Protecting Capitalism Case by Case (2013), by Eliot Spitzer


Returning from banishment to the wilderness, Eliot Spitzer, the former “Sheriff of Wall Street,” has written a most timely and essential book on American governance of our contemporary and future capitalist economy in the Global Era. A hard-nosed, realistic, knowing and canny warrior, Spitzer maps out the constant fight it will take to make capitalism work for America. His post mortem on the Great Recession and his shrewd and experienced understanding of enlightened ways to promote responsible fiduciary behavior in the financial, corporate and political worlds are indispensable.

In grand sum: The threat grows of a twenty-first century massive financial catastrophe (a “bust” in what would probably be the biggest boom-and-bust cycle yet in that growing dynamic), a catastrophe brought on in a world of ever more vast financial scale and computer-based business and trading by the very old tendencies to fraud and collusion via the “baked in” conflicts of interest in the major American corporations such as pharmaceuticals and insurance companies as well as in investment banks and funds and agencies managing the enormous trillions-of-dollar investments of the besieged middle class (pension funds, mutual funds, etc); this threat can be diminished by an enlightened and separate regulatory power of integrity which is punitive as needed but finally focused on the least intrusive and most corrective structural remedies for the long run, this regulatory and remedial initiative operating under a system of mixed capitalism. “Mixed capitalism” might be thought of not as “populist” but as the inverse of the deregulated financial sector out of which the 2008 Recession exploded.

Here is Spitzer’s post mortem on the 2008 Recession:

A crisis may be a terrible thing to waste–as we have been told so often. But we essentially have. Now that a few years have passed since the cataclysm of 2008, it is useful to make a first evaluation of how we fared in accomplishing the three post-crisis objectives: 1) resuscitate the economy at a moment when it was in apparent free-fall; 2) reform the industry that was primarily responsible for creating the crisis, in an effort to prevent the sort of risks and misapplication of capital that metastasized into the crisis from occurring again; and 3) impose sanctions on those whose behavior–either collectively, individually, or organizationally–merited sanctions. The bottom line? We get a passing but not exemplary grade on the first objective, and a failing grade on each of the next two.

Three rules from the battle-hardened Spitzer:

1. Without effective outside enforcement, behavior of the lowest common denominator (collusion, fraud) will invariably prevail in the financial and corporate sectors. Given the scale and technology of today’s investment dynamic, there is probably a greater proclivity here than in the past.

2. Euphoria about easy money among both predators and victims has almost always overcome skepticism and realism during the inevitably foolish, essentially identically self-deceptive, usually illegal, and ever-more-dangerous, business boom (and bust) cycles. See especially John Kenneth Galbraith’s A Short History of Financial Euphoria and novels such as Bonfire of the Vanities and The Great Gatsby.

3. The inherent conflicts of interest in the financial and business sectors invariably lead to corruption against which consumers, busy and dispersed, cannot by themselves form and pose an effective advocacy.

Implicit here is the sometimes cynical Spitzer’s unpopular but earned-through-experience canonical wisdom about Adam and Eve and “filthy lucre,” a Biblical term echoing in subsequent history. (There are two “filthy lucre” tours available, though: the second is drier but more streamlined. See “Human Primatology.”)

Protecting Capitalism Case by Case is a principled (if not exceptionally well-edited) setting forth of many of the adventures of Spitzer during which he successfully prosecuted fraud and collusion and from which he learned perhaps more than anyone else about vigilance and enforcement in making American capitalism behave in the public interest. The successful prosecutions led by Spitzer are in several classes: those in which competition was illegally squelched; those which expose as false the idea that supply-and-demand invariably sets the right price and quantity; those which reveal that self-regulation (“market discipline”) is virtually a myth; those which show that fiduciary responsibility is too seldom encountered; and those which highlight the frequent abuses of corporate governance.

As a young prosecutor, Spitzer took on the case of the Gambino family’s monopoly-by-intimidation of the trucking business in the Garment District in New York City: several trucking companies were stood up in a phony appearance of competition and garment businesses were intimidated into using only those firms: heavy fees were charged but all the businesses paid the same fees and the added cost was quietly passed to consumers. Spitzer also prosecuted the largest insurance brokerage firm, Marsh and McLennan, for rigging the bidding of insurance companies for insurance contracts to (1) create a false sense of competition and (2) actually increase costs for consumers of the insurance by using the rigged “competition” to raise rates steeply. He also successfully took on big pharma in the case of Bistol Myers-Squibb and its expensive drug, Taxol, designed to treat breast and ovarian cancer, a drug for which Bristol Myers-Squibb falsified research to prevent fraudulently the entry of other competitors (offering “generic” versions of the drug) into the marketplace after the standard five-year monopoly period granted drug originators. He notes other examples of squelching competition such as gerrymandering in politics.

Spitzer, when New York Attorney General, successfully prosecuted power companies for violating the Clean Air Act, for example, suing power companies outside the state of New York which in the context of standard supply and demand reasoning had obtained cheap energy and clean air locally but, owing to atmospheric dynamics, rained down soot and smog and acid rain beyond their states, including in New York.

He also prosecuted mortgage banks for “redlining,” the practice of making disproportionately expensive mortgage loans to urban minorities. Spitzer writes:

There were tens of thousands of pages of documents, reflecting loans to thousands of individual homeowners in New York City. On the surface, these documents had all the earmarks of the free market’s efficiently distributing credit to customers in need. The records were in perfect order…just what you’d expect to find in the files of a legitimate mortgage bank.

…But to really understand whether the market is operating cleanly… you have to ask the question: Would any reasonable consumer take this deal if they actually understood what the economic impact was going to be?

The mortgage loans we reviewed that spring of 1999 flunked this test miserably–every last one of them did. …we found a consistent pattern of the mortgage lender’s selling loans to people without regard to their ability to repay.  …The second remarkable thing we found was that, in some cases, the very people who were offered loans up to 14 percent actually had good credit histories and could qualify for much less expensive loans.

…And finally, we found extensive evidence of…”flipping,” when a lender, often working with a broker, pressures a homeowner to refinance an existing mortgage loan for a new one with more onerous terms.

In all this, there was little if any risk to the originating mortgage lenders and to Wall Street because the lenders moved the “toxic” mortgages off their books by selling them to Wall Street which then securitized the bad loans into overrated bundles (the ratings agencies, given bank fees for their services, displayed considerable corruption here) which they sold to outside institutional buyers, the latter ending up with the bad debt. Meanwhile, the lending banks and Wall Street, their books clear, took on more (often absurdly leveraged) subprime lending and securitization. Of course, this cyclical pattern grew into the 2008 Recession. (Robert G. Kaiser in his Act of Congress writes that early on the Federal Reserve saw the practice and its potential danger quite clearly and did nothing.)

Spitzer’s tabloid representation as a fanatic bent simply on jailing financial and corporate leaders and criminally prosecuting business entities is absurd, as seen in his incisive discussion of enlightened remedies he himself pursued in his prosecutor’s sallies far beyond the merely (and insufficient) punitive ones, sustainable structural and institutional remedies which seek to maintain market freedom while trying to counter inevitable fraud long after the prosecutions. Spitzer is no less clear than people like Greenspan about the verdict in favor of imperfect capitalism over other such isms, a verdict given by that brutally candid Oldster, History. But as a tough reformer, Spitzer, a great friend of capitalism, has a worldly take on capitalism. He believes capitalist enterprises are far less fragile, far more able to adapt to significant structural and procedural reforms imposed from without, than you would find in the admonitions of, say, Tim Geithner and The Wall Street Journal editorial board. And he has in his crime-fighting adventures aggressively rescued billions of dollars on behalf of cheated consumers: in large, the American middle class. You could certainly make an argument that such must be included among the more vital national imperatives.

You could go on much longer about Spitzer’s cases of trying to protect capitalism from itself. But his book is the place to learn about those adventures. Mostly they yield his insights from the battlefield which have coalesced into his grand themes and assumptions.

Spitzer is attempting a comeback, starting with his current campaign to become Comptroller of New York City (which would give him oversight of, and considerable legal jurisdiction over, huge pension funds). Almost everyone in politics, the media, and especially in the financial and corporate worlds, is desperately and fearfully against him. We find him these days suffering the likes of Jay Leno and Bill Maher; swearing to take but one dollar in pay should he be permitted to serve as New York City Comptroller; never hesitating to own up publicly to his “personal failing” and “hubris”; and reigning in his no-suffering-of-fools soaring smarts to make with self-effacing sweet talk amidst Media Think People. He is the Public Penitent and, maybe just possibly in that role, he must think, able to make enough voters glean his lonely value for their own protection: that he just might be their advocate after a long spell without one.

In the biggest sense, it seems clear to me, Eliot Spitzer, certainly far from the Idyllic American of the national mythology, embodies the indispensable idea of Separation of Powers. I’ve long considered this foundational wisdom absolutely necessary for prevalence of the things we hold dear. Moment by moment, a considerable number of politicians and other powerful people, often perhaps unconsciously, and usually well rewarded for it, assault that fortress with all their energies. They don’t take the long view; they take the short view.

After all, isn’t that short view an essential part of what drives an economic “bubble”?

In my view Spitzer hasn’t a chance for a Large Role unless a President decides to give him one. The other night I dreamed that Elizabeth Warren has become President and that she has Eliot the Terrible as her Treasury Secretary. It was one of those instances in which you hate to wake up.

I’m not a wagering soul. But as they say, miracles do sometimes happen.