The Evil and Wacky World of Eliot Spitzer
by Jack Rain
I have a personal list of four men who I think are the most
dangerous men in America. They are George W. Bush, Rudy
Giuliani, California Governor Grey Davis and New York State
Attorney General Eliot Spitzer. In my columns I deal regularly
with George W. Bush. Davis and Giuliani will have to wait their
turn. Today it is time to look at the evil and wacky world of
Eliot Spitzer.
My story, though, starts in the 1980s. Back then, a gentlemen
by the name of Lowe wanted to publish an investment newsletter.
He had one problem. He was a convicted felon, and back then all
investment newsletters were regulated by the SEC. The SEC
wouldn't register Lowe as an investment advisor because of his
felony conviction. Lowe wasn't trying to scam anyone through
his newsletter. He had learned his lesson, paid his dues to
society, and just wanted to go about earning an honest buck,
which the SEC was trying to stop him from doing.
So Lowe with his lawyers decided to fight the SEC in court,
based on First Amendment freedom of speech grounds. And he took
his case all the way to the Supreme Court (Lowe v. Securities
and Exchange Commission, 472 U.S. 181 (1985)). The Court ruled
in his favor, kind of. They ruled in his favor enough for him
to publish his newsletter without having to be regulated by the
SEC. But it was a murky and wacky ruling from the Court.
The Court ruled that because Lowe was publishing his newsletter
on a regular basis, that therefore he was covered by the First
Amendment clause granting freedom of speech. The justices, in
their infinite murky wisdom, never explained where in the First
Amendment it says you have to speak or write on a regular basis
to be protected by the First Amendment. But that is what they
ruled in Lowe's case. So Lowe was able to publish his
newsletter free of SEC harassment.
But the ruling had a strange effect on Wall Street. If someone
wanted to write a regular newsletter on investments, he could
do so. However, if you were more research-oriented and wanted
to write long, detailed, thorough reports on publicly traded
stocks on an irregular basis--the way research analysts
generally do--well then you were still, according to the
Supreme Court, required to follow SEC and state regulations and
register as a broker or investment advisor.
Now to publish written research work and earn a living that
way, you are going to have to sell your reports in more than
one state. Since the cost to register at the multi-state and at
the SEC level becomes prohibitive, the Supreme Court ruling,
for all practical purposes, killed the independent research
report. Thus, stock brokerage firms put out the only research
reports. Since they were already registered with the SEC, they
had no additional cost to putting them out, as opposed to the
regulatory filing hurdles an entrepreneurial, independent
research analyst would have to go through.
Except for a few independents who fly way under everybody's
radar screen, don't register with the SEC and sell their
research strictly to a limited group of institutional and hedge
fund types, the Supreme Court, through their ruling, turned the
research report business into the domain of the brokerage
industry.
Now with this as background, we can quickly turn to the 1990s
and the Federal Reserve and its fearless leader Alan Greenspan.
Greenspan pumped money like crazy through most of the '90s,
creating an epoch stock market boom which was as sure to bust
as any high flying helium balloon. Once Alan Greenspan ever so
slightly took his foot off the monetary growth accelerator, the
bust occurred, to which we can all now attest. With the bust in
the stock market, the reputation of many analysts who rode the
boom ever upward also crashed. These analysts were prime meat
for any unscrupulous regulator or politician to feast on. Many
investors suffered great losses as they always do in these
government-managed manipulations of the economy. An evil
politician would never be able to get them their money back,
but he could put on quite a show for these investors by going
after these analysts and blaming the whole thing on them,
despite the fact that it was the government through Greenspan
who really caused the boom-bust.
So at this point Eliot "I want to be like Rudy Giuliani when I
grow up" Spitzer enters the picture. Spitzer is the New York
State Attorney General, a position of public profile not much
different from Rudy Giuliani's one-time position as a United
Sates Attorney for the Southern District of New York. Giuliani
used his position to go after high profile Wall Street names
such as Michael Milken, and in the process killed the
aggressive takeover attacks launched with the financing of
Milken and the like.
As a quick side note, Giuliani's killing of aggressive
takeovers ended the fears of corporate fat cats that they would
be taken over by the likes of Milken if they squandered
corporate assets, and thus these fat cats were set free to go
on their merry way with major splurges on themselves from high
salaries to private corporate jets and everything in between,
wasting corporate assets, to the tune of billions. After
Giuliani's march through the district, there was no one on Wall
Street left standing who could stop the fat cats and keep them
in check by taking them over when they wasted corporate assets.
In truth, it turns out that Giuliani was nothing more than the
fat cats' soldier, a pawn , a tool.
In any case, Giuliani used the notoriety gained from "Going
after Wall Street" as the springboard to launch his successful
New York city mayoral campaign.
Spitzer, who appears to have very grand political ambitions but
no imagination of his own, is simply using the Giuliani formula
of going after Wall Street to get his name in the paper on a
daily basis in front of potential voters who have lost money in
the markets because of the Greenspan boom-bust.
His game plan is to go after the Wall Street brokerage
industry, blame the whole boom-bust cycle on them and the fact
that their research is not "independent." Since the SEC and the
Supreme Court have both made it near impossible for independent
research to exist, especially at the retail level, Spitzer
decides to ignore all this and go after the brokerage industry
anyway, as though it is somehow their damned fault that there
is no independent research.
Spitzer's claim is the analysts do not put out reports
independent of the company they work for. Huh? This would be a
great way to run a business. The Eliot Spitzer way. Find a
bunch of analysts who think the products at your
company--excuse my language--are a piece of shit. Put them on
your payroll, print thousands of copies of their negative
reports, send it to your sales force and your customers. And
call me in a month, if your phone is still connected, to let me
know if you are still in business. This would be the equivalent
of me, Jack Rain, writing all the press releases for Spitzer's
next political campaign. Hey Eliot, I'm ready. I'll put out
some real "independent" press releases for you. Email me
anytime.
Now Eliot's solution to this lack of independence is to force
the brokerage industry to contribute a pool of money so that
research can be independently written. A board is to choose who
the best analysts are. Since the only analysts to warn about
the bust were the writers in the Austrian economics tradition
at Mises.org, all the money should go to them. Somehow I don't
think Mises president Lew Rockwell is holding his breath for
any of this money, never mind all of it. And if somehow Spitzer
did try to send Rockwell some of the loot, I would love to read
the letter Rockwell sends Spitzer when he sends the check back.
The solution to this whole mess is easy. You can't ever, in any
product situation, get "independent" research from the company
putting out the product. The research put out by a product
distribution company will always, whatever the company, be the
best case scenario. Product distribution companies are just
that, product distribution companies. If they are not going to
put out the best case scenario, who is?
You go to independent analysts and competitors for the other
scenarios. So the solution is simple: Tell the SEC to leave
independent research analysts alone. Let them publish
unregulated reports whenever they want, regularly or
irregularly. Spitzer should understand this solution. He is a
graduate of Harvard Law School and was editor of the Harvard
Law Review.
But he would rather crush Wall Street, ruin some careers, maybe
throw a few people in jail and climb on their bodies and wave
at the masses as he plans his assault on the next political
position he has his eyes on.
November 15, 2002
Jack Rain is a traveler and observer of world events.