Speculation about that issue ended on Nov. 2,
though there's never been any need to speculate about which
politician is most feared by Wall Street - New York State
Attorney General Eliot Spitzer gets the vote hands down. That's
because he successfully carried out that most effective of
all political attention grabbers, namely a crusade against
big guys on behalf of the little guy. All indications are
that he will be a formidable candidate for governor in New
York in 2006.
If you've been looking for an aspiring politician
with a superb ability to bring irony to life, Mr. Spitzer
is your man: He advanced his career interests while pursuing
the public's interest by stopping conflicts of interest in
Many observers believe that Spitzer has taken
the path paved by Rudy Giuliani in the 1980s, when as a U.S.
attorney he successfully prosecuted Ivan Boesky and Michael
Milken. It's obviously true that Spitzer has similar political
instincts, at least in realizing that you don't get much press
by busting the street corner small fry. It's big fish who
bring big headlines: when you issue indictments on Wall Street,
voters tend to notice.
Yet Eliot Spitzer didn't go after one or two
big names -- his crusade was against an entire financial establishment.
This has arguably made Spitzer New York's most
successful David vs. Goliath story since Fiorello la Guardia
took on Tammany Hall. From research analysts to investment
bankers, from mutual fund managers to insurance companies,
from the world's biggest brokerages to the New York Stock
Exchange, he has so far won every fight he has started.
That's a lot of crooked financial ground to
cover, and on his web site (spitzer2006.com) he will inform
you that, "For a guy who makes $151,000 a year, he's
brought in well over $2 billion. Not a bad employee."
How did he uncover this much corruption in that
many places? More easily than you might think, though the
answer comes in two parts. Part 1 is New York state's unusually
broad anti-fraud statutes, which were all Spitzer needed to
make a case against the financial conflicts of interest that
had become an accepted way of doing business. Spitzer went
after the offenders with the deepest pockets and applied the
statute as broadly as possible.
Some of these conflicts had been open secrets
for years, such as the sell-side research coming from big
brokerages. Anyone with a shred of knowledge about the brokerage
business understood that this was "research" in
name only, while its true purpose was to cheerlead for stocks
and get investment-banking clients. Spitzer's condition for
a collective "settlement" of this conflict was $1.4
Other abuses were more disguised, such as the
mutual fund "market timing" scandal, in which fund
managers worked with select clients to exploit the time lag
between current market conditions and the funds' closing prices.
Spitzer saw to it that all told, this cost the previously
unblemished mutual fund industry some $2.3 billion in penalties,
restitution, and reduced fees.
Part 2 of what made Spitzer's crusade easy was
the psychology of a three-year bear market. The historic run-up
in stocks during the 1980s and 1990s allowed more than enough
time for many conflicts of interest to become habitual, thus
unnoticed or overlooked -- until, that is, the S&P 500
lost half its value, the Nasdaq even more. With 50% of U.S.
households owning some form of stocks, the math was simple:
A few big guys prospered at the expense of millions of families.
Eliot Spitzer knew whom to side with.
What's the next major battle in Spitzer's crusade?
Probably a court date with former New York Stock Exchange
Chairman Dick Grasso, the only big fish that has so far refused
to settle on terms dictated by Spitzer. At issue is the $140
million pay package that Grasso claims he earned under a legal
employment contract. Legal arguments aside, it is no coincidence
that Grasso decided to fight back in late 2003, at the end
of a year when the stock market had rebounded handsomely.
It's easy enough to suppose that the stock market
trend in 2005 will anticipate the jury's decision about whether
Dick Grasso can keep his millions. But in Spitzer's case,
the stock market's fall has already ensured his political
Today no one doubts that he'll make a strong
run for governor. What very few people foresee is how rapidly
Eliot Spitzer could climb to an even higher rung on the political
ladder: If the stock market sees yet another year or two of
decline, the 2008 Democratic presidential nominee may indeed
hail from New York -- but that individual's name will not
be Hillary Clinton.
Robert Folsom is a financial writer and editor for Elliott Wave International, the largest independent provider of technical analysis in the world. To read more from Mr. Folsom, and to discover the value of unbiased market analysis, readMr. Folsom's Market Watch column on elliottwave.com.
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