Could Spitzer Have Done More than Paterson to Avert the Financial Meltdown?

by on October 21, 2008 18
0sharesFacebook
0tweetsTwitter
0stumbledStumbleUpon
0sharesReddit
0recommendGoogle

I liked Eliot Spitzer. He's real smart, he knows Wall Street, he went after some parts of Wall Street. I like David Paterson but I've never been that impressed by his intelligence. Innocent questions: Could Spitzer, who was brought down by the vice squad last March for a victimless crime, have done something, anything, to forestall the tremendous financial meltdown, or to have eased its magnitude? Is it possible that he might have been on this, as NY gov, in a way that Paterson wasn't? Just askin…

About Philip Weiss

Philip Weiss is Founder and Co-Editor of Mondoweiss.net.
Posted in Beyondoweiss, US Politics

{ 18 comments... read them below or add one }

  1. Duscany says:
    October 21, 2008 at 8:22 pm

    Patterson is too busy getting sued because he put only black officers on his security detail to worry about any so-called fiscal crisis in the State of New York.

  2. John says:
    October 21, 2008 at 9:27 pm

    why did the NY Insurance commissioner allow AIG etc to buy CDO's…..too risky for an insurance company……our elite is so corrupt……But perhaps they are just visiting. They may reckon that they needed to "acquire" as much loot as possible before moving on and propositioning a new proposition nation.

  3. americangoy says:
    October 21, 2008 at 10:04 pm

    probably not, but some s**theads would be in jail by now.

  4. Lysander says:
    October 21, 2008 at 10:21 pm

    The coming depression is overwhelming. No one man could have done anything about it. Indeed, the more the government tries to do something about it, the worse it becomes.

    I have no Problems with what he did. But he did prosecute people for the same victimless crime. It should be perfectly legal IMHO.

  5. syvanen says:
    October 21, 2008 at 10:48 pm

    What a foolish question. Of course Spitzer could not have stopped this train wreck. The problem was systemic. Many individuals saw it coming but there was nothing they could do except issue warnings. Their warnings would not be acknowleged until the wreck. Too much money was being made in the meantime. Anybody in a position of authority who tried to stop it would have been, to continue the metaphor, flattened by the onrushing trains.

  6. Madrid says:
    October 21, 2008 at 11:27 pm

    John has a point. The company that is at the center of Wall Street's problems is not Lehman– it is rather AIG, and Spitzer was in fact involved (somewhat tangentially) with its downfall. To this degree, there are those on Wall STreet that blame some of the unfolding of the crisis on Spitzer. Here is the context:

    AIG was never regulated properly because the trade in Credit Default Swaps is not an insurance trade. Credit Default Swaps are a kind of insurance, but the law does not define them as such. Moreover, the main AIG unit that was dealing in CDS's was based in London in case the Fed's did begin to try to regulate CDS's. Thus the state regulators who normally regulate insurance had no oversight over the Cradit Default Swap trade, and AIG was free to sell as much CDS as it wanted to, and it was a very profitable trade as long as the insured bonds and derivatives were holding up.

    Now on to the Wall Street mess. One of the first people Spitzer brought down was Hank Greenberg, CEO of AIG, in May 2005. And the charges brought against Greenberg were securities fraud and violations of insurance and securities laws. Spitzer's charges forced Greenberg to resign, but after further investigation, the charges were dropped for lack of evidence.

    Where there is smoke, there is fire, and Greenberg was obviously playing fast and loose with insurance regulations at AIG, but Spitzer's investigations had nothing to do with CDS's or derivatives. What brought AIG down was perfectly legal. They sold CDS on bonds and other securities for Lehman brothers and other investment banks (Goldman, Merrill, Morgan). AIG primarily sold the stuff to hedge funds on the corporate bonds that the hedgies had bought from the investment firms. What caused the acute crisis this fall was that, with the market tanking, the hedge funds figured out a way to make a quick buck. They decided that they could short sell the investment banks like Lehman in order to make them fail, causing the corporate bonds that the hedgies had bought to become worthless, so that the hedgies could collect on the insurance (CDS's) that they had bought from AIG on said bonds. Now this should be illegal, just like burning your house down to get an insurance payout is illegal, but since CDS's are not defined by law as insurance, it is perfectly legal.

    What most people on Wall Street say is that Spitzer exacerbated the problems by driving Greenberg out of his position as CEO of AIG. According to most insiders, Greenberg was the only person who truly understood the complexities of that insurance company, and he would have found a way to hedge more against CDS losses if he had remained CEO. It is also claimed that Greenberg wouldn't have been so stupid about AIG's CDS's exposure as Sullivan, the new CEO, was. That he wouldn't have committed AIG to so many CDS's– that he understood, like Warren BUffett, who is also in the insurance business, that CDS's were basically a weapon of financial mass destruction.

    This is obviously pure conjecture, but it is true that many people on Wall Street and at AIG blame Spitzer for having taken down Greenberg, and there are rumors (who knows if there is any substance to them) that it was Greenberg that was responsible for exposing Spitzer's identity as Client 9.

    My own feeling about the crisis is that Spitzer would not have been able to forestall the meltdown whatsoever. State regulars, as I said, could not regulate CDS, so Spitzer had no authority over their trade, even if he understood how they functioned, which most outsiders did not in 2005. In reality the crisis was caused by three things: 1) real estate brokers in the heartlands selling houses to people who couldn't pay for them 2) bundling mortgages into securities, that were fraudulently rated by Moody's and S&P as triple A rated, for sale across the world to banks who had no idea what they were buying, since up until that point the US real estate market had been relatively dependable, and most importantly 3) the trade in CDS, which is basically unregulated insurance. Insurance companies did not have to have the capital and cash reserve rules that state regulators forced them to have with other types of insurance, so they could sell as much CDS as they wanted at whatever price they wanted. Spitzer surviving would not have had any bearing on any of these three causes.

    I am

  7. Madrid says:
    October 21, 2008 at 11:33 pm

    sorry– I had started another sentence there at the end of my long comment, but I can't remember now how I was going to conclude.

    I guess I was going to say that I find it quite amazing that no journalists have bothered to go ask Spitzer what he thinks of what has occurred on Wall Street now, since he left. There is a good story for you Phil

  8. Paul Easton - Bensonhurst, Brooklyn, Belly of Beastly says:
    October 22, 2008 at 12:48 am

    That was very interesting Madrid about hedge funds burning down their houses.

    I think the larger context is that most coorporate actors have morphed into sharks. Grab what you can and devil take the hindmost. You dont want to be a shark? Would you rather get eaten?

    This has been coming on for quite some time. At least ten years ago a friend who was an accountent for small businesses told me he didnt like it any more because no one wanted him to do an honest job.

    So what it comes down to is that modern capitalism systematically unravels the 'social contract'. I dont know the details but I suspect it has to do with approaching the resource limits on growth. If you see no long term future for your coorporate investment it is rational to get what you can whatever way you can. Free idea. Someone should write a book.

  9. Eva Smagacz says:
    October 22, 2008 at 5:44 am

    I take your point about capitalism unravelling the social contract. I believe that this process accelerated after the modern concept of limited company has been introduced, with the company acquiring the legal position of separate identity. This makes taking a short term view on any business decision an only rational choice, with all the damage this entails. If your average CEO is staying in post for 3-6 years, he is likely to do any bubble-forming activity to drive up the company share price long term, amply supported by the banker who will receive the bonus on the money lend and the mergers, de-mergers, acquisions and asset disposals that he can push through in the next 12 months. Most investment bankers I know do not think in terms of long term career in the same institution. They always have this sense of their next bonus being their last one. This permanent threat culture is in direct contrast to the security, stability and longetivity of the family owned firms, which do not suffer with such an extreme short termism of its management process.

  10. anon says:
    October 22, 2008 at 9:05 am

    One big tool in the legal fraud net is defining a corporation as "a person" for all sorts of reasons, none protecting the average hard working American who is an actual person.

  11. LeaNder says:
    October 22, 2008 at 9:10 am

    What brought AIG down was perfectly legal. They sold CDS on bonds and other securities for Lehman brothers and other investment banks (Goldman, Merrill, Morgan). AIG primarily sold the stuff to hedge funds on the corporate bonds that the hedgies had bought from the investment firms.

    Madrid I find this very interesting too. But what I do not quite understand are the dependencies between bank (Lehman, Goldman …)AIG and the Hedge Funds.

    Does that mean the CDS is essentially an insurance offered by AIG but that has to be paid by the banks involved in case of loss of value of the assets the credit is based on? AIG is only acting as some kind of intermediary? While the liability lies by the bank?

    Weapon's of Mass destruction

    Wasn't the AIG case related to all the accounting creativities of the last decade?

  12. Madrid says:
    October 22, 2008 at 9:27 am

    Everyone could issue CDS, including the banks. Because of the deregulation of banks and financial firms during the 90's, a lot of banks like Citigroup got into the business of selling insurance or merging with insurance companies. But for CDS, that is besides the point. It is unregulated insurance, so any financial firm could sell CDS. In fact, I think even General Electric is waist deep in the CDS mess. Hedge funds and private equity firms could also sell them– at this juncture the hedge funds that are going out of business are the ones that sold lots of CDS– now facing huge redemptions and taking big losses.

    Moreover, the big kicker is that buyers of CDS could buy insurance worth 3 or 4 times what the actual bond was worth, so for example, in the case of Lehman, buyers of Lehman corporate bonds and buyers of CDS on Lehman corporate bonds had a real interest in seeing Lehman go out of business as it did.

    New York should shut down the hedge funds– that would solve so many problems, but on the other hand, if they did so, it is unclear to me whether the DOW could ever reach 14,500 again in our life time. It might never reach that point again.

  13. scorpio says:
    October 22, 2008 at 1:45 pm

    Eliot Spitzer, whatever his personal failings, was one of the very few people in positions of power to actually use that power to rein in runaway corporations and Wall St over the last nefarious years, and his office did it using their own words as discovered in their own emails. open and shut cases. which is why he had to go.

  14. MRW says:
    October 22, 2008 at 8:05 pm

    "Moreover, the big kicker is that buyers of CDS could buy insurance worth 3 or 4 times what the actual bond was worth, so for example, in the case of Lehman, buyers of Lehman corporate bonds and buyers of CDS on Lehman corporate bonds had a real interest in seeing Lehman go out of business as it did."

    Madrid, you're mixing apples and oranges. The buyers of CDS were all buying insurance on the same asset and no one knew how many were buying.

    EG. I buy a $100 Ford bond. Eight months down the road I get nervous about Ford's credit and want to protect my capital, so I go to a CDS guy and say "What do I need to pay you to protect my $100 in case it goes south?" The CDS guy, knowing Ford is low risk, says "Pay me $2/yr." I think that's a good deal and I do.

    But now someone in Atlanta gets wind of that and says to the CDS guy, "Hey, I want to pay you $2/yr in case MRW's bond goes south." The CDS guy says sure. Why not? He makes money. Then someone in Los Angeles wants the same deal. And Singapore. And London. Etc. Soon 100 people worldwide pile on buying insurance on bond.

    The CDS guy loves it. He collects $200/yr in cash on a $100 bond that he's positive will never goes south.

    None of the 100 guys buying insurance on my Ford bond know about each other, and most importantly neither do I. There is no requirement for transparency or a nightly tally of the exposure. You're flying blind.

    But the $100 bond does go south and I go into collect my $100 and discover that the CDS guy now has a $10,000 exposure he can't meet.

    The problem is that you can't deal in the CDS market unless you have $5 million. And the CDS guy's exposure isn't $100, it's $100 million or $10 billion. One person from one CDS.

    This CDS market is between $63 and $93 trillion, and the entire Global economy is only $53 trillion. It has nothing to do with foreclosure market which is a measly $2 trillion, and involves the money market fund and short term commercial paper thing that Lehman's got caught up in. A COMPLETELY DIFFERENT ANIMAL.

    The CDS market is the Titanic turned vicious and created in the dark and no one knows how much its powerful 2008 engines will suck the ocean down with it as it torpedoes to shore on the its own hydroelectric power.

    The Republican-controlled Congress voted on Dec 15, 2000 to an 11,000 page budget that had a Republican amendment tacked onto it that made NO regulation of the CDS market a law. Rubin and Greenspan pushed it through with Gramm and the Wall Street boys. They knew goddam well what they were doing because Arthur Levitt was on NPR describing a late 90s meeting in Clinton's office with both Rubin and Greenspan about regulating the CDS. Levitt was expressing deep remorse that he didn't fight back more. He was over-ridden.

    You'll notice Robert Rubin and Alan Greenspan are not Obama advisers anymore. Volker is.

  15. John Dickerson says:
    October 22, 2008 at 8:17 pm

    Did Wall Street Nail Eliot Spitzer?" – by Alexander Cockburn, March 2007

    DOWNLOAD- link to rapidshare.com

  16. John Dickerson says:
    October 22, 2008 at 8:22 pm

    THE ARTICLE:" Did Wall Street Nail Eliot Spitzer?" – by Alexander Cockburn, March 2007

    DOWNLOAD-
    link to rapidshare.com

    ll_Street_Nail_Eliot_Spitzer_PDF.pdf.html

  17. Madrid says:
    October 22, 2008 at 10:25 pm

    I don't have any issue with anything you say. CDS is the big fish in the sludge, but the first CDS exposure by the banks and AIG was caused because they were writing CDS on mortgage backed securities that began to fail. My only quibble with you is that I think the foreclosure market will end up being well north of 2 trillion. And then there are the falling home prices, which is an extra incentive for people to walk out on their mortgages. It all starts with the home loan business, and the relatively new practice of bundling mortgages into securities and selling them to banks that had nothing to do with originating the loans. When those securities started failing, the CDS's on them starting paying out. Places like Lehman were up to their eyeballs in mortgage backed securities, and when they got into trouble, their bonds started to fail– again CDS payouts. So I disagree with you about the origins of this. The other big culprit is Moody's and S&P, which rated all of these securities as triple AAA, fraudulently.

    Not at all sure about the future– sometimes I think we are in for big inflation as a result of all this. Then I think it's all deflation from here, with the only thing worth holding Cash or Gold. Sometimes Im optimistic– sometimes pessimistic.

  18. Madrid says:
    October 23, 2008 at 12:43 am

    In my opinion– only way out of this mess is huge infrastructure investment. Retreat all the bases back to our borders, carve out a sphere of influence here, and spend, spend, spend on infrastructure. Try to transform the car companies and military hardware manufacturers into train builders, clean energy producers, tech producers. Have the defense contractors do something productive for a change.

    Only way out of this mess now is massive public investment– otherwise, GM and Ford and possibly GE and US Steel go out of business as a result.

Leave a Reply