On Thursday, November 12, former New York Governor Eliot Spitzer appeared as a guest of Harvard’s Edmond J. Safra Foundation Center for Ethics. While his presence may seem ironic given Mr. Spitzer’s infamous resignation after his involvement in a prostitution ring was exposed in 2008, this speaking engagement was not focused on ethics in politics but rather the role of government regulation in the greater business environment.
Given that focus and Mr. Spitzer’s impressive background as a former New York Attorney General, the affiliation was quite reasonable.
Free tickets to the speech were distributed earlier in the week, and the lecture space in Emerson Hall was packed with students and faculty across Harvard’s schools as well as newspaper reporters and television crews. While many in attendance were familiar with the lecture series, many more were there purely out of curiosity.
While I was taking my seat I overheard a rather heated conversation a few rows back. One man summed up the general consensus of the group just as the host was taking the stage: “I’m not mad at Spitzer because he paid for sex. I’m mad at him because he paid so much for sex. I mean, he’s driving prices way up – how are average Joes supposed to be able to compete? We’re getting priced out of the market and that just pisses me off.”
After the crowd quieted, Safra Center Director Lawrence Lessigÿintroduced Mr. Spitzer. “No one doubts that what Governor Spitzer did was wrong, to his family, to his state, to his supporters across the country, to himself. This much is serious and clear,” Lessig said. “Likewise, no one doubts that until the moment he was charged, Governor Spitzer inspired the best in our profession.” Those two sentences summed up the whole of the matter and for the next 90 minutes both Mr. Spitzer and the audience seemed to move past the ordeal. It wasn’t until the audience question-and-answer session that the topic was raised by an audience member, and Mr. Spitzer deflected it quite simply, “That is outside the scope of why I was invited here today.”
Instead the focus of his more than hour-long speech was on the role of government regulation. First, he insisted that only the government can enforce rules relating to integrity and transparency in the market because only they can be a disinterested party. Furthermore, only the government can address some core values that markets simply cannot price into their models, values like a minimum wage or anti-discriminatory hiring. “They will never have pure market solutions,” he said. “The argument is that discrimination is inefficient and thus should eliminate itself from the marketplace, but this has shown time and again to be wrong. Social expectations are the only thing that can overcome these examples.”
Second, he transitioned into a discussion on how well the government has dealt with the current crisis. He had harsh words for the Treasury’s negotiation of the AIG bailout, particularly in regard to the counterparty contracts with investment banks: “When AIG got $85 billion Goldman [Sachs] insisted their $12.9 billion get repaid. [Secretary of the
Treasury] Tim Geithner argued that ‘we are a nation of laws and there was a contract’.
But taxpayers were not a party to that contract and thus we were not required to make good on it, and certainly not at 100 cents on the dollar. We were not the counterparties.”
A newly released report from the Office of the Special Inspector General for the Troubled Asset Relief Program supports Mr. Spitzer’s position.
“There is no question that the effect of FRBNY’s [Federal Reserve Bank of New York] decisions-indeed, the very design of the federal assistance to AIG-was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.”
The report goes on to state that Secretary Geithner and his team ended up making the counterparties whole instead of valuing the derivatives contracts at their fair market value.
Not only did Mr. Spitzer criticize the execution of the bailout, but he also asserted that regulators abdicated their duties long before the crisis. “We didn’t need new laws; what we needed was regulators to use the power already given them. They don’t need additional power; they need the willpower to use it.”
Interestingly, Ben Bernanke’s testimony before the Committee on Financial Services in March of 2009 contradicts this assertion: “AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.”
However, the TARP oversight report comes to a very different conclusion. “[T]he refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely ‘voluntary,’ made the possibility of obtaining concessions from those counterparties extremely remote.”
In any case, Mr. Spitzer felt very strongly that the Treasury’s handling of the negation distorted the banks’ tolerance for risk during that very turbulent time by “socializing losses and privatizing gains.”
Finally, Mr. Spitzer wrapped up his lecture with a discussion on the role of boards of directors and shareholders in the sphere of corporate governance. He was insistent that corporations run the economy and create jobs; the government should stick to regulation and as such act as a “facilitator.” This means then that boards of directors and shareholders should take a more active approach to governance. Specifically, he asserted that all directors should be independent and that shareholders should be able to elect them directly.
Overall, Mr. Spitzer’s appearance was well-received. He had great presence and was at once both insightful and humorous. While I came to the event wanting to dislike him (after all, I lived in New York when the scandal erupted) I left hoping that Mr. Spitzer would be given a third act. Like former-President Clinton and a host of philandering politicians before him, Mr. Spitzer’s mistake was just one event in an otherwise impressive career. Let’s not forget that his experience with regulation, corporate governance and other issues are extremely relevant in the current climate, and his voice could certainly be a valuable addition to the conversation.
Christina Wallace is an EC from Lansing, Michigan.ÿShe is Co-President of the HBS Democrats and a participant in the Oval Office political training program at the Harvard Kennedy School.ÿShe is also actively involved in the social enterprise community at HBS.