Full text of questions for Eliot Spitzer from CNBC reporter David Faber
David Faber: It is late, but I do want to follow up on a couple of things. Certainly, I’m sure, many in the audience have questions about your particular address, Mr. Spitzer. You know, you mentioned stock picking, and you used some statistics, I think, to support the contention that many of those who are chosen for these awards have not been particularly strong stock pickers even when compared with some of their peers. Anybody in this audience will be happy to tell you it is extraordinarily hard to be a good stock picker, and even more so over a long period of time. I can cite any number of people who’ve been good for a year on a particular sector, or even 18 months. Two years, three years, five years . . . much more difficult. And so, in some ways, the subjective nature, perhaps, of what the criteria are used by, or are used to judge here -- my question . . .
Eliot Spitzer: I was waiting for that.
Faber: Yeah. Why not eliminate ratings altogether? Why not protect the individual investor by not having them see a buy, a sell, a hold or a price target at all, by making them read the research and perhaps even try and understand it? And protect, in some ways, the very people in this audience, who by putting a buy, a sell or a hold on a particular stock are under enormous pressure, not just from their bankers, but from others as well?
Spitzer: Well, David, I think that there is a powerful argument that can be made that eliminating the buy, sell and hold and the price targets would be a worthwhile way for the industry to run itself. But I don’t think it’s for government to mandate that. I think there may be some companies who say, “We will do better for you by not giving you a false target but by giving you a text that you can read and understand.” Having said that, I think some people don’t appreciate this, but I do not believe the government should interfere in the marketplace with those companies that wish to put a buy, sell, hold, or whatever it may be, on a particular stock. What I do believe we have a responsibility to do is permit the transparency, so that those who put a buy, sell or hold or create a price target can then be judged based upon the quality of the work that they produce. If half the entities out here tonight decided they didn’t want to put on a rating, great, good luck, and see if the marketplace absorbs it. But it is not for us to mandate that you do it or not do it.
Faber: You’ve been focusing your efforts on the conflict between investment banking and research. I would again speak for the audience in saying certainly in my own experience as a reporter that the pressures that many analysts are under are not confined at all to investment bankers. In fact, companies can be extraordinarily vindictive. I don’t mean to single somebody out, but I’m doing it in a positive way. Colin Devine is here from Salomon Smith Barney, I believe. He was a critic of Conseco for years, and he faced enormous pressure. There are any number of other people who have spoken up negatively about companies through the years and been faced with enormous pressure to change a rating. Companies find a way. They find a way. A board membership is shared; CEOs know each other quite well. And let me add one other actual pressure as well: Money management firms can also be extraordinarily vindictive in terms of directing trading and commissions when something goes their way. Mutual funds can only invest for the most part in stocks that go up. They can’t short stocks. They therefore are very vindictive when an analyst comes out and says something negative. Banking is certainly a conflict; it’s certainly a pressure. But how in the world are you going to go about dealing with those other two, which can be much more significant and can end up having a piece of research be just as useless?
Spitzer: I’m flattered, I suppose, that you think we will move on to that as soon as we’ve solved this problem. But we all recognize there are more conflicts than those that are front and center in the newspapers these days. The issue of retaliation is something that we have talked about a fair bit. I’m frankly surprised that when these issues began to hit the public’s attention back in April, we didn’t hear more from the investment banking community about the retaliation that they felt and the pressure that they felt from the client companies. I thought that would be a natural way to explain to the world, “Wait a minute, we’re not the bad guys.” That argument was not made.
Faber: Why haven’t we heard heard more?
Spitzer: Frankly, because I think the evidence was so damaging that it simply didn’t resonate. It was simply not a meaningful response. Having said that, the issue of retaliation is something that we are trying to confront, possibly through brightline prohibitions. Of course the prohibitions are only as good as the enforcement. And so we are working at that. And we are trying to figure out mechanisms to provide that comfort to analysts -- from the investment bankers, from the clients, from the mutual funds, from whatever set of relationships may exist that provide this additional pressure. They’re very real, and they have to be dealt with.
Faber: You are the attorney general of the state of New York, which faces an enormous budget deficit. The city of New York and Mayor Michael Bloomberg are dealing with about a $5 billion budget deficit. I’m a resident of New York City. I’m gonna hate to see my streets dirtier, more crime or whatever it’s going to take. You’re attacking an industry that employs a great many people, especially people who have large tax bills. To what extent do you start to work to the detriment of the citizens of this state by some of the efforts that you’ve undertaken?
Spitzer: Well, two things. First, some of the investment banks have suggested to the state, I think, to save a little bit of money by eliminating my investor protection bureau. They thought that would be a good way to save a few hundred thousand dollars. Second, the way you phrased the question is wrong. I am not attacking the industry. What I am doing is attacking fraud, just as we attack fraud in the context of political corruption, organized crime, health care, whatever sector it may be. The industry will be stronger as a result of the general public’s confidence that results from the industry cleaning up its act. I have absolutely no doubt about that. And there is an atrophying effect, a corrosive effect to the sort of problems that we revealed that ultimately would have brought the industry down of its own weight had these problems not been confronted. So, yes, the industry right now is suffering. It is not suffering because of the investigations; it’s suffering because there’s no deal flow. The equity markets are not in good shape. Interest rates are as low as they’re gonna get, so the debt market simply doesn’t have a whole lotta move. There is no revenue stream there for the industry. That is why the industry is suffering. Which makes it, I would argue, an especially unique and opportune moment to clean up these structural problems, so that when the economy begins to come back, the industry will be poised to take advantage of the confidence the public should have in it.
Faber: Your efforts may well result in a fundamental and seminal change in the way research is conducted that results in much lower compensation levels for members of this audience and others. Sorry to say, but they already know that. And . . .
Spitzer: Well, there’s a back door here, so I can get out, so that’s all right.
Faber: . . . And a reduction in employment. Certainly, that has to factor into what you’re thinking, in some ways, as a politician.
Spitzer: Let me say, no, well . . . First of all, it doesn’t factor into what I think. I was trained as a prosecutor. And I will do what I was trained to do in Bob Morgenthau’s office, which is you go after cases wherever you find them. What I would say to the analysts who were getting $20 million a year -- of which $18 million was essentially a percentage of the investment banking revenues -- is: That shouldn’t have been paid to them. If they’re getting $2 million a year because that’s the value of the research they generate, God bless ‘em, that’s what they should get. The incremental $18 million that was a percentage of investment banking revenues that they were claiming simply is not a legitimate analyst compensation, and as you see the new rules that have been written ether in the Merrill settlement, or my guess is, in any global resolution, or in any individual company settlement that emerges, you will see outright prohibitions on investment banking revenues and the garnering of investment banking revenues being part of the compensation package. That’s as it should be. I have no qualms in saying that, and to folks that are going to say, “Gee, I’m going to be getting a little bit less,” so be it.
Faber: To what extent is there a threat that ultimately the individual investor will be hurt, because the investment banks will cut back on their staffing levels, will only focus on the areas that are most liquid, certainly? And therefore you will have less coverage of many company stocks. Coverage is a valuable currency in and of itself -- simply offering it, in many cases, can result in getting banking business. To what extent is that a threat, and ultimately does that work to the detriment . . .
Spitzer: I’m not sure, David, that there’s a correlation between the improper banking/analyst practices we are seeing and excess coverage or broader coverage. The problem with orphan stocks, stocks that aren’t covered, stocks that need coverage, is a very real one. I think all regulators, at least those who understand the market, understand that we are thinking about ways to ensure broader, deeper coverage of those stocks. And there are a bunch of ideas out there. None of them has been implemented yet. But I think that is an issue that is discrete and separate from the issue of how analysts are relating to the investment banking side.
Faber: To the extent that you can share with us and other members of the press who are here, where do the settlement talks stand? You know [SEC chairman] Harvey Pitt is still in his job and is going to be relieved of it. Some people have said, “Well, that is going to potentially slow the cooperation between your office and the SEC.” How far along are things? Is it possible we’re gonna see an industrywide settlement before the end of this year?
Spitzer: Is it possible? Certainly. Do I hope so? Absolutely. Do I think it’s likely? I think there’s a good shot. I would say this, and I’ve said it to a couple of people I met last night, with [SEC enforcement chief] Steve Cutler, with Harvey Pitt, with a bunch of others. We are trying very hard to work through these issues. Does that mean we will succeed? Of course not. There are still many trapdoors we can fall through, many serious issues to be resolved. The members of the industry have spoken not always with a unitary voice, which is, of course, what you would expect, and so it is conceivable to me that we will get deals either with the industry or with various members of the industry. We on the government side have a pretty fair and accepted view of what we think the rules should look like. And I think that I’m quite confident that Harvey Pitt’s departure at some point down the road will not slow this down. There is an intellectual and philosophical agreement among the government regulators, and I think we are now in the position to say to the industry: “Here it is. If you want it, wonderful; if not, so be it, then we’ll proceed with alternative approaches.”
Faber: What do you think is going to be the response from the industry?
Spitzer: You tell me. This is . . . I know, Sallie, somebody tell us. I don’t know. We’ll be waiting to find out.
Faber: Well, Sallie Krawcheck is running a new unit at Citigroup, and they have moved to separate it, at least internally. Is that enough? Is that the kind of a thing you are going to welcome on the part of the other investment banks if they follow suit?
Spitzer: Is it enough? No. I don’t mean to pick on one company or to look at one paradigm and say why it is sufficient or not sufficient. But I think, clearly, there you have a step that is affirmative, a step that is helpful, but you still have research that is reporting back to the same board of directors, which has theoretically the same concerns, tensions; that looks to the investment banking side; that looks at the revenue stream; and information can go back and forth. There is not the sort of division that would lead to the purity of research that we would aspire to. Does it help? Of course. And so therefore did I and other regulators look at it and say this is a good step? Absolutely.
Faber: You seem to be implying that ultimately the solution would be something that truly separates banking and research, perhaps even through a spin-off of some kind and only through that.
Spitzer: No, I didn’t say that either. What I said is that it would be a partial solution. There may be other mechanisms that you can put in place to try to craft a resolution that in aggregate gives to retail consumers the type of research that they deserve and that they need, based on which they can then make honest evaluations.
Faber: And are you hearing those kinds of solutions from the people you’re dealing with to try and craft a settlement?
Spitzer: Oh, sure. We’ve made a lot of progress. Does it mean that they’re happy about it? No. Does it mean that they are doing it begrudingly? Maybe. Does it mean that they will say, “Sure, we have to do it, because we’re at a disadvantage from a negotiating perspective and will bad-mouth it every way we can”? I’ve seen that happen before. We’ll see what happens. But I think we have made some significant progress. I also step back and put things in a slightly larger time frame. Yeah. The time frame right now being that it’s ten after ten. But the more important time frame being that on April 7, the day before we announced the first case against Merrill, I don’t think the public at large, I don’t think -- some journalists understood the problem -- but I don’t think there was an acceptance that there was a significant structural issue that had to be addressed. We are now here eight, nine months later, and we are debating the various range of solutions. And that’s fine. There will be disagreement; there will be a fair debate about how to craft this. Having said that, there is now, I think, almost a uniform acceptance that the diagnosis was correct.
Faber: Mr. Attorney General, you have mentioned the time, and we are out of it. So I want to thank you on behalf of everybody. I know Mike Carroll’s gonna come up and make closing statements. But thank you for being here, thanks for entertaining my questions and being so straightforward.
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