, D.C.

“What was he thinking? And with what was he thinking?” asks Joseph Grundfest, a Stanford Law School professor.

Law-and-order reputation

Steve Sidener, a San Francisco securities attorney who represents investors in class-action suits, says Spitzer is “the last person you think would get caught up in this. His reputation was being the person who wanted to clean up Wall Street and promote ethics. He was viewed by many people as being on the side of law and order.”

He calls the Spitzer scandal “a Shakespearean tragedy in a way. He did a lot of things (to highlight investment fraud) at a time when the Securities and Exchange Commission (under former Chairman Harvey Pitt) was asleep on the job.”

Barbara Roper, the Consumer Federation of America’s director of investor protection, agrees.

“He looked at problems that existed on Wall Street that people knew about, didn’t care about, and said, ‘This is unacceptable.’ That was true in the analyst scandal, true in the mutual fund scandal.”
Where Roper faults Spitzer was in his follow-through.

“The analyst investigation was a big deal. The agreement that was negotiated was pretty modest in its reforms,” she says, adding that the SEC, the NYSE and the National Association of Securities Dealers “played a major role in negotiating it.”

The same is true with Spitzer’s crusade against mutual fund trading practices. “It made a big splash, and relatively little came out of it in terms of meaningful reform,” she says.

Roper says Spitzer “was the model of the activist attorney general, using his authority that he had very effectively to push reforms that had implications beyond the borders of his state – and using the media extraordinarily effectively to accomplish those goals.”

That same quality earned Spitzer the ire of libertarian and other groups that thought he was overstepping his authority.

After he became governor, Roper says Spitzer seemed somewhat less hostile to Wall Street.

He showed up at a news conference to endorse the results of a study, commissioned by New York Sen. Chuck Schumer and New York City Mayor Michael Bloomberg, that showed “general support of this notion on Wall Street that (U.S. securities firms) are at a disadvantage because of over-regulation,” Roper says.

In recent weeks, Spitzer helped persuade some investment banks to back a capital-raising plan by Ambac, the struggling bond insurer. His alleged tryst with a prostitute occurred the night before he testified about bond insurers to Congress.


Columbia Law School Professor John Coffee says, “I am an admirer of Spitzer. His greatest strength was his ability to expose conflicts of interest across a variety of contexts. Like other well-known Democrats in (recent) years, he took risks that were reckless for someone in his position.”

Despite calls for Spitzer’s immediate resignation, Coffee predicts he “will hang tough for at least several days to gauge the reaction” to the prostitution scandal.

Only time will tell whether Spitzer’s alleged indiscretion will overshadow his record as a Wall Street crusader.

“Whatever his legacy is, it now has a very interesting asterisk,” says Grundfest.