This is not another tirade against Eliot Spitzer, the man who slunk out of the New York Governor’s Mansion to the sound of champagne corks popping up and down Wall Street. As I said at the time in an interview with Neil Cavuto on Fox Business News, I am familiar enough with the culture of Wall Street to know that if we said, “Let he who is without sin pop the first champagne cork,” it would be a dry town.
Instead, it is a tirade against Eliot Spitzer, the man who sacrificed principle to get into to the Governor’s Mansion, a fellow who always acted from ambition and not integrity.
To ease into this, I will pose the reader a question. I note that the crusade for which Eliot Spitzer first made his name was a campaign to root-out conflicted research on Wall Street. Jim Cramer has often written (with no detectable irony) of this heroic Spitzerquest. For example, Cramer wrote in his 2002 book, You Got Screwed!
“The actions taken by the federal government subsequent to the prodding by elected officials such as Eliot Spitzer, the attorney general of New York, who got the ball rolling, certainly helped clarify conflicts, and even shed harsh light on the most revolting of them.”(You Got Screwed!: Why Wall Street Tanked and How You Can Prosper, Simon & Schuster, 2002, page 5).
In keeping with his tough-guy-looking-out-for-you shtick, however, Cramer added that “…within weeks of those actions, the complex of interests that kept you in the dark about how the stock market really works was right back in action.” (You Got Screwed! Page 5.)
Similarly, in Cramer’s latest book, he writes:
“Eliot Spitzer, the New York State attorney general, ended that game when he determined that analysts were no more honest than movie critics who are employed by the movie companies themselves.” (Jim Cramer’s Real Money: Sane Investing in an Insane World, New York, Simon & Schuster, 2005, page 134).
The odd thing about these statements is that, as should be obvious from the post “Jim Cramer is a Complicated Man“, Mr. Cramer is the single most conflicted journalist-money-manager in the history of Wall Street. In fact, the concept of “journalist-money-manager” was invented to describe Jim Cramer, as before his rise to prominence US financial journalism still had editors with integrity. Yet while Spitzer “got the ball rolling” looking high and low for conflicts, “and even shed light on the most revolting of them,” he overlooked Jim Cramer and everyone in Cramer’s circle, without exception. Why is that?
The short answer is that Eliot Spitzer has had a unique relationship with Jim Cramer for three decades. It started when they became roommates and friends at Harvard Law. It continued throughout Spitzer’s subsequent career. Through it all theirs has always been much more than a casual schooldays’ friendship: Cramer has worked hard to aid Spitzer, both financially and professionally, and it appears that this good will was reciprocated.
This essay will explore the implications of their bond.
The Thug Also Rises
Cramer’s cronies have always been Spitzer’s biggest contributors. Nick Maier describes a fundraiser Cramer threw when Spitzer first pursued the Attorney General’s office:
“We invited every broker who covered us to that party, kept track of who came, and, most important, noted who contributed to Eliot’s campaign. The smart brokers made sizable donations and were rewarded for it. (Trading with the Enemy, page 33).
Early on, this connection between Cramer and Spitzer proved troublesome for Cramer. According to Cramer, from 1995 to 1997, Cramer & Co. yielded consistently high returns for investors. In 1997 Jeff Berkowitz was invited to be partner, and the fund became Cramer Berkowitz. 1998, however, was a crisis year for the fund. The melt-down of Long Term Capital Management had led to double-digit declines in the fund’s positions.
“Then, one day in early September, I got a call from one of my biggest investors, Eliot Spitzer, who was making his second bid for New York State attorney general. When Eliot studied with me at Harvard Law he had seen how driven I was and how much I loved the stock market. When I set up the fund he had come in as a partner early on and I had made the man a ton of money. Now the papers were saying that Eliot might be violating campaign finance disclosure laws by getting hidden money from his family. That was a total crock and I knew it, as I had made a boatload for Eliot. But there was only one way to refute his charge and it was to open up the fund. It was an emergency.” (Confessions of a Street Addict, page 186).
Cramer opened up the fund so Spitzer could withdraw. Many of Jim’s other investors chose the opportunity to withdraw as well. With help from Karen the fund did finish up for the year, but still disappointing relative to the averages.
Yet such occasional hiccups could not outweigh the great synergy that existed between the financiers in Cramer’s orbit and the Attorney General of the state where they did business. After Spitzer was elected to the position of Attorney General in 1998, he pursued a variety of targets. He started with conflicted researcher, but expanded his efforts to take on immensely powerful targets, such as AIG and Hank Greenberg, Marsh & McLennan (there targeting Hank’s son Jeffrey), and bond insurers such as MBIA and Ambac. As I will explain, however, Spitzer did not “take them on” in a way that would have been recognized as legitimate in any previous era.
The misdeeds upon which Spitzer focused were generally industry practices that extended beyond living memory. Some of these were obvious evils (e.g., conflicted research on Wall Street). Some were arcane probable-evils (e.g., the way Marsh Mac created insurance quotes for D&O insurance). And some were “evils” worthy of Talmudic dispute: for example, if in some negotiation the firm on the other side of the table offers you highly attractive terms, and you accept, is it your responsibility to approve of, or even know, the accounting method that other company uses to reflect the deal on its own books?
Novel were the misdeeds were for which Spitzer pursued his quarries, and more novel yet was his method. It is a truism that, as former New York Chief Justice Sol Wachtler put it, a good prosecutor “could get a grand jury to indict a ham sandwich.” It is also a given that no financial firm can withstand a criminal indictment: individuals of a financial firm may be indicted, but since it is the business model of financial firms to say, “Give us X now and trust us to give you Y in the future,” a criminal indictment is more or less an order to shut their doors.
Put these two facts together, and it means that it is within the power of every prosecutor to wake up on any given morning and destroy any financial firm in his jurisdiction. How? Here is one of several ways: at the end of each quarter every financial firm has to make thousands of estimates, estimates which in the light of hindsight may prove to be on balance accurate (or even conservative), but some of which will surely prove to be in error. Thus, if a prosecutor can indict a ham sandwich, think how easy it is to indict a firm whose books will, at any given time, always contain estimates some significant fraction of which are false. There are others ways, but its all basically the same idea: financial firms are uniquely ill-suited to be recipients of criminal indictments, and if a prosecutor looks hard enough he can indict …. the proverbial ham sandwich.
Thus every Attorney General is always in a position to destroy any financial firm in his or her jurisdiction. Most people who reach the level of Attorney General have the maturity not to abuse that vast power. Spitzer exercised it with abandon. For example, he went public with allegations of criminal misconduct against Hank Greenberg, the legendary CEO of AIG. Spitzer refused to negotiate with AIG until Greenberg stepped down from the company he had built. Given the dynamic described above, that demand is extraordinary: it is a negotiation where Spitzer was able to force the other side to cave without having anything on him. Spitzer’s power to end Greenberg’s career came not from any legal acumen, but was simply intrinsic to his position as AG: he threatened the destruction of a financial firm by bringing a criminal indictment, thus giving a good leader only one alternative. If you ever wanted to know what a thug would look like as an Attorney General, that’s it. That’s what one would look like.
Months after Greenberg stepped aside, Spitzer’s criminal allegations against Greenberg quietly fizzled out.
The previous example is not, alas, a one-off. In fact, the hallmark of Attorney General Spitzer’s reign was precisely the kind of headline-making bullying that would make the US Chamber of Commerce describe Attorney General Spitzer’s methods as, “the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times.” That “form of intimidation” often bore the flavor of someone who had seen too much TV.
An example of that came in Spitzer’s dealings with the John Whitehead, the former chairman of Goldman Sachs, one of the most highly respected men in modern Wall Street history, and in my view, the kind of man the industry ineeds (that is, heavyweight players who keep the game straight, or at least reasonably straight, by keeping Young Turks in check: other than a few old-school guys like Ken Langone, such men are in short supply these days on Wall Street). John Whitehead had the temerity to write a Wall Street Journal op-ed (“Mr. Spitzer Has Gone Too Far“) that made the simple point that in America, people are innocent until proven guilty. That included Hank Greenberg:
“Something has gone seriously awry when a state attorney general can go on television and charge one of America’s best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.”
The day this editorial appeared, Spitzer called Whitehead (a retired octagenerian) and said:
“Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning, and you will pay dearly for what you have done.”
Whitehead’s account went unchallenged by Spitzer.
The Many Sugar Daddies of Eliot Spitzer
Jim continued to support Spitzer in his re-election campaigns, even after he (Jim) left Cramer Berkowitz. For example, this 2003 New York Post article describes a huge fund-raising event for Spitzer that Cramer helped to organize (I beg the reader to please read this closely, as I will suggest two mental notes about this paragraph):
“Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates; Titan Advisors fund-of-funds chief George Fox and Jeff Berkowitz, manager for the hedge fund Cramer Berkowitz (co-founded with Street.com’s Jim Cramer); real estate mavens Edward and Howard Milstein; developer Donald Trump; class action attorney Melvyn Weiss… Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal, was quick to point out that Spitzer’s work has made him more than a few enemies on Wall Street.” (Jenny Anderson, “Fundraising for a Fund Crusader,” New York Post, December 12, 2003).
The first mental note concerns this: “Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates.” Please stick a pin in the name, “James Chanos.”
The second mental note concerns the absence of critical thought exhibited by the New York Post in publishing this sentence: “Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal…” How do we know that Melvyn Weiss’ work has been, “pursuing financial fraud”? Because Weiss said so? In fact, three years later, Melvyn Weiss was charged by the US Department of Justice with taking part in a now-notorious $200 million kick-back scheme involving one of the most powerful law firms in the United States, Milberg Weiss Bershad & Schulman (as of a few days ago, all three of Weiss, Bershad, and Schulman are convicted felons, as is their former partner, Bill Lerach) Thus, with the benefit of hindsight (or critical thought) it would have been more accurate for the New York Post to say, “Weiss, whose own work in practicing financial fraud…”
However, that would have been poor form of the New York Post, the piano player in the bordello that is the New York financial industry. That is why, as I will demonstrate in a later piece, the New York Post is for folks who move their lips while reading People Magazine.
Connections among Spitzer and Cramer’s cronies, such as Marty Peretz, no doubt proved calming on what may have been otherwise bleak and unhappy occasions. For example, in 2003 Spitzer’s office opened an investigation into an ailing hedge fund controlled by Gotham Partners Management. Shortly thereafter, Gotham closed down the fund, and no charges were filed. The fund’s principle investor was Marty Peretz. (Henny Sender and Gregory Zuckerman, “New York Examines research by Gotham Partners on MBIA, The Wall Street Journal, January 10, 2003.) In fact, in a turn-around which has become a standard operating policy against any who try to expose this group, Spitzer began an investigation in MBIA.
By 2005 this coziness between the Attorney General Crusader and hedge funds was an open secret. For example, The New York Observer eloquently explained in January, 2005):
“The ‘hedgies,’ as they’re sometimes called, love Eliot Spitzer. While Wall Street bankers have tended to steer clear of his campaign – in part because of a state law prohibiting contributions by any corporations that sell bonds to the state, in part because they’re still peeved about his crusade against corrupt stock analysts – hedge-fund managers seem to have Spitzer headquarters on speed-dial. Some of these guys, like Kynikos Capital’s James Chanos, always pop up on Democratic host committees (what else are they supposed to do with their $10 million year-end bonuses?). But others, like Stanley Druckenmiller… are genuine converts to the Spitzer cause.
“And why not? While the Attorney General brought his prosecutor’s wrath down on Canary Capital – a hedge fund tied up in the mutual-fund market-timing scandal – he has, thus far, left hedge funds largely alone. As the hedgies are fond of saying, Mr. Spitzer seems to ‘understand’ hedge funds. After all, some of his best friends are hedge-fund managers, and for many years he was a loyal hedge fund investor, reaping what his good friend James Cramer described in his book, Confessions of a Street Addict, as a ‘boatload’ of money from the Cramer-Berkowitz fund.
“But, perhaps most compelling, Mr. Spitzer’s tactics have been good for hedge-funders’ wallets…
“And, like so many of their breed, the hedgies know a good investment when they see one. ‘It’s a lot like investing,’ said Keith Rosenbloom, a Spitzer fund-raiser who runs ComVest Investment Partners, a $1.4 billion fund-of-funds. ‘When you find an investment that’s really special, you’re supposed to bet more on that one if you really understand it. This is a guy who is really special-and you try to back the guys who are really special.’”
Allying yourself with the wealthiest and most powerful people in your state, many of whom (as Deep Capture is demonstrating) are scofflaws, while donning the mantle of a reformer: that’s some gig.
Governor Spitzer: Tous ca change
Politically astute American know the initials “AG” do not, in fact, stand for “Attorney General”, they stand for “Aspiring Governor”. When New York Aspiring Governor Spitzer set out on the utterly predictable course of turning himself into New York Governor Spitzer, his “hedgie” friends were there for him. As The New York Times put it:
“ALBANY, Jan. 25 – Eliot Spitzer has not angered everybody in the business world.
“In fact, Mr. Spitzer, New York State’s attorney general and the front-runner in the polls for this year’s governor’s race, has taken contributions from some of the biggest names in hedge funds, venture capital, real estate and commodities in building a $19 million war chest for his campaign nine months before the election.
“That figure exceeds the $16.3 million that Gov. George E. Pataki had raised at this same point in 2002, when he enjoyed the formidable fund-raising powers of incumbency. In Mr. Spitzer’s case, his campaign finance filings suggest the influence of his actions as attorney general on political donations in the race for governor.” (Danny Hakim, “Filings Show Spitzer’s Allies in Big Business,” New York Times, January 26, 2006)
Then, less than two weeks later, The New York Times explained that “Spitzer Campaign Getting Money From Sources Spitzer Disavows” (Michael Cooper, February 7, 2006):
“ALBANY – In his run for governor, Attorney General Eliot Spitzer has called for ending the ‘pay-to-play culture that exists in Albany’ and pledged not to accept contributions from anyone with business pending before his office. But in Albany, where campaign donations gravitate toward power, Mr. Spitzer’s early lead in the polls has translated into contributions from lobbyists and special interest groups in amounts that are usually not seen except when incumbents are running.
“When Mr. Spitzer held a gala fund-raiser that added $5 million to his campaign in December, the invitation, which listed some big donors along with members of the host committee, read in places like a who’s who of powerful Albany lobbyists…. The contributions highlight the sometimes blurry line that the campaign is trying to walk as it claims to hold itself up to a higher ethical standard in the area of campaign finance while still raising millions of dollars in a state where lobbyists and special interests are among the most reliable donors.”
Again: allying yourself with the wealthiest and most powerful people in your state, many of them scofflaws, while being portrayed as a reformer. Some gig indeed.
The Comeuppance of the Slowhand
As I said at the outset, I am not going to dwell on the Client #9 aspect of this story. I object to our society’s stigmatization of women such as “Kristen.” I was once friendly with a truly fine woman who was, she revealed in time, a high-price escort. One day she showed me her Rolodex (and she did, in fact, have a Rolodex, an old-fashioned, sit-on-the-desktop Rolodex). It had thick paper stock cards that were intended for individual entries. I would estimate that to 60-75% of them were stapled business cards of Managing Directors of upper-crust Wall Street financial firms, along with a smaller number of cards discretely embossed with the names of the white-shoe law firms which service such financiers (discretion precludes me from mentioning the names of any of these firms, but the ones that jump to the mind of the reader conversant with Wall Street are, in fact, the ones I mean). Incidentally, this was true even though the gal lived and worked a long way from New York.
Thus, Wall Street’s Spitzerschadenfreude strikes me as hollow and disingenuous as… most everything else about our financial Power Elite. If anything, women such as “Kristen” should be embarrassed at being exposed entertaining men of standing in “polite society” while “polite society” mouths hypocritical platitudes about them.
Instead, I will burden the reader with two requests.
The first request is that the the reader consider the possibility that the career of Eliot Spitzer reveals more to us about the topsy-turvy, Alice-in-Wonderland world we inhabit than we are likely to see for a long time. Mr. Spitzer became AG due in large part to the guidance and financial support of Jim Cramer and his hedge fund cronies. As Attorney General, Spitzer made a name for himself pursuing conflicted research on Wall Street while never touching Cramer, who embodies the most clear-cut, deepest conflicts between journalism and money management that the financial world has ever seen. Spitzer augmented this reputation pursuing insurance companies like AIG and MBIA over deeply ambiguous financial arcana worthy of Talmudic debate, but never touched the hedge funds who regularly, on a day-to-day basis, as their very business model, manipulate stock prices, rob Americans of their chance to invest in a fair capital market, and (in the case of one) openly brag about it in books and on TV. Spitzer ran for Governor on a campaign of, “The Sheriff of Wall Street is going to put an end to the pay-to-play ways of Albany,” while to his gubernatorial campaign were donated greater funds than his “pay-to-play” predecessor had raised as an incumbent, and in that campaign Spitzer’s strongest support came from the hedge fund cronies to whose industry Attorney General Spitzer had given hall passes.
Did I miss anything?
Thus to me, Spitzer’s downfall is the least interesting part of his story. The career of Eliot Spitzer was always a sluttish thing. The real question with which it confronts us is: what is the state of our public discourse that it would ever see Eliot Spitzer as admirable? Even as he pursued clear evils (such as conflicted analysts on Wall Street) were there any who doubted he did so out of ambition and a desire for headlines? Is Eliot Spitzer what a righteous man looks like to our present age?
In sum, how shabby has our public discourse grown that Eliot Spitzer could be outed over a secret tryst with “Kristen”, but not over the many with whom he slept around openly, for years, in the bordello of New York financial circles?
The second request is that the reader please remember the name, “Jim Chanos”.