Whose job was it, in your view, to prevent the financial calamity that came to a head in 2008?
The regulators who are being paid to stop the sort of behavior that metastasized into the crisis. Having said that, investment banks had created an intellectual environment where libertarianism had become the flavor of the decade—or the flavor of several decades, going back to President Reagan as the leading politician that embraced this line of thought. It became the ideological framework within which we operated for quite some period of time.
The investment banks helped create it, they politically lobbied for it, they pushed back on Capitol Hill, and elsewhere, against any flex of regulatory muscles. They came down very hard on those who did try to enforce regulatory rules. All this leads to their shared culpability. So there are multiple parties—but regulators, who at first issue have the responsibility to stop the behavior, should have done much more.
As Attorney General of New York, you brought suits against firms like Merrill Lynch for engaging in predatory lending practices, and against AIG for fraud. Some would argue you built your reputation on not being afraid to pursue white-collar crime cases. Why are these types of suits so rarely seen, why are convictions and regulatory overhaul so elusive, when there's broad public support?
Well, here's the bizarre thing. You're right, now the public looks kindly on those actions. But when I began to bring those cases, people thought I was crazy. There was enormous pushback within the world of politics, where people thought I was cutting my throat politically—these are important institutions politically, socially, in terms of the economy in many areas, certainly in New York City. It was rattling the cage before it was obvious to most people that we had a problem.
But, then and now, these are very hard cases—they're not two-witness ID cases where you get two people to point say "he did it" and you're done. It's not a whodunit. It's a much more complicated task of explaining very difficult transactions, proving intentions and states of mind that are often very subtle and subject to contrary evidence. So nobody should underestimate the difficulty in these cases. Bottom line is, more cases should be brought. I hope more cases will be brought.
The MIT Press
So the attitude you encountered among prosecutors was, "Leave these guys alone and let them do their work?"
Many prosecutors had bought into the ideological perspective that prosecuting these cases was injurious to the marketplace. And that, I think, is a fundamentally wrong perspective. But it was what was there for quite some period of time.
Aren't prosecutions difficult, also, because high-level financial practices are arcane, esoteric, and complex? How can we police industries that require specialized knowledge which outsiders don't fully understand?
I'm not sure I agree with your premise. I think that the vocabulary is arcane. But the underlying impropriety is very simple. People get what conflicts of interest are. People get that telling the public to buy mortgage-back security at the same time you're betting against it, creates a tension that's undeniably wrong. The underlying concepts that have to be proven here are as simple as the concepts underlying fraud cases that have been the bread and butter for prosecutors for decades—even if the particular vocabulary on Wall Street is marginally different. Prosecutors should explain these practices in a straightforward way, and that's what good lawyers know how to do.
Your book reports that, in 2004, you stated subprime loans "are foisted on borrowers who have no realistic ability to repay them and who face the loss of their hard-won home equity when the inevitable default and foreclosure occurs." In what context did you say this?
That was an article in The New Republic, and that was the one sentence where [co-author Andrew] Celli and I really fulminated. The essay was an effort to create a larger intellectual framework for what we were doing [in the Attorney General's office]—the first sort of dim explanation of what became a slightly more complete discussion of what government should be doing in the marketplace. One of the lines of argument was that there are certain core values the government needs to protect: we don't allow child labor, for instance, not because child labor is inefficient—though it is—but because it's wrong, and government needs to enforce it. Another value we argued for is fairness, in terms of discrimination. And another was subprime debt. We had brought a number of subprime cases and there was enormous opposition to them. But we said, "This is what government has got to do."
If you were able to put your finger on the problem in 2004...why was there so much surprise in 2008?
That's a good question—I have no idea. We worked to try to pursue a lot of these subprime lending cases and the FCC and the banks shut us down. That was the case up in the Supreme Court, we didn't end up winning until either 2008 or 2009, I can't remember which—I was out of office by then. There was significant opposition. I don't know what I can tell you—there was just huge conceptual opposition to what we were trying to do.
In your book, you suggest that Wall Street knew the government would bail them out; they knew that the taxpayer troughs would hedge their risky bets. Why is this a fair assertion?