Latest / Economy & Finance / How Wall Streets moral crusader was undone by his own vices _ The Story of Money

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How Wall Streets moral crusader was undone by his own vices _ The Story of Money · Economy & Finance

0:00
Speaker 1: He's done something unbelievably stupid. He starts taking out big
0:05
Speaker 1: bundles of cash from his bank account. This gets reported
0:08
Speaker 1: to the FBI, who then promptly set up a sting.
0:11
Speaker 1: They actually initially think, oh, maybe he's taking bribes. And
0:14
Speaker 1: so they set up a sting to figure out what's
0:15
Speaker 1: going on, and they discover he's going to the Emperor's Club.
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Speaker 2: The Emperor's Club? What's that? Is that like all these
0:20
Speaker 2: New York clubs they have, like the Metropolitan Club or
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Speaker 2: the Century Club?
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Speaker 1: No, sadly for him, it was a high-class escort service. Oh, dear.
0:38
Speaker 2: Today on the story of money, the rise and fall
0:42
Speaker 2: of a man who made his name taking on America's
0:45
Speaker 2: biggest banks in the early 2000s and who transformed the
0:49
Speaker 2: way that Wall Street was policed. He was a politician
0:53
Speaker 2: hailed as a future presidential contender, a moral crusader who
0:57
Speaker 2: promised to clean up investment banking's cultural greed, but also
1:02
Speaker 2: a man who, in a spectacular twist, was brought down
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Speaker 2: by his own secret and somewhat sordid double life. I'm
1:12
Speaker 2: talking about Eliot Spitzer. As New York's Attorney General in
1:17
Speaker 2: the late 1990s and early 2000s, he transformed financial regulation,
1:22
Speaker 2: exposed conflicts of interest, and forced some of the most
1:25
Speaker 2: powerful financial institutions in the world to change their ways.
1:30
Speaker 2: In fact, his nickname was the Sheriff of Wall Street.
1:33
Speaker 2: And for a while, few people were more feared in
1:37
Speaker 2: American finance. until it all came crashing down with a
1:42
Speaker 2: sex scandal. So you might wonder, why would anyone want
1:47
Speaker 2: to talk about Eliot Spitzer today? Well, the reason is
1:50
Speaker 2: that in spite of all his flaws, many of the
1:53
Speaker 2: problems he warned about back then have never gone away.
1:58
Speaker 2: In fact, some people might say we actually need another
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Speaker 2: Eliot Spitzer right now, but without the scandal. Now, Robin's
2:06
Speaker 2: away this week, but here to tell the Spitzer story
2:09
Speaker 2: is my FT colleague, Brooke Masters.
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Speaker 1: Hello, Brooke.
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Speaker 2: Great to have you here. So, Brooke, your day job
2:15
Speaker 2: is at your U.S. managing editor of the FT in America,
2:19
Speaker 2: a job I used to have myself some time ago.
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Speaker 2: But tell us why you are so well-placed to talk
2:24
Speaker 2: about Eliot Spitzer.
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Speaker 1: Well, back in the early 2000s, I was covering Wall
2:28
Speaker 1: Street and white-collar crime. in New York, and Eliot Spitzer
2:33
Speaker 1: was the biggest thing since sliced bread. I mean, he
2:35
Speaker 1: was dominating the news, and he was enforcement back then.
2:39
Speaker 1: And I not only covered his cases, I got so
2:42
Speaker 1: interested in it, I wrote a book about it called
2:44
Speaker 1: Spoiling for a Fight, which is a reference to how
2:47
Speaker 1: pugnacious he was.
2:49
Speaker 2: Well, Spoiling for a Fight is a great title, and
2:52
Speaker 2: it also explains why we're talking about this right now
2:55
Speaker 2: because one of the questions is, do we need another
2:58
Speaker 2: big fight today? So welcome to the story of money
3:02
Speaker 2: from the Financial Times with me, Gillian Tett.
3:12
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3:47
Speaker 2: So we know how Eliot Spitzer's story ends. Plot twist, spoiler,
3:52
Speaker 2: in an embarrassing sex scandal. But when Spitzer's career first
3:56
Speaker 2: took off in the early 2000s, he was seen as
4:00
Speaker 2: a white knight and was very popular with the public.
4:04
Speaker 2: And taking on Wall Street, as he did later, requires
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Speaker 2: a lot of guts. So, Brooke, tell us, where did
4:12
Speaker 2: Spitzer come from and why did he feel this burning
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Speaker 2: need to go to war with Wall Street?
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Speaker 1: Well, Eliot Spitzer is a classic New York privilege story.
4:22
Speaker 1: His dad was a very, very successful real estate developer.
4:27
Speaker 1: He built many of the big apartment buildings in Manhattan.
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Speaker 1: And the Spitzers raised their three kids to be highly competitive,
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Speaker 1: highly competitive, and incredibly smart. Friends who used to come
4:40
Speaker 1: over for dinner said it was absolutely frightening to be
4:42
Speaker 1: at the dinner table with them. And so Elliot goes
4:45
Speaker 1: off and has a proper, you know, preppy education. He
4:47
Speaker 1: goes to Horace Mann. He goes to Princeton. He goes
4:50
Speaker 1: to Harvard Law School. He then takes an interesting side
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Speaker 1: turn and starts working for the Manhattan District Attorney's Office.
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Speaker 1: And this is the beginning of his sort of crusade.
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Speaker 1: And while he's there, he does a bunch of stuff.
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Speaker 1: But the most interesting thing he does is he and
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Speaker 1: a colleague convince the Manhattan D.A., that they could get
5:09
Speaker 1: the mafia out of the garment district in New York.
5:11
Speaker 1: Now the mafia has been there for decades and they
5:14
Speaker 1: have this really clever idea where they set up their
5:17
Speaker 1: own little company that is, you know, making clothing and,
5:22
Speaker 1: The Gambino family dominated trucking in the garment district. And
5:26
Speaker 1: so if you wanted to get your cloth in and
5:28
Speaker 1: your clothing out, you had to pay them. And so
5:31
Speaker 1: they set up their own little clothing company. And then
5:33
Speaker 1: Gambinos come knocking to demand their money. And of course,
5:36
Speaker 1: they have the whole place wired. They arrest the Gambinos
5:38
Speaker 1: and they work out a deal with them where the
5:40
Speaker 1: Gambinos agree to leave the garment district. And so... The
5:43
Speaker 1: mafia's influence is pulled out of the garment district because
5:46
Speaker 1: of this clever idea Spitzer had.
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Speaker 5: Wow.
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Speaker 2: Sounds a bit like a version of The Sopranos, but
5:50
Speaker 2: with a rather positive twist at the end.
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Speaker 1: Exactly. He's doing really well, and he decides with his
5:57
Speaker 1: daddy's money he wants to be attorney general. So he
6:00
Speaker 1: runs for what is essentially the top law enforcement job
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Speaker 1: in New York, but it's elected. He runs in 94,
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Speaker 1: loses unbelievably badly. then spends the next four years of
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Speaker 1: his life driving around New York State, making friends with people,
6:13
Speaker 1: meeting voters. And in 1998, he wins. And that makes
6:17
Speaker 1: him attorney general starting in early 1999.
6:21
Speaker 2: So that requires a lot of guts and tenacity because
6:23
Speaker 2: a lot of people after losing so badly would have
6:25
Speaker 2: just said, hey, let's go and work for Goldman Sachs
6:27
Speaker 2: or some big law firm or have a nice cushy life,
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Speaker 2: particularly given his pedigree. But he's clearly got a strong
6:33
Speaker 2: sense of public service. But Tell us why in the
6:37
Speaker 2: early 2000s, around the turn of the century, he decided
6:40
Speaker 2: that that was the right moment to go after Wall Street.
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Speaker 1: Well, I think you need to think about the fact
6:45
Speaker 1: that Teddy Roosevelt is his sort of idol. And Teddy
6:49
Speaker 1: Roosevelt went after the biggest businesses in his day. And
6:53
Speaker 1: Spitzer decides he's going to do the same thing. He
6:54
Speaker 1: has this sort of progressive streak that we will tame
6:58
Speaker 1: big business to protect the little guy. And if you
7:02
Speaker 1: think back to 1999, early 2000s, That's the dot-com bubble.
7:06
Speaker 1: And we are in a period where every terrible internet
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Speaker 1: company in the world is going public, selling shares to
7:13
Speaker 1: the public, taking, you know, mom and pop's money, and
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Speaker 1: then basically they have no business model, they lose money,
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Speaker 1: and lots of people start to lose a lot of money.
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Speaker 1: And Spitzer asks the question, why is it so many
7:27
Speaker 1: terrible companies, you know, their shares are getting sold to
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Speaker 1: ordinary people, And who is it that, or the bad
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Speaker 1: guys here? And he decides it's Wall Street.
7:35
Speaker 2: Now, one of the reasons, one of the many reasons
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Speaker 2: why this story is so relevant for today, right now,
7:41
Speaker 2: is because lots of people see parallels between the dot-com
7:43
Speaker 2: bubble and what's been happening with AI and big tech recently.
7:47
Speaker 2: But a lot of people will say, why is it
7:50
Speaker 2: up for Elliot Spitzer to be doing this? Why is
7:52
Speaker 2: he bothering to do this? Rather than the regulators who
7:56
Speaker 2: normally jump in, like the Securities Exchange Commissioner?
8:00
Speaker 1: It's actually a very interesting parallel then and now. At
8:04
Speaker 1: the time, the Securities and Exchange Commission was run by
8:07
Speaker 1: Republican appointees who believed in a hands-off approach and allowing
8:12
Speaker 1: business to do business and giving Wall Street a bit
8:14
Speaker 1: of a free hand. And that is absolutely what we're
8:17
Speaker 1: seeing again today. It was Harvey Pitt was the chairman
8:19
Speaker 1: back then. Today we have Paul Atkins, who actually was
8:22
Speaker 1: at the commission at the time then too, And they
8:24
Speaker 1: both took the view that government should be less involved.
8:28
Speaker 2: So laissez-faire kind of thing.
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Speaker 1: Very laissez-faire.
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Speaker 2: And the assumption that the industry can just kind of
8:33
Speaker 2: regulate itself and self-correct.
8:35
Speaker 1: Exactly. And that the government's more likely to screw it
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Speaker 1: up than not.
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Speaker 2: And, of course, one of the ideas behind that is
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Speaker 2: the idea that you know, if there are excesses, you
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Speaker 2: have discipline because smart investors see the excesses or the
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Speaker 2: fraud and basically weed it out, which works well with
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Speaker 2: big investment players, but not small ones, of course.
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Speaker 1: Right. And particularly in the dot-com era, shares were getting
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Speaker 1: sold directly to the public and lots of day traders
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Speaker 1: and ordinary people would watch on TV and these analysts
9:00
Speaker 1: would come on and say, you need to buy pets.com
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Speaker 1: or bluenile.com or the latest thing that was selling groceries online.
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Speaker 1: And people would buy the shares and then eventually they'd
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Speaker 1: lose their money. Now it's more complicated in that more
9:13
Speaker 1: people are, they are partly investing in individual companies, but
9:17
Speaker 1: they also own index funds. And so they're ending up
9:19
Speaker 1: having to own companies whether they want to or not.
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Speaker 2: So, and we'll come back in later on about the
9:24
Speaker 2: parallels for today and why they matter so much. But,
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Speaker 2: you know, Spitzer decides he's going to go to war
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Speaker 2: with Wall Street, very brave given his pedigree and things.
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Speaker 2: And he starts off with one of, the most storied
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Speaker 2: and highly respected companies, Merrill Lynch.
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Speaker 1: Tell us why. He and his right-hand man, a guy
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Speaker 1: named Eric DiNalo, have been looking into what are the
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Speaker 1: conflicts of interest that might be leading banks to take
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Speaker 1: public companies and sell shares to the public, companies that
9:55
Speaker 1: basically have no business model. They literally had no way
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Speaker 1: of ever becoming profitable. They became convinced that there is
10:01
Speaker 1: something really wrong going on where Wall Street is making
10:05
Speaker 1: so much money bringing these companies public that they are
10:07
Speaker 1: not thinking through what happens next. And there are a
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Speaker 1: couple of settlements with investors, small settlements, like one lawyer
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Speaker 1: sues Merrill Lynch. And they see one or two of
10:17
Speaker 1: those involving Merrill Lynch. And they think, let's go ask
10:20
Speaker 1: Merrill Lynch for their records and see what's going on.
10:23
Speaker 1: And this seems so primitive. But back in 2001 and
10:27
Speaker 1: 2002 when they're starting to do this, people were just
10:31
Speaker 1: starting to use email as their main form of communication.
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Speaker 1: There's no text really.
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Speaker 2: It's very hard for the younger generation to actually imagine this.
10:37
Speaker 2: I mean, hey, kids, if you're listening, try to imagine
10:40
Speaker 2: a world where there was not just no Instagram and TikTok,
10:43
Speaker 2: there was almost no email.
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Speaker 1: And so what he says, give me all your emails
10:47
Speaker 1: that are related to this. And it's a fishing expedition
10:50
Speaker 1: to a certain extent, but there are these existing settlements.
10:53
Speaker 1: They know there's something. And because people hadn't thought through
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Speaker 1: emails before, They were writing all kinds of stuff. And
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Speaker 1: so basically what's happening is the way the Wall Street
11:05
Speaker 1: money machine works is company, let's say Blue Nile, which
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Speaker 1: said it was going to sell diamonds, comes to a
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Speaker 1: bank and says, we want to go public. The bank
11:15
Speaker 1: helps them do all the paperwork, gets paid a lot
11:17
Speaker 1: of money for this. The bank's analysts who are writing
11:21
Speaker 1: stock reports about companies will write, Blue Nile is the
11:25
Speaker 1: greatest thing ever. You should buy it because it's selling
11:28
Speaker 1: for $ 10 now and it'll be worth $ 300 next week.
11:31
Speaker 1: And they would go on TV. This is the start
11:33
Speaker 1: of when CNBC and 24-hour cable is growing. And lots
11:39
Speaker 1: of either bored people or gullible people, including my poor grandmother,
11:44
Speaker 1: are would sit and watch these analysts tout the latest
11:47
Speaker 1: stock and then go buy it. And so my grandmother
11:50
Speaker 1: got this crush, frankly, on Henry Blodgett, who was the
11:54
Speaker 1: hottest analyst of the time. He was this good-looking, blue-eyed, blonde-haired,
11:59
Speaker 1: Ivy League-educated guy, spoke very clearly, and he made himself
12:02
Speaker 1: famous by saying at the time Amazon was going to
12:05
Speaker 1: go from $ 100 to $ 400 per share. He was actually
12:08
Speaker 1: right about that. But he also said that about every
12:11
Speaker 1: other company.
12:12
Speaker 2: And so he had this whole kind of groupie fandom
12:14
Speaker 2: out there who were retail investors who'd never really been
12:17
Speaker 2: exposed directly to this kind of stuff in their own
12:20
Speaker 2: sitting rooms, suddenly going, wow, we love this stuff, and
12:25
Speaker 2: suddenly pushing up the share prices higher and higher.
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Speaker 1: Exactly. And they were just rushing and buying everything. And
12:31
Speaker 1: what's crucial now about the fact that it's the email
12:33
Speaker 1: era is people While Henry and his friends are doing this,
12:38
Speaker 1: and his competitors, it's not just him, people at every
12:40
Speaker 1: bank were doing it, they were also writing emails privately
12:44
Speaker 1: about the companies, you know, and talking about them. And
12:47
Speaker 1: there are a bunch of very salty emails that Spitzer
12:50
Speaker 1: gets his hands on, including ones where somebody asks, you know,
12:54
Speaker 1: what's the point of this company other than investment banking fees?
12:58
Speaker 1: And the answer is nothing. And Blodgett would refer to
13:03
Speaker 1: a company as POS, which means piece of excrement, in
13:08
Speaker 1: his emails and then go on TV and say, you
13:10
Speaker 1: should buy it.
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Speaker 2: So you could actually see the hypocrisy. There's a lovely
13:14
Speaker 2: line in your book about the fact that people, the
13:17
Speaker 2: investigators originally thought that POS stood for something completely different,
13:20
Speaker 2: didn't they?
13:21
Speaker 1: They thought it meant positive because he had been, he
13:23
Speaker 1: was touting POS, POS, POS. And it took them a
13:29
Speaker 1: while to figure out that that's what was going on.
13:31
Speaker 1: I think they actually had to get somebody internal to
13:33
Speaker 1: come tell them that.
13:34
Speaker 2: So if you ever felt confused by all the jargon
13:36
Speaker 2: that your own interns, trainees, kids are using, don't worry,
13:40
Speaker 2: you're not alone.
13:41
Speaker 1: I mean, yeah, no, the investigators had no idea what.
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Speaker 2: POS stood for. So did you ever get to know
13:46
Speaker 2: Henry Blodgett, ever meet him?
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Speaker 1: Actually, Henry and I were in French class together in
13:50
Speaker 1: high school.
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Speaker 2: Are you serious?
13:52
Speaker 1: Yes. And so we ran across each other again in
13:55
Speaker 1: the course of this case.
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Speaker 2: So I have to ask you a question. How was
13:58
Speaker 2: his French?
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Speaker 1: I think not very good because he's a year older
14:01
Speaker 1: than I am and he was in my class.
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Speaker 2: So basically, Spitzer starts amassing this body of evidence which
14:07
Speaker 2: shows the extreme clash between what people are saying in
14:12
Speaker 2: public and in private, or if you like to be
14:14
Speaker 2: blunt about it, the extreme hypocrisy. And what did he
14:17
Speaker 2: do then?
14:18
Speaker 1: He opens negotiations with Merrill Lynch and says, I can
14:22
Speaker 1: see that you have said one thing in public and
14:27
Speaker 1: something else in private. I think that's securities fraud. And
14:31
Speaker 1: that's actually quite powerful, particularly in the state of New York,
14:34
Speaker 1: which every state has a law against securities fraud, as
14:37
Speaker 1: does the national government. New York's law happens to be
14:41
Speaker 1: written in a way where It's very strong. You don't
14:45
Speaker 1: have to show you were intentionally committing fraud. You just
14:47
Speaker 1: were committing fraud. And so Spitzer has this really powerful weapon,
14:52
Speaker 1: which said, if I can just show this gap, I
14:55
Speaker 1: can bring a case against you. And under this law,
14:58
Speaker 1: which is from the 1920s and had not really been used,
15:01
Speaker 1: and it has never truly been tested because it's such
15:04
Speaker 1: a scary law that everybody always settles when somebody brings
15:06
Speaker 1: a martin. It's called the Martin Act. And he goes
15:09
Speaker 1: to Merrill and says, I have the Martin Act. I
15:11
Speaker 1: have these emails. Give me a bunch of money and settle.
15:14
Speaker 2: So what actually happens? Because he called the lawyers in,
15:17
Speaker 2: didn't he, in a very old-fashioned way and tried to
15:21
Speaker 2: flip a whole sort of dynamic on them in the meeting.
15:24
Speaker 1: Exactly. Normally, Wall Street has the best lawyers in New York.
15:29
Speaker 1: All the big firms work for them. They have the
15:32
Speaker 1: high-powered lawyers there. But Spitzer calls them in, the lawyers
15:36
Speaker 1: for Merrill Lynch, and says, you know, sits them down.
15:38
Speaker 1: He has this office where he likes, it becomes legendary
15:41
Speaker 1: in these cases. He sits people down in his, you know,
15:45
Speaker 1: conference room. And there's this couch he puts the people
15:48
Speaker 1: he's going to be demanding things from on. And the
15:50
Speaker 1: couch has really soft cushions. And so you sink into it.
15:55
Speaker 1: I hate sitting in that. I used to talk to
15:57
Speaker 1: him a lot. And I hated that couch. You know,
15:59
Speaker 1: you really feel like your knees are going to your ears.
16:02
Speaker 1: And so they're already like they're uncomfortable. And then this,
16:05
Speaker 1: you know, Spitzer waltzes in and you have to remember
16:07
Speaker 1: he's he's big. He's got this big jutting chin and
16:10
Speaker 1: he leaves with his chin and he is aggressive and
16:13
Speaker 1: his ears kind of stick out. And he's he look
16:15
Speaker 1: he's he was a pugnacious guy and he looks pugnacious.
16:18
Speaker 1: And he goes in like says, you will settle or,
16:21
Speaker 1: you know, your CEO is going to end up going
16:24
Speaker 1: to jail.
16:25
Speaker 2: So he's standing up while they're sitting down.
16:28
Speaker 1: I think he may have been sitting, but they're in
16:29
Speaker 1: this stupid couch. So they're like, he's definitely towering over
16:32
Speaker 1: them and leaning over them.
16:33
Speaker 2: And of course, that's very opposite of what they teach
16:35
Speaker 2: you to do on Wall Street, which is if you're
16:36
Speaker 2: on a trading desk, you're actually taught to stand up
16:39
Speaker 2: so that you actually, you know, sound more confident. And
16:42
Speaker 2: all those movies about Wall Street always have people standing
16:44
Speaker 2: up and shouting at each other. So suddenly these lawyers
16:47
Speaker 2: are sitting down like school kids on a couch, you know,
16:50
Speaker 2: being lectured by essentially Spitzer.
16:53
Speaker 1: And from their point of view, This is insane. State regulators,
16:56
Speaker 1: even if they have the Martin Act, they're not supposed
16:59
Speaker 1: to be regulating securities. The SEC and Washington do that.
17:02
Speaker 1: Who is this guy, from their point of view, asking
17:05
Speaker 1: this stuff? And so they resist, and they also assume
17:10
Speaker 1: this is going to follow the usual American way of
17:13
Speaker 1: dealing with cases involving Wall Street, where basically when the
17:17
Speaker 1: SEC does it, they say, here's the case against you.
17:20
Speaker 1: you get some time to tell us why we're wrong
17:23
Speaker 1: and we'll negotiate and it'll take a couple of months
17:25
Speaker 1: and it'll all be secret. And Spitzer is like, I
17:28
Speaker 1: want an answer now. And they're like, no, give us
17:30
Speaker 1: some time. And they think they're going to have time.
17:33
Speaker 1: And they're going back to their client, which is Merrill
17:37
Speaker 1: Lynch and the CEO, to sort of develop their negotiating position.
17:42
Speaker 1: They think they have time. And Spitzer's saying to DiNalo,
17:44
Speaker 1: go to the courthouse and file. He's not interested in waiting.
17:49
Speaker 1: You know, they were caught completely cold.
17:52
Speaker 2: It sounds a bit like in a funny kind of
17:53
Speaker 2: way echoes of what, say, President Trump has done in
17:55
Speaker 2: terms of changing the tactics and communication style and blowing
18:00
Speaker 2: up the long established norms and traditions and just trying
18:03
Speaker 2: to use communication to get the world on his side.
18:06
Speaker 2: Because the next thing that Spitzer does is go to
18:09
Speaker 2: the public, isn't he? He makes all of this transparent,
18:12
Speaker 2: much to the horror of the way that Wall Street
18:14
Speaker 2: had traditionally operated.
18:16
Speaker 1: Exactly. I mean, they file a case and immediately hold
18:20
Speaker 1: a press conference. And, you know, Spitzer was really good
18:23
Speaker 1: at this. Like he had blowups of the most embarrassing emails,
18:27
Speaker 1: like the one where the analyst is like writing, we
18:30
Speaker 1: are losing people money and I don't like it. You know,
18:33
Speaker 1: I am not a management whore. And so he's got
18:37
Speaker 1: those on big blow-ups and it makes for great, you know,
18:40
Speaker 1: great videos. All the TV stations come. And remember, this
18:43
Speaker 1: is New York, so you have the New York Post,
18:44
Speaker 1: which can go hog wild with fun headlines. And so
18:49
Speaker 1: he's immediately washing Wall Street's dirty linen in public in
18:54
Speaker 1: a way that they completely did not expect.
18:56
Speaker 2: And a way, frankly, that no one's done for many years.
18:59
Speaker 2: I mean, possibly during the Mike Milken scandals this happened,
19:02
Speaker 2: possibly during the 1920s, but The fact he's doing this
19:05
Speaker 2: with a combination of a new form of electronic communication
19:09
Speaker 2: and immediacy into people's living rooms is really powerful.
19:12
Speaker 1: It's absolutely powerful. There's also a weird misstep he's done,
19:16
Speaker 1: which is he didn't realize that when he filed a
19:20
Speaker 1: fraud case against Merrill Lynch, that triggers a relatively obscure
19:23
Speaker 1: federal statute that briefly meant that Merrill could no longer
19:27
Speaker 1: be in business because you can't have a fraud. It's complicated.
19:31
Speaker 1: You can't manage money if you have an open fraud case.
19:33
Speaker 1: And so Merrill has to call the SEC, who is
19:36
Speaker 1: their main regulator. And the SEC calls Spitzer and says,
19:39
Speaker 1: do you realize that hundreds of millions of people who
19:43
Speaker 1: have been using Merrill Lynch as their money manager can't
19:45
Speaker 1: use them unless you stop this? So he had no
19:48
Speaker 1: idea this was going to happen. This tells you how
19:50
Speaker 1: new he is to this game. I mean, he's caused
19:52
Speaker 1: an absolute catastrophe. And so he then withdraws his case,
19:57
Speaker 1: having already gone public with it, and says, you know,
19:58
Speaker 1: we're going to have time to negotiate. Because if there
20:00
Speaker 1: isn't an active case, then Merrill Lynch can keep managing money.
20:03
Speaker 2: So how, obviously, how did Merrill Lynch respond and the
20:06
Speaker 2: other Wall Street banks? And how does the public respond,
20:09
Speaker 2: more crucially?
20:10
Speaker 1: Merrill, I mean, basically within a couple of weeks has
20:13
Speaker 1: completely caved. They reach a settlement where they pay a
20:16
Speaker 1: big fine. They agree to put new Chinese walls in
20:20
Speaker 1: where the analysts who are writing the stock recommendations that
20:24
Speaker 1: are made public are in a separate part of the
20:26
Speaker 1: business than from the investment bankers who are bringing the
20:29
Speaker 1: companies public. So that inherent conflict of interest where somebody
20:33
Speaker 1: who's supposed to be giving investment advice is actually getting
20:37
Speaker 1: paid to tout a company. So the They put in
20:39
Speaker 1: this Chinese wall and they also start setting up a
20:41
Speaker 1: system where there's going to be independent analysts. The rest
20:44
Speaker 1: of Wall Street is like, how could Merrill settle? This
20:46
Speaker 1: is insane.
20:47
Speaker 2: And presumably they're all scared because it looks like Spitzer's
20:50
Speaker 2: going to come after them as well because it wasn't
20:52
Speaker 2: just Merrill doing this, was it?
20:53
Speaker 1: No, it absolutely wasn't just Merrill. And actually at the
20:55
Speaker 1: press conference where Spitzer announces the Merrill settlement, he says,
20:58
Speaker 1: I'm coming for the rest of you. And guess what?
21:00
Speaker 1: I've enlisted all the other state attorney generals from around
21:03
Speaker 1: the country. So California and Massachusetts and Connecticut are also
21:06
Speaker 1: starting to do this stuff. Meanwhile, the public is largely
21:10
Speaker 1: incredibly supportive of Spitzer because, again, if you think back
21:14
Speaker 1: on the time he's doing this, we have just had
21:16
Speaker 1: the dot-com crash where people have been watching their shares
21:20
Speaker 1: and their holdings go up and up and up and up.
21:23
Speaker 1: And they had just absolutely collapsed. I mean, the NASDAQ
21:27
Speaker 1: was down something like 40 percent from its high. And
21:29
Speaker 1: so there are a lot of people nursing a lot
21:32
Speaker 1: of losses. And this is the era when Americans have
21:35
Speaker 1: first started to have foreclosures. what are known as 401k plans.
21:39
Speaker 1: And so they have their retirement money in the stock
21:42
Speaker 1: market and they can see what happens to it day
21:44
Speaker 1: to day. So many people who had previously really not
21:48
Speaker 1: followed the ups and downs of the stock market now
21:51
Speaker 1: can see it in their own retirement pots. And so
21:53
Speaker 1: they are furious. I mean, they stopped Spitzer on the
21:55
Speaker 1: street to slap him on the back and say, you go.
21:58
Speaker 1: He was incredibly popular on the street. I mean, you
22:01
Speaker 1: could not go around New York with him because, again,
22:03
Speaker 1: I was with him without getting stopped at this period.
22:05
Speaker 1: He's so popular. And yet the folks on Wall Street
22:08
Speaker 1: on the trading floors are like, I think he is absolutely,
22:11
Speaker 1: I mean, it closed in over his head. He had
22:13
Speaker 1: no idea what he was doing. This isn't his job.
22:17
Speaker 1: The federal government is really the main regulator of stocks.
22:21
Speaker 1: And so there's the disconnect between how hated he is
22:25
Speaker 1: on Wall Street itself and the general public. What's really interesting,
22:28
Speaker 1: you could see it walking down the street because his
22:31
Speaker 1: office was right in the middle of Wall Street. So
22:35
Speaker 1: the financial district is all around him. And if you're
22:37
Speaker 1: walking down the street, ordinary people and tourists are slapping
22:40
Speaker 1: him on the back. And like every fifth person that
22:42
Speaker 1: was somebody who actually works on Wall Street, usually the
22:44
Speaker 1: guy in the suit, and they're like sneering at him.
22:46
Speaker 2: I'm sure they're ready to spit on him or whatever,
22:48
Speaker 2: or give him the finger, middle finger, that kind of
22:50
Speaker 2: time-honored New York way of dealing with things we don't like.
22:53
Speaker 2: But in terms of sort of what actually happens as
22:56
Speaker 2: this dramatic settlement with Merrill Lynch then, you know, basically
23:01
Speaker 2: takes hold, he then goes off the other bank as well,
23:04
Speaker 2: doesn't he? He ends up with a kind of basically
23:06
Speaker 2: attack or settlement with all the banks or most of
23:08
Speaker 2: the big banks in quite dramatic fashion.
23:11
Speaker 1: Exactly. I mean, he marshals the other attorneys general and
23:14
Speaker 1: the SEC now joins in because they realize if they
23:17
Speaker 1: don't get on this train, they're going to get left behind.
23:20
Speaker 1: And they put together what is known at the time
23:22
Speaker 1: as the global settlement.
23:23
Speaker 2: And it's... I love the fact that Wall Street imagines
23:26
Speaker 2: it is global.
23:27
Speaker 1: It is the world.
23:28
Speaker 2: But anyway, leave that aside.
23:29
Speaker 1: Well, to be fair, Credit Suisse and UBS and Barclays
23:31
Speaker 1: are all part of it. Right. So $ 1. 4 billion settlement.
23:35
Speaker 1: Which in those days was quite a lot of money.
23:36
Speaker 1: I mean, it's not now. It was the biggest ever.
23:39
Speaker 1: It was the biggest ever at the time. And so
23:41
Speaker 1: they end up in 2003 finally hashing this whole thing out.
23:44
Speaker 1: And so all of the banks agree to put in
23:46
Speaker 1: these Chinese walls and pay a bunch of money and
23:49
Speaker 1: give money back to their investors.
23:50
Speaker 4: Right.
23:51
Speaker 1: And it was supposed to change Wall Street for good.
23:54
Speaker 1: And in many ways, it did make it a bit cleaner.
23:58
Speaker 1: You know, the analysts are now separated from the bankers.
24:02
Speaker 1: There are disclosures, like when you get an analyst report
24:04
Speaker 1: that says this is the greatest company ever, it will
24:06
Speaker 1: say at the bottom, you know, Goldman Sachs seeks to
24:09
Speaker 1: do business with this company or Goldman Sachs actually does
24:11
Speaker 1: business with this company. So it's a little bit clearer.
24:15
Speaker 1: And for a while, the settlement also called for, you know,
24:18
Speaker 1: they were literally babysitters who had to listen to the
24:21
Speaker 1: analyst calls when they were talking to the media or
24:23
Speaker 1: the public to make sure they didn't say something inappropriate.
24:26
Speaker 5: Wow.
24:27
Speaker 2: So at this point, of course, everyone now knows what
24:29
Speaker 2: POS stands for. But it could also stand for presidential
24:34
Speaker 2: operating style, couldn't it? I mean, because by this point,
24:37
Speaker 2: he begins to be talked about as a potential... future president.
24:42
Speaker 1: He does. Particularly, actually, he brings a second set of
24:44
Speaker 1: cases against the mutual fund companies, which are the people
24:48
Speaker 1: who really do manage retirement money. And he finds this
24:52
Speaker 1: very complicated scam that's going on, where basically they're shaving
24:55
Speaker 1: pennies off the dollar. And he ends up getting $ 3
24:58
Speaker 1: billion of settlements that actually get sent back to people.
25:01
Speaker 1: And the two cases together really make him a hero
25:05
Speaker 1: at a time when You have to remember, again, there
25:08
Speaker 1: aren't a lot of Democrats who are doing very well.
25:09
Speaker 1: This is, you know, pre-Obama. We're miles before Barack Obama
25:14
Speaker 1: shows up. So the Democrats are in disarray. You know,
25:18
Speaker 1: Bush wins this overwhelming re-election victory in 2004. And so
25:22
Speaker 1: people are looking around for who could be the Democrat.
25:25
Speaker 2: A bit like now. I mean, you know, everyone's desperately
25:27
Speaker 2: trying to work out who could be the next presidential
25:29
Speaker 2: contender for the Democrats.
25:31
Speaker 1: And absolutely, Spitzer wanted to be the first Jewish president.
25:34
Speaker 1: He had complete ambitions. Of course, he's incredibly wealthy because
25:37
Speaker 1: of his dad, so that helps a little bit in
25:40
Speaker 1: giving– and he's got this great purchase in New York,
25:42
Speaker 1: which is the biggest media market. And he's taking on
25:46
Speaker 1: the bad guys. And he brings a series of cases.
25:50
Speaker 1: Those two are the big famous ones. And then he
25:52
Speaker 1: brings some other ones where he goes after CEOs of AIG,
25:55
Speaker 1: the big insurance company, and Marsh, the big insurance broker.
25:58
Speaker 1: And he's definitely feeling in his oats and he's very powerful.
26:02
Speaker 1: And he runs for governor because why not?
26:04
Speaker 2: So going from being sheriff of Wall Street to essentially
26:06
Speaker 2: trying to become governor of New York. I mean, it
26:09
Speaker 2: sounds in many ways like a very logical progression because
26:12
Speaker 2: he's seen as a man of the people, even though
26:14
Speaker 2: ironically he's been born with a silver spoon in his mouth.
26:16
Speaker 2: So what happens when he runs for governor?
26:19
Speaker 1: He wins overwhelmingly. He's incredibly popular. It's a walkover of
26:22
Speaker 1: an election. Because he is a hero. And he's just
26:26
Speaker 1: like Teddy Roosevelt. He's done the next step. He's gone
26:28
Speaker 1: from enforcer to New York governor. And he's absolutely dreaming
26:32
Speaker 1: of the presidency at this point. The election was 2006.
26:35
Speaker 1: So early 2007, he takes office as governor. And he's
26:39
Speaker 1: thinking big.
26:40
Speaker 2: So there he is. He's in the governor's office. He's
26:43
Speaker 2: in the hot seat. He's adored by everyone. What could
26:46
Speaker 2: possibly go wrong? Listen on.
26:55
Speaker 4: Alternatives play a key role in investor portfolios. Traditional stocks
26:59
Speaker 4: and bonds are becoming increasingly correlated in the most recent downturn.
27:04
Speaker 4: Equities and fixed income were both significantly negative. Alternatives can
27:09
Speaker 4: add diversification to your portfolios and lower correlations between the
27:13
Speaker 4: asset classes. Both of those can help your portfolio behave
27:16
Speaker 4: in a more resilient manner during the economic ups and downs.
27:32
Speaker 2: So we're back and we left the story just as
27:35
Speaker 2: Spitzer is riding high. He has essentially won extreme popular
27:42
Speaker 2: support by taking on Wall Street. He has just won
27:45
Speaker 2: the New York governor's race by a landslide. He's now
27:50
Speaker 2: sitting in the office and then two things start to
27:54
Speaker 2: go wrong. Tell us about the first one about his
27:56
Speaker 2: governing style.
27:57
Speaker 1: He turns out not to be a very good governor
27:59
Speaker 1: because this is a guy who's gotten where he's gotten
28:03
Speaker 1: by using the power of the courts and subpoena power
28:06
Speaker 1: to force people to do what he wants. That does
28:09
Speaker 1: not work when you are the governor negotiating with the
28:12
Speaker 1: state Senate. And so he threatens people and nothing happens.
28:15
Speaker 1: And he's really struggling to get stuff done, perhaps because
28:20
Speaker 1: things are not going well. Who knows? Somewhere around here,
28:24
Speaker 1: he then does the other terrible thing, which is he
28:27
Speaker 1: secretly starts using a high price escort service.
28:31
Speaker 2: What is it about the number of powerful, successful men
28:35
Speaker 2: who end up being tripped up by this kind of stuff?
28:37
Speaker 2: I mean, that's another material for another episode. But how
28:40
Speaker 2: does that come out?
28:41
Speaker 1: Well, what happens is he does something unbelievably stupid, which
28:45
Speaker 1: is he starts taking out big bundles of cash from
28:50
Speaker 1: his bank account, like a relatively small Long Island bank.
28:54
Speaker 1: And in the U.S., there's a law that if you
28:57
Speaker 1: take out $ 10, 000 worth of cash, the bank has to
29:00
Speaker 1: file a report because that's weird. Anything above that needs
29:04
Speaker 1: to be tracked. He starts taking like $ 9, 900 out, which he,
29:08
Speaker 1: as a law enforcement person, should know also triggers a
29:12
Speaker 1: report because it's clearly what's called structuring. You're avoiding the $ 10, 000 limit.
29:17
Speaker 1: And it's a relatively small bank. And he's the governor
29:19
Speaker 1: of the state. And so the bank, it was probably
29:23
Speaker 1: the most exciting thing that happened there in 15 years.
29:26
Speaker 1: They file a report saying, like, the governor is doing
29:29
Speaker 1: weird things. And they don't just file the report. They
29:32
Speaker 1: follow up with a phone call, like, saying, we've just
29:34
Speaker 1: filed a report.
29:35
Speaker 2: And, you know, was he doing that? I mean, as
29:39
Speaker 2: you said, it was incredible.
29:40
Speaker 1: Stupid.
29:40
Speaker 2: Was he doing that because of a sense of entitlement that,
29:43
Speaker 2: you know, no one could touch him? Was it just
29:45
Speaker 2: because he was so blind? Was it because he was
29:48
Speaker 2: so arrogant? I mean, what made him do that? Because
29:51
Speaker 2: you would have thought it's such a rookie error if
29:53
Speaker 2: you are the former regulator in charge of these banks.
29:57
Speaker 1: I honestly have never gotten a good answer. I've asked...
30:00
Speaker 1: There is no good answer. There were conspiracy theorists who
30:03
Speaker 1: think that somehow he was set up. But I mean,
30:05
Speaker 1: the reality is he did this.
30:06
Speaker 2: I mean, there's been a lot of people who really
30:08
Speaker 2: wanted him to basically be taken down.
30:11
Speaker 1: Exactly.
30:12
Speaker 2: And so lots of people have thought, well, surely it
30:14
Speaker 2: must be a banker who leaked it.
30:15
Speaker 1: Exactly. I mean, but best one can tell is this
30:19
Speaker 1: gets reported to the FBI, who then promptly set up
30:21
Speaker 1: a sting. They actually initially think, oh, maybe he's taking bribes.
30:25
Speaker 1: Maybe this is bribes. And so they set up a
30:27
Speaker 1: sting to figure out what's going on, and they discover
30:29
Speaker 1: he's going to the Emperor's Club.
30:31
Speaker 2: The Emperor's Club? What's that? Is that like all these
30:33
Speaker 2: New York clubs they have, like the Metropolitan Club or
30:36
Speaker 2: the Century Club?
30:37
Speaker 1: No, sadly for him, it was a high-class escort service. Oh, dear.
30:42
Speaker 1: And he's meeting prostitutes, and there's some fairly graphic descriptions,
30:47
Speaker 1: and they catch him on tape, and he's wearing his
30:49
Speaker 1: little black socks, and he never takes his socks off
30:52
Speaker 1: when he has his encounters. He's moving too fast. And
30:54
Speaker 1: it should be reminded, this guy has an extraordinarily beautiful,
30:57
Speaker 1: smart wife. He does.
30:59
Speaker 2: I mean, Zilda is a wonderful wife. I know. In fact,
31:02
Speaker 2: I rented an apartment from her. Not from her, but
31:05
Speaker 2: through her, through a friend of hers. And she's wonderful.
31:08
Speaker 2: And anyone from the outside would say, why on earth,
31:11
Speaker 2: when you've got this amazing wife, would you, you know,
31:14
Speaker 2: do this kind of thing?
31:15
Speaker 1: And, you know, nobody I know, and I spent a
31:18
Speaker 1: lot of time with a lot of people around him,
31:20
Speaker 1: has ever come up with a complete answer. But it
31:23
Speaker 1: may partly be that he got this incredible high of
31:28
Speaker 1: taking on Wall Street successfully and things are not going well.
31:30
Speaker 1: And maybe the risk-taking, who knows?
31:33
Speaker 2: Maybe it's just human frailty. I mean, unfortunately, around the
31:36
Speaker 2: Epstein scandal, we saw all kinds of examples of powerful,
31:40
Speaker 2: successful people who should have known better and had so
31:43
Speaker 2: much to lose if this kind of thing became public.
31:46
Speaker 2: And yet they still got pulled into all kinds of
31:49
Speaker 2: ancient vices. It's extraordinary. you know, how frail human psychology
31:55
Speaker 2: and morals can be under pressure.
31:57
Speaker 1: It is true. But so what happens from then on
32:00
Speaker 1: is that, you know, they catch him on tape and
32:03
Speaker 1: then basically the New York Times stumbles on the fact
32:06
Speaker 1: that there's this case involving this prostitution ring and there's
32:09
Speaker 1: a reference in the documentation to Client 9 and he's
32:12
Speaker 1: Client 9. And they make the connection that this case
32:15
Speaker 1: that's going through is, you know, is about him. He
32:18
Speaker 1: himself is not charged, but it becomes public that he's
32:21
Speaker 1: client nine in this prostitution ring. And he ends up
32:23
Speaker 1: giving this absolutely awful press conference with poor Silda, his wife,
32:27
Speaker 1: standing next to him. I remember his press conference really well.
32:31
Speaker 1: I was in London by then and I was supposed
32:33
Speaker 1: to be cooking dinner and I literally burnt the kid's
32:36
Speaker 1: dinner because I was so mesmerized. Spitzer is standing there.
32:39
Speaker 1: He's absolutely pale and pasty. And next to him, Silda
32:43
Speaker 1: was standing there and she's doing that stand by your
32:46
Speaker 1: man thing and looking absolutely sick to her stomach. And
32:50
Speaker 1: it was absolutely awful. And he ends up resigning.
32:54
Speaker 5: But I've disappointed and failed to live up to the
32:57
Speaker 5: standard I expected of myself. I must now dedicate some
33:01
Speaker 5: time to regain the trust of my family. I will
33:05
Speaker 5: not be taking questions. Thank you very much. And I think.
33:09
Speaker 1: It's interesting to think whether these days he would have
33:11
Speaker 1: resigned because standards have changed so much.
33:13
Speaker 2: Well, because, you know, in the current era with, you know,
33:16
Speaker 2: under President Trump, I mean, you know, this kind of
33:19
Speaker 2: scandal has happened and bubbled and people are notably not resigning.
33:22
Speaker 2: I mean, it's very, very striking all over the place.
33:24
Speaker 1: Although it is worth remembering that very few of those
33:27
Speaker 1: people had presented themselves as lily white law enforcement people.
33:30
Speaker 1: People who, I mean, Spitzer's image was, I am the
33:33
Speaker 1: good guy. I am pure. You know, I stand for,
33:37
Speaker 1: you know, honesty and transparency and all that. So it
33:41
Speaker 1: was a lot worse for him.
33:42
Speaker 2: He later sort of presented this as a case of
33:45
Speaker 2: him being a bit like Icarus, who'd just flown too
33:47
Speaker 2: close to the sun and then got burnt. Do you
33:49
Speaker 2: think that's a fair way of putting it?
33:51
Speaker 1: I think that's feeding into the paranoia that somebody set
33:53
Speaker 1: him up and did it. I mean, he did soar
33:56
Speaker 1: very high, but there is no reason why somebody who
34:00
Speaker 1: is governor needs to be seeing prostitutes. I think the
34:03
Speaker 1: part of him being a lousy governor is closer to
34:05
Speaker 1: the Icarus thing. I think in the end, I'm not
34:10
Speaker 1: sure even if he hadn't had a sex scandal, whether
34:13
Speaker 1: he ever would have made it to president because he
34:16
Speaker 1: turned out not to be very good at negotiating with
34:18
Speaker 1: other politicians. And that's more Icarus. The sex scandal sidecar,
34:24
Speaker 1: that's just done.
34:25
Speaker 2: Except it obviously made very spicy content for a lot
34:28
Speaker 2: of the newspapers and made the issue of financial regulation,
34:31
Speaker 2: which can often seem very boring, suddenly seem like front
34:34
Speaker 2: page news all the time, which, you know, who would
34:37
Speaker 2: have guessed? And the tragedy. But so, you know, so
34:41
Speaker 2: he's risen high. He then collapses. Tell us first what
34:45
Speaker 2: happened to him afterwards, because, you know, he went on
34:49
Speaker 2: something of an apology tour, didn't he, to try and
34:52
Speaker 2: resuscitate his career later on?
34:54
Speaker 1: A bit. I mean, basically he resigns and then over
34:57
Speaker 1: the next couple of years he tries being a TV host.
35:00
Speaker 1: He tries to run for a city office, New York
35:04
Speaker 1: City Comptroller, which is a financial office, which if he
35:08
Speaker 1: had been able to pull that off, he might have
35:10
Speaker 1: been able to get back into sort of some way
35:12
Speaker 1: of being a good guy in finance. He loses that.
35:16
Speaker 1: He has another mini sex scandal where he's caught sucking
35:18
Speaker 1: the toes of somebody in a hot tub. And it's
35:21
Speaker 1: not a full-on sex scandal, but it just reminds everyone
35:23
Speaker 1: just how sordid the whole thing was.
35:25
Speaker 2: I mean, it's really tragic because you say Sildur's wife,
35:27
Speaker 2: you know, is wonderful. There was a period when they
35:31
Speaker 2: were very openly and visibly trying to present themselves as,
35:35
Speaker 2: you know, soldiering on together as a family. I remember
35:38
Speaker 2: seeing them over dinner together and, you know, they were
35:41
Speaker 2: talking a lot about, you know, trying to, you know,
35:44
Speaker 2: enjoy life together upstate and that kind of stuff. But
35:47
Speaker 2: in the end, unfortunately, it couldn't work, could it?
35:49
Speaker 4: No.
35:49
Speaker 1: And you have to remember, during this period, he has
35:51
Speaker 1: three daughters, tween to, I think, late teenage. And I
35:56
Speaker 1: think some of that just must have just weighed on him.
35:59
Speaker 1: I mean, our hearts shouldn't bleed too much. He still
36:03
Speaker 1: is from this fabulously wealthy family. What he then does
36:06
Speaker 1: is he takes over his father's real estate business, which
36:09
Speaker 1: he still runs. And it's profitable. They live well. He
36:13
Speaker 1: invested in a company that rates analysts and stock analysts.
36:19
Speaker 1: So he's sort of still got a little bit of
36:20
Speaker 1: a hand in that. I mean, he's got a comfortable
36:23
Speaker 1: life and he periodically pops up. But I mean, I
36:26
Speaker 1: don't think he will ever have the same sort of gravitas.
36:29
Speaker 2: Now, one thing that's obviously clear all these years later
36:32
Speaker 2: is the lesson about its rise and fall. in terms
36:35
Speaker 2: of the riskiness of using high-class escort agencies, that lesson
36:41
Speaker 2: clearly hasn't been learned by large numbers of people on
36:44
Speaker 2: Wall Street or elsewhere because we've seen things like the
36:47
Speaker 2: Epstein scandals and other things like that. But what about
36:50
Speaker 2: the bigger lessons about finance and where things are going
36:54
Speaker 2: or not going? Do you think that the financial world
36:57
Speaker 2: has learned lessons from the Spitzer scandal?
37:01
Speaker 1: The most important thing is he really pointed out that
37:03
Speaker 1: when there are conflicts of interest on Wall Street between
37:06
Speaker 1: the banks and end users of financial products, the banks
37:11
Speaker 1: will always go with their own self-interest. That happens in
37:13
Speaker 1: the financial crisis in 2008. And every time new products happen,
37:17
Speaker 1: you know, banks have gone from saying that crypto is
37:19
Speaker 1: garbage to crypto is wonderful because they can sell you crypto.
37:22
Speaker 1: And maybe they've really had a genuine change of heart
37:25
Speaker 1: and crypto is wonderful. But who knows? I mean, when
37:30
Speaker 1: in doubt, In the end, financial institutions put their own
37:33
Speaker 1: profits ahead of ordinary people. And that's why they are
37:37
Speaker 1: a regulated business. We have rules in this country for
37:43
Speaker 1: what you can do with a financial product and how
37:47
Speaker 1: you can sell it and the care you have to
37:49
Speaker 1: take in selling it to ordinary people. And that's really important.
37:53
Speaker 1: And I think Spitzer helped highlight that. I don't think
37:56
Speaker 1: we will ever completely get away from the self-interest problem.
37:59
Speaker 1: And so what you need, you kind of need every
38:01
Speaker 1: 10 or 15 years, you need someone, maybe not as
38:04
Speaker 1: dramatically as Spitzer, who keeps reinforcing, like, there are rules.
38:08
Speaker 1: You have to follow the rules and there have to
38:10
Speaker 1: be protections for individual investors.
38:13
Speaker 2: And that point is very interesting because, of course, we're
38:15
Speaker 2: in another era right now, a bit like at the
38:17
Speaker 2: turn of the century, where you know, Republicans are back
38:20
Speaker 2: in power and they have been ripping up many of
38:23
Speaker 2: the rules that were keeping American investors safe. And in fact,
38:28
Speaker 2: what's even more striking is that under the second Trump term,
38:31
Speaker 2: we've actually seen the Consumer Financial Protection Bureau, you know,
38:34
Speaker 2: basically ripped to shreds. We've seen all kinds of other
38:37
Speaker 2: rules taken apart. Do you think we need another Spitzer today?
38:41
Speaker 1: I think there is a big hole developing where Wall
38:44
Speaker 1: Street and now hedge funds and not just the investment
38:49
Speaker 1: banks anymore, but the private credit firms and private equity
38:52
Speaker 1: firms have been given a bit of a free reign
38:55
Speaker 1: to say, do what you do. And if nobody's watching,
39:01
Speaker 1: my personal view from having lived through too many of
39:03
Speaker 1: these is that without guardrails, bad things happen. And so
39:08
Speaker 1: While I can understand the deregulatory impulse, because sometimes there
39:12
Speaker 1: are too many regulations, if you just say free-for-all, go
39:15
Speaker 1: have at it, bad things will happen. And you do
39:18
Speaker 1: want a cop on the beat. And whether they have
39:20
Speaker 1: to be as pugnacious as Spitzer or whether they could
39:24
Speaker 1: do some halfway house, I don't know. But a completely
39:27
Speaker 1: copless Wall Street seems like a terrible idea.
39:31
Speaker 2: Absolutely. I mean, in many ways, the only people who
39:33
Speaker 2: are actually trying to, you know, expose wrongdoing right now
39:37
Speaker 2: are the media. And one of the many ironies in
39:40
Speaker 2: the story is that Henry Blodgett, after he is shot
39:44
Speaker 2: into the headlines because of his POS email. He then
39:47
Speaker 2: faces his own series of, you know, attacks and censure
39:51
Speaker 2: and stuff like that, leads the industry. And then he
39:53
Speaker 2: pops up as someone who's doing all kinds of interesting ventures,
39:56
Speaker 2: including funding a media or running a media outlet and
40:00
Speaker 2: creating one. So, you know, the world has a very
40:02
Speaker 2: strange way of going full circle after all this. Nothing
40:06
Speaker 2: like being pilloried in the press to then end up
40:08
Speaker 2: creating your own media outlet after that. But I'm curious,
40:12
Speaker 2: you wrote this wonderful Lunch with the FT back in
40:16
Speaker 2: 2009 where you interviewed him. And you say at the end,
40:20
Speaker 2: now 50, his hair has a few new gray flecks
40:25
Speaker 2: and the wrinkles around the eyes are a bit deeper
40:26
Speaker 2: than they were during his glory years when you were
40:29
Speaker 2: talking to him so much, both during the extraordinary rise
40:32
Speaker 2: and then afterwards for your book. We shake hands and
40:35
Speaker 2: he walks off slowly, a man who has all the
40:38
Speaker 2: time in the world. which, of course, he never had
40:41
Speaker 2: when you knew him initially. Given that he has all
40:43
Speaker 2: the time in the world now, what do you think
40:46
Speaker 2: he would say today, both about his own rise and fall,
40:50
Speaker 2: but also about where he sees the biggest dangers for
40:53
Speaker 2: Wall Street today?
40:54
Speaker 1: I think he would say that it is very dangerous
40:58
Speaker 1: for particularly the federal regulators to simply believe in the
41:03
Speaker 1: goodwill of the industry, that that is a recipe for disaster.
41:08
Speaker 1: It's worth remembering that in the analyst scandal era, the
41:12
Speaker 1: SEC knew perfectly well that there was a conflict of interest.
41:16
Speaker 1: Harvey Pitt, who was the chairman at the time, convened
41:20
Speaker 1: a meeting several months before the Merrill Lynch case became
41:23
Speaker 1: public saying, guys, this analyst thing where they're going on
41:27
Speaker 1: TV and you guys are tying their compensation to how
41:31
Speaker 1: much investment banking money you're making. That's bad. You should
41:35
Speaker 1: fix this. You know, I'll give you like six months
41:37
Speaker 1: to fix it.
41:37
Speaker 4: Wow.
41:38
Speaker 2: And they actually said that.
41:40
Speaker 1: It was a private meeting. They knew there was a problem.
41:42
Speaker 1: They didn't know because in the era they didn't think
41:44
Speaker 1: about looking at the emails and how bad the emails were. But, no,
41:47
Speaker 1: they knew perfectly well there was a problem. And if
41:50
Speaker 1: you talk to people in the industry, they're like, oh,
41:52
Speaker 1: we would have gotten around to fixing it, you know, after,
41:55
Speaker 1: you know, mom and pop had lost all their shirts. Yeah.
41:57
Speaker 2: And after they'd collected big fat bonuses for all of that.
42:01
Speaker 2: But if Spitz was around on camera now, or just
42:04
Speaker 2: from your own point of view, where do you think
42:07
Speaker 2: the biggest risks for retail investors today are? Is it
42:09
Speaker 2: in crypto? Is it in AI stocks? Is it in
42:13
Speaker 2: these meme stocks, things like, you know, all these trading
42:16
Speaker 2: platforms that aren't controlled? Is it around AI and robo-advisors?
42:20
Speaker 2: Where do you see the biggest dangers for retail investors?
42:22
Speaker 2: And what should people be diving into if they want
42:25
Speaker 2: to make their name as a tough regulator now?
42:27
Speaker 1: Well, I think one of the things is this idea
42:30
Speaker 1: that we're going to open alternative assets, whether it's crypto,
42:34
Speaker 1: private credit, private equity, to smaller investors. And that's dangerous
42:38
Speaker 1: for two things. One is that those are complicated products
42:41
Speaker 1: and with long time horizons, and it's very hard to
42:43
Speaker 1: tell upfront whether you're getting a good deal. The other
42:45
Speaker 1: is that the companies that the firms that make and
42:48
Speaker 1: sell them are have never dealt with retail. And so
42:51
Speaker 1: they are not used to making sure that people understand
42:54
Speaker 1: what they're buying. And so I think almost certainly that's
42:58
Speaker 1: going to end in tears. And some of the companies
43:01
Speaker 1: may do it perfectly well. They may do a good job.
43:04
Speaker 1: But there's a lot of room for either a bad
43:05
Speaker 1: actor or a lazy one to missell a lot of
43:08
Speaker 1: products to a lot of people. And I think that's
43:11
Speaker 1: true for crypto as well. I think the AI stocks
43:15
Speaker 1: are more complicated. Those companies, SpaceX, and if we get
43:19
Speaker 1: Anthropic and OpenAI, those are big companies. And it's less
43:23
Speaker 1: clear to me that there will be an obvious conflict
43:25
Speaker 1: of interest in them. The other thing I think somebody
43:28
Speaker 1: wanting to make their name might want to look into
43:30
Speaker 1: is this question of whether there's circular financing going on
43:33
Speaker 1: in these big AI stocks and AI suppliers. And that
43:36
Speaker 1: reminds me of the dot-com era where there were things
43:40
Speaker 1: like the telecoms companies were incredibly dependent on the internet
43:44
Speaker 1: bubble because they were selling lots of equipment. And so
43:46
Speaker 1: you can see that that too might have a parallel.
43:49
Speaker 1: And I would say an ambitious state regulator, given that
43:52
Speaker 1: the feds are not on the beat. You know, you
43:54
Speaker 1: wonder the next New York attorney general.
43:56
Speaker 2: Well, we've got Mandani as New York mayor, Zohra Mandani. And,
44:02
Speaker 2: you know, the whole tenor of his government is that
44:04
Speaker 2: they're willing to take on big business and Wall Street
44:07
Speaker 2: when it suits them. Is there anyone floating in the
44:09
Speaker 2: wings who you think is coming forward? I mean, Lina
44:11
Speaker 2: Khan's now advising Mamdani, the former head of the FTC
44:15
Speaker 2: under Biden. She's very progressive. But is there anyone who
44:17
Speaker 2: looks like they might be about to do this?
44:19
Speaker 1: I would say the progressives running New York City right
44:21
Speaker 1: now clearly could be interested in this subject. The way
44:25
Speaker 1: the laws are set up, the mayor's office is a
44:27
Speaker 1: tough place to do this from. Attorneys general have an
44:31
Speaker 1: actual role in regulating finance. And so what I would
44:34
Speaker 1: do is look around the country. And for Blue State,
44:38
Speaker 1: attorneys general. And particularly there are two that I think
44:41
Speaker 1: have real potential as new Spitzer-esque figures, hopefully without the
44:46
Speaker 1: sex scandal. In California, you see Rob Bonda fighting back
44:52
Speaker 1: on issues of antitrust, which is another area the federal
44:54
Speaker 1: government's not fighting on. And in Oregon, what's really interesting
44:58
Speaker 1: is the state attorney general there went to his The
45:02
Speaker 1: feds are not prosecuting financial crimes as much as I
45:05
Speaker 1: think they should. Can I have extra money to do it?
45:07
Speaker 1: I promise it'll make more money than it costs. And
45:10
Speaker 1: he's well into that campaign.
45:12
Speaker 2: Fascinating. Well, I must say one of the other great
45:15
Speaker 2: lessons of this bit's a story, aside from the frailty
45:18
Speaker 2: of human psychology and emotions and the susceptibility to be
45:23
Speaker 2: dragged and distracted by, you know, succumbing to various vices.
45:29
Speaker 2: One of the main lessons is that whenever you see
45:31
Speaker 2: retail dashing into a new product and whenever you see,
45:35
Speaker 2: I should say, you know, German and Japanese regional banks
45:39
Speaker 2: or investment groups dashing into a new product, that usually
45:42
Speaker 2: signals that the peak is near. And the fact we've
45:44
Speaker 2: seen such a big retail boom in the last year
45:47
Speaker 2: in America is very striking in terms of retail investors.
45:50
Speaker 2: getting involved in all kinds of finance and all kinds
45:53
Speaker 2: of new instruments. So lots to think about, lots to
45:57
Speaker 2: watch for in terms of the question of who might
45:59
Speaker 2: actually end up being the next spitz arrest type character,
46:03
Speaker 2: hopefully without the scandal going forward. So just remains for
46:07
Speaker 2: me to say a very big thank you to you, Brooke.
46:10
Speaker 2: Your book, Spoiling for a Fight, I think is still very,
46:14
Speaker 2: very relevant. And it's been great having you on the show.
46:16
Speaker 2: Thank you.
46:17
Speaker 1: Thanks for having me. It's been a pleasure.
46:19
Speaker 2: So that's it for this episode of The Story of
46:21
Speaker 2: Money from The Financial Times. If you liked it, please
46:25
Speaker 2: do subscribe, comment, and also like the show. And if
46:29
Speaker 2: you really enjoyed it, then come and join us at
46:32
Speaker 2: the FT Weekend Festival this September at Kenwood House in London.
46:37
Speaker 2: Robin and I will be talking to the author, David McWilliams,
46:41
Speaker 2: about what Dante thought about bankers. It's pretty damning, ha ha.
46:46
Speaker 2: but it will be really interesting. Details, including a special
46:50
Speaker 2: discount promo, are in the show notes.
46:53
Speaker 1: That's it.
46:53
Speaker 2: I'm Gillian Tett, and I'll see you here next week.