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Tough Love Toward Wall Street

Published Sunday, October 30, 2005 in the Star Tribune.

By Dave Hage

Eliot Spitzer made his reputation holding corporate America's feet to the fire. But if you suggest he's a foe of business, he'll reply that he's actually one of its best friends.

Eliot Spitzer has become one of the nation's leading consumer advocates, using his post as New York State attorney general to sue Wall Street brokerage firms, reform the mutual fund industry and expose some of the biggest corporate scandals of recent years. Spitzer, now a candidate for governor of New York, was in Minneapolis last week to speak at the University of St. Thomas Law School and the Center for Ethical Business Cultures.

Q You made headlines when you accused some major brokerage firms of a conflict of interest -- enticing small investors to buy the stocks of their big corporate clients -- and when you accused several mutual fund companies of gouging small customers. Have those industries actually changed in ways that will benefit the average investor?

A In the analyst context we accomplished objective one, which was to eliminate most of the impropriety, most of the pressure points where the underwriters influenced the analysts. That was the biggest American consumer fraud in history, with people investing millions of dollars based on bad advice. Analysts will tell you now that they have the freedom to do their jobs honestly, and if you look at the distribution of "buy,"sell" and "hold" recommendations, we're getting a much better distribution. The more deep-seated problem was: How do you attach a revenue stream to the analysts and guarantee an adequate flow of research to investors? Brokerage firms should do that as a service to retail clients, but it hasn't always worked that well. But the first thing you do is you get rid of the fraud. Then you figure out how to provide more research.

With the mutual funds, we got rid of the funny timing of trades and the late trading that they allowed for certain favored clients. That was a cancer that was beginning to invade the mutual fund world. But the larger problem with mutual funds was high fees. When people are getting a 5 or 6 percent return and seeing 2 or 3 percent of it go to fees, and there's no competitive pressure to bring down the fees, that's something you should look at. But I do think the fees are coming down, and that's billions and billions of dollars to investors.

Q You've crossed swords with the Securities and Exchange Commission and other federal regulators, who think that national financial industries should be governed by national authorities and that you're just grandstanding. What do you say to those critics?

A I agree with the premise -- it would be optimal to have federal regulation because coherence of rulemaking and enforcement is what you would want in a national economy. The problem is when federal authorities fail to do their job. Now I would argue that they have failed, and that they have intentionally failed because of ideology.

Ever since Ronald Reagan first ran for president, he articulated a theory that government is the enemy. Since then, we've been in an intellectual environment where the role of these agencies is openly and publicly derided. So it should be no surprise that 30 years later we look back and see that every one of these agencies has failed to do its job.

Q You are widely regarded as an enemy of corporate America. Are there business leaders you admire?

A Oh yeah, absolutely. Though I do think that's a bit of a caricature. If you just read the Wall Street Journal editorial page, you'll believe that I'm some sort of populist villain. I'm just the opposite: I'm a defender of capitalism and the marketplace because it's in my veins and I think I know what makes the market function properly.

But yes, there are some stupendous people out there. Chuck Prince at Citigroup. He's a real solid guy who's trying to change the culture of a company that had some trouble. Jack Bogle, the head of Vanguard. He's a brilliant individual who understands how things should work and how they shouldn't. Warren Buffett is an exemplar.

Look, I don't see the business world as full of villains. Every organization will make mistakes from time to time. The question is how they deal with issues when they arise. I'll give you two examples. Jeff Greenberg at Marsh & McLennan, who refused to the last bitter moment to admit that bid-rigging and fraud in his company was even a problem. Which is why I said to his board, you must give me someone I can negotiate with if you want a settlement. If you don't want a settlement, we'll prove our case. Versus a Chuck Prince or a Warren Buffett, who, when they see a problem, deal with it immediately.

Q As it happens, here in Minnesota we also have an attorney general who wants to be governor. Some people say that attorneys general are involved in such contentious, complicated issues that it's hard for them to reach out to the general voter. What do you think?

A I won't pretend that I haven't thought about this a little. Historically, AGs have not done well moving up to governor. It may be that there's a distinction in the public's eye between the role of a prosecutor and the role of a chief executive.

But recently the track record has gotten very good. Some of the most effective governors in the nation are former prosecutors -- Janet Napolitano in Arizona, Jennifer Granholm in Michigan, Christine Gregoire in Washington.

In the political context, it's true -- if you say "bureaucrat," people go cold. But if you say "prosecutor" -- someone who enforces the laws that allow our system to function -- then I think the public supports that.

© Copyright 2005 Star Tribune. All rights reserved.

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