At his Iconoclast blog, Declan McCullagh has a very good write-up of the broad sweep of NSA surveillance and the resurrection of the Total Information Awareness program in a new guise.
At his Iconoclast blog, Declan McCullagh has a very good write-up of the broad sweep of NSA surveillance and the resurrection of the Total Information Awareness program in a new guise.
In 2002-2005 I documented in some detail what today’s Wall Street Journal editorial referred to as Eliot Spitzer’s “consistent excesses as Attorney General.”
A January 2003 piece on “Spitzer’s Shakedown” revealed the fatuous nature of his inquisition against Wall Street.
Shortly after one of these articles appeared I received a phone call at home from an investigative reporter with one of the largest New York newspapers. He prodded me for quite a while to find out if I had been influenced or bribed by one of the companies Spitzer had attacked. Did I know anyone at, say, Merrill Lynch? (Nope). Do I own stock in the company? (Not then, and I’m currently shorting financials.)
I explained that nobody has accused me of any breach of integrity since I began writing in 1971. Besides, it would be very expensive to bribe me, I joked, because I had accumulated more money through investing than I know how to spend. I asked the reporter where he had gotten this very bad tip. He told me he had been contacted by Mr. Spitzer’s office. Hardball was their favorite game.
What follows is an unpublished February 2005 speech I gave to some small group in D.C. (which paid me less than half what Gov. Spitzer apparently spent for far less entertainment). Excerpts later appeared in my “Trial by Press Release.”
Regulation by Litigation
By Alan Reynolds
“I was asked to say a few kind words about Eliot Spitzer. But that would be such a difficult chore I would be compelled to charge an exorbitant fee for an extremely short talk. In the interest of frugality, I’ve decided to tell you what I really think.
Conflict of interest might be a good place to start.
When travelers use a travel agent, the agent is apt to be paid a commission only by certain hotels, tours and cruises. If customers view that as “a conflict of interest,” they might worry about being steered to an overpriced vacation at some place they don’t really want to visit.
When jobseekers use an employment agency to find a job, the commission is likely to be paid by the employer. If customers view that as a “conflict of interest,” they might worry about being steered to the wrong job at the wrong salary.
When consumers go to a State Farm office to inquire about home or car insurance, the agent they talk to is paid by State Farm. If customers view that as a “conflict of interest,” they may worry about being steered to the wrong policy at an inflated price.
When homebuyers buy a house, the realtor is usually paid a commission by the seller. If customers view that as a “conflict of interest,” they might worry about being steered to the wrong house and paying an inflated price.
In fact, consumers are neither naïve or gullible, so they don’t share Mr. Spitzer’s paranoia about conflicts of interest. On the contrary, the fact that many sorts of brokers and agents are often paid by sellers rather than buyers suggests this is a method of compensation all parties must find mutually satisfactory, otherwise it would not have survived in the competitive marketplace.
“Conflict of interest” does not depend on whether brokers are paid by sellers or buyers, because any broker who did not continually earn a good reputation by taking care of customers would soon lose clients to those who do. Insurance companies have no incentive to pay contingent fees to brokers who cannot attract and retain moderate-risk corporate customers for their policies, for example.
PRESUMPTION OF GUILT
Moving on to Eliot Spitzer’s lucrative backroom deals with financial firms, mutual funds and insurance brokers, we have to start with a big question: Why do companies like Merrill Lynch or Marsh & McLellan rush to settle if they’re not guilty?
Answer: The Martin Act. The 1921 Martin Act gives New York’s AG unique power to smear a company, industry or profession in the press, and to threaten to unleash interminable class action suits unless the target companies write a big check to Albany. Power corrupts and Mr. Spitzer has too much of it. From his point of view, power is delightful and absolute power is absolutely delightful.
The Martin Act has been called “the legal equivalent of a weapon of mass destruction.” Writing in Legal Affairs last June, Nicholas Thompson explained that the Martin Act empowers the New York attorney general “to subpoena any document he wants from anyone doing business in the state… People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination… . To win a case, the AG doesn’t have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. Plus, when the prosecution is over, trial lawyers can gain access to the hordes of documents that the act has churned up and use them as the basis for civil suits.”
That last feature – the fact that Spitzer’s e-mail collections are irresistible bait for class action lawyers– makes it suicidal for any company to challenge a Martin Act accusation. The vagaries of the law make it too easy to be found guilty of fraud for simply being careless or unclear. And any admission or finding of guilt would soon bring an unbearable flood of class actions suits.
In the ULR complaint, for example, the company stands accused of not making “appropriate” disclosure, and of misrepresenting “the reasonableness of their compensation.” Since “appropriate” and “reasonableness” are matters of opinion, so too is the alleged criminality.
Don’t be too surprised if Mr. Spitzer’s run for governor turns out to be largely bankrolled by trial lawyers. Eliot Spitzer is the best gift to trial lawyers since the invention of asbestos.
There is no way to know beforehand if you have committed fraud under the Martin Act. The only sure way to find out is to read the papers and see if Mr. Spitzer has put out a press release about your company.
TRIAL BY PRESS RELEASE
Trial by press release has certain predictable effects:
1. First, the accused company’s stock will lose half its value in a few days, largely because of the threatened expense of endless litigation.
Daniel Gross, writing in Slate last October, noted that “Spitzer doesn’t like taking cases to trial. Instead, he has developed a more powerful tactic: He exploits the threat of stock declines and business losses to force industries to change… .He didn’t simply indict. He issued press releases.”
In the first Spitzer assault by press release, Merrill Lynch’s stock fell by $10 billion, making it look like a relative bargain to pay $100 million in ransom.
Marsh & McLellan’s stock likewise lost half its value, for a while, and the firm laid off 3000 people.
“A Spitzer blitz,” wrote Henry Manne, “with its inevitable stock price decline, calls for a fast triage response in order to stave off a calamity on the scale of Arthur Anderson or Enron.”
Incidentally, finance and insurance are (or were) important industries in New York City. By some strange coincidence, the unemployment rate in New York City has been remarkably high ever since the Spitzer blitz began – 7.9 percent in 2002, 8.4 percent in 2003, and still 6.1 percent at the end of 2004 (compared with 5.3 percent for the State). This raises another big question: Can New York City afford Eliot Spitzer?
2. Second, unproven accusations about misdeeds by a few individuals are invariably described as proof of and industry-wide “scandal” or “corruption.” Spitzer’s press release about Marsh was titled “Investigation Reveals Widespread Corruption in Insurance Industry.” But smear words such as corruption and scandal have no legal meaning.
In his testimony before a Senate subcommittee, Spitzer complained that “favoritism, secrecy and conflicts” rule the insurance industry. But favoritism, secrecy and conflicts are purely imaginary crimes. Mr. Spitzer might actually hope to criminalize such open-ended sins, along with corruption and greed. But that would replace the rule of law with the rule of lawyers.
3. Third, it’s all about money. Eliot Spitzer has become a tax farmer for Albany, raising close to $4 billion in hush money with only the vaguest hints about disgorging any of it alleged victims. Spitzer deals are always settled in cash without formal charges, due process or even admission of guilt. I hesitate to call this a shakedown or extortion – because neither term seems quite strong enough.
Write a big enough check, or get into bed with Spitzer’s teammates, and the most dramatic threats and accusations will magically disappear.
Marsh & McClellan quickly fired CEO Jeffrey Greenberg because Spitzer asked for his head. And their new CEO, Michael Cherkasky, just happens to be an old friend and former colleague of Spitzer’s. On the same day Mr. Chekasky was hired, Spitzer stopped threatening criminal charges against the company and quietly dropped the complaint’s explicit demand for punitive damages. Did someone speak of corruption?
To invest in similar anti-Spitzer insurance, Morgan Stanley prudently hired one of Spitzer’s top lawyers, Eric Dinallo. Bear Stearns hired another, Beth Golden who, the Washington Post explained, “can help explain the Martin Act.” As if anyone could.
4. Fourth, Spitzer has apparently appointed himself the nation’s wage and price control czar – three decades after Richard Nixon abandoned that policy. Has involved himself in tinkering with mutual fund fees, Dick Grasso’s employment contract, Marsh & McClellan’s commission structure, and (I’m not making this up) the fact that New York City washroom attendants worked for tips rather than wages.
THE MARSH COMPLAINT
Spitzer’s charges have never been tested in a court of law, for good reason. Trial by press release does not have to let any court making findings of fact, or let the accused face their accusers (usually competitors), or prove anything beyond reasonable doubt. Spitzer’s complaints merely have to dig up a few seemingly juicy e-mail tidbits to be echoed uncritically by the gullible media.
In the Marsh & McLellan and ULR (Universal Life Resources) complaints, Spitzer tries to depict a world in which professional buyers of insurance at the world’s largest corporations are mindless sheep and insurance brokers are their evil shepherds. He told a Senate panel, “the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised.” In ULR’s case, these supposedly clueless purchasers include Intel, Colgate-Palmolive, Eastman Kodak, Marriott, United Parcel and Dell. Nearly all of Marsh’s clients are also Fortune 100 firms. These are scarcely innocent babes in the woods. They can and do switch brokers or deal directly with insurance companies.
Mr. Spitzer’s belief that such sophisticated corporate buyers could be routinely overcharged for insurance by one or two insurance brokers without anyone catching on or shopping around is literally unbelievable.
Fortunately, Spitzer’s office eventually put the exhibits online for the Marsh case. That lets us check to see if quotations used in the Complaint against Marsh were ripped out of context. It turns out they often were.
Paragraph 55 of the Complaint claims “Marsh asked ACE to refrain from submitting a competitive bid because Marsh wanted the incumbent, AIG, to keep the business.” This is followed by a quote that seems to suggest that ACE “could get to $850,000 if needed” – the same bid as AIG. But the next sentence of that quote is suspiciously omitted. What is said was, “Apparently both Marsh Atlanta and Client are extremely unhappy with AIG and if we can put offer on table at $800,000 we’ll get it.”
Paragraph 66 lists assorted complaints with the New York office solicited from Marsh regional managers. One is quoted asking, “What are the rules on pricing – are we to quote our numbers or what MGB (Marsh Global Booking) wants us to quote?” The next sentence, however, is curiously omitted. What it said was, “We get more price-driven deals from them [MGB] than anyone. The local offices don’t push us for price the way they do!” This regional manager’s anxiety about pricing was obviously not about being pushed too hard to raise prices (as Spitzer implied) but to lower prices – to make price-driven deals.
Paragraph 63 claims Munich-American Risk Partners disclosed to a client “contingent commissions that were being passed on to the client.” But that is not what the cited letter says. What it actually complains about is that the commissions cannot be passed on, and are therefore burdensome to Munich. The letter said Munich and Marsh should “find a way to share in the financial impact rather than having Risk Partners share the entire burden.”
Paragraphs 64 to 66 echo other self-interested gripes from Munich about not getting much business from Marsh, so why should they even bother to show up at client meetings. Yet the undisclosed part of this same letter admits Marsh wasn’t recommending Munich because Munich’s bids were too high. The business was instead going to Zurich, which did not pay contingent commissions to Marsh. The Munich executive wrote, “Zurich is currently very aggressively pricing umbrella business … We currently stand almost no chance of competing with Zurich … Their pricing approach seems to be just what MGB is looking for… . Pricing still drives that operation [namely, MGB].” The undisclosed complaint from Munich was not that Marsh was charging clients too much, but that Munich’s competitors were charging too little.
Many of the most serious assertions are just unverifiable hearsay, supported by no evidence at all. A key complaint, for example, asserts that, “Typically, Hartford’s underwriters were told to price the quote or indication 25% above a particular number, and that by doing so Hartford need not worry that it would get the business” (59,60). Why would Hartford worry about getting the business? Don’t they want to sell insurance? If Hartford typically quotes too high a price, then Hartford need not ever worry about selling any insurance. Why would they go along with a deal like that?
The complaint says, “A cast of the world’s largest insurance companies … have paid hundreds of millions of dollars for Marsh to steer business their way.” Yet Marsh cannot steer business to one without steering it away from another, so why don’t the others complain?
The only alleged evidence of “steering” is in the final paragraphs 70 through 74, concerning the Greenville South Carolina School District. The choice among four bids came down to ACE and Zurich. ACE paid contingent commissions to Marsh but Zurich did not. Zurich won the bid. If that was steering, Marsh needs driving lessons.
Spitzer does not claim the highest bid won in this case or any other, yet the antitrust portion of the case nonetheless asserts (without a shred of evidence) that “clients purchased insurance at prices higher than they would have paid.” Where’s the proof?
Paragraph 42 asserts that “insurance carriers pass the cost of contingent commissions directly on to the clients in the form of higher premiums” If it that were true then carriers like Zurich who refused to pay such commissions could charge lower premiums and win the bid, as Zurich did against ACE and Munich. No carrier can pass on any cost if another carrier wins the bid.
In short, to make his case, Mr. Spitzer had to rely on what the Martin Act refers to as deception, concealment, suppression and false pretense.
The cash pay-off in the Marsh case doesn’t matter much – a capricious Spitzer tax has become price of doing business in New York, at least for finance and related middlemen. But the resulting unlegislated change in the way brokers are compensated, on the other hand, is likely to injure clients and insurers alike – if it spreads and sticks.
Methods of compensating people for their services evolve for good reasons and should not be meddled with lightly.
Contingent fees in the insurance business are often based on the profitability of the business, so that brokers who keep bringing high-risk clients to insurers will not be rewarded for doing so. This solves what economists call an “agency problem” – just as CEOs need incentives to act in the stockholders’ interest rather than their own, independent brokers need some incentive to act in the carrier’s interest rather than their own. Contingent fees for renewing policies likewise provide a clear incentive for brokers to keep clients satisfied, to minimize needless churning, and to communicate special client needs to insurers. It is not at all clear that any alternative incentive system would work as well.
Yet Mr. Spitzer’s myopic vision of “conflict” demands that insurance brokers stop collecting such fees from carriers, so Marsh and some insurers have capitulated. If all brokers and carriers did the same, however, that would leave only two alternatives. One possible alternative would be to virtually eliminate independent brokerage, reverting to captive single-company agents and direct negotiations between insurance companies and clients. Another alternative might be to charge higher brokerage fees to clients, but high client fees would also tend to eliminate a lot of independent brokerage. So would underpaying brokers.
If Spitzer succeeds in regulating and legislating insurance commissions arbitrarily by the threat of bad publicity and endless litigation, Henry Manne predicted in the Wall Street Journal that “we may witness the demise of specialized insurance-brokerage firms … [with] a decrease in market specialization … [and] economic efficiency.”
In a CNN interview, Spitzer once referred to himself as a “prosecutor-slash-regulator.” He’s become a guerilla regulator, operating with no legitimate authority, rewriting laws and regulations through public threats and private deals. He has appointed himself the nation’s regulatory czar, price controller, legislator and judge.
I am told that Eliot Spitzer is running for Governor of New York. He cannot count on my unqualified support.”
A further development in the cross-border supply of gambling and betting services broke today when the European Union announced they would launch a formal investigation into the selective (and retroactive) prosecution of European gaming interests by US authorities.
This is yet another twist in the saga first brought to light by Antigua’s case against the United States in the WTO. That case (summarized here and updated here, here, here, and here) sparked a slew of indirectly related skirmishes, a plethora of “David vs. Goliath” headlines, and an unprecedented reaction from the United States to pick up their ball and go home. The various twists and turns of the dispute have provided ample fodder for trade junkies in the form of commercial and systemic issues: Does the WTO dispute settlement mechanism provide effective recourse for big as well as small members? How should WTO members respond when one of their cohorts wants to change the nature of the contracts between the parties? How do members balance their rights and obligations in the context of issues of public morals?
The questions look far from answered because if the EUs investigation proceeds, a new WTO case could be on the horizon. Although the EU and the United States came to a settlement in December over the United States’ wish to withdraw its commitment to open its market to the cross-border supply of gambling and betting services, the details of that settlement are sketchy. And the December deal pertains to compensation for the withdrawal of market access going forward: unless and until that deal is ratified by all WTO members (including those who are asking for compensation of their own), the U.S. obligations stand and so does the ruling that found the United States was in breach of those obligations.
In other words, while the United States might eventually be able to get away with changing its obligations to provide WTO members access to the lucrative U.S. gambling market, in the meantime their (discriminatory?) prosecution of offshore interests leaves them vulnerable.
Sen. Barack Obama resumed his winning streak by beating Sen. Hillary Clinton in the Wyoming caucuses after a brief full-court press by both sides. The Wall Street Journal noted one of Obama’s themes in the rugged-individualist Cowboy State:
Tailoring his message to the state’s antigovernment streak, Sen. Obama put new emphasis on his criticisms of the Bush administration’s warrantless wiretaps and other heightened law-enforcement activities implemented as antiterror measures. “You can be liberal and a libertarian, or a conservative libertarian,” Sen. Obama told a crowd of about 1,200 at a recreation center here. But “there’s nothing conservative” about President Bush’s antiterror policies. “There’s nothing Republican about that. Everybody should be outraged by that,” he added.
He may have been reading some of the articles David Kirby and I wrote about the libertarian vote and the Mountain West:
In the Goldwateresque, “leave us alone” Mountain West, Republicans not only lost the Montana Senate seat; they also lost the governorship of Colorado, two House seats in Arizona, and one in Colorado. They had close calls in the Arizona Senate race and House races in Idaho, New Mexico, Colorado, Nevada, and Dick Cheney’s Wyoming. In libertarian Nevada, the Republican candidate for governor won less than a majority against a Democrat who promised to keep the government out of guns, abortion, and gay marriage. Arizona also became the first state to vote down a state constitutional amendment to define marriage as between one man and one woman….
If Republicans can’t win New Hampshire and the Mountain West, they can’t win a national majority. And they can’t win those states without libertarian votes.
Jeffrey Rosen has praised Obama’s civil libertarian record. Lest we get too excited about Obama’s new libertarian appeal, though, we should note that in his speech he also said he would undermine trade agreements and promised enough goodies from the Treasury to make Ted Kennedy happy.
For all its wonders, technology is not something policymakers can sprinkle on deep-seated economic and social problems to make them go away. Electronic employment eligibility verification - the idea of automated immigration-background checks on all newly hired workers - illustrates this well.
A national EEV program would immerse America’s workers and businesses in Kafkaesque bureaucracy and erode the freedoms of American citizens, even as it failed to stem illegal immigration.
Ultimately, there is no alternative but for Congress to repair the broken immigration system by aligning legal immigration with our nation’s economic demand for labor.
Read about it in my new paper, “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.”
IMHO, the best show on television is HBO’s The Wire. Now the writers and producers are taking their passion to the pages of Time Magazine, where they rail against the injustices of the drug war and call for jury nullification. (HT: Radley Balko’s Agitator).
Cato co-published the most comprehensive book on jury nullification in 1999.
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