Eliot Spitzer on Fared Zakaria

Really, a remarkable interview.

Spitzer: When AIG initially received $80 billion -- a decision that was the consequence of a very brief meeting of the president of the New York Fed, the secretary of the Treasury, perhaps Chairman Bernanke and arguably, some reports say, the chairman of Goldman Sachs -- $80 billion, virtually all of it flowed out to counterparties, $12.9 billion to Goldman Sachs.

Why did that happen? What questions were asked? Why did we need to pay 100 cents on the dollar on those transactions, if we had to pay anything? What would have happened to the financial system, had it not been paid?

These are the questions that should be pursued. Look, bonus is a real issue. It touches us viscerally. The real money and the real structural issue is the dynamic between AIG and the counterparties.

More, plus video, after the jump...




Spitzer, on the bonuses:

[A]t a moment in our nation's history when everybody is being asked to bear a piece of the burden -- everybody -- people are being told work four days a week, not five. Sales taxes are going to go up. Contracts are being broken and renegotiated for workers across America. Our 401(k)s and our savings have been depleted by the recklessness of Wall Street.

For Goldman and the other counterparties not to be able to say, we can make do with only 50 cents on the dollar, 30 cents on the dollar, after we've already given Goldman a $25 billion cash infusion, they are sitting on vast amounts of cash on the sidelines -- which is their right, but they're going to invest it in due course, based upon their judgment -- for them, on top of all that to get another $12.9 billion in the dark without questions, after a meeting of this sort [over the weekend, between then TreasSec Paulson, then NY Fed Pres Geithner, AIG, and Goldman Sachs], is fundamentally wrong. And that is the nature of the inquiry that should be raised.

Spitzer, on new regulations:

The regulatory system was structurally flawed, but that's not why this happened.

After the last round of scandals -- Enron, et al. -- we passed Sarbanes-Oxley. And we said, aha, we've solved the problem. Now we have another set of scandals.

There are enough laws, enough regulations on the books for smart, aggressive regulators and prosecutors to make all the cases. What was missing was judgment. And you can't legislate judgment. You can't regulate judgment. Either the people who are the regulators will walk into a bank and say "Your leverage is too great. We are going to take actions to pull it back," or "This type of investment is flawed," or they won't. You can't pass a law that says, you must use sound judgment.

Bubbles have been there through history, through over-regulation and under-regulation. This is a question of judgment and of failure of judgment.

When I was attorney general, people said, "Oh, you're using this crazy little statute," the Martin Act in New York, "to bring all these cases." The Martin Act had a simple anti-fraud provision. That's all we used.

The federal government has exponentially more regulatory power than we did. What was lacking was the judgment, the tenacity, the desire to rein in a financial system that was spiraling out of control.

[...]

ZAKARIA: But should there have been a different kind of regulation? How should this have been prevented?

SPITZER: There should have been a very different regulatory framework. Not in the sense that we needed more words in the books. We needed more aggressive voices at the SEC, the FTC, the OCC -- this welter of federal agencies -- people who came to Wall Street and said, "Wait a minute. That leverage is crazy."

And it was -- it's kind of odd, because everybody derided leverage in public, but in private, participated to the hilt. And when you look back at these deals you say, this was crazy. We needed regulators who said it. We needed wiser voices on Wall Street.

Spitzer on Obama and the populist mood of the country:

ZAKARIA: How do you think President Obama is handling this crisis?

SPITZER: Well, I think he is doing stupendously. I mean, I'm a huge fan of his. I think we all have to be and should be, if only because he has been thrust into a dynamic that is almost impossible.

He is trying to put out not 500 small fires, 500 forest fires simultaneously. And he is addressing them sequentially, trying to keep a political coalition together. But it's very hard.

And I think one of the largest, most difficult tasks that he has is to control the outrage that is brewing in the public -- sympathize with it and garner it, but use it to get good policy, not policy based upon anger.

Populism, if we go to the other extreme -- and we had libertarianism masquerading as capitalism for the past 30 years. That didn't work. And we knew it wouldn't work.

I'm worried that we will go to the other extreme and end up with rank populism. That could be just as dangerous.

And it's very hard to craft the reasoned policies that make the market work without losing the support of the public. That's what he's trying to do. It's a very difficult task.

He is a brilliant communicator and a brilliant leader, and I think we all have to hope that he succeeds.

ZAKARIA: Do you worry about this kind of populist anger when you watch the outrage over the bonuses?

SPITZER: Yes, yes. The outrage is legitimate, but it is being fomented by sort of a faux populism by many on Capitol Hill who saw this coming, who knew this was going on. And so, I look at them and I say, "Come on, guys. You're supposed to be more mature. Express the anger, but then say, how do we solve it? Don't just throw more oil on the fire."

And I am worried about that. And I'm worried that it will be destructive to our capitalist system. And I've said since the very beginning, that my energy was directed at preserving and protecting capitalism.

The libertarians didn't understand it. Populists don't understand it. But capitalism is what we want to preserve.

Spitzer on the ho (oh, please... you were wondering):

ZAKARIA: You know, there are a number of people watching who are going to say, Eliot Spitzer doesn't have credibility to talk about these issues, because of what happened over the last year with your own behavior.

What would you say to them?

SPITZER: I would say to them that I never held myself out as being anything other than human. I have flaws, as we all do, arguably. I failed in a very important way in my personal life, and I have paid a price for that.

I have spent a year with my family, with my wonderful and amazing and forgiving wife and three daughters, and have rebuilt those relationships, and hope to do that as time goes on.

I also feel that, to the extent, if I'm asked, and I can contribute to a very important conversation, I will do that as well. That is our right, arguably our obligation as citizens. I will do what I can, and with full awareness and heaviness of heart about what I did.

ZAKARIA: But it wasn't just a personal failing. There were also legal issues involved...

SPITZER: Well, those were not pursued by those who decided to pursue them.