"I always felt that if he felt the firms had actually broken the law in terms of investor research, he should have prosecuted them either as individuals or as firms," the Wall Street Journal editorial-page editor Paul Gigot, who has occasionally excoriated Spitzer in his columns, told me. "Let a jury decide. I always thought it was strange that he stopped short of prosecution in actual instances. He got the maximum amount of publicity out of … settling for some kind of agreement that is less than revolutionary or remarkable." In other words, Gigot said, Spitzer got prosecution-level publicity without actually having to prosecute. "I would argue the Enron prosecutions are going to have a greater impact on corporate behavior than any of the Eliot Spitzer settlements, because you have the lesson of people going to jail. In stock-market research, nobody's going to jail."
Spitzer has heard this argument before. And on a summer day in his twenty-fifth-floor downtown-Manhattan office, from which, nearly three years earlier, he had watched a plane slice through the second of the Twin Towers, he attempted to explain to me what he was really after in these financial cases: reforming the internal architecture of Wall Street.
Achieving structural reform was more important than punishing any one analyst, he told me, "even a Jack Grubman"—referring to the former Salomon Smith Barney stock analyst whose career ended with a $15 million fine and a lifetime ban from working with securities but no indictment. "Structural reform is much more important than putting people away in cuffs," Spitzer continued. "I'm not going to be the guy who prosecutes the twenty-eight-year-old analyst who's writing these junk reports because he's been pressured to do so, and is in a system that gives him every incentive to do that. His defense would be that everybody knew this was the game. When it came to the individual analyst, it seemed unfair to make him or her the scapegoat for that system."
Critics on the right assert that Spitzer's attempts at regulation have impeded the operation of the free market in a way that's damaging to the public interest. In response, Spitzer invokes Teddy Roosevelt. "Roosevelt was one of the few—if not the only—voices who looked at an economic structure that was increasingly dominated by trusts and power brokers who were saying, 'This is the market; this is what generates wealth.' And Roosevelt said, 'No, that's not the proper way the market should work, and we need antitrust laws. We need competition.' That's exactly what we're trying to do."
Continuing to speak about his libertarian critics Spitzer says, "They reflexively evoke the words 'free market' without an understanding of what the term means. I believe in the market as much as anybody, but I believe I understand it better than they do. I understand that a market needs to have rules by which it lives. If you have a marketplace unbridled by rules that mandate integrity and transparency, then the market will not work." Indeed, his efforts at imposing regulation on Wall Street derive from a "very deep-seated belief on my part that competition does work," he says. "That's what the marketplace is all about." And if the agencies of the federal government—the SEC, the FDA, the FCC, whatever—abdicate their authority to protect that marketplace, Spitzer says, "I view it as my responsibility to twenty million New Yorkers who are investors, who work in the marketplace," to assume it.
Spitzer is well aware of what he has helped create: a system of one-upmanship in which the state and federal governments try to outdo each other, both hoping to seize headlines and regulatory jurisdiction first. Indeed, on July 1, when The Wall Street Journal reported on the SEC's new proactive "wildcatting" program of looking out for scams without hard proof of wrongdoing, it explained that the program was created "after New York Attorney General Eliot Spitzer exposed a number of abusive anti-investor practices in the securities markets, upstaging the SEC."
"Look," Spitzer says, "the way I view the discomfort of those moments is that it's well worth having awakened the SEC, so that it is now doing what it should have been doing all along." He concedes that his actions may also have encouraged other state attorneys general to overstep their bounds. "We haven't quite figured out—and we may need to figure out—how to deal with the few state actors who've become more disruptive than is appropriate. That's going to be a real problem."
To hear Spitzer speak about his job, about what it has become, about what he's made it, is like sitting down with Bruce Wayne, Batman's alter ego, and asking him why he dresses like a bat and lurks in the corners of Gotham each night. He didn't want these cases, Spitzer says—really. But there was a void that needed to be addressed. The process that began when President Ronald Reagan dissolved federal constraints and regulations that had been in place since Franklin Roosevelt's time—a process that has continued through the Administration of George W. Bush—had created a power vacuum that no states-rights advocate thought would ever be filled. If Joe Chill's bullet gave birth to the Dark Knight, Reagan's "new federalism" gave birth to Eliot Spitzer. What was once the prerogative of the federal government is now the prerogative of the states—or so Spitzer sees it.
He sometimes wonders, however, where the right balance between state and federal government lies; he was, after all, opposed to Reagan's ostensible aim of returning power to the states from the federal government. "In law school I was opposed to the Reagan Revolution, which was premised on a devolution of power to the states," he says. "I had this vision, this very classic New Deal vision, of federal agencies in Washington doing their job." Which is not to say, Spitzer acknowledges, that Reagan didn't correctly perceive an underlying truth: federal regulatory agencies had become enormously cumbersome and overly bureaucratic.
Spitzer is at pains to make clear that he is not trying to usurp federal prerogatives. The states "should not be the exclusive overseer of the marketplace," he says. "The SEC is the primary enforcer in the securities market. The EPA is the primary enforcer in the environmental market. In the labor markets there is the Labor Department. By and large, we should be the secondary or tertiary enforcers. But in an era when there has been such retrenchment at the federal level, we become more significant. And when the structural breakdowns are of such magnitude that something needs to be done, as I would argue was the case with investment research and mutual funds and the Clean Air Act, we will jump in."
"The things I set out to do three, four years ago appeared at the time to be insane," Spitzer says. "Now everybody here today is saying, 'Look at all this notoriety that he's gotten.' Back then they thought I was nuts. Here I am, going up against the financial-services community. People thought it was political suicide. And the notion back then that I thought it was good politics is ludicrous. Nonetheless, I was concerned about giving these state agencies the latitude and capacity to intervene. It doesn't mean I hesitated, because I went after these cases, but now the genie's out of the bottle, and we're going to try and figure out how we cap it. How do we control this thing?"