He dropped another bombshell on Apr. 8, when he publicly displayed a series of e-mail messages that had been sent among Merrill Lynch research staffers. Spitzer says they're concrete proof that analysts were recommending stocks they didn't believe in. Although initially, Merrill said the messages were taken out of context, at a shareholders' meeting on Apr. 26, Merrill Lynch CEO David H. Komansky apologized to shareholders and clients for the firm's conduct.
Since then, Spitzer has taken heat from Wall Street, regulators, and other politicians, who have dubbed his investigation everything from "self-serving" to "a witch-hunt." In a May 1 interview with BusinessWeek Banking Editor Heather Timmons, Spitzer defended his inquiry, dismissed his critics, and waxed philosophical about what's wrong with Wall Street. Edited excerpts of their conversation follow:
Q: When you spoke during an Apr. 30 memorial service for your one-time boss, Manhattan Special Commissioner Edward F. Stancik, you said the legendary investigator strongly believed that "sunshine was a great disinfectant." That seems like an apt description of what you're trying to do on the Street -- drag everything into a public venue in order to expose, and consequently clean up, any corruption.
A: That's what I'm trying to do. To a certain extent the remedies we're promoting are "sunshine." We want to permit investors to understand conflicts [of interest] and potential conflicts. We need to go beyond mere sunshine though, and not just say that disclosure alone is sufficient. We need to go beyond the proposed National Association of Securities Dealers [NASD] rules, to more structural changes. We hope to really create a buffer between analysts and investment-banking fees.
There is another piece of this, and that's how do you protect the analysts from the pressure that will be inevitably applied by the investment banking side of the business?
Q: Isn't there also the issue of how do you protect analysts from pressure applied by corporations?
A: Correct. There are many points of potential conflict. If I'm Company X, and I'm going to an investment house, and I want them to underwrite my offering, I can say implicitly or explicitly, "How is your analyst going to cover me?" I've [heard about this from all perspectives, from having spoken] to at least 100 investment bankers and CEOs who have felt the pressure being pitched both ways.
For example, CEOs have told me "When they came in to solicit my business, they offered me a strong buy if we took the business to them." Sometimes [the pressure] is used by the investment house, sometimes it's used by the client company as a bargaining chip: "If you want my business you'll have to deliver."
The critical issue is: How do we insulate the analysts to insure integrity in his or her reports?
Q: Do you have a solution?
A: Well, we have a bunch of things we've been talking to Merrill about -- we've had some ideas, and they have some ideas. I think the people in the industry -- the ones who live with it and the ones who understand it -- are at least as likely as I to come up with some creative ideas. We haven't settled, and we aren't about to settle, but we've had some useful conversations. [He declined to give details.]
Q: Can you characterize the tone of the negotiations with Merrill? Were they hostile at any point?
A: I wouldn't say hostile, because I'd like to think that even though we have disagreed significantly about substantive issues, these are people I know and respect. These lawyers are friends and colleagues of mine.
There was a period prior to our going to court where we negotiated and couldn't reach an agreement with Merrill. One of the critical sticking points was the e-mails -- they didn't want them out.
I insisted they come out even if there was a resolution -- because, in order to get systemic reform, the e-mails had to be public. Only the e-mails could crystallize public opinion and [make] the regulators understand what was going on. The e-mails provided the evidence of a problem that many suspected but had never been able to prove. An agreement with Merrill to put some changes in place but then keep the e-mails private wouldn't work.
Q: You've gotten criticism from other regulators and legislators who call this political grandstanding.
A: Until we [made the e-mails public], the efforts by the others had come to naught. The proposed NASD rules were woefully inadequate, and the hearings that had been held by Congress hadn't provided any evidence of the underlying problems. So I would do again exactly what I have done, which is to provide the evidence to the public.
I look forward to working with all the other regulatory agencies to construct a uniform resolution, but I maintain that had we not acted as we have acted, none of this would be happening.
Q: At the Stancik memorial, you were sitting near New York City Mayor and Wall Street veteran Michael Bloomberg and former Mayor Rudy Giuliani, who Merrill Lynch enlisted recently for advice on the situation. There must be a lot of pressure from people with whom you've worked closely not to investigate this situation fully.
A: To investigate the major industry in New York City at this moment, when the city is in economic distress, is not only not good politics, but it's not something I enjoy doing. On top of that, half my friends work on Wall Street. We're right, so I'm going to do it. My job is to protect investors, but it's not easy or terribly fun.
Q: What's your next move?
A: I'm continuing to negotiate with Merrill. There have been fruitful discussions, but negotiations can break down over a range of things, so who knows how that could turn out.
Q: You sound like you're a long way away from a settlement.
A: Look, I don't want to lock myself in.... We have significant issues that haven't been resolved. [He declined to give details.]
We're working now with NASAA [North American Securities Administrators Assn.], and we'll benefit from the additional resources. Also, the Securities & Exchange Commission has asked us to join with them in their effort. At several levels is a more substantial inquiry is ongoing. Hopefully, a uniform set of rules that can guide the industry [will come out of all this].
Q: What does this investigation, and the need for it, tell us about Wall Street? There has always been a notion that it may be somewhat corrupt, but is it worse than it was before?
A: I'm troubled by what I'm seeing, as I think many investors are. I'm told by those that have been on the Street a long time that the behavior we're seeing today would not have been tolerated [before].
Is that true? Who knows -- but certainly there's a sense that something is a bit more...crass about the relationships today than in the past.
Q: How did things get so bad? One theory is that the excesses of the tech boom contributed to it.
A: I think, and I don't mean to talk around the issue or be too theoretical, it is something that extends to other sectors as well. In the not-for-profit world and in other major institutions, we've seen a lessening of standards. I think there has been a less-than-meticulous adherence to the proper rules of governance and conduct in many areas -- government as well.
Maybe there are moments where we step back and we say, "Wait a minute. We have to reapply the rules of law and the rules of behavior, be it not-for-profits, or Wall Street, or our religious institutions."