Spitzer: "Break the Banks"
Eliot Spitzer’s foolish, reckless visit to a prostitute and subsequent resignation from the governorship are far more consequential than most realize. As Governor of New York and a former Attorney General with deep knowledge and suspicion of Wall Street, Gov. Spitzer would have been in a powerful position to shape the debate — in a pro-public, anti-bank way — when the financial crisis broke.
How convenient, then, for banks that Spitzer was publicly shamed for his private foolishness by a Republican, Bush-appointed U.S. Attorney soon before the financial crisis erupted.
At least one bank found Spitzer’s downfall so convenient that it helped orchestrate it by closely monitoring Spitzer’s bank account and bringing his “suspicious” $5,000 purchase to the government’s attention: “At least one bank used by Mr. Spitzer, Capital One Corp.’s North Fork unit, flagged his transactions to federal regulators as a potential sign of corruption.”
The bank was dead wrong and should have known the transaction had nothing to do with corruption. Corruption usually occurs when someone puts money into a governor’s bank account.
Besides, virtually all transactions flagged by banks are for one of the following: money-laundering, check fraud, counterfeit checks, mortgage loan fraud, credit card fraud, identity theft, false statement, check kiting, consumer loan fraud, and defalcation/embezzlement. None of these was relevant to a purchase made by Eliot Spitzer. The bank should never have flagged the transaction.
But banks and the federal government possess the unfettered right to poke through our personal transactions to look for things to embarrass (or blackmail?) government officials with. The Bush Administration obviously wanted to cripple Spitzer politically because Spitzer’s name could easily have been concealed: “"Historically, ‘johns’ haven’t been prosecuted for conspiring with principals of a prostitution entity,” says New York defense lawyer Gerald Lefcourt, who isn’t involved in the case. “Could they be? Maybe. But that’s not the way law enforcement has proceeded.”" And we never learned about the many other clients of this prostitution ring.
When Spitzer’s case became public, Wall Street literally rejoiced. They considered it manna from heaven:
On CNBC, markets reporter Bob Pisani quoted an unnamed trader’s reaction, which spoke for the vast majority on Wall Street. “There is a God,” the trader was quoted as saying.
The Wall Street Journal article “Wall Street Cheers As Its Nemesis Plunges Into Crisis” reported “The news stunned traders on Wall Street, where Mr. Spitzer long has been viewed with fear and contempt”:
Amid the rash of corporate scandals that plagued Wall Street early this decade, [Spitzer] was the single most visible force trying to weed out abuses and bring down wayward chief executives. Mr. Spitzer brought fines against some of America’s largest companies for industry practices that were routine, if not accepted. He rarely sent anyone to jail in these cases, but in the process, he changed corporate behavior in lasting ways, putting many industries on alert that state officials would take a more aggressive role. “I’m a huge fan of Eliot Spitzer, and I’ll be very sorry if this is the end of his political career,” says Nell Minow, a corporate-governance expert. “Wall Street is singing, ‘Ding, dong, the witch is dead,’ but Spitzer set an expectation of better oversight by officials that will continue.”"
and
Mr. Sabin, owner of precious-metals firm Sabin Commodities [said] “…I’m sure everybody on Wall Street is happy.”
and
In a [2003] meeting of the New York Society of Securities Analysts in the ornate dining room of the Harvard Club, the attorney general mingled with financial executives, seemingly in his element working the crowded room. But when he took the podium to give the luncheon speech, his tone changed. He lashed out against mutual funds and brokerage firms for abusing the “little investor” and warned that executives would go to jail for the trading scandals he’s prosecuting.
Which brings us to Spitzer’s new article, which tells us how this debate might have moved had Spitzer not been toppled by banks and the Bush Administration (plus his foolishness):
The Obama administration, which has spent much of the past year bailing out banks and protecting the markets, has done shockingly little to help the middle class that has borne the brunt of the financial meltdown. Two acts are particularly revealing. First, the administration failed to go to the mat to give judges the power to reform mortgages in the bankruptcy context….
The second act is the recent—equally difficult to understand—concession to the banks, allowing them not to be required to offer what are called “plain vanilla” mortgages and other products to consumers. These products are simpler, more understandable, less ridden with fees, and less prone to long-term risk than most of what banks try to sell consumers on a regular basis. These are the very products consumers need.
Trillions of dollars of taxpayer infusions—direct cash, loan guarantees, capital purchases, policies to keep banks' cost of capital at virtually zero—have kept the banks afloat. It is amazing that the administration didn’t leverage these infusions to negotiate these two simple policies that would have made banking more sensible for the middle-class Americans whose tax dollars have bailed out the banks.
The administration’s failure on these two policies is symptomatic of its larger failure of vision when it comes to banking reform. The administration has spent more time worried about the musical chairs of regulatory jurisdiction than it has asking fundamental questions about what banks should be doing, what we should expect in return for the vast sums we have invested in the banks, and how discomforting it is that the banks—in an effort to forestall these very questions—are already trying to assert that things have reverted to normal. It’s worth recalling that the greatest impact of the New Deal was not the money spent on particular programs but, rather, the fundamental restructuring of the banking and securities sector that President Roosevelt imposed over the objections of business leaders….
For 50 years, under a regime of careful constraints on how and to whom banks lent, we avoided a meltdown of the sort we have just suffered though. The least we should now expect is a serious conversation about where banks should be active and how we can avoid rebuilding the same system that just collapsed.
The message we should be sending is clear: If banks want to participate in the high-risk activity that generates outsize bonuses but also outsize risk, they must do so only with their own capital, separated from guaranteed deposits and a taxpayer backstop to their debt and borrowing capacity. Unfortunately, this message is not being sent.
Posted by James on Sunday, October 04, 2009