Banksters and Gangsters with Eliot Spitzer

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Banksters and Gangsters with Eliot Spitzer

January 11, 2012

I sat down yesterday with former New York Attorney General Eliot Spitzer to go over some of the ideas in my new book, Greedy Bastards. Believe it or not, there is a good kind of greed, when money is invested to create real wealth, long-term. But that is not what we are doing today.

Spitzer, who went after both mobsters like Tommy Gambino and Wall Street firms, said both sectors “squeeze money” out of a sector, and that there are more parallels there than we would find comfortable. “The mob was at its most powerful when it was a monopolist,” he said. “Each has figured out how to use leverage” and “how to eliminate competition”.  The three letters we have to understand to get Wall Street, Spitzer said, are “OPM” – Other People’s Money.

We discussed how naked credit default swaps can be classified and regulated as online gaming, according to controversial figure Dick Grasso, who used to run the NYSE.  Spitzer called the swaps market a “cesspool” which doesn’t do anything but let people “bet in a casino without any social utility.”  Finally, we talked about how banking regulations are like the water coolant in a nuclear reactor for the fuel rods.  Without them… meltdown!

Here’s the full transcript:

DYLAN RATIGAN: We’ve been talking a lot about the new book Greedy Bastards. And maybe we’ve given you the impression that greed is a bad thing.  But there are ways to structure the natural human tendency to acquire things into a greed that could actually be good for America — where you can only make money by actually solving a problem. It’s about bringing out the “long term greed” in every American and explicitly those who invest money. They should only be able to make more of it if they’re aligned in their interests of those they’re investing with. How do you do that? We have the sheriff of Wall Street and the former Attorney General of the state of New York, Eliot Spitzer breaking it down.

ELIOT SPITZER: Congratulations on the book. It is spectacular. Buy it.  You heard it from me — buy it.

RATIGAN: That’s validation. It’s interesting — before the commercial you were watching the mob segment.  You were Attorney General in the state.  Tell them what you were telling me.

SPITZER: Here’s what we said off the record. Before AG, I was a line assistant to the Manhattan District Attorney’s office.  I prosecuted Tommy Gambino — and the famous line “every time I get out, they keep pulling me back in.”  Really, the Michael Corleone figure I thought was Tommy Gambino.

The similarities and parallels between the way organized crime would squeeze money out of a sector — and to a certain extent what Wall Street has become — there’s more there than just sort of a metaphor for the moment on TV. Each has figured out how do you use leverage, how do you organize in a way to eliminate competition. Because the mob was at its most powerful when it become a monopolist.  Anti-trust violations.  Wall Street, the same thing.  Violations of fiduciary duty, conflicts of interest, they squeeze all the money out. Even though it doesn’t serve their client or the public at large. Parallels there that really should be developed.

RATIGAN: Obviously as long as you and I keep showing up to work, we can extend that conversation.

SPITZER:  That’s right.

RATIGAN:  I want to read just two paragraphs from the conclusion of the Banking chapter of Greedy Bastards which is basically my assertion of how you align those interests.  I want to get your assessment and find out whether this is actually happening.

“The financial markets need regulation the way a nuclear power plant need as cooling agent for its radioactive fuel rods. If safety rules are enforced, the result can be clean abundant energy.  But if the cooling process is neglected, there could an meltdown. Similarly, capital requirements are the cooling agent of risk taking in the economy. And just as nuclear fuel will always be reactive, people will always have a tendency to be greedy.  We need to enforce rules to balance natural greed so that greed can create risk taking and competition, not short term extraction.”

Fair assessment?

SPITZER:  Not only is it fair, it’s a brilliant metaphor and here’s why.   I and many others have always said a football game without referees become mayhem and a mob, and you don’t want that.  Your metaphor is much better.  People appreciate a nuclear power plant without coolant — the cataclysm that results is really big. So I think your metaphor is exactly right.  You and I — and I think this is a point that bears repetition — we are capitalists. We believe in capitalism, competition, and people trying to get rich. That’s good. It’s a question as you say of having the coolant, the referees, the rules to make sure it is done the right way.

RATIGAN:  And the right way very simply is if you, if you want to buy something, should have money to purchase it.   You — if you want to lend money — should actually have money that you can lend.  Fair?

SPITZER:   Dylan, I always say the three letters you have to understand to understand Wall Street is “OPM.” Other people’s money. As long as Wall Street is merely a mechanism to play with other people’s money –

RATIGAN: Like our pension funds.

SPITZER: Like our pension funds.  The whole issue of extending mortgages without “skin in the game,” to use the street vernacular, is that that you take enormous risk because somebody else is bearing the burden and you only get the up side, then you get an imbalance a disequilibrium — crisis. Nuclear healmeltdown.

RATIGAN:  Have we done anything since 2008 to restore the water in the reactor to — because the other side of the nuclear meltdown metaphor is a properly cooled reactor — where you have everybody working together, investors, entrepreneurs, students, educational universities, advising, senior members of society advising and teaching people like me and down the line  — that you’re in a situation where everybody is aligned and you’re going in that direction and you get that with capital requirements. Are we doing that?

SPITZER:  We’re beginning to take very tiny steps in the right direction. I think that’s why your book is so good because it really explains the framework and gives people a prism with which to understand it.   Basel III, to use the jargon, yeah, it’s better.

RATIGAN:  Basel III is the standard that international banks and American banks use for capital standards.

SPITZER: Interestingly, most of the good stuff has come from overseas. The europeans — and I gather from watching Romney last night that the last thing you want to be is a european these days.

RATIGAN: They’ve got more upward mobility than we do, let me tell you!

SPITZER: And lower unemployment.  But putting that aside, the european banking structure is going through a more fundamental restructuring.  England, they’re actually going back or proposing to go back to a pre-Glass Steagall era where you you take out the investment banking and the commercial banking which would be an important real manifestation of the Volcker rule done right.

RATIGAN: So one issue is the Volcker rule and the reestablishment of capital requirements and putting the water back in the reactor so they can create clean abundant energy, as opposed to melting all over us and creating poverty and horror.

Another part of that is we’ve created some fuel rods, if you will, that are the swaps market that are very toxic fuel rods.  Specifically everything else in the world, stocks, bonds, commodity, oils, is traded on an exchange and I can see what it is.  Yet we have a $708 trillion swaps market which is the credit insurance market that is the only market in the world that is not traded on an exchange.  Why is that a secret market?

SPITZER: Because people make a ton of money there.

RATIGAN: But come on, that’s not really the reason.

SPITZER: Sure it is.

RATIGAN:  So you’re saying the politicians — people make a ton of money — a secret $700 trillion — the president has authorized –

SPITZER:  This is the cesspool that you and I and many others understand — has driven so much of what is corrupt out there.And you have asked the most critical question which is what purpose does it serve? Most of the other markets you talked about are there to create capital raising function so that money will create businesses that create products and jobs. So much of the swap market, the credit markets, now are revolving around these arcane products that don’t do anything other than permit people to bet in a casino without having any real social utility. And so you ask the yes why are we even supporting it. And what wouldn’t we do better just to eliminate it.  And in fact, my good friend Dick Grasso has proposed that.

RATIGAN:  So lets talk about that.  I asked Dick Grasso — he used to run the New  York Stock Exchange — he knows about securities, how to create marketplaces for securities.  And i said, Dick, how do we deal with the swaps?  This is crazy!  I still am stuck on the fact that you really believe the only reason the swap market exists is that they’re paying off the government. But you’re right.

SPITZER:  Let me add a footnote. There are some swaps, and some parts of it are hugely important, but not the size you’re talking about. A lot of it is just gambling on other people’s houses, whether it’s going to burn down. Not a useful thing.

RATIGAN:  And your friend and mine Richard Grasso makes the point that we can distinguish between mission critical swaps that are facilitating energy, food, other mission critical things, and things that are not. And here’s the rule change he suggests.

He says:  “I believe regulators should require the product (being swaps) to be registered with a central clearing agency like an exchange or perhaps central bank. And thus able to be monitored globally to prevent contracts being written in excess of the debt obligations they’re designed to insure.” He goes on to say “this is easily accomplished by regulators and treasury issuing a rule adopted by non- US counter parties.” This is the most interesting part. He says, “any contracts there in that second category, non-mission critical, non-real basically, any contracts written outside of these requirements would be deemed null and void by regulators as simply online gaming.” Is that online gaming?

SPITZER:  It seems to me it is. And in fact this issue has been addressed by state regulators who in the past — back when credit default swaps and all this stuff we never heard of before, ’07 ’08, before it suddenly exploded and metastasized, they said what are these products and do they — should they be prohibited as violative of state laws that prohibit online gaming?  It’s not a crazy thought. I think Dick is on to something. He and I have had our battles in the past, but I think here he is exactly right. What he’s really saying is if these products don’t serve a purpose, get rid of them.

RATIGAN: What do you think of the chances would could get Eliot Spitzer and Dick Grasso together to say that?

SPITZER: 100%.

RATIGAN:  Elliot, thanks so much.

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