The Magazine

I, Eliot

From the March 7, 2005 issue: Will New York's attorney general conquer the "investor class"?

Mar 7, 2005, Vol. 10, No. 23 • By MATTHEW CONTINETTI
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Cramer twisted and looked at one of the many computers arranged on his desk. The screen was covered with a stream of constantly changing financial data. Then he went on: "Eliot believes that capitalism is fabulous--provided that people play fair. He is the most Republican Democrat I know, because his stance is always the same: pro-growth, everybody wins; but growth without rules--zero-sum game."

This is what you hear again and again from Spitzer's friends, and from Spitzer himself: His many investigations into shady dealings inside Wall Street's most prestigious financial institutions aren't the result of any particular animus toward the Street, or toward capitalists, or toward "the system" in general. Spitzer isn't a radical, one's told.

And what one's told is correct. Spitzer's biography, his parentage, his schooling, his friendships all confirm it. Spitzer isn't an enemy of business. He is separate, but not alien. Every morning, after all, when he wakes up early and jogs around the reservoir in Central Park, he's surrounded by hundreds of traders and analysts and managing directors and CEOs. And yet--recall for a moment his friendship with Cramer--it's clear Spitzer isn't in bed with business, either. He just lives next door to it.

ELIOT SPITZER has been a lawyer for 20 years--only about eight of which were spent in private practice. After law school, and after clerking for a federal judge, Spitzer joined a firm in New York City. He left before two years were out. He became an assistant district attorney in New York, worked on cases related to organized crime, and rose to the top of the labor racketeering unit. Spitzer took on the Gambino crime family. He took on the garment and labor cartels. He earned his first mentions in the New York Times.

He left the district attorney's office in 1992 for another stint in private practice. It's clear, in retrospect, that this was little more than a placeholder; Spitzer first ran for New York state attorney general two years later, in 1994, as a tough-on-crime liberal who would bring to the job six years of experience as a battle-hardened district attorney.

He lost that race, badly. There were four candidates in the Democratic primary, each occupying a different space on the ideological spectrum. Spitzer finished dead last. Cramer remembers when he first heard the news, surrounded by Spitzer's family and supporters. It wasn't a happy scene: "I'm at the party with his mother and father, and I'm crying and apologizing, saying, 'I thought we'd do better.'"

Bruised but undeterred, Spitzer went into private practice for a third time. He was one of the founders of the firm Constantine and Partners, which he used mainly as a fundraising platform for his next bid at attorney general. In 1998 he won the Democratic primary and took on Republican incumbent Dennis Vacco in the general election. The race was close; so close that Spitzer sat through a six-week recount before declaring victory, by 25,000 votes out of the more than 4 million votes cast.

The attorney general of New York sits atop a huge and roiling bureaucracy; Spitzer employs 600 lawyers in four divisions divided into 16 bureaus scattered throughout 13 regional offices. At any given moment these lawyers are involved in thousands of cases. ("It's virtually impossible to get a count," one of his aides told me.) The tenor of these investigations is a function of the attorney general's politics. Spitzer's great innovation was to talk like a Republican and litigate like a Democrat.

This did not happen overnight, and it did not happen by design. Before 2002, Spitzer was best known for his 1999 offensive against General Electric. Late in the '90s the company disclosed it had polluted the Hudson River with PCBs from the 1940s to the 1970s. At first blush, suing G.E. was a textbook example of environmental activism: Spitzer wanted the company to pay for dredging the river, which would amount to billions of dollars in damages. But, as the New Republic's Noam Scheiber pointed out, Spitzer added a twist. He took an issue that satisfied the environmental lobby--making a bloodthirsty corporation pay for its crimes--and dressed it in pro-business language. G.E.'s dumping of PCBs into the Hudson wasn't bad per se, Spitzer argued. It was bad because it had hurt commerce in upstate New York.

The way that Spitzer talked about the Hudson River case in 1999 prefigured the way he talks about Wall Street today. Yet the fame he's won from his Wall Street suits makes it easy to forget that many of the cases Spitzer pursues are unsusceptible to such rhetorical and ideological shading. They are standard liberal Democratic fare. Cases against gun manufacturers, for example. Cases against industrial air polluters. Cases against grocery stores that don't pay satisfactory wages. Cases against predatory mortgage lenders. Cases against "Big Tobacco." It's a lengthy list.

In fact, if it weren't for Spitzer's investigations into the financial industry, and the political contortions they permitted, it's likely he wouldn't be a national figure at all. He'd be only one of many Democratic state attorneys general, all sharing the same goals and the same means to achieve them.

Which is ironic. Because the case that made Spitzer famous was sui generis--a historical hiccup in which an offhand remark, coupled with the unique subpoena powers of New York's attorney general, led to an investigation that uncovered real fraud. Remove any of those elements, and Spitzer's political reputation would not exist.

LIKE CLOCKWORK, the '90s stock market boom ended as that decade drew to a close. Stocks fell precipitously in the spring of 2000. The technology and telecommunications sectors were hardest hit. Bubbles burst. Bulls transmogrified into bears. The New Yorker's John Cassidy picks up the story from there. As Cassidy explained in a 15,000-word exegesis of Spitzer's Wall Street investigations, one day in 2000, a Spitzer lieutenant named Eric Dinallo spoke to his writer-father, Greg. Dinallo fils headed the New York state investor-protection bureau in the attorney general's office. Dinallo père wrote pulp thriller novels and the occasional screenplay. Here is Cassidy:

Greg, who had written episodes of Quincy, M.E. and The Six Million Dollar Man before turning to thrillers, was complaining about Wall Street analysts who kept "buy" recommendations on technology and Internet stocks even though so many of them were plummeting. "When analysts recommend these stocks, what's their interest in it?" he asked.

Intrigued by his father's off-the-cuff question, Dinallo told Spitzer in an early 2001 memo that his bureau would investigate "abuses by investment advisers" and "investment banking firm analysts" in the coming year. Around the same time, a Queens doctor named Debases Kanjilal filed suit against brokerage house Merrill Lynch. In the suit, Kanjilal claimed that one of Merrill Lynch's tech-stock research analysts, Henry Blodget, had urged his clients--including Kanjilal--to stick with a stock even as its price tanked. Kanjilal had lost thousands of dollars as a result.

Using the Kanjilal case as a springboard, Dinallo and his team of investigators discovered that Blodget routinely contorted his analysis of stocks in order to bring business to Merrill's investment-banking division. Put another way: Blodget told investors like Debases Kanjilal to stick with a tanking stock because Merrill Lynch wanted to keep the company that issued the tanking stock as an investment-banking client. It was an obvious conflict of interest.

It was also an explosive revelation. When Spitzer announced on April 8, 2002, that he had discovered "a shocking betrayal of trust by one of Wall Street's most trusted names," Merrill Lynch's stock lost around $5 billion in value in a matter of days. By May 21, the company had agreed to settle with Spitzer out of court. The settlement had two parts: Merrill would separate its research and investment banking divisions, and pay $100 million in penalties. But the investigation didn't stop there.

Another team of Spitzer's investigators found similar abuses at the brokerage firm Salomon Smith Barney, which had been acquired by Citigroup, the world's largest bank. The culprit in the Smith Barney investigation was another research analyst, Jack Grubman, who like Blodget had a . . . unique stock rating method. Grubman's "research" was not just skewed by the interests of his firm. It was heavily influenced by self-interest, too.

Spitzer's office turned up the following email, which Grubman wrote to an analyst at another firm:

Everyone thinks I upgraded T [AT&T] to get lead for AWE [AT&T Wireless]. Nope. I used Sandy [Weill, Citigroup's chairman] to get my kids in 92nd St. Y pre-school (which is harder than Harvard) and Sandy needed [AT&T chairman Michael] Armstrong's vote on our board to nuke [former Citigroup co-chairman John] Reed in showdown. Once coast was clear for both us (i.e. Sandy clear victor and my kids confirmed) I went back to my normal negative on T. Armstrong never knew that we both (Sandy and I) played him like a fiddle.

Well, he did now. And so did a whole lot of other people.

Collusion, corruption, crass neglect of individual stockholders--this was what Spitzer's investigations into Wall Street uncovered. The consensus was that if Spitzer ever brought these cases to trial, some of America's largest firms would fall apart.

So Spitzer didn't take the cases to trial. Instead, in December 2002, 10 of Wall Street's most famous banks settled out of court with the New York state attorney general's office: Bear Stearns, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, and UBS. The earlier settlement with Merrill Lynch provided the model. As with Merrill, the firms would adopt reforms separating research from investment banking; the combined penalties reached upwards of $1.4 billion. And all because someone who used to write dialogue for The Six Million Dollar Man lost money in the stock market and had a son who worked for Eliot Spitzer.

The investment-banking scandal resonated with voters. It helped Spitzer win reelection in 2002 with 60 percent of the vote. It exposed what had become a toothless Securities and Exchange Commission. But it also exposed Spitzer to criticism; that none of the cases went to trial, that none of the analysts was convicted in a court of law, suggested to some that Spitzer was more interested in publicity than reform.

And as Spitzer's investigations grew in number, so did his critics. He was reckless, said some. He was undemocratic, said others. Those in the Reckless Camp argued that wherever Spitzer's eye turned, economic ruin followed. In 2002, remember, Merrill Lynch stock lost over $5 billion in a matter of days. In 2004, when Spitzer told reporters he was looking into the insurance industry in general and Marsh & McLellan in particular, Marsh lost 43 percent of its value. According to Slate's Daniel Gross, together Marsh and AIG insurance lost $38 billion in market capitalization. Such numbers may look abstract, but they have real-life consequences. Marsh, for instance, laid off about 3,000 employees.

Those in the Undemocratic Camp argued that Spitzer had become business's "judge, jury, and executioner." (The words are Chamber of Commerce president Tom Donohue's.) As evidence, the Undemocratic Camp pointed to the attorney general's September 2003 settlement with Alliance Capital Management and other mutual funds. Spitzer's office found that some mutual fund companies had engaged in tawdry after-hours trading--profitable for their hedge-fund buddies but costly to their individual investors. Moreover, Spitzer felt that the fees some funds charged their customers were too high. As part of (yet another) out-of-court settlement, Alliance cut its fees by 20 percent, froze that rate for five years, and began a host of other reforms.

Spitzer was reforming by fiat, critics in the Undemocratic Camp said. Legislatures are supposed to come up with the rules, and attorney generals are supposed to enforce the rules. But Spitzer was making up new rules as he went along. And all came with a high price tag: Alliance Capital's reforms cost an estimated $300 million. Plus the $100 million in penalties it forked over. Plus another $150 million in returned profits.

And there were other costs. Afraid they might become Spitzer's next target, companies began hiring former Spitzer lieutenants, donating to Spitzer's campaigns, capitulating to the attorney general's every whim. The line between Spitzer's office and Wall Street began to blur. Eric Dinallo left the Investment Protection Bureau for a job at Morgan Stanley as "managing director of regulatory affairs." His replacement, David D. Brown IV, came to Spitzer's office from Goldman Sachs. In the fall of 2004, after Spitzer told reporters he couldn't work with Marsh & McLellan's current leadership, the firm's board purged then-CEO Jeffrey Greenberg. Greenberg's replacement was lawyer-executive Michael Cherkasky, who had spent only ten years in the insurance industry.

But Cherkasky had more important credentials. Specifically: He was a close friend of Spitzer's. He had been Spitzer's boss at the Manhattan district attorney's office, and he was one of Spitzer's longtime political contributors. Spitzer began to face conflict-of-interest accusations himself. A further example: Last year Spitzer filed suit over former New York Stock Exchange chairman Richard Grasso's $139.5 million compensation package. Home Depot cofounder Ken Langone was named as a defendant. Who did Langone hire for his defense? Attorney Gary Naftalis--who, according to Newsweek, had donated $10,000 to the attorney general's coffers.

Read the millions of words that have been written about Eliot Spitzer (those by Newsweek's Charles Gasparino in particular), and you learn some disturbing facts. You learn that a year before Spitzer sued GlaxoSmithKline, drug giant Eli Lilly gave him $5,000. You learn that the mutual fund companies which weren't implicated in the attorney general's investigations routinely donated to Spitzer. And you learn that former Democratic candidate for New York governor and prominent New York Stock Exchange board member Carl McCall--who signed off on Grasso's huge payday--conspicuously was not named as a defendant in the Grasso compensation suit (not, Spitzer's office assures, for any reason remotely related to partisan politics).

Burrow through all this material, and suddenly you are struck with the impolite notion that maybe the attorney general isn't saving--or even practicing--capitalism. Shear away all the highfalutin' language, and you begin to think that Spitzer looks more like a traditional political boss: rewarding his friends, and punishing his enemies.

HE HAS A VASTLY MORE HIGH-MINDED explanation for what he's up to, of course--and the language he uses to explain it comes from American conservatives.

It's hard not to notice: Over the past 25 years the number of Americans who own stocks and bonds has skyrocketed. According to the Federal Reserve's survey of consumer finances, in 1983, 19 percent of American households owned stocks. In 1989 the number was 32 percent. In 1995, 41 percent. In 2001, 51.9 percent. The current number won't be released until 2006, but if the past is any indication, expect it to have grown.

What all this means is more difficult to discern. The economic dimension of the investor explosion is straightforward enough, one supposes: More stockowners means more money in the stock market. But the social dimension is a different story; hardly anyone talks about who all these new stockholders are, where they live, why they enter the market, and what impact, if any, owning stock has on their everyday life. There's little talk of these new stockowners as individuals.

But there is a whole lot of talk about them as a class. Sometime in the late 1990s, conservatives noticed that while the investor explosion was significant in the population at large, it was even more significant in the voting population. A full two-thirds of voters, perhaps more, own stock. According to an Investors Action exit poll taken on Election Day 2004, 70 percent of voters owned some sort of stock.

Conservatives used to cast a wary eye on class politics. But that was when the classes involved were sullen proletarians and priggish patricians. Today a whole cottage industry has sprung up to promote the "investor class" as the keystone supporting the Republican majority. As magazine publisher and political strategist Richard Nadler, who popularized the idea of the "investor class," put it: "It stands to reason" that the investor class's "growth would benefit Republicans," because "high-income voters trend Republican." To enter capital markets, so the theory goes, is to undergo a transformative experience. If you own stock, the investor-class theorists preach, you'll save more, spend less, start reading the Wall Street Journal, and no longer support government intrusion into the economy. If you are bald, you'll grow hair. If you are a Democrat, you'll vote Republican.

Actually, if you are a Democrat who owns stock, you probably won't turn into a Republican. Consider: According to the 2000 Rasmussen Portrait of America exit poll, 51 percent of voters who owned more than $5,000 in "equities, bonds, and mutual funds" cast their ballots for George W. Bush. Al Gore, by contrast, received the support of 45 percent of investors. Now compare those numbers to last year's. According to the 2004 Investors Action poll, Bush received the votes of 52 percent of investors last November. John Kerry received the votes of 46 percent of investors. Which is to say: Over a period of four years in which the number of stock-owning households no doubt increased, there was no significant change--close to no change at all, in fact--in investor voting patterns.

The theory of the investor class, it turns out, is long on assertion and supposition but short on evidence. And yet, conservatives--who are normally alert to the limitations of crude economic determinism--have tended to swoon over the investor-class thesis. "Rather than 52 percent of Americans owning stocks and bonds," writes Stephen Moore in his new book Bullish on Bush, "the Bush [Social Security] plan would rocket that share up to 80 or perhaps even 90 percent." To which the average conservative reader these days may react: "Think of all the new Republicans there will be!"

But while universal stock ownership may be desirable for other reasons--most economists believe that lower-income Americans would benefit from having at least some of their savings in stocks--it hardly guarantees political catnip for Republicans. For one thing, if 80 or 90 percent of Americans own stocks and bonds, "investors" will no longer be a class at all--unless it's the class of all voters, in both parties. Furthermore--and more immediately--there's a corollary to the investor-class thesis that favors Democrats. As more people enter the market, they may turn to politicians who offer protection from rapacious capitalists and irresponsible money managers. Burned by market downturns, they will want politicians to go after those who did them harm. And those politicians, in turn, will say they are "saving" markets in the process. Politicians like Eliot Spitzer.

THERE IS NO DEMOCRAT more in love with the conservative theory of the investor class. Spitzer mentions it in interviews, he mentions it in speeches, he writes essays about it for the New Republic. Yes, yes, yes, he croons, let more people enter the market, and let them come to me when they get skunked. Investor-class enthusiasts recoil at this line of argument. But they don't have a persuasive answer to it.

One day this winter, I went to see Spitzer in his Manhattan office. It's on the 25th floor of a Broadway skyscraper in the city's financial district, and it is big and clean and has a view. The bay windows along the far wall look out at the pit where the Twin Towers once stood. It was a clear day and from the window you could see the great cranes building the new World Trade Center.

Spitzer sat down, crossed his legs, and talked about the investor class. "I ask myself, 'What is it out there that has resonated with folks?'" he said. "And it was evidently clear that there was this enormous group of Americans who are now participants in the marketplace. And this is a wonderful thing. And whether you call it the ownership society or the investor class, there is this huge swath of America that has mutual funds, 401(k)s, day-traders for a little while, but they have taken this wealth that has accreted to the middle class, and invested it--not just in houses but in equities.

"And it's helped capital formation. It's been a remarkable success story. And if we don't protect it, and say to them, 'Yes, we've encouraged you to invest with us, and the game is unfair'--if we fail to make the game fair, then they'll retreat from the marketplace. And they'll say, 'Well, wait a minute. You guys scammed us. You wanted us to invest so you could get rich off our money. Not so that we do well together.'"

He paused thoughtfully.

"And what I--what we--tried to do subsequently is make the game fair. Not a game where you don't lose--you win, you lose, that's the nature of the market--but make it fair in the sense of disclosure and honest information upon which you can make a decision."

He inhaled and clasped his hands. "I tried to sell John Kerry on the notion of arguing that we were the better voice for the investor class," he said.

"All summer we tried. All year we tried. And they rejected that notion to their detriment. I said to Kerry and his campaign, 'You guys are missing the argument. Not only are you missing the argument that we as a party understand the role of markets and the importance of keeping them fair and honest, but worse, from a lawyer's perspective,' I said, 'they're going to steal it from us. And they're going to claim the mantle of the ownership society, even though we are the ones who've been willing to challenge the system to make sure it's fair, and they're the voice of the status quo.'"

And what was Kerry's response? "They descended into their typical yammering. That's why that campaign was devoid of ideas." He shook his head. "Washington waste."

Spitzer, on the other hand, is the sort of politician who is fond of big theories. It's what attracted him to the idea of the investor class. It's what gives him cachet with the press. It's also what lends him a reputation as an arrogant know-it-all--which reputation is only enhanced by interviews like this one, from a get-to-know-the-candidates exchange published in Newsday in 1994:

"Q: Who's your favorite Beatle? Spitzer: I don't know. My favorite composer is Brahms."

He's not the sort of politician you'd invite to the neighborhood kegger, in other words.

But that may not matter. When Spitzer declared his gubernatorial candidacy last December, the election was still over 20 months away. Today he is the only announced candidate in the race, and, over a year out, he is in a strong position. After he announced his candidacy in December 2004, his approval rating was 60 percent among Democrats and 63 percent among Republicans. As of January 1, he had $7.8 million in cash on hand.

Investor-class rhetoric notwithstanding, however, Spitzer's positions are dim, his politics a haze. His economic plan? According to the Atlantic, he told union bosses in upstate New York that "We've got to somehow create a new economic model that's going to get jobs here."

For someone who likes big ideas, Spitzer avoids talking about policy, and instead wraps himself in the fuzzy blanket of "problem solving." He told New York: "We're going to need somebody who can say, 'Wait a minute: Here's the problem, here are the facts, here are the value judgments, here's the way we will apportion burdens in getting to answers.'" He told the Harvard Political Review: "I would move into the Albany decision-making process and, with no regard for special interests, make sure that the state is led in the interests of its people." He told me:

As governor, you make triage decisions. You are, to a great extent, allocating scarce resources among competing but all good objectives. You want to fund more education, more health care, more infrastructure, lower taxes, reduce debts, and it's a resource constraint that limits your ability to do things that are unquestionably good, so you have to say no to good things here. You're saying no to good ideas.

A Spitzer supporter hears such answers and pronounces them deep, even profound. A Spitzer critic says, Yes, they're profound--profoundly shallow. But what both the supporters and critics miss is that such sentiments--in fact, nearly all of Spitzer's stated political positions--are opaque. The man is an empty vessel, into which flow the aspirations of liberals, the anxieties of businessmen, and the heroic narratives of idolators.

Toward the end of our conversation, I noticed the black and white photograph of Theodore Roosevelt that hangs in Spitzer's office.

Spitzer's eyes lit up, and his mouth stretched into a wide, goofy grin. "You see, the amazing thing is, he's everybody's icon these days," he said. "And the question is: What does he really stand for?"

Matthew Continetti is a reporter at The Weekly Standard.