day the morning paper brings a fresh example of the flotsam
bubbling to the surface following the collision of corporate
greed and post-Enron reality: golden boy executives forced
to walk the plank, formerly high-flying companies “restating”
fraudulently inflated earnings, internal e-mails exposing
the depths to which Wall Street firms have sunk to boost their
Yet the word emanating from on high—from the well-appointed
congressional committee rooms of Washington to the elegant
dining rooms of Los Angeles—is that the worst is behind us.
Yes, they say, Enron was a bit of a wake-up call, but let’s
not overreact. We’ve learned our lesson, so please pass the
truffle sauce and let’s move on.
And, more than likely, that’s exactly what we’d be doing were
it not for Eliot Spitzer, the crusading attorney general of
New York, whose investigation into conflicts of interest in
the investment- banking world is ruffling feathers from Wall
Street to Capitol Hill.
His probe has so far uncovered shocking evidence that analysts
at Merrill Lynch gave investors misleading stock recommendations
in order to help promote companies with which their firm’s
investment bankers were doing business. It has also forced
the sheep-in-wolf’s-clothing Securities and Exchange Commission
to actually begin to do its job and launch its own inquiry
into the matter.
The result? Well, surprise, surprise, Spitzer is now being
told to back off and leave the matter to the big boys in Washington.
While being careful not to cross jurisdictional swords, SEC
chairman Harvey Pitt gently reminded Spitzer that “only the
federal government can set nationwide standards.” And U.S.
Rep. Richard Baker (R-La.), whose Capital Markets subcommittee
held hearings on conflicts of interest on Wall Street, cautioned
Spitzer: “It is essential that the SEC now lead the concluding
phase of this inquiry.” Concluding phase? Baker thinks the
inquiry is wrapping up while Spitzer, who is after fundamental
reform, knows it has barely begun.
So now he’s having to take on both the bad guys and the
guys who are supposed to protect the public from the bad guys.
If Congress and the SEC had done their jobs, there would be
no need for Spitzer.
The good news is that he is a man on a mission and won’t be
easily deterred. “Nobody can force me to pull back,” he told
me, “and I have no intention of doing so.” As for the urgings
of Messrs. Pitt and Baker, Spitzer doesn’t pull any punches:
“The hearings conducted by Mr. Baker were pointless. They
didn’t ask the right questions and they didn’t produce the
kind of evidence necessary to bring about real reform. As
for the SEC, it clearly didn’t step up and prevent these abuses
Spitzer is savvy enough to realize that he won’t be able to
overhaul the way Wall Street does business without the support
of the public—and its outrage. That’s why he released those
damning Merrill Lynch e-mails, in which the firm’s analysts
privately trashed companies as “a piece of crap” (and other,
less publishable, synonyms) while publicly urging investors
to buy shares in the same companies. The e-mails also show
that the highly touted “Chinese Wall” between Merrill Lynch’s
stock researching analysts and its stock-promoting investment
bankers was more of a wide-open gate. “The whole idea that
we are independent from banking,” wrote one analyst, “is a
Spitzer’s gambit has paid immediate dividends, shaming Merrill
Lynch’s CEO, David Komansky, into offering a mea culpa—albeit
a mealymouthed one. “Anything that happens on my watch,” said
Komansky, “I’m responsible for. Those e-mails were embarrassing
to me, and I truly regret that they ever happened.” Notice
that he doesn’t regret the out-and-out fraud the e-mails reveal;
he regrets the e-mails. How much do you bet that the newest
Merrill Lynch employee-training session is something along
the lines of “Making the Delete Key Your New Best Friend”?
Komansky’s carefully calibrated contrition was the very model
of the latest in PR-approved damage control: apologize quickly,
accept responsibility, and put the past behind you. Only you
don’t really apologize, and you don’t really accept responsibility.
It also doesn’t hurt to hire high-profile power players to
help guide you through the crisis. To that effect, Merrill
Lynch has retained Rudy Giuliani as an advisor. Maybe he can
give Merrill Mike Milken’s number.
But all the apologies and damage control in the world won’t
make this problem go away. Too many people were lied to and
financially devastated along the way. Since the Merrill Lynch
e-mails were made public, lawyers across the country have
been inundated with calls from angry investors looking for
Lynch used to be the gold standard for how an investment banker
should do business,” Philip Aidikoff, president of the Public
Investors Arbitration Bar Association, told me. “Now, at my
firm alone, we’re getting 40 to 45 calls a day from Merrill
customers who feel they’ve been duped.”
So Merrill Lynch has gone from gold standard to “crap” pusher.
And it’s not alone. To pull our corporate culture out of the
muck, it’s going to take more than public contrition and non-stop
mea culpas on CNBC, which, given the current volume, may have
to turn itself into the Self-Flagellation Channel. It will
take some CEOs paying a real price for fraud, and securities
regulations with real bite.
Stay tuned, this one is far from over.