Eliot Spitzer: “In retrospect, I wish we had put more people in handcuffs.”

Eliot Spitzer, "The Sheriff of Wall Street"

Eliot Spitzer was a law enforcement official so tough on corporate malfeasance that the US Chamber of Commerce helped coin a new term “Spitzerism” to describe what he was doing.  As New York Attorney General, Spitzer pioneered a strategy of using state resources to enforce laws that were typically within Federal jurisdiction.  He pursued standard consumer rights cases that most state attorneys general find as their bread and butter, but he also went after white collar crimes and Wall Street conflicts of interest that came to light after the bursting of the internet bubble.

Since a scandalous fall from grace as New York Governor, Spitzer has picked up his aggressive law enforcement chops as a writer and spokesman for law and order.  He has become one of the most outspoken opponents of the Federal Reserve and the generally lax Federal regulatory environment.  He was on our show yesterday, talking about the power of the banks, the Fed’s secret loans, MF Global, and Citigroup.

I’ve known Spitzer for a long time.  He was in fact the very first guest on the Dylan Ratigan Show.  Here’s his interview.

FULL TRANSCRIPT:

ELIOT SPITZER: There was an amazing piece of journalism that came out yesterday which analyzed the magnitude of the loans that have been made by the feds to the banks. The six big banks in particular got over $400 billion of secret loans, most of which we had not heard about. Now, at the time these banks were getting these loans, they were claiming to be in great financial shape. So why were the loans made? Is there a tension between the public statements being made by the CEO’s of the banks–

DYLAN: Let’s stop there. It’s very clear there’s an anecdote, Bank of America, we can reference all these things, where those bank CEO’s are saying explicitly, ‘this is a sound financial institution,’ at the exact moment that they are drawing against the U.S. taxpayer at its central bank, into the hundreds of billions of dollars, now we are learning, going into the trillions. What is the answer to that question? Which is, can I go out and say that and do this?

ELIOT SPITZER: The answer is no. And if you or I did that, if you or I went to a bank –

DYLAN: Or went to our shareholders.

ELIOT SPITZER: Or made any public statement, knowing it to be false, we’d be in handcuffs. So the question I have is, look, we don’t know a lot of these facts. Let’s predicate — there are 100 uncertainties, but where is the inquiry right now about all the statements being made by the CEO’s, CFO’s none of which revealed these enormous loans.

DYLAN: Let me ask you a question to play devil’s advocate. Is there integrity in my saying, as the CEO of Bank of America that my financial institution is healthy, knowing that I’ve got, let’s say $80 billion out to the Federal Reserve, because it is healthy, because I have $80 billion from this Federal Reserve?

ELIOT SPITZER: It depends where and when and how those loans were made. If, at the moment you went to the Fed and said, we know we’ve got a mortgage overhang, because our mortgage exposure is $2 trillion, and therefore we’re insolvent and we’re illiquid, “help!” And at that very moment, you’re saying, we’re a stable, sound institution, yes, you’re misrepresenting in a way that’s fundamentally actionable and should be the subject of civil and perhaps criminal investigations.

SUSAN DEL PERCIO: But when you talk about, for example, civil action, or even if you’re looking to prosecute, as Attorney General, you went after a lot of these folks. And you settled a lot of cases. And some of them settled because they didn’t even want to have the PR that you were investigating. But now maybe in retrospect or if you were giving an Attorney General advice now, would you look and say, maybe we should show that there are serious consequences. Because the fines were really just a matter or a cost of doing business. Would you look at it differently now?

ELIOT SPITZER: Yes, well, we brought more cases and that’s why I lost a few friends along the way on Wall Street, which was unfortunate, but the reality and so be it. The decision by Judge Rakov yesterday to throw out and reject the SEC settlement, because he said not enough facts were presented to the court, and this notion that banks will be permitted to say “neither admit nor deny,” as though somehow, yeah, we’ll pay the fine, but really we did nothing wrong, that should come to an end.

SUSAN: But it’s a settlement?

ELIOT SPITZER: No, he rejected the settlement. Judge Rakov said, we’re beyond the point where recidivist institutions that time and time again, and when I started doing this back in ’98, we brought some big cases and said, “okay, you’ve got a problem, are you going to learn?” And they said yes. In retrospect, they haven’t. No question about it. In retrospect, I wish we had put more people in handcuffs. I don’t mind saying it, because the banks didn’t learn the lesson. Judge Rakov, arguably the most important person in the capital markets right now, because he has set a new bar. He has done something critically important, to say, I won’t let you just internalize as a cost of doing business through fines and other small reparations massive structural fraud. And I think what he is doing redefines the way the SEC will have to operate, justifies a lot of the aggressive stuff we did. I’m all for it. My hat goes off to Judge Rakov. He’s a critically important guy.

DYLAN: Were you to be Attorney General today, what would your view be of either prosecuting or investigating Jon Corzine or MF Global relative to the blending of firm assets and customer assets?

ELIOT SPITZER: Let me be careful here for the following reasons. John has been a friend. I’ve always liked him. I want that to be out there, full disclosure, which is a critically important thing in every domain. I still have a hard time believing that John ever would have sanctioned using customer segregated money, the money that is in customer accounts to cover margin calls for MF Global. If that happened, people should go to jail. It is simply not acceptable. Now, there may be paperwork that permitted them to dip into those funds, if it was properly collateralized. This moment of crisis, it’s hard to see how that happened. I think John is an honorable guy, he’s an aggressive trader. I don’t see how you can be leveraged 44 to 1 and be betting on sovereign debt in Europe. Leverage is great on the way up, not so good on the way down. I don’t get it as a business model, but I think we have to wait and see how the facts come out.

JIMMY WILLIAMS: So, all right. so we give these banks the money, right? and then we tell them, in TARP. — now, there’s all this other new stuff.

DYLAN RATIGAN: TARP was the tip. TARP is what we tossed them as the tip. It’s what you tip them at the garage — that was a $700 billion — the was just the side money so you can go to a party.

JIMMY WILLIAMS: So we gave them more. The whole point was, all right, you’ve got to go and go loan this money out.

ELIOT SPITZER: Right.

JIMMY WILLIAMS: I would be — I would be interested in knowing how much money was loaned out.

DYLAN RATIGAN: We do know. The lending was off the cliff, down.

JIMMY WILLIAMS: So why aren’t we forcing them to do refinancing of mortgages?

ELIOT SPITZER: you’re asking — i know, behind that innocent question, right. You’re asking the question that goes to the heart of my grievance with Tim Geithner from the very first moment. It was that night we needed to solve the institutions and the solvency of our nights, it was that we got nothing back. He never once said, we will save you if you agree to reform the system, solve the mortgage crisis, lend to small and medium-sized businesses that will create jobs. There was never any of the conditionality that we do. The IMF has done it for 30 years with every other country in the world. Tim knows that. He was there. I don’t get this.

KAREN FINNEY: So just quickly, speaking about the IMF, and it makes me think of Europe, and we know that, I guess my question would be, can you talk a little bit about what you see happening on the horizon with Europe? And what is the exposure of the American banks and should we expect that all over again, we’re going to have a crisis should they go into crisis?

ELIOT SPITZER: You’re asking me? I have no idea. I’ll be the first one to tell you, I don’t have the foggiest idea what is going to happen in Europe. I see the stock market here gyrating up and down, 400 points either direction, because somebody makes an offhand comment and things are good, things are bad.

DYLAN RATIGAN: Can I ask you a specific question to that end? I have not been able to find a single human being in the world who can tell us what the risk is in Europe, for the simple reason that the risk marketplace, which is the credit default swap market, exists in secret, and it is mathematically impossible for you or anybody else to define what the risk is!

ELIOT SPITZER: Dylan, there was a great article by Gretchen Morgenson about two or three Sundays ago in The New York Times where she dug into the credit default swap market,and how the market is looking at these various sovereign debt issues, and what she found is that the committee that determines whether there’s been a technical default that would trigger the obligation to pay has determined that the 50% write-down isn’t a default.

DYLAN RATIGAN: Oh, I know.

ELIOT SPITZER: They said, oops, we don’t want to pay.

DYLAN RATIGAN: The point is the actual system by which we are managing our global risk, because it’s done in secret –

ELIOT SPITZER: Correct.

DYLAN RATIGAN: It is impossible for the biggest and most powerful banker in the world to be able to know what the risk is, correct?

ELIOT SPIZER: Yes, but here’s another measure. Put credit default swaps aside for a moment. If you look at the actual interest rate that’s now being paid by the Italian government, it is poking through 7%. That’s not sustainable for a government. When you begin to see Italian Spanish debt hitting that level, crisis is afoot.