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Eliot Spitzer Calls Financial Self-Regulation a Canard

By Larry Doyle on September 14, 2009 at 3:01 PM in Current Affairs, Economy, Sense on Cents (Larry Doyle blog)

Eliot Spitzer


Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.

Spitzer is slowly regaining his stature. He pulls no punches in taking on the many holes in our financial regulatory framework as he writes in The New Republic, Better Regulate Than Never. I commend Spitzer as he calls out the Wall Street self-regulatory oversight in writing:

We know markets are still the best way to allocate resources and to set prices and wages. But the first and essential corollary to any theory of markets should hold that they are fragile and must be protected. No matter how frequently large swaths of the world loudly shout, “We love the market!,” virtually nobody does. In the absence of rigorous enforcement of rules, market players seek monopoly power and unfair advantages; they take risks at the undisclosed expense of others, or violate fiduciary duty. None of this means these actors are “evil” or “immoral.” But their actions demonstrate that self-interest, unbridled by enforcement of rules, will destroy the very market so many people so ostentatiously claim to adore.

So, we can now dispose of that old canard that self-regulation preserves the integrity of markets. There is essentially no evidence that any self-regulatory entity–from the Securities Industry Association to the New York Stock Exchange–ever revealed or resolved a single structural flaw in the market place. Rather, they papered over and rationalized away all the bad behavior they witnessed. (LD’s highlight)

I totally concur. As much as financial self-regulatory organizations would promote that they are aggressively moving forward to clean up the industry, their historical track record belies that fact.

I would point out that Spitzer’s reference to the Securities Industry Association (SIFMA) is misplaced. SIFMA is merely a de facto trade organization rather than a real cop. Spitzer should have targeted FINRA (Financial Industry Regulatory Authority), which is supposed to be the ‘tough cop.’ That said, I commend him for raising this topic.

Will our media and government pick up on Spitzer’s premise, elevate the debate, and serve the public interest? We have yet to witness any real concerted efforts by the media or the government on this front. Why? The media and the government serve at the behest of the financial industry to a far greater extent than they serve at the behest of the American public.

Spitzer sheds further light on this point by writing:

Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy.

I totally agree with Mr. Spitzer. So, where do we go from here? Do we allow the media and the government to neglect their public duty and continue protect Wall Street vs. Main Street?

Keep following my work, as I will continue to bang the drum.

LD

  • Linda Anselmi

    Just wondering if any one felt more confident about regulation and our financial situation after Obama’s speech today.

  • http://noquarter foxyladi14

    thanks Larry for the drum beating.we are listining

  • helenk

    http://thehill.com/homenews/administration/58233-obama-sets-stage-for-using-budget-maneuver-to-pass-health-reform

    A new threat from the dems. maybe ” a bridge too far”

    WOMEN WITH INTELLIGENCE AND EXPERIENCE,MEN WHO SUPPORT THEM AND COUNTRY BEFORE PARTY ALWAYS

    PUMAS,BUBBAS,EQUALISTS AND THOSE PEOPLE RULE

  • Tricia Spiegel

    Excellent post, Larry!

    Sptizer was my hero, and it broke my heart when his libidinous adventure was brought to light (and who can forget his lovely wife’s agonized face when he admitted his bad to us all).

    But, like Bill Clinton, he is well worth perserving and listening to. I hope for redemption and to see him in a place of influence once again. He is a No Quarter dream!

    • donjo

      What bugs me is that repubs do this infidelity thing all the time and it doesn’t seem to bother anyone. But let a dem, i.e. Clinton or Spitzer, get caught in the wrong pants and it’s Katy bar the door.

      Gov. Mark Sanford being an example and the congresscritter in the Minneapolis airport being another. Let’s add Newt Gingrich to the pot, as well.
      The list is probably too long to post on a blog.

      Not condoning messing around, but it doesn’t seem quite “fair and balanced.”

  • HARP

    The 50 Richest Members of Congress…. Guess how many DEMS in the top ten.

    http://www.rollcall.com/features/Guide-to-Congress_2009/guide/38181-1.html

    • tango

      Looks like 8 Democrats in the Top 10. And of the Top 50 richest members of Congress, 28 are Democrats whereas the GOP has a total of 22.

      Hmmm….. I thought it was the Republicans who were the party of rich people taking advantage of capitalism to reward themselves while punishing the poor???

  • Jack

    Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.

    Actually, the fact that he was going after Wall Street goons is what got him in trouble. He was conveniently caught with a prostitute at the brink of a financial collapse in Wall Street? LOL

  • Peggy Sue

    Though I’m not a conspiracy nut, and I know that Eliot Spitzer was responsible for his own demise, I cannot help but wonder about the timing of “the fall.” Was he getting too close???

    I’ve read a number of Spitzer’s essays and/or watched vids, where he’s explained the mess we’re in, how we’ve been miserably served by the very institutions that were suppose to be watchdogs and have come away impressed each and every time.

    Keep beating the drum, Larry. And I hope Spitzer keeps speaking out as well.

    • Jack

      On Feb. 14 2008, Spitzer wrote an oped for the WashPost titled Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers,” which charged, “Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”

      Spitzer signed his death warrant with this article. That article appeared one day after Spitzer’s rendezvous with the prostitute at the Mayflower Hotel. Furthermore, on March 4, 2008, he proposed legislation that would impose penalties for mortgage fraud and predatory lending.

      Coincidence? I don’t think so.

      • rosa

        I agree about Spitzer and the comment below about why Hillary was blackballed in primary. If regular people like me get it ,why aren’t more people taking a stand in the dem party,when are principles going to be what they stand for ? are they all so greedy and where are they going to go when the U.S. is a failed state?

        I called the dem national party and a few others today and said what we are talking about here now, it is like whistling in the wind! We need a movement to make ourselves heard but not a screaming match where no one listens or hears.

  • wbboei

    I think Elliot is on the right track here, but the statements require more context. The core problem here is that new investment vehicles were created which were outside the traditional regulatory structure of banks and banks got swept up in it as well. These vehicles then became the new engines of liquidity for the global economy, and they were funny money. The centers of that finance shifted from New York to Greenwich, and from London to Mayfair. And while all this was happening, Mr. Andrea Mitchell smiled benignly, nodded knowingly and failed to act–other than an occasional hennie youngman one liner about the irrational exuberance of markets. Chris Cox was a big disappointment.

    Blame Bush if you like for the borrow and spend policies that created our national debt–until Obama got in and now it is Katie bar the doors. But blame Greenspan for the collapse of your portfolio. He was negligent. You simply cannot allow unregulated hedge funds, private equity funds and shifting sands mutuals to control our economy. This includes people like George Soros.

    Hillary was determined to regulate hedge funds, etc. and that was no small part of the reason why these people backed Obama. His commitment to free trade was coded language for I will let you do your thing.

  • Ginger

    I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

    – Winston Churchill

  • boonies

    jack, peggy sue…many years ago FDR said “in politics NOTHING ever just happens…you can be sure it was MADE to happen”
    I concur that the “Sheriff of Wall Street” would’ve brought unshirted HELL down on criminals like Hank Paulson (Herman Munster in a tailored suit) and the folks at Government-Sachs after the meltdown happened, and Hank gave us that $700 billion ransom note.
    Gee, and just after McCain picked Sarah Palin as VP and he pulled even with Obummer and even ahead in some polls. The excitement she generated among lukewarm-to-McCain conservative voters, coupled with growing concern about Sen. Kremlin (D,Ill.) had to be blunted and fast. It worked….for now.
    Thank you Larry !!

  • Mountainaires

    The best die young, or that’s what they always say. And, being old, I’ve discovered that all our heroes usually have feet of clay in some sense or another. Spitzer was so needed; and he screwed up–pun intended–big time! I was really sorry to see it; he could have been a President this cycle if he hadn’t had his fatal flaw.

    However! I don’t know if I completely agree with Spitzer on the “fragility” issue. I contend that markets can be “self-regulating” if only no one ever stepped in to save the market when the market screws up. It’s the old parental notion of “learning from natural consequences.”

    We need laws, yes, fair laws; but what will inevitably happen is that new regulations spawn new scams to skirt them, new “innovations” that circumvent them; what then?

    The “market” as a natural environment, functions best when neither regulations nor bailouts alter the natural ebb and flow. When they get “too big to fail,” it’s a sure sign that we have somehow altered the “natural” environment by either too little or too much regulatory additives. Suppose the government hadn’t bailed out anyone. It would have been painful; but wouldn’t we have cleared out the crooks, the criminals, the corrupt, the oligarchy, and had a new, fresh beginning?

    I don’t know the answer, but it seems to me that if we were stern enough to stick to capitalism–real market economics–instead of cycles of “no regulation” and cycles of “much regulation”–we’d all be better off in the long run. I’m thinking that the FED would not be around in a real “free market” environment; because we wouldn’t need it.

    • Peggy Sue

      Mountainaires said:

      “I’m thinking that the FED would not be around in a real “free market” environment; because we wouldn’t need it.”

      I read a “wake up and smell the coffee” article at AlterNet. Here’s a intro to one of the essays:

      “The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

      This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

      “The Fed has a lock on the economics world, says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”"

      We have dived down the rabbit hole. Is it any wonder why the public wonders who and what it can trust and/or believe?

      Btw, this was also published at the Huffington Post.

      Amazing!

      PS: Audit the Fed, now!!!

  • wbboei

    I will give you a perfect example of what I am talking about. Years ago the company I worked for had a bargaining relationship with a mafia dominated local union at JFK airport. We had a pension fund which was invested in treasury bills which produced low yields, but his was done primarily to keep honest men honest. Then that union was placed under a federal court trusteeship, and a high profile ex assistant U.S. Attorney was appointed trustee. The law was changing and the case law was intimating that a trustee could breach his fiduciary liability by being too conservative. Naturally the union members wanted a maximum rate of return. Hence, there was pressure to consider alternative investment vehicles. The trustee pushed hard for us to consider one of those alternative investment vehicles centered in Greenwich, the home of the noveau rich. He argued that this company Long Term Capital Investment I think it was had world class mathmeticians and would provide an astronomical rate of return therefore we must give it a whirl. Our position was regardless of all that the market is still the market. We did not agree and we opted for a more balanced portfolio. Sometime later the company in question collapsed.

  • http://shhhithitsthefan.wordpress.com/ ithitsthefan

    But isn’t self-regulation exactly what Obama is proposing and the Democrats are enabling?

    Obama thanks Wall Street for Destroying the Economy so that he could get Elected

  • Wisewoman

    Self regulation is a bunch of crock. Example: Highway speed limit is 65 mph. However, it is known that their are no patrolmen to enforce the rule. Results: 90% of the people, including me will drive over the speed limit by at least 10 to 15 mph. Same analogy with regulations not enforced; and worst yet NO controlling rules or regualtions. Nuff said.

  • Tammy

    Sorry, guys, but I don’t know why anyone would listen to anything that Spitzer says.
    What a lying creep.
    He’s just as disgusting as that Sanford guy.

    Both of them should just shut up and go away.
    Isn’t the shame they’ve brought onto their families enough.
    Spitzer.
    Sanford.
    STFU.

    • TexasMirth

      I’m with you, Tammy. Spitzer disgusts me. He prosecuted prostitution rings while being a client of others. If I find Geithner a horrible choice for Secretary of the Treasury since he is also a tax cheat, then I will be just as critical of Spitzer.
      There have just got to be better people out there to quote or applaud than this repugnant individual.

  • Patience

    If TBTF is a prevailing ethic, then maybe we need to prevent financial institutions from becoming too big in the first place. Unfortunately, just the opposite is happening.

    I wonder if bailouts of the magnitude we’ve just witnessed will be countenanced by the public in the future? We need to somehow make sure that our legislators get the message that they can’t keep indemnifying the irresponsible failures of Wall Street.

    The current POTUS isn’t the man to do the job. Neither it seems is this Congress. Would Republicans be up to the task?

    I’ve said before on NQ that I believe until political campaigns are publicly funded and no other campaign contributions are allowed — I mean none, zero, zip — I see no hope whatsoever that Wall Street fat cats will ever have to sufficiently suffer consequences. I’m not naive enough to think that outright bribery and sweetheart deals would stop, but it could be a big first step towards draining the DC swamp. I’d gladly add $20 to my tax return if it would help put a stop to the madness.

  • DAB

    I never paid much attention to Spitzer until his after-the-fall TV appearances and was so impressed by the depth of his knowledge of financial affairs.

    It made me sad that he no longer has the clout to make his assessments count for much. I agree that he was Presidential material of the type we haven’t seen in a while.