I loathe Eliot Spitzer for a variety of reasons, which I won't go into here. (And for reasons that have nothing to do with his prostitution ties, even though they made me laugh out loud.) But today I found an interesting speech he made several years ago. Below is an extended quote from remarks Spitzer made on June 4, 2003 at the Securities and Exchange Commission Historical Society's 4th Annual Meeting. It's kind of a long slog, but it goes nicely with an email I wrote to Amba, which she placed in the update to this post.
I do want to make two substantive points...Some of this relates to our current troubles, some doesn't. I hope I can come back to this in a few days to add some more thoughts, but I can't guarantee that I'll have any time to do so. In the meantime I hope you find this worthy of some thought.
First, when it comes to the larger decline in ethical behavior at the board level that we have seen in the private sector, I think we make a serious mistake when we think about the problem and confine it to the private sector. What we have seen is endemic through every sector in our society. It is in our government, both elective and appointive. It is in our not-forprofit sector. It is in our religious institutions. It is in our media. It is in the private sector.
And when we step back and try to critique and figure out what went wrong, therefore, I think we are deluding ourselves a little bit if we think that it is exclusively a matter of greed and money, because money is not the sole motivating factor in several of those other sectors. And, therefore, I think we have a more complicated textured problem to deal with than simply analysts could make more money by putting a buy on a stock that was being underwritten by the company. That is, you know, a critique that fit that one little paradigm, but it does not answer the much more difficult question about what happened in all of these other sectors.
The only thoughtful answer that I have seen to this problem was crafted by somebody who I think is one of the most brilliant elected officials we ever had, and he died, unfortunately, not long ago, and that's Pat Moynihan.
Pat Moynihan, in a very different context, wrote about defining deviancy down. When he was talking about criminal justice and street crime, he said that over a period of years we lost the will to prosecute and pursue small violations. Whether it was graffiti, pickpocketing, whatever it may have been, we lost the will to pursue that.
And what happened over time was that there was a dissipation in standards, a dissipation in our expectation with respect to the behavior that people had to live up to. And that permeated our society and crime exploded.
Now, then from that sort of intellectual nugget, what evolved was the broken window school of prosecution, which went after small crimes to re-establish our basic moral principles. And over time we have beaten back the issue of street crime to a great extent. We have some problems here and there, certainly, but we have made enormous progress.
I think the same thing happened with respect to our governing structures. Small violations that may have been akin to a barnacle on the bottom of a boat, that did not appear to be material, one-off balance sheet partnership, one small indiscretion, began to grow during a decade when things were so good that we lost the will to challenge small violations. And over time it led to a larger dissipation.
And as a result, we woke up a year or two ago when things crashed for a number of other reasons, and because a rising tide washes away a lot of sins, we suddenly had to see what wreckage was there. And it was a consequence of a growing complacency that calls out in many sectors for all of us--and I think that's why--and I hate to pontificate, to use a word derivative of one you just used. But I think all of us who are in positions where we have fiduciary duties have to re-examine how we fulfill them. Because I think it is everybody in every position of some power or governing responsibility who has to examine what happened and why. And I think we all have to sort of pull ourselves up by the bootstraps and think of this in a much larger context.
The second issue I want to address very quickly is: Do they get it? And this emerged, I suppose, very--with some significance on the day we announced the global settlement, and there were some responses from CEOs in various companies that challenged people's judgment about do the CEOs in the investment banking community get it.
But the "they" that I'm referring to right now is not the "they" in the investment banking community. I think they do get it. I really do. And I'm--you have to be an optimist in the business that we're in, and maybe this is a self-delusion and five years from now we'll wake up and say, no, they simply didn't. But I do think they get it, and not necessarily because of the new rules or the new regs, but for a different reason that maybe I'll touch on.
But the "they" that I'm asking about now is Congress. And I think there's a large question about whether Congress, which ultimately enacts the laws that will define the boundaries of financial regulation, whether they have properly understood that after a spasm of deregulation that maybe in certain instances was important and right and necessary, nonetheless, there are problems that have emerged and tensions that have emerged that have not been properly mediated.
And I would give you two examples of ongoing legislative potential enactments that I think suggest to me that perhaps Congress needs to step back and re-examine its role. And those two are: one, the definition of "disinterested party" in the bankruptcy statute in terms of who can give advice in the bankruptcy context, where their--what passed the House would permit the very investment banks that did the underwriting to step back in and garner fees from the very wreckage that they helped create, a change in a statute that for 70 years had served us very well, an issue that passed the House with hardly an inquiry of relevant parties, no inquiry as far as I know to the SEC, and recently when we were up at the Senate Banking Committee, Chairman Donaldson, I was thrilled to see, opposed this move. But the House passed it without that inquiry.
The second measure that they're about to enact or the House passed it--it is before the Senate, I understand--relates to industrial banks where there is about to be created an entire--a possibility for an entire secondary banking system outside the regulatory structure of the Fed. Chairman Greenspan has opposed this, and yet in dark of night, basically, this measure as well has passed.
And so what we are still seeing on the Hill is a willingness to break down those rules and divides and barriers that were, to a great extent, important protectors of investors, depositors, and had some meaning, even though it was very easy for a number of years to malign them and say deregulation is the cure for all.
And I think if you look at the sectors where we have gone through this deregulatory spasm, we now should know there is, in fact, no cure-all called deregulation. So I think that we need to ask do they get it, not just of the investment banks but of our congressional leadership that, through its behavior, may not be serving us terribly well.
Now, I know Ted has a lot of questions, as do you, I hope. Let me just make two very quick final observations.
One is what will ultimately drive this. It is not laws. It is not even necessarily--it is enforcement actions, but in a derivative sort of way. Shame is the greatest public motivator. And I think what has changed out there in the past two years is that individuals who were inviolate, individuals who believed they were beyond reproach, so-called masters of the universe, have now found out that that is a very transitory phase.
And I will leave you with two really final brief thoughts. One is the advice that I have given to many folks, which is, if you want to learn the lesson the real way, get "Bonfire of the Vanities" and read it. It is that book more than anything else that shows you how somebody who--Sherman McCoy was the master of the universe. One wrong turn off the Deegan(ph) into the South Bronx, game over. And suddenly your life changes. And I grew up in the Bronx. I can say this. So he did not understand where--what the boundaries were of his power.
And the second thought is that--it was emblazoned on a T-shirt that a friend of mine gave to me that captured up--captured much of this, and it said across the front, "Hubris Is Terminal." And that I think is what befell not only the investment banking sector but also other sectors where we now have seen this governing crisis, where people did feel they were beyond reproach, and hopefully the renewed attention to this will resuscitate feelings of shame, to a lesser extent an obligation that is captured by our notions of fiduciary duty, and population will begin to live up to the mandate that we have invested in them.
If that happens, this entire spasm will have been enormously worthwhile and productive, and at the end of the day will have served investors and the public at large very, [very well.] [The transcript is garbled here, so the I'm not about the last two words.]