Spitzer v. Schapiro

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New York – Riled by the SEC’s support for relaxing restrictions erected by the Global Research Settlement, Eliot Spitzer launched a personal attack on Mary Schapiro, Chairman of the SEC.  In an article titled “The Pushover”, Spitzer accused Schapiro of being too soft on the financial industry.  Although Spitzer has an obvious ax to grind, his diatribe underlines the tensions facing the SEC with the advent of new financial regulation.

About nine months after his resignation from Governor of New York in March 2008, Eliot Spitzer began a long, slow process of rehabilitating his reputation.  He started writing a column in Slate magazine and gradually began making media appearances, including The Colbert Report.  His tone has been contrite, wry and, for Spitzer, humble.  He even appeared in an interview with Henry Blodget, the former Merrill internet analyst banned from the industry after Spitzer’s release of compromising emails.

The latest offering from Spitzer is no puff piece, however.  Angered by the SEC’s support for a relaxation in the Chinese wall between investment banking and research (overturned by Judge Pauley), he slips back into the Spitzer of yore.  He accuses the SEC of inaction in the face of the subprime crisis: “Two years after the largest financial meltdown in history, the SEC has still not brought any cases that challenge the structural flaws of the financial industry.”

He then launches into Mary Schapiro.  He cites Schapiro’s past positions supporting the securities industry: “Her oft-stated perspective was that the securities industry needed ‘a more flexible regulatory paradigm’ and that consolidated supervision of securities firms was not ‘necessary or appropriate.'”

Spitzer relates an incident as the various regulators jockeyed internally over the terms of the Settlement.  According to Spitzer, Mary Schapiro, who was then head of the NASD (now FINRA), defended the then-prevalent practice of ‘spinning’, or allocating shares of a hot IPO to CEOs of other banking clients.  Spitzer wanted to ban it, but “Schapiro took the other side, arguing that CEOs should continue to receive these benefits. Our argument prevailed, and over her objections, the final settlement banned spinning.”

Although Spitzer’s anecdote is interesting, it is not persuasive that Schapiro is a pushover.  More likely, she was not aware that the SEC was supporting the industry’s initiative to allow increased communication between bankers and analysts.  If anything, Schapiro is trying to increase the number of enforcement actions.

Spitzer yearns for the modern equivalent of the Pecora Investigation probing the events leading up to the recent financial crisis.  And in this, maybe he’s right.  A good airing would have been beneficial.   We might have a clearer sense of what actually happened at AIG and other casualties of the crisis.

Now that financial reform is finally being implemented, regulators like the SEC will be under pressure to continue to step up their scrutiny of the financial industry.  The firestorm over the SEC’s ill-advised support for relaxing the terms of the Settlement illustrates that for the next year or so, the regulatory impulse will be to shoot first and ask questions later.

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