A conversation with the former Governor of New York State.

Question: Are any particular firms or individuals to blame for the market meltdown, or was the system as a whole rotten?

Eliot Spitzer: Well, the answer is both. I shy away from either/or questions or answers. I think there would be a simplicity and a desire to say, “Ah ha, we found the one person whose grievous errors in judgment caused this entire cataclysm.” Let’s begin it at a different level.

There was an ideological framework that began – politically began with the election of President Reagan and grew in power, and gained its greatest strength perhaps in Alan Greenspan as the Chair of the Federal Reserve Bank. A belief that deregulation of markets would create greater wealth. Now, those that believed this worldview are not evil, they’re not bad people by any stretch. They simply embraced an ideological framework that certainly, I think, is wrong. And I think most of the world now having seen where it took us, would agree that it was wrong. And they fundamentally misunderstood how markets work. That’s sort of a broad statement, and yet I think it’s accurate. I don’t think Alan Greenspan really understood markets. He didn’t understand human behavior. He didn’t understand the drive and urge on the part of market participants to play games, to over-leverage, to cheat, to break the rules that are essential for a market to work, and therefore he and those who were participants in this world view did not believe in either parameters for leverage, or enforcement when it came to principles of integrity and transparency.

We could have a more complicated discussion of externalities and how you can get to systemic risk, but there was that ideological backdrop. There were also individual malefactors who committed outright fraud. You have Bernie Madoff at one extreme, you have people who were marketing mortgages that they knew were not real, in the sense that the borrower could not repay. You had people who were putting triple A ratings on debt that was not good. You had people who were lying about the value of the house; you have people who were lying about their income. So, across the spectrum, you had individual acts of deceit and lies and criminal conduct, but you also had this systemic failure that derived from an ideological perspective that needed to change.

Question: What legal or institutional safeguards should have been imposed to prevent the crisis?

Eliot Spitzer: Well there should have been many things that could have been done from the regulation of derivatives, which I think is everybody’s favorite example of where a financial product was created that permitted enormous wealth to be generated for investment bankers. This buying and selling of a financial instrument, about risk related to something you don’t even buy that really didn’t add a great deal, if anything, to the valued – underlying value of our economy. And there was absolutely no regulations of the leverage that attached and that was existing in some of the institutions that were buying and issuing these derivatives was astronomical. Of course, the AIG Financial Products Division being the, sort of the final straw that when it broke the camel’s back, is the old cliché, we saw that there were hundred of billions, if not trillions of dollars of guarantees backed up by no capital. And you say to yourself, “How can that happen?” This was crazy. So that was one example of fundamentally misguided economic structure that needed to be addressed.

Question: Is Bernie Madoff emblematic of our era, and if so, what about our era gave rise to him?

Eliot Spitzer: Well, there have been Ponzi schemes throughout history. He was bigger, more brazen, more remarkable, because of his capacity to survive, even when the SEC had supposedly taken a hard look at him on numerous occasions. So, yes, I think he will become – his name alone will come to typify and capture an era of irresponsibility and lack of allegiance to simple principles of integrity in the marketplace.

Now, he also stands for the abject failure of the SEC. During my years as Attorney General, I was very critical of the SEC because it didn’t make sense that the Attorney General of New York was bringing the sorts of cases that we were bringing. The SEC should have been there doing what we were doing, but they were both ideologically opposed and actually intellectually incapable of doing what they were supposed to do. There was a lethargy, there was a hesitancy, there was a failure of intellect that was hard to get my arms around. When Harvey Pitt came in as Chair of the SEC, he said to the world, to the investment bankers, he said, “You will find a kinder, gentler SEC.” And that’s ridiculous. I said to him, “We don’t want a kind and gentler enforcer of the marketplace. We want somebody who is fair, but rigorous, tough, and understands how to ensure integrity in the marketplace.” But that was typical of what began with President Reagan, and it continued through President Bush, and so we needed to unwind that failure of regulatory backbone.

Question: Why did Madoff elude the Attorney General’s office as well as the SEC?

Eliot Spitzer: We were doing everything we could. We brought the systemic cases against analyst’s insurance, mutual funds, on and on and on. I’d never heard Bernie Madoff’s name. I wish I had, I wish we were aware of him. Had anybody sensible taken a quick look at his structure, you would have realized, a) the trades he pretended to have made simply couldn’t fit within the market space he was talking about, and have you even looked to see, and had said, I want one day of trading records and then I want know who your custodian is. Who actually keeps these shares? You would have found out the whole thing was a scam. So, it would have been the simplest investigation in the world. I just – we never heard of him.

Question: You’ve called for emails between the New York Fed and AIG to be released. What do you believe they would reveal?

Eliot Spitzer: Well, understand that the New York Fed is at the vortex of all the regulation that is supposed to occur with respect to banks. The New York Fed is the least known, but most important regulatory body out there. It oversees all of the financial institutions, controls access to borrowing for these institutions, and actually has individuals from the New York Fed present at each of the banks. So, it can see and hear and feel what’s going on in the marketplace, and yet it failed abjectly to see what was going on in terms of leverage in terms of risk exposure, etc.

Now, this is all while Tim Geithner was President of the New York Fed and Tim Geithner said when he was being confirmed for Treasury Secretary, he had never been a regulator. Which should have been not just a flare; it should have been an exploding missile saying this guy didn’t understand his job. And I think he has failed as Treasury Secretary as a consequence. Put that aside for a moment.

The AIG debacle and the bailout of AIG, where $180 billion of tax money was funneled through AIG, much of it then being passed through AIG to the counterparties, everybody from Goldman Sachs on down, were given 100 cents on the dollar on credit default swaps they had bought from AIG for no apparent reason Goldman was given a check for $12.9 billion, which is, parenthetically, just about precisely the profit they booked last year, calendar year ’09. So, the entirety of Goldman’s profit you can think of as a taxpayer infusion. Why did we give that to them?

Now, Geithner and Blankfein would say, because we were owed it. What? Now, what possible reason was there for taxpayers to give Goldman Sachs that money? I want to see what their conversation was back and forth. Would Goldman have failed absent of that infusion? Did we negotiate with Goldman in return and get stock, get warrants; did we negotiate the amount of the payment? Why 100 cents on the dollar? All sorts of other people have been taking huge financial hits. Why did Goldman get paid off?

There are many, many areas of inquiry that would be exposed and would be explained if we could break through and see AIG’s emails radiating out into the regulatory and financial center.

Question: Do you believe Secretary Geithner was in bed with large banks, or just unwilling to stand up to them?

Eliot Spitzer: Well, let me make it clear. I don’t think Tim Geithner is a bad person by any stretch of the imagination. He’s not corrupt. He’s not taking bags of cash. He’s not morally in anyway suspect. He’s just wrong. And as I say, there’s no crime in being wrong. We are all wrong at one point or another in varying degrees, and I’m certainly in that category as well, as everybody knows. So, he was wrong. So, when I say he failed as Treasury Secretary, or has failed as Treasury Secretary and as President of the New York Fed, it’s because he did not bring the right set of principles and understanding of what his regulatory role was supposed to be. He embraced the Alan Greenspan worldview of “let them do what they want because the marketplace somehow will provide a magic answer.” And that I think is the intellectual error that he has committed, along with Larry Summers, and again, extraordinarily smart, brilliant individual, but just wrong. And there’s no crime in being wrong, but I think that they have just taken us to a point, in terms of economic policy, that is not good and we have all paid a price in terms of the cataclysm of the past two years.

Question: What would you do differently if you were on Obama’s economic team?

Eliot Spitzer: Well, understand that when the meltdown occurred. And so, let’s begin at the point of the meltdown. Prior to the meltdown, to give you a quick answer on that, leverage was completely out of control. There should have been dramatic limitations in a scaling back of leverage. There should have been a redefinition of what banks that had access to the federal window, the federal reserve window, in terms of tax, gaining access to federal guarantees and actual cash could do with that money and that’s prospectively as well.

So, retrospectively, they failed to control the leverage and the risk that was coursing through the system and that’s why we refer to it as systemic risk. Prospectively, the fundamental reform we need, and thankfully the President has now begun to listen to Paul Volcker much more than to Tim Geithner and Larry Summers on this, we’re beginning to say to banks, we will no longer permit you to ask taxpayers to cover the downside while you keep the upside. Notice the asymmetry between risk and reward is what led to the massive overleveraging and over exposure of the system. It’s what we have called, it’s somebody else’s line not mine, we’ve socialized risk and privatized gain. And anytime I can play with a huge pile of money, and if Iose it’s your problem, but if I win I keep the upside, of course I’m going to get involved in much riskier investments than I should. And so, we need to correct that balance, scale back the leverage, tell the banks, do what banks are supposed to do. If you want access to federal dollars, to guaranteed deposits, lend that money to people who will create jobs, who will be businesses borrowing to expand, rather than using it for either hedge funds, private equity investments, proprietary trading, the sorts of endeavors that create great risks through the system.

So, that is one structural issue which the President has now begun to focus on. Whether it’s post-Massachusetts and post-political meltdown or not, it doesn’t really matter to me. He’s now getting that right and I’m hoping that Geithner and Summers are having their wings clipped because they’re the ones who were not articulating for the President the obligation to put that sort of reform in place.

Question: How can we credibly commit to not bailing out any more large firms?

Eliot Spitzer: Only by making them smaller. In other words, the “too big to fail” problem is at the heart of this and the institutions that got too big to fail that were overleveraged, that had a federal guarantee could again, absorb risk in their investment portfolio with the knowledge that if things went bad, they weren’t going to pay the price, taxpayers would. So, at the point of crisis, we couldn’t let the banks all fail because then we would have had a depression. So, there was an imperative to get cash into the system to ensure the solvency of the banks. The question is, what did we do in return? What did we get back from them? And that’s where Geithner and Summers failed. They didn’t ask for anything back. It was at that point we should have said. The nature of your investment portfolio has to change. What you do with the money has to change. And the size of the institution has to be limited. And so, that is the reform that we’re talking about.

You know, a lot of screaming and shouting about passing bills, giving enforcers more power. Enforcers didn’t need more power; they just needed to use the power they already had. And I think that is evident, not only from the cases that we made when I was Attorney General, but what they have been able to do over the past year. There hasn’t been a new law passed giving the Fed and other institutions more power. They finally woke up to the fact that they needed to use it. So, hopefully that is where we’re headed.

Question: Given your criticisms of his appointed Senator, Kirsten Gillibrand, do you regret choosing David Paterson as your lieutenant governor?

Eliot Spitzer: Well look, it wasn’t – No. The short answer is no. I don’t regret asking David to be Lieutenant Governor when I ran. I think David has been thrust into a very difficult environment. If you look at John Corzine in New Jersey, who was a remarkably talented, capable individual; he was voted out of office. He tried to do many things that were wise. Arnold Schwarzenegger, a different side of the political aisle. His approval rating is down in the 30’s. Ted Strickland in Ohio, Deval Patrick in Massachusetts – being a governor right now is a very difficult job. Revenues are way down. People still want to get their education funding. They’re still wanting Medicaid and healthcare to be funded. And when you have shrinking revenues, it’s just a very difficult environment to survive politically. So, David has been struggling with that and I think the budgetary proposals he has put forth is quite wise, but unpopular. And that’s the nature of being a Governor at certain points in time. Do I disagree with his choice of Kirsten Gillibrand? Yes. She has unfortunately shown that she is more a careerist than politician dedicated to standing up for a principle on issues of immigration rights, on issues of gun control, on issues relating to some core principles that I believe in. But we’ll see. She is the Senator, and we’ll see what happens.

Question: How do you assess President Obama’s effectiveness in handling the financial crisis?

Eliot Spitzer: I went through a first year in office as Governor where you come in with tremendous expectations and you try very hard to define a reform agenda and a year later you wake up and you say, wait a minute, not everything had worked. It’s difficult. The effort to reform any system, any structure is fraught with the risk that the forces of the status quo will array against you, whether it is hospitals, whether it is the unions that work in the hospitals, whether it is the teaching establishment. So, it doesn’t mean they’re bad, good, indifferent, or invidious. It just means that those who were benefiting from the current system don’t want things to change. The President has encountered that. Has he pushed aggressively enough for reform in every instance? No, I don’t think so. The financial services I’ve been critical of where he has ended up until very recently with Paul Volcker’s ascension on the issues of restructuring the banks, which I think is important.

On other issues, I think he has been spectacular. I think the tone that he has set, the fact of a President who is thoughtful, who is smart, who is inquisitive, who tries to address issues, whether it be global warming or our relations with foreign nations at the level of intellectual accuracy and thoughtfulness is wonderful to see. But these issues are sometimes intractable. I mean, you look at the roadblocks to progress in the Middle East. He’s tried; he has appointed superb people. Does it mean you can get parties that have irreconcilable differences to sit down and agree?

So I think he is a wonderful public servant, he will go down, I’m persuaded, as a great President. The recent political bumps with the election of Republican Senator from Massachusetts are part of the both maturation process and process of learning how to use the levers of power that will make him stronger in the years ahead.

Question: What advice would you give the Democratic Party as midterm elections approach?

Eliot Spitzer: Well, look. I hesitate to say I’m giving advice. I just, you know – but here’s what I’ve said and what I’ve written for Slate and elsewhere. There is a choice that the White House has to make at this point. Do they go the path of instrumentalism? Do they choose to try to be incremental in their efforts and thereby reach accommodations with Republican Party in a spirit of bipartisanship? Or, alternatively, do they do what I would encourage which is to say, “Wait a minute. We have a progressive agenda, that agenda of reform in financial services, in healthcare and education is correct. We still have 59 votes in the United States Senate; we still have a very significant majority in the House of Representatives. We will do everything we can to enact a meaningful fundamental reform agenda because that’s what this nation needs.” Let’s not kid ourselves. We are in a very treacherous point in terms of our economy, in terms of our competitive position, visa vie the world, in terms of the social contract that has been crumbling in our nation. So if we don’t take those fundamental steps, we’ll be in trouble. So, I would encourage them to be aggressive. Do that which his perhaps riskier, which is to push the progressive agenda at this very moment, and if it leads in November consequently to a choice to be made by the electorate, that’s good. Let the public see a choice between a Democratic Party that believes in progressive values and a Republican Party that is standing in opposition, and we will see which way we go.

I think the mistake they have made, and this has been a mistake of tone and a mistake of communication, has been to let the Republican Party over the last number of months appear to be the party of populist anger. And it is absolutely mind-boggling that Sarah Palin and Scott Brown have been the beneficiaries of populist anger, rather than Barack Obama and Democratic Senators. So, I think that is a communication problem that we need to think about and overcome.

Question: What do you teach your students at CUNY?

Eliot Spitzer: Well, the question that we address is, what is the role of government? And we come at it from several different perspectives. And the syllabus is to a certain extent, what I consider the “greatest hits” over the last couple of years in thoughtful writing, and some goes back a little farther. We read John Rawls, we read Karl Marx, we read Nozick, we read John Stuart Mill, all in the first week asking the fundamental question, how should income be distributed? And whose job is it to distribute it? Is it purely the private sector, Nozick libertarian world view – what I earn is mine, I keep it? Is it Karl Marx’s terms of a communist socialist world view, John Rawls social contract of worrying about the position of the least well off member of society? And I do not try to proselytize at all in this course, but what I want the students to do is think about their answers to tough questions and come up with an answer based upon a theoretical answer to the question, what should government do? How should government intervene in the marketplace? Issues in the stock market of fraud, whose responsibility is it to enforce integrity, externalities in the context of the environment, tax policy, intergenerational justice issues, and then we end up with a few weeks of the role of the United States in the world. We read Tom Friedman’s classic The World is Flat, and Fareed Zakaria’s I think spectacular book, The Post-American World. And we try to discuss, what are the shifts in the tectonic plates of world power?

Question: Your career has spanned several fields. What career would you advise students to go into today?

Eliot Spitzer: I guess first thing I’d say is, stay in school as long as you can. It’s an ugly world out there, and there aren’t a whole lot of jobs, and the academic environment is wonderful. In terms of pursuing a career, look, I’m going to sound like a Hallmark card. Find something you enjoy. It really is the case that if you enjoy being a Prosecutor, be a lawyer and do that. If you enjoy trading stocks on the floor of the Stock Exchange, do that. Ideally, what do we need for our society? People who are innovative, who come up with technical ideas that would drive the economy forward, a new operating system, a new social network and software package, something medical that will cure a disease, all of which then creates capital flows, jobs and improves the lives of many people.

But finding something that is emotionally satisfying is really, as I said, is an obvious answer, but it’s really the best one, I think.

Question: Has your own scandal given you a new perspective on the people you prosecuted as Attorney General?

Eliot Spitzer: Well, inevitably when you’ve gone through what I’ve gone through and I would hope that – not to talk about other people, but obviously it generates a bit of self-analysis and reflection and questioning. So, sure, it has driven home what I’ve always appreciated, which is that we are all fallible and through everything I did as a Prosecutor, I was always very aware of my own capability to err, and in fact I did, as everybody now knows. And what I think it makes one appreciate is violations in certain domains does not speak to the totality of one’s personality. Some of the people, for instance, whom we had to prosecute or entities we had to prosecute for market violations were in many respects good institutions or individuals. And so, there are more subtleties to these dynamics than are always or often apparent and so one realizes that.

Question: What was your darkest moment during the scandal?

Eliot Spitzer: I think the hardest piece of this is recognizing the pain I’ve caused to my family, which is a heavy burden to carry, as it should be. And the sense that I have let down, not only my family, but friends, colleagues, the voters who had asked me to do a certain type of job and I desperately wanted to do that job and wanted to do that well. I think we were trying, we were in many ways doing that job, but I let them down. And that is a very heavy burden to carry.

Question: Do you feel you’ve earned the forgiveness of your family and the public?

Eliot Spitzer: I don’t think it’s for me to judge whether or not I have earned it, or deserve it. All I can do is ask for it at a certain point in time and obviously my relationship with my family is what I care about first and foremost, and I have been extraordinarily fortunate to have a remarkable wife, three spectacular daughters, and we as a family are in certain respects stronger than we’ve been and they have been forgiven and I have been the very lucky beneficiary of that.

Question: What would you advise Tiger Woods or other notable people who have generated similar scandals?

Eliot Spitzer: Look, again, I hesitate to give advice. I would just say, what I’ve tried to do is look within and that is where one must ultimately one’s sense of self and purpose and that’s all one can do. The other interesting thing in moments like this is, of course, you find where your friends really are and you realize who you can depend on and who is there and who tries to help. And that’s also important.

Question: Scandals like yours keep recurring. How would you advise politicians to avoid them?

Eliot Spitzer: When you know something’s stupid, don’t do it. It’s really – there often isn’t a lot of subtlety to the things that cause trouble. And it’s not a lack of capacity to distinguish between right and wrong. It’s the failure to exercise that judgment at the particular moment whether out of hubris, out of a sense of entitlement, out of a sense of adrenaline, whatever it may be. But, you know, it’s stupidity that brings people down.

Question: What is love?

Eliot Spitzer: You know, I don’t know. It’s one of these feelings that you sense when you meet somebody and there is a response that is different and is unique, and is palpable. And it then changes over time. In other words, the sort of exaltation of first meeting and falling in love is, I think everybody would admit, is different than the feelings that you might have after 25 years. When my wife is watching this, she may say, “What are you talking about?” But it is. After 25 years, it becomes almost a dependence. And a sense of knowing somebody so well that you have merged as personalities, and know each other’s thoughts and there’s a comfort that is there, which is part of it, and equally important.

Question: What does it take to redeem oneself in public or private life?

Eliot Spitzer: I don’t know if there are either prescribed paths to redemption, or if there is such a thing. I have no illusion that I can ever get this piece of my life to fade significantly to the background. It was too much of a media hysteria about it. And I’m not saying improperly. It’s there. You come to grips with that. All you can do is step back and say, “Okay, move forward and try to continue to do something useful.” And over time, perhaps that will cause people to say, the other piece of his life is one aspect, but there are other aspects as well. But you can’t live or die every day thinking about redemption, you have to move forward and try to do things that are useful and worthwhile and learn.

Question: Was anything said about you when you resigned that you found untrue or unfair?

Eliot Spitzer: Oh, I’m not sure if I worry about unfairness. I think that the critique that I bridle at, and have, and this is not related to what led me to resign; is the critique of the Wall Street Journal editorial page and others who from the very outset said, “He (Spitzer) doesn’t appreciate or understand the market, or creation of wealth, or jobs, or capitalism.” To which my response has always been, and it was harder to say at the beginning, and now after the cataclysm I think it’s a bit easier to say, “No, we are the ones that understand the market, and the necessity of rules and enforcement in order to permit the creation of wealth and risk taking that actually make sense.” Those who dislike me, and as I say, some people dislike me for legitimate reasons. When you’ve been on opposite sides of litigations like this, it would be foolish to believe they wouldn’t have some sense of dislike for me. That’s human nature. And so, some folks dislike me for the wrong reason, which is they think I don’t understand markets. Some dislike me for the right reason, which is when you’ve been in a situation like this; you’re not going to have warm and fuzzy feelings about the person who was the prosecutor. So, I think that’s the critique that we didn’t understand markets always bothered me because I was persuaded that we did. We understand markets, we understand progressive politics, we understand how wealth is created for more and more people. So, I guess the critique of me in other ways, I just try to look within and say, “Okay, I hope I learn something as well.”

Question: Do you mean that critiques of your policy bother you more than critiques of your private life?

Eliot Spitzer: Well, the critiques of my private life, to the extent that they are legitimate and justified, you got to just accept that and move on. You can’t try to deny reality sometimes. That’s part of maturing and growing up, and none of us is without flaws. Mine are very evident to the world. Very little in my life has ever been private.

Question: Was it true about the socks?

Eliot Spitzer: No.

Question: Aside from moral issues, what insights have emerged from your personal reflection since resigning?

Eliot Spitzer: I think there are many ways to contribute and it is unclear to me whether one contributes more by being an elected official, being a school teacher, being an academic, working in not for profits that provide services to those who are in need and thereby creating opportunities for them, by being a technology whiz who creates some next step in some area I can’t even understand.  There are so many different ways to participate in ways that are rewarding emotionally.  Make one feel good about participating in our community so that we can focus as much as we often do, certainly as much as the media does on the politics.  You ask me, and again, this goes back to the days of the ancient Greeks where the politicians – we remember Paracelsus, we don’t remember the guy who was the great teacher at the high school in Athens.  So, we focus on politicians, perhaps too much.  Those who really have changed society, however – I guess Paracelsus did, but at large politicians don’t, it is Einstein, it is Freud, it is Bill Gates, Steve Jobs, it’s people who are creative thinkers who really change society in a fundamental way.  

Question: What has motivated your fairly early return to public life, and will you ever attempt a return to politics?

Eliot Spitzer: You know, it’s – I began simply by writing some articles for Slate. I enjoy writing whether people would be interested or not wasn’t clear to me. Interestingly, it had been a number of years since I’d actually had the opportunity to write because even though as Attorney General and Governor, I would speak quite often, rarely did I have the time to sit down and actually write an article, or a speech. And so, it was almost liberating to be in a position where I had the time to do that. And I enjoyed it. So, writing a few articles and then I was asked to provide some commentary on a few TV shows, and so bit by bit, I’ve accepted those invitations and spoken at a few venues. It has not been part of any preordained plan on my part. I have a day job, not only working in the family business, but teaching and now doing the writing, so I’m busy enough. So, this is not part of some scheduled return to anything, but I’ve enjoyed it.

Question: Where would you most like to see yourself in 10 years as a public figure?

Eliot Spitzer: Oh, I don’t know where, if anywhere, as a public figure. Ten years from now I’d like to see myself upstate with a little piece of property up there and – it is where I find peace and quiet, sitting there. It sounds, again, very kind of like a Hallmark card. You look up at the stars and you realize, okay, none of us is that important, but it’s where I love to spend time.

Recorded January 21, 2010
Interviewed by Austin Allen