Squaring the Culture




"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

03/15/2008 (3:15 pm)

Spitzer the Tyrant

Most of the talk about this week’s demise of Eliot Spitzer focused on the hookers and Spitzer’s family, whether he was going to resign, and so forth. Only the occasional, offhand comment sank more than a few microns below the surface of his career. It was a comment on Protein Wisdom (not one of my usual haunts), not a primary article, that sent me searching for the True Eliot Spitzer (see my previous article, Reflections on Eliot Spitzer.)

What I found was a great deal worse than a cautionary tale. Spitzer, as Attorney General of New York, was a growing tyrant, destroying lives by wielding vague laws, bullying his targets and the press, enforcing his own will as though he were a legislature of one, and establishing a reign of terror like that which our Constitution was written to prevent. He didn’t even have to hide his actions; he was shielded by a complicit press, and by the fact that his targets were wealthy figures in the world of public finance, a world that’s too technical for most readers to penetrate, figures so wealthy that we find them difficult to pity. As governor, he promised more of the same. His tale offers us a warning bell reminding us to guard our liberties that much more diligently.

His motivation seems to have been an overweening sense of personal morals, which he felt was his right to make into a public standard of decency without convincing the legislature, and by implication the people, to support him.

Kimberley Strassel’s article in the Wall Street Journal summarizes the record best:

Mr. Spitzer’s main offense as a prosecutor is that he violated the basic rules of fairness and due process: Innocent until proven guilty; the right to your day in court. The Spitzer method was to target public companies and officials, leak allegations and out-of-context emails to a compliant press, watch the stock price fall, threaten a corporate indictment (a death sentence), and then move in for a quick settlement kill. There was rarely a trial, fair or unfair, involved.

Once the mark had agreed to settle out of court, Spitzer would impose regulations affecting some aspect of the mark’s business that Spitzer personally felt was immoral. The coerced mark would be left on the spit, threatened by an always-impending indictment, while being forced to obey Spitzer’s rules.

Roger Donway, managing editor of The New Individualist, provides a thorough explanation of Spitzer’s approach to taking over free businesses in his lengthy article, “Eliot Spitzer: Ayatollah General”:

The seven steps of a Spitzer inquisition were all present here in his first crackdown on the impious. (1) Business Utopianism. Denounce the realities of business, especially the pursuit of economic self-interest, as ethically sordid—in this case, denounce the reality that hustle and hype are the Brownian motion of commerce, from the rug merchants of the Middle East to the stockbrokers of Wall Street. (2) Universal Fiduciality. Ignore the rule of “caveat emptor” and the responsibility of market participants to look out for themselves. In the name of equality, insist that business leaders have a fiduciary responsibility to all their customers, investors, workers—indeed, to the public at large… (3) The Bloody Shirt. Find a handful of acts that cross the line into inexcusable (though not necessarily illegal) behavior… (4) Extra-legal Punishment. Use these examples of deplorable (though perhaps legal) behavior to publicly smear and threaten an entire company and its top executives, putting it and them under a cloud and driving down the company’s market value. (5) Play the Good Cop. Offer a lenient penalty in exchange for the right to dictate corporate policy. (6) Repeat as Needed. Use the above sequence of steps as often as necessary to restructure an entire industry in conformity with the morality of Eliot Spitzer.

But the final step is the true key to a Spitzer settlement. (7) A Virtue-cratic Takeover. Make it clear that Eliot Spitzer and his morally superior minions are now in charge. Executives may be allowed to pretend they are running their companies. Lawyers may be allowed to pretend that objective rules and regulations exist. But the hard truth is that the company or the industry must behave in ways the ayatollah general decides are ethical.

Using this formula, Spitzer first assaulted the securities industry. Using a thoroughly vague law called the Martin Act, Spitzer obtained private emails from brokerage firms, and used them to discover that there had been times when a broker’s public recommendations did not agree with their private ones. By leaking certain details to the press, Spitzer drove down Merrill Lynch’s market value by as much as $11 billion in a single month. He then offered them a settlement in which they were required to reform the way they paid their analysts — something that was not a part of the alleged infraction in the first place.

Regardless of what one thinks of Merrill Lynch and their lying to some of their customers, there are at least two things that are deeply disturbing about this process:

1) There was no trial, no presumption of innocence, no day in court, no fairness of any sort. The attorney general achieved complete, tactical control through blackmail, with the willing complicity of the press;

2) The desired behavior had no relation to the illegal act. Enforcing the law, making the guilty party pay for whatever infraction, is one thing: creating new law through economic coercion is entirely another. It’s like Donway quoted UCLA law professor Stephen Bainbridge as saying: “It’s as though you got busted for pot possession and the DA said you had to give up snowboarding;” — just because the DA didn’t like snowboarding.

Spitzer repeated his performance against Merrill Lynch in several later escapades, bringing first the mutual fund industry, then the insurance industry, under de facto regulation by the New York Attorney General’s office, often for practices that were far from illegal. He had a lousy record of prosecutions: when those he assaulted decided, for reasons of individual liberty, to fight back regardless of the personal cost, Spitzer did not win. However, he managed to change practices in major industries by exerting his particular brand of moral blackmail against companies for whom the principle of freedom was not worth the cost of public excoriation. From Kimberley Strassel again:

On the substance, his court record speaks for itself. Most of Mr. Spitzer’s high-profile charges have gone up in smoke. A New York state judge threw out his case against tax firm H&R Block. He lost his prosecution against Bank of America broker Ted Sihpol (whom Mr. Spitzer threatened to arrest in front of his child and pregnant wife). Mr. Spitzer was stopped by a federal judge from prying confidential information out of mortgage companies. Another New York judge blocked the heart of his suit against Mr. Grasso. Mr. Greenberg continues to fight his civil charges. The press was foursquare behind Mr. Spitzer in all these cases, and in a better world they’d share some of his humiliation.

To enjoy liberty in a free society we need to accept the roles of the institutions as they are defined, so that we remain a government of laws, not of men; law is to be created by the legislature, enforced by the executive, and interpreted by the court. Spitzer provides us a clear example of how liberty gets damaged when we short-circuit the roles: he appointed himself the legislature, cut the court out of the process altogether, and used blackmail to achieve what he considered a moral result.

The worst tyrannies are those driven by a sense of moral superiority. The tyrant who seeks his own power and comfort may tire of oppressing when he gets to you, and let you slide; but there’s no escaping the moral energy of the Enlightened.

Spitzer’s main tools were the press and a horrible law called the Martin Act. The Martin Act, a New York statute from the New Deal days, basically makes it a crime to mislead anybody for any reason. It doesn’t matter, under the Martin Act, whether you actually intended to mislead, whether any transaction was consummated, whether anybody was hurt; the simple act of misleading, deliberately or accidentally, constitutes a crime. Furthermore, the Martin Act provides the means by which the state may obtain any private communication it chooses. It had existed on the books since the 30s mostly by gentleman’s agreement of attorneys general not to use it, except against the occasional Ponzi scheme. In Spitzer’s hands, it became a blackmail tool, with which the Attorney General could threaten, as he famously did once, to arrest a corporate CEO “in front of his daughter and his pregnant wife,” for acts that may have produced no harm at all. Let’s hope the New York legislature has the good sense to strike this one from the books before another tyrant learns how to use it.

For those wanting to understand further how Eliot Spitzer illustrated that tyranny is a monster that is far from dead in modern America, reading and understanding Roger Donway’s article is a good first step. Also, Charlie Gasperino of the New York Post apparently fell afoul of Spitzer’s wrath by once daring to note that he excused his political friends, and has a harrowing tale to tell of how Spitzer’s office responded. However, an online blog that appears to serve the investment and business community, called Dealbreaker, has been following Spitzer’s career for years, and contains more information than you’ll probably need. Check it out.

It’s from Dealbreaker that we get the curious observation about the political left, how it’s prone to ignore procedural due process when the target is wealthy, but to insist on it when the target is one of America’s foreign enemies. It’s a remarkable inconsistency, one which I hope some of the leftists who read this blog can explain to me; if it’s so dangerous to ignore the rules in the slightest when dealing with terrorists, why is it not even more dangerous when dealing with stockbrokers who happen to be American citizens?

The images at the top are from a fun take on this serious topic at The People’s Cube, called “Operation Corner Office.”

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2 Comments »

March 16, 2008 @ 12:21 pm #

“Though he believeth not in God, yet he does God’s work.”

Spitzer did wrong.
I believe in free markets, with the minimum of necessary regulation.

That said, Spitzer ended years of shameless abuse in the insurance sector in particular. There was no other way to end the gross manipulation practiced by the likes of AIG, Gen Re, and the big brokers.

I’d be glad to review in detail the technical evils of so-called “finite insurance,” commission rebates and similar schemes. But at this level it suffices to note that a murderer like Al Capone was only brought down by a tax fraud conviction.

The real winners are the honest insurers and brokers, who played by the rules from the start, and now enjoy a level playing field.

As for Grasso, it was an egregious failure of corporate governance, for stock companies to set the unjustifiable pay of their own regulator at the NYSE.

March 19, 2008 @ 2:49 pm #

[…] I’ve already said enough about Mr. Spitzer, whose use of blackmail to impose his morality on businessmen in New York was far worse than the peccadillo that drove him from public life. Kimball says more, and better. | Related posts: Liberty, National Politics […]

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