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Lost by many in the week’s financial markets’ nightmare were ghosts of Wall Street past.
Some in business and politics are blaming the need for Tuesday’s historic federal bailout for American International Group Inc.’s on the relentless pursuit of AIG founder Maurice “Hank” Greenberg by New York’s former attorney general, Eliot Spitzer.
AIG needed the $85 billion loan from the federal government to stay afloat, save thousands of jobs and protect its insurance customers, while warding off another blow to a staggered financial market. Running the company during this crisis was an AIG management team brought to power after prosecutions by Spitzer, who parlayed his national stature as a Wall Street crusader to the governor’s office, only to resign in disgrace 14 months later.
In 2005, then-Attorney General Spitzer forced Greenberg out of the company he built over nearly 40 years. Spitzer accused Greenberg of conflicts of interest involving a foundation that Spitzer said benefited Greenberg and AIG.
The New York Sun’s editorial on Wednesday put it bluntly: “Among all (of Spitzer’s) mistakes, it’s hard to think of one more catastrophic than his decision to force Maurice ‘Hank’ Greenberg out of the leadership of AIG.”
Business blogs and Republican pundits carried much the same message, accurately noting that Spitzer eventually dropped some of his charges against Greenberg, that Greenberg hasn’t been found guilty of other charges, and that Greenberg continues to fight back in court.
Blaming Spitzer will get a voice from New York Republicans who could use their favorite target again as they try to retain the Senate majority this fall.
“When he was attorney general he was on a witch hunt, he’d go after anyone he could to get headlines,” said Senate Majority Leader Dean Skelos. “I look at the pattern form when Hank Greenberg went out, not just the crisis now, and the stock plummeted. It cost taxpayers hundreds of millions of dollars in our pension system.”
Spitzer, silent since his resignation March 17 after being implicated in a federal prostitution investigation, has also been blamed for contributing to a state budget crisis this year. Now, Spitzer is working for his millionaire father in Manhattan real estate while the prostitution probe continues. It was just two years ago he carried a historic margin of victory over Republican John Faso.
“Don’t blame me,” a bumper sticker seen in Albany says, “I voted for the other John.”
Blaming Spitzer for AIG’s near catastrophe, however, is too easy. Although it’s hard to disagree AIG ran more smoothly under Greenberg, the management that replaced him faced unprecedented challenges of the financial industry that included meltdowns in the subprime mortgage and credit sectors.
“I think the AIG problems were probably even bigger than Hank Greenberg and Eliot Spitzer,” said Professor James D. Cox of the School of Law at Duke University. “I would hope that something of this scale — which is mammoth, both the bailout and the problems that led up to it — are bigger than just politics.”
Columbia Law Professor John Coffee blames AIG’s troubles on AIG owns practices: “Ratings agencies don’t downgrade anyone because Eliot Spitzer doesn’t like them.”
But Spitzer’s crusade against Greenberg leaves another lesson.
Spitzer was unyielding against Greenberg. AIG relented and booted a scapegoat, as most companies did in those prosecutions brought by Spitzer and, subsequently, by other ambitious attorneys general nationwide.
That’s because a felony to a firm is fatal. So anything short of that, even agreeing to reform a string of misdeeds in settlements in which no one admits wrongdoing, is preferable. Short-term headlines aren’t much of a problem to a company in that spot, and even paying out millions in penalties — when billions are at stake — can be a pretty easy call.
Even as Greenberg, as an individual, fought back, Spitzer knew the public would be on his side. Part of that was because Attorney General Spitzer was — sorry political revisionists — usually right about abuses he fought on Wall Street. Spitzer had smart, tough lawyers on his team, including Eric Dinallo, the current state insurance superintendent who was critical this week to keeping AIG alive long enough for the historic federal loan bailout.
But Spitzer knew something else about public opinion in his effort to push Greenberg out of AIG: One of the few things millionaires who had great power can’t buy is public sympathy.
Today, Spitzer is learning that lesson first hand.
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Michael Gormley is the Albany, N.Y., Capitol editor for The
Associated Press. He can be reached by e-mail at
mgormley(at)ap.org.