We will publish this interview in two parts (update: read the second part here), with the first part focusing on financial regulation and regulatory capture.
Guy Rolnik: The last time we sat down for an interview was in 2011, right after the Occupy Wall Street protests began and the growing discontent of many Americans with the financial system came into prominence. What has changed since then?
Eliot Spitzer: Wall Street is different today than it was either in 2008 or 1998. It’s more concentrated in terms of the too big to fail banks. Now, one can have a conversation [on whether] that issue has been confronted with Dodd-Frank or not.
There’s greater concentration, but I also think there has been some positive movement in terms of capital requirements and de-risking their portfolios, because some of the most toxic derivatives and lending practices have been eliminated.
There’s also a reality, which is that the next crisis is never quite like the last one, and so while we may have dealt with derivatives, and we may have dealt with certain elements of subprime lending, what’s going to blow up next is something we’re not thinking about right now.
GR: I’m reading Jesse Eisinger’s book, The Chickenshit Club. Eisinger, who was a guest here at the Stigler Center last year, argues that in the last 15 years or so the U.S. has “lost the will and the ability” to pursue white collar criminal investigations and indictments when it comes to the CEOs of large firms. Do you share this view?
ES: I’m not sure we lost it, because I don’t think we ever had it.
GR: And if I had asked you that 15 years ago, when you were New York’s Attorney General?
ES: I don’t want to sit down and toot my own horn and say that we did some useful and important stuff, but I think that, by and large, there has been a failure. The S&L crisis might be the exception. There has been a failure to rigorously oppose the obligations of ethical banking throughout the system on a regular basis.
That continues to be the case, because it is difficult. Look at the continuing scandals that are pouring out of Wells Fargo, with the most recent headlines about their having sold car insurance to people without any rationale, whatsoever.
Frankly, I view the Wells Fargo problems and the Volkswagen problems as being perhaps the most remarkable, because they involved the greatest number of people, and therefore speak directly to a corporate culture that created incentives to act in a way that was blatantly illegal.
In other conspiracies, like the Libor conspiracy, the criminal acts arose among a limited number of people who saw the opportunity to garner significant upside, they thought, in a way that won’t be detected. What is remarkable this time is that you have that many people involved, and you say, “how could that possibly have happened?” That’s why the Wells Fargo saga, both round one, with the false accounts, and then round two, with the auto insurance, and Volkswagen surreptitiously avoiding the emissions detection, are absolutely staggering to me in terms of the scope of the conspiracy.
Even if there was a significant desire in the immediate aftermath of 2008 to do something—and Dodd-Frank did something—now the pendulum has swung back the other way with the new leadership at the Securities and Exchange Commission (SEC) and the Office of the Comptroller of the Currency (OCC) affirmatively saying, “We want to roll back those obligations (the few obligations that were imposed) and become more lenient,” because they believe that these obligations were stifling economic activity, which I honestly don’t think is the case.
GR: You mentioned the actions taken by the current administration, but before that there were eight years of the Obama administration, and Democrats have been in power for 16 of the last 24 years.
ES: I say none of this to suggest that the Justice Department under Eric Holder should be held out as an example. Just the opposite. [Former Assistant Attorney General for the Criminal Division of the Department of Justice] Lanny Breuer’s articulation of “too big to prosecute“ goes down as, on the one hand, the most honest and also the most disturbing statement made by the head of the Criminal Division in the Justice Department.
It would frankly have been more understandable for the Treasury Secretary to say, “Guys, we consider these are the implications.” But for the head of the Criminal Division to basically give carte blanche by saying, “You’re too big to prosecute,” was mind-boggling.