Spitzer on "Self-Regulation" and "Powerful Friends"

"So, what are the principles? Rule number one: Only government can ensure integrity in the marketplace. Now that seems like such an obvious statement, but nobody believed it three, four, five years ago. There was this canard, this oxymoron, called 'self-regulation.' We can all sit here and roll our eyes, but that was the governing ideology for a long time. And when I would go down to Washington and we’d bring out cases and I would say “Self-regulation doesn’t work,” people would say, 'Oh, come on, you’re just some left-over from the 1960’s....'

"This was a very difficult fight. And the story that brought it home to me was our case against investment bank Merrill Lynch. And it had to do with the tension that existed between underwriting IPO’s and secondary offerings on the one hand, and also having analysts simultaneously recommend those stocks to the investing public, which we thought was a conflict of interest. Jack Grubman, one of the analysts involved in all this, captured the moment in time when he said, 'What used to be viewed as a conflict of interest is now viewed as a synergy.'

"What happened in this case… we found the needles in the haystacks. And we were about to file the case. My first introduction to this type of litigation was when the lawyer from Merrill called me up and said, “Eliot, I’m warning you, we have powerful friends.” And I said, 'Well! That’s an interesting legal argument. They didn’t teach me that in law school.' (Laughs.) What am I supposed to say?

"Nonetheless, we filed the case, and the Merrill lawyers came in and said, 'Eliot, you’re absolutely right, but we’re not as bad as our competitors.' And that was their defense! 

"The point was this: when it came to a choice where they knew the behavior was problematic, sacrificing that integrity vs. market share, they sacrificed integrity. The reality was that the marketplace drove behavior down to a standard that was simply unacceptable, and the only entity that could come in and say 'Stop, that’s not acceptable,' was government."