Eliot Spitzer

Recent Posts by Eliot Spitzer

Obama's FDR Moment
Aug 17, 2011Eliot Spitzer
Americans are looking to the President for bold ideas. Here are two.
Americans are looking to the President for bold ideas. Here are two.

President Obama should heed the famous wisdom of FDR: "Above all, try something." Being passive in the face of rising anxiety breeds discontent, doubt, and ultimately, contempt.

Interestingly, the president's one grand moment to date -- his embrace of the plan to capture Osama Bin Laden --emerged from a willingness to be bold, even when many of his advisers were counseling otherwise. He defied the more modulated approaches many military advisers recommended, and the payoff, both substantive and political, was huge. The president should take this lesson and apply it to his actions in the domestic arena.

First, he should act dramatically to help the American homeowner. There is a continuing and incendiary crisis in the housing market, with about 20 percent of all homes underwater (that is, the mortgage owed on the house is greater than the value of the house). This is dragging down our economy, creating a downward spiral of foreclosures and abandonment. The lack of mortgage reform also reminds every homeowner of the unfairness attached to the bailouts: The banks, in their moment of insolvency and need, got hundreds of billions in direct cash payments, guarantees, and transfers in the form of artificially low interest rates, all of which have led to a massive transfer of wealth from taxpayers and savers to the banks. Yet homeowners who have seen their primary asset drop in value have been given nothing at all by the banks and nothing meaningful by the president.

The administration, in conjunction with the Federal Reserve, should insist that banks, in return for all the taxpayer subsidies they have gotten and continue to receive, reduce any mortgage that exceeds the value of the house. Once it is established that the homeowner is underwater, other variables can be considered to determine how much the mortgage should be reduced: the income of the borrower, the year the mortgage was issued, the behavior of the bank in recommending the mortgage, or the culpability of the borrower in misrepresenting income levels.

Borrowers with reduced mortgages would have more money to spend, thus boosting the economy and relieving the housing market of a huge overhang. Owners would regain mobility, and the market could set a clearing price. Many also believe that the banks would come out ahead --facing fewer foreclosures, less abandonment, fewer houses stockpiled.

In addition, the banks could also receive a piece of the upside when and if owners sell their houses for more than the value of the reduced mortgage. How much of the upside could be worked out with rules designed to encourage rational behavior by all parties. (If the bank got 100 percent of the price above the value of the mortgage, there would be no incentive for an owner to charge more; if the bank got only a tiny percentage of the price differential, it would never recoup the amount by which the mortgage has been reduced.) The opportunity is to force the banks to give the housing market a shot in the arm -- while also allowing them to retain an equity stake that permits them to recoup any short-term loss.

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The critical point is this: The best way to revive the housing market is to help out the millions of Americans who are underwater on their mortgages. It is also the best way for the president to make it clear he is acting on behalf of the public at large.

Second, the president should do more to help the American worker. He should establish a jobs program. Do the simple math: We are spending more than $110 billion annually in Afghanistan. Stop it. Or scale it back to the sort of covert operations and drone war that is warranted. Savings? Perhaps about $100 billion -- per year. Use that money to create up to 5 million jobs at $20,000 each. With the unemployment among those aged 16 to 19 at an astonishing 25 percent, and unemployment among black people at 15.9 percent, there is no question that the crisis of unemployment is destroying the fabric of our nation. Those who refuse to work get denied all other benefits.

Put Jack Welch and Jeff Immelt, former and current CEOs of GE, in charge of using this labor well. Just as FDR did during the Great Depression, put these Americans to work in states, counties, schools, parks. Make them work -- but pay them. Get the dollars flowing back into the economy to help pull us out of the Great Recession. And when the unemployment rate dips below an agreed upon number, indicating that the labor market is healthy again, phase out the program.

There are ideas out there. All the president has to do is argue for them. Americans are not used to feeling that we are not masters of our own fate. We are a nation steeped in the idea that we can redirect the course of history at will. What we need at this moment is a president with bold ideas and the passion to fight for them.

Eliot Spitzer is the former governor of the state of New York.

Crossposted from Slate.com.

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SEC & MMS: A Tale of Two Failures
Jul 8, 2010Eliot SpitzerWilliam K. Black
How many disasters will it take to overhaul the regulatory agencies?
How many disasters will it take to overhaul the regulatory agencies?

The SEC and the Minerals Management Service's (MMS) share a number of characteristics we can't help but notice in the wake of the worst environmental disaster in U.S. history, which followed the second-worst financial disaster in same. We have endured two cataclysms in which a regulatory agency upon which our nation's economy and environment depended failed to meet even the minimum requirements for doing its job. The ecological disaster was aided and abetted by the systematized incompetence and cronyism of the MMS, just as the financial meltdown was stoked by the laxity and inadequacy of the SEC. Both regulatory agencies were designed to fail. At the time of the critical regulatory lapses, they were run by leaders chosen because of their anti-regulatory stance. Both agencies have been failures for at least a decade.

In both instances, the regulators accepted industry assertions about the reliability of their safety mechanisms while failing to acknowledge -- much less investigate -- the darker, more complex reality. In each crisis, we had the same story of a belief in the reporting done by corporations, and in each case, we had a failure to recognize the enormous potential for fraud and the lack of incentives these corporate entities have in ascertaining and measuring potential risks to the public. The regulators continued to believe the lies fed them by CEOs even when the lies had become absurd. Both times, the agencies charged with regulating ignored the advice of their own experts, neglected to enforce rules, and engaged in an alarmingly cozy relationship with the industry they were supposed to be monitoring.

So far, the Obama administration has failed to fully grapple with the weaknesses and corruption of the regulatory agencies meant to guard the public from harm. Across the entire spectrum of regulatory agencies, there exists a dangerous atrophy of infrastructure which may lead to disasters we cannot yet imagine. Maybe now, as the oil slicks spread across the Gulf, killing wildlife and wrecking lives, our false sense of security is dissolving. We hope so, because if we don't learn from these horrific experiences, we can expect more of them. Where will the next disaster occur? At the Food and Drug Administration? At the National Transportation Safety Board? At the Nuclear Regulatory Commission?

The Government Accountability Office (GAO) is supposed to identify "high risk" governmental activities and require that the agencies address any weaknesses. Unfortunately, the GAO has traditionally excluded key regulatory activities from this high risk designation. It has only treated a regulatory activity as "high risk" if the taxpayers were likely to be the direct victims of the fraud or abuse. So far, the GAO has failed to designate either the SEC or MMS' regulatory activities as "high risk" even after recurrent scandals at both agencies that have led to multi-trillion dollar losses and epic catastrophes. That must change. The Obama administration should not only direct regulatory agencies to thoroughly audit themselves, but it must also instruct the GAO to systematically review the agencies' effectiveness and integrity, identify critical weaknesses, and require their timely correction.

Let's not wait for another catastrophe.

Eliot Spitzer is a former attorney general and governor of New York.

Roosevelt Institute Braintruster William Black is a professor of economics and law at the University of Missouri-Kansas City.

ND20 ALERT: Join us in NY for fresh ideas, July 16-18! Guild Hall, in collaboration with the Roosevelt Institute, will gather thought leaders in the arts, the economy, and the media in East Hampton for a can’t-miss symposium featuring George Soros, Van Jones, plus ND20 contributors Elizabeth Warren, Rob Johnson, Jeff Madrick, Editor Lynn Parramore, and more. RSVP today - seats are limited.

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Spitzer & Black: Questions from the Goldman Scandal
Apr 26, 2010Eliot SpitzerBill Black
Spitzer and Black argue that the Goldman revelations underscore the need for serious financial reform.
Spitzer and Black argue that the Goldman revelations underscore the need for serious financial reform.

For those who have spent years investigating fraud, it was no surprise to hear that Goldman Sachs, the (self-described) jewel of Wall Street, is the latest firm to emerge from the financial crisis with tarnished reputation. According to a lawsuit brought by the Securities and Exchange Commission, Goldman misrepresented to its customers the quality of the toxic assets underlying a complex financial derivative known as a "synthetic collateralized debt obligation (CDO)."

As you may now have heard, the story involves a pair of Paulsons. As CEO of Goldman, Hank Paulson oversaw the buying of large amounts of CDOs backed by largely fraudulent "liar's loans." When he became U.S. Treasury Secretary, he went on to launch a successful war against securities and banking regulation. Hank Paulson's successors at Goldman saw the writing on the wall and began to "short" CDOs. They realized that they had an unusual, brief window of opportunity to unload their losers on their customers. Being the very model of a modern investment banking firm, they thought that blowing up their customers would be fine sport.

John Paulson (unrelated), who controls a large hedge fund, also wanted to short CDOs and he, too, recognized that there was a narrow window for doing so. The reason there was a profit opportunity was that the "market" for toxic mortgages only appeared to be a functioning market. It was, in reality, a massive bubble in which ratings and "market" prices were grotesquely inflated. The inflated prices were continuing only because the huge players knew that the prices and races were fictional and were covering it up through the financial equivalent of "don't ask; don't tell." According to the SEC complaint:

In January 2007, a Paulson employee explained the company's view, saying that "rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while 'real money' investors have neither the analytical tools nor the institutional framework to take action."

We know from Bankruptcy Examiner Valukas' report on Lehman that the Federal Reserve knew that the "market" prices were delusional and refused to require entities like Lehman to recognize their losses on "liar's loans" for fear that it would expose the cover up of the losses. Valukas reports that Geithner explained to him when interviewed (p. 1502) that:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in "collateral damage" by demonstrating weakness and exposing "air" in the marks.

Goldman and John Paulson worked together. One of the key things to understand about shorting is that it is extremely valuable if other major players short similar targets at the same time. By helping Paulson take advantage of Goldman's customers (the ones that lacked "the analytical tools" to avoid being hosed), Goldman not only earned a substantial fee, but also aided its overall strategy of shorting the toxic paper.

Goldman created a deal in which John Paulson played a major role in selecting the toxic paper that would underlie the investment. He picked assets "most likely to fail - quickly" and studies show that he was particularly good at picking the losers. At this juncture, there is some dispute as to whether ACA was complicit with John Paulson and Goldman in picking losers (ACA initially invested in the synthetic CDO, but then transferred the risk of loss to German and English taxpayers).

What isn't in dispute is that Goldman, ACA, and Paulson all failed to disclose to purchasers of the synthetic CDO that it was designed to be most likely to fail. The representation was the opposite: that the assets were picked by an independent entity with their interests at heart (ACA). Goldman claims it's a victim because while it intended to sell its entire position in the synthetic CDO to its customers, it was unable to sell a chunk. One feels the firm's pain. Goldman tried to blow up its customers to the tune of over $1 billion, but were unable to sell them the last $90 million in exposure.

The Goldman scandal raises several important questions: Did John Paulson and ACA know that Goldman was making these false disclosures to the CDO purchasers? Did they "aid and abet" what the SEC alleges was Goldman's fraud? Why have there been no criminal charges? Why did the SEC only name a relatively low-level Goldman officer in its complaint? Where are the prosecutors?

In a December New York Times op ed, we, along with Frank Partnoy, asked for the public disclosure of AIG emails and key documents so that we can investigate the deceptive practices exposed by the Goldman case. Goldman used AIG to provide the CDS on most of these synthetic CDO deals (though not the particular one that is the subject of the SEC complaint), and Hank Paulson used tax payer money to secretly bail out Goldman when AIG's deceptive practices drove it to failure.

The SEC's Goldman fraud complaint points to fundamental problem in the financial sector that has been at the root of the financial crisis -- one that still exists today. The market is not transparent. It has been fraudulently manipulated to enrich managers. Investors lack clear information to make decisions about what they are buying. A continuing absence of real consumer protections makes people like those trying to obtain mortgages before the crash understand that they were, in many cases, being ripped off. According to internal Goldman Sachs e-mails, the company vice president, 31-year old Fabrice Tourre, did not really understand the complex deals he was making. And yet we note that many of these Goldman-style deals were "insured" by AIG. Without transparency, regulators cannot properly see all these kinds of deals in the aggregate. So they can neither stop the fraud nor prevent catastrophic results.

We applaud the SEC lawsuit, but it will not solve the problem. Unless our financial system is reformed to put adequate protections and checks and balances in place, we can expect this kind of fraud to continue. Financial executives will continue to take risks they do not understand. Those who control the flow of capital will continue to churn out profits with socially disastrous consequences.

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Lehman Scandal: Where's the Follow Up?
Mar 23, 2010Eliot SpitzerJosh Rosner
Eliot Spitzer and Josh Rosner have a few simple questions in the wake of the Lehman scandal.
Eliot Spitzer and Josh Rosner have a few simple questions in the wake of the Lehman scandal.

It doesn't take a rocket scientist -- and certainly not an accountant -- to deduce one thing from the Lehman scandal. The misleading of regulators, investors and the public did not happen in isolation. Like Enron, WorldCom, Tyco, Wachovia, Washington Mutual, Fannie/Freddie, CDOs, Bear, AIG, bond insurers, GM, Chrysler, CIT, California, Greece and the countless others wrapped up in this crisis, Lehman is symptomatic of a banking system bent on finding ways to hide risk from the investing public and regulatory community. Every time the truth was uncovered, investors fled and new investors demanded returns that compensated them for the new understanding of the known risks and for those that might remain hidden. In some cases, the cost of that new capital broke the firms.

Traditionally, banks and investment banks acted as principals or agents, matching capital in search of economic return with borrowers needing capital to earn a real return on economic activity. Today, they have turned to manufacturing artificial demand for financial products on false pretense. We have seen them act in such a manner on behalf of their debt-issuing clients. And in the case of Lehman, they have done so on their own behalf. We can expect that other firms used this and similar tactics to hide their true financial condition - firms that are still in business and, to varying degrees, massaging or manipulating their numbers.

It should be clear to all that a deeper examination of the relationship between all the audit firms and their clients on the issue of risk-obfuscation is needed. Limiting any inquiry to Lehman alone is inadequate. To start, here are a few simple questions:

1. To the Fed: Where were you? Did you know what Repo 105 was? You claim that you were not the regulator but acknowledge that you were on site for 6 months before Lehman's failure to make sure you would be repaid on your exposures, so wouldn't deceptive accounting have reduced your faith in your ability to collect on your exposures?

2. To the SEC: What are you doing to ensure that other banks and investment banks are not using similar techniques to manipulate their books?

3. To federal investigators: Where are the subpoenas?

4. To the remaining post-Arthur Anderson audit firms: Have you signed off on any client transactions whose primary purpose was not driven by economic business decisions but rather to change the appearance of assets or liabilities? Are you aware of any of your client firms using any mechanism to optically reduce the appearance of leverage while actually retaining the risk?

5. To the investment banks and banks: Did you use Repo 105 or any other accounting practices, such as the end-of-quarter parking of assets at unconsolidated but related hedge funds or total return swaps for the primary purpose of shifting income?

6. To shareholders: Shouldn't you demand to know if the firms in which you have invested have used deceptive accounting practices?

7. To Congress: You have authority to demand answers from virtually all of these entities, and especially the Fed, the SEC and the auditors. What are you waiting for? Why have you not already sought all the email traffic between the FED and Treasury and Lehman, and, as we have argued elsewhere, AIG and the Fed?

In the banking world, there are generally four types of risk; liquidity risk, credit risk, operational risk and reputational risk. Of these, only reputational risk failures threaten the entire value of the business and its goodwill. If our questions remain unanswered, the entire financial system will remain dangerously exposed.

Eliot Spitzer is former governor of New York. He blogs for Slate.com and guest posts on New Deal 2.0.

Joshua Rosner is managing director of an independent financial services research firm.

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Time for Truth: Three Card Monte is for Suckers
Mar 16, 2010Eliot SpitzerWilliam K. Black
Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman's accounting deception and the release of relevant emails and internal documents.
Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman's accounting deception and the release of relevant emails and internal documents.

In December, we argued the urgent need to make public A.I.G.'s emails and "key internal accounting documents and financial models." A.I.G.'s schemes were at the center of the economic meltdown. Three months later, a year-long report by court-appointed bank examiner Anton Valukas makes it abundantly clear why such investigations are critical to the recovery of our financial system. Every time someone takes a serious look, a new scandal emerges.

The damning 2,200-page report, released last Friday, examines the reasons behind Lehman's failure in September 2008. It reveals on and off balance-sheet accounting practices the firm's managers used to deceive the public about Lehman's true financial condition. Our investigations have shown for years that accounting is the "weapon of choice" for financial deception. Valukas's findings reveal how Lehman used $50 billion in "repo" loans to fool investors into thinking that it was on sound financial footing. As our December co-author Frank Partnoy recently explained as part of a major report of the Roosevelt Institute, "Make Markets Be Markets", such abusive off-balance accounting was and is endemic. It was a major cause of the financial crisis, and it will lead to future crises.

According to emails described in the report, CEO Richard Fuld and other senior Lehman executives were aware of the games being played and yet signed off on quarterly and annual reports. Lehman's auditor Ernst & Young knew and kept quiet.

The Valukas report also exposes the dysfunctional relationship between the country's main regulatory bodies and the systemically dangerous institutions (SDIs) they are supposed to be policing. The NY Fed, the regulatory agency led by then FRBNY President Geithner, has a clear statutory mission to promote the safety and soundness of the banking system and compliance with the law. Yet it stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a "three card monte routine" (p. 1470). The report states:

"The FRBNY discounted the value of Lehman's pool to account for these collateral transfers. However, the FRBNY did not request that Lehman exclude this collateral from its reported liquidity pool. In the words of one of the FRBNY's on-site monitors: 'how Lehman reports its liquidity is between Lehman, the SEC, and the world'" (p. 1472).

Translation: The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed's behavior made it clear that officials didn't believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so.

The Fed wanted to maintain a fiction that toxic mortgage products were simply misunderstood assets, so it allowed Lehman to maintain the false pretense of its accounting. We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values: "According to Paulson, Lehman had liquidity problems and no hard assets against which to lend" (p. 1530). We know from Valukas' interview of Geithner (p. 1502):

The challenge for the government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in "collateral damage" by demonstrating weakness and exposing "air" in the marks.

Or, in plain English, the Fed didn't want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the "marks") were inflated with worthless hot air. Lehman claimed its toxic assets were worth "par" (no losses) (p. 1159), but Citicorp called them "bottom of the barrel" and "junk" (p. 1218). JPMorgan concluded: "the emperor had no clothes" (p. 1140). The FRBNY acted shamefully in covering up Lehman's inflated asset values and liquidity. It constructed three, progressively weaker, stress tests -- Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Need we tell you the results?

We believe that the Valukas report cries out for an immediate Congressional investigation. As we did with A.I.G., we demand the release of the e-mails and internal documents from the New York Fed and Lehman executives that pertain to analyses of Lehman's financial soundness. What downside can there possibly be in making these records available for public analysis and scrutiny?

Three years since the collapse of the secondary market in toxic mortgage product, we have yet to see significant prosecutions of the kind of fraud exposed in the Valukas report. The SDIs, with Bernanke's open support, exorted the accounting standards board (FASB) to change the rules so that banks no longer need to recognize their losses. This has made the SDIs appear profitable and allows them to pay their executives massive, unearned bonuses based on fictional profits.

If we are to prevent another, potentially more devastating financial crisis, we must understand what happened and who knew what. Many SDIs are hiding debt and losses and presenting deceptive portraits of their soundness. We must stop the three card monte accounting practices that create the potential and reality of fundamental misrepresentation.

A.I.G.'s CEO, its board of directors, and the trustees that are supposed to represent the interests of the American people have failed to respond to our December letter calling on them to release to the public the AIG documents that would be the treasure trove (along with other SDI documents) that would allow our nation to uncover and end the gamesmanship that caused this financial crisis and will bring us recurrent crises. We call on them to act.

Eliot Spitzer is a former attorney general and governor of New York.

Roosevelt Institute Braintruster William Black is a professor of economics and law at the University of Missouri-Kansas City.

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