liot Spitzer

The fall of ethics man

A shocking descent from grace for Eliot Spitzer, New York state’s governor

ELIOT SPITZER made his mark as the “sheriff of Wall Street” and then as the steam-rolling governor of New York state. As the state’s attorney-general he came to prominence by holding New York’s powerful financiers to the highest of ethical standards and earned a reputation for zealously unearthing wrong-doers. So the revelations on Monday March 10th of his alleged connection to a prostitution ring caused jaws to drop and in some circles—mostly on Wall Street—cheers for Mr Spitzer’s come-uppance.

Mr Spitzer was reportedly caught arranging a rendezvous last month at a swanky hotel in Washington, DC, with a prostitute from Emperors Club VIP, a high-end call-girl business. Reports indicate that the FBI initially suspected that Mr Spitzer was involved in a case of public corruption that included a money-laundering scheme. This led federal agents to investigate the prostitution ring and begin electronic surveillance of his phone calls, texts and e-mails.

Federal prosecutors filed conspiracy charges on March 6th against four people who managed the up-market prostitution club. A 47-page affidavit outlining the evidence revealed that “clients” paid up to $5,500 an hour and as much as $31,000 a night for the club's services. But interest centred on one particular customer of the Emperor Club.

“Client 9” (reportedly Mr Spitzer) arranged to transport “Kristen…a petite, very pretty brunette” from New York to Washington, DC. In doing so, the governor apparently would have violated the Mann Act, which makes it a federal crime to transport a person across state lines to pay them for sex. The affidavit makes clear this was not the governor’s first “encounter”. After several calls to determine his existing credit with the club and whether or not his deposit had arrived, Mr Spitzer handed over $4,300 to “Kristen”. That sum included a down-payment for a future meeting.

What makes the allegations so extraordinary is that Mr Spitzer had forged a reputation as the epitome of the incorruptible lawman. He made his name nationally for his dogged targeting of Wall Street in search of legal and ethical wrong-doing. Time even anointed him “Crusader of the Year” in 2002, after his landmark settlement with securities firms accused of misleading investors.

It was this image that convinced voters to elect Mr Spitzer as governor of New York in 2006 with a sweeping mandate to clean up state affairs. He promised to battle corruption and to usher in a new era of ethical standards. The exposure of his hypocrisy is all the more poignant given that he busted at least two prostitution rings during his time as attorney-general.

Even before his latest, probably terminal, setback Mr Spitzer’s 14 months as governor had been tumultuous and marked by scandal and turmoil. He tried in vain to make good on a campaign promise to allow undocumented immigrants to apply for driver’s licences. Last summer, a feud between Mr Spitzer and the state legislature contributed to political gridlock. Even by New York state’s standards the feuding caused new lows of dysfunction. Mr Spitzer was accused of using state police to spy on political rivals. But now the man who was elected to shake up state politics is likely to lose his job and may face prosecution.

As if New York state needed more problems, the latest scandal will distract from, if not halt, state business. Mr Spitzer had been preparing for a fight to get his contentious budget passed by the state legislature later this month. The budget, as well as many of his other reforms, is now in serious jeopardy. Mr Spitzer’s self-destructive behaviour has shocked not only his closest advisers but even the most cynical of political commentators.

Mr Spitzer used a brief news conference on Monday to apologise to his family and the public but did not address his political future. But it is hard to see how he can remain in office. David Paterson, Mr Spitzer’s lieutenant-governor, is said to be preparing to assume his boss’s duties.

Spitzer, Ethics Crusader, Now Probed Over Own Conduct (Update3)

March 11 (Bloomberg) -- New York Governor Eliot Spitzer, who spent the last nine years pursuing malfeasance in government and on Wall Street, now finds himself a target following reports linking him to a prostitution ring.

After a public apology yesterday for behavior ``that violated the obligations to my family and that violates my or any sense of right or wrong,'' Spitzer faces calls from friends and adversaries for his resignation less than 18 months after winning election with the biggest majority in state history.

``It's very unlikely he can survive,'' said Lee Miringoff, director of the Marist College Institute of Public Opinion in Poughkeepsie, New York. ``Everything is made more problematic because it's an issue of integrity, which had been his strong suit.''

On Wall Street, where Spitzer made his reputation as state attorney general with battles against firms including American International Group Inc. and Citigroup Inc., ``I can only tell you that people are somewhat gleeful,'' said Chuck Gabriel, whose Washington firm, Capital Alpha Partners, provides political analysis to institutional investors. ``This is a guy who had Wall Street under his thumb, and now he's fallen into the same kind of trap as those who suffered under his hand.''

IRS Probe

The New York Times reported today that the investigation into Spitzer's behavior was triggered by a routine Internal Revenue Service check.

IRS investigators examining suspicious financial transactions reported to them by banks spotted several unusual movements of cash linked to the governor of New York, the newspaper said.

Spitzer appeared to be trying to conceal the source and destination of thousands of dollars, which went to the accounts of what seemed to be shell companies, the newspaper reported, citing unidentified officials with knowledge of the matter.

Messages left today at Spitzer's office by Bloomberg News outside regular business hours weren't answered. Calls and e- mails sent today to the Manhattan U.S. Attorney General's office at the same time didn't get a response.

The Times reported on its Web site yesterday that Spitzer, a Democrat, was caught on a federal wiretap planning to meet a prostitute in Washington after arranging for her to travel from New York. A person briefed on the federal investigation said Spitzer was the individual identified in an affidavit as ``Client 9'' who met with a woman in the Mayflower Hotel in Washington, the Times reported.

High Standards

Client 9 paid $4,300 for an appointment that began on Feb. 13 and ended at 12:02 a.m. the next day, according to the affidavit.

``It goes beyond anything I've ever seen,'' said former three-term U.S. Senator Alfonse D'Amato, 70, a Republican. ``He had enormous potential. He was outstanding as attorney general but if you're the crusader, you're going to be held to the highest standards, and so I think he has to leave, and soon.''

Rebekah Carmichael, a spokeswoman for Manhattan U.S. Attorney Michael Garcia, whose office is prosecuting the prostitution case, declined to comment when asked if Spitzer was under investigation for links to the ring, known as the ``Emperors Club.''

At his 1-minute, 18-second Manhattan briefing with his wife, Silda, by his side, Spitzer, 48, didn't specify the behavior by which he ``disappointed and failed to live up to the standard that I expect of myself.'' The governor has three daughters.

Public Schedule

Spitzer said politics was more ``about ideas, the public good and doing what is best'' than about individuals. He promised he would report back ``in short order.''

The governor's office said Spitzer would be in New York City today, with no public activities scheduled.

``It's another instance in which a very smart, very powerful man brings himself down through his own hubris,'' said William Cunningham, a political consultant who worked on the senior staffs of former Democratic New York Governors Hugh Carey and Mario Cuomo. ``We have seen it with Richard Nixon, we've seen it with Bill Clinton, very successful people who think they have their own set of rules, and self-inflict their own wounds.''

Washington Testimony

The encounter by ``Client 9'' with the prostitute occurred while Spitzer was in Washington to testify before a House subcommittee on the higher costs of government debt caused by the impact of the subprime crisis on bond insurers.

That testimony held the prospect of helping to reverse a yearlong slide in the governor's approval rating, political analysts said.

The governor's popularity plunged last year after disclosures that his staff had directed state police to compile records on Republican Senate Majority Leader Joseph Bruno's use of state-owned aircraft. In November, the governor withdrew his proposal to permit illegal immigrants to obtain drivers licenses amid widespread opposition.

H. Carl McCall, a former state comptroller and gubernatorial candidate in 2002, said Spitzer ``will have to decide whether under these circumstances he can provide the leadership to carry forward his priorities.''

Hevesi Resignation

Spitzer played a role in forcing McCall's successor as state comptroller, Alan Hevesi, to resign amid disclosures that Hevesi had used his state-paid driver as a chauffeur for his disabled wife, at a cost to the state of more than $170,000.

He gained nationwide attention after investigations by his state attorney general's office exposed conflicts of interest between Wall Street analysts, who misled investors on the value of Internet stocks to win underwriting assignments during the dot-com boom in the 1990s. Securities firms eventually paid $1.4 billion to settle claims from the probe.

Spitzer then investigated the money management industry in 2003, showing how hedge funds and mutual funds were given preferential treatment in the timing of their trades by brokers. Funds and brokerage firms paid more than $5 billion to resolve the federal and state investigations.

Should Spitzer step down, Lieutenant Governor David Paterson would finish the governor's term, and Bruno would be next in line.

``The important thing for the people of New York state is that people in office do the right thing,'' Bruno said in a statement.

`Shocked' Democrats

Hank Sheinkopf, the architect of Spitzer's upset victory election to state attorney general in 1998, said ``it's not likely'' the governor would survive.

``Democrats are shocked,'' Sheinkopf said. ``The state faces major economic problems and probably soon-to-be-governor Lieutenant Governor David Paterson will have to rise to the occasion.''

State Assembly Speaker Sheldon Silver, a Manhattan Democrat, issued a two-sentence statement yesterday, saying, ``The allegations against the governor are before the public. I have nothing to add at this time.''

Joseph Mercurio, a New York political consultant who has worked for both Democrats and Republicans, said politicians have survived these kinds of scandals before.

``This isn't malfeasance in office, he wasn't misusing public funds, it's a matter between him and his family,'' Mercurio said. ``But his damage control is going to have to be handled very delicately.''

Political Stability

Spitzer's removal, said D'Amato, would bring ``some political stability back to the state because Paterson's a guy who could govern in a much less partisan way. He knows how to deal with people to get things done.''

The scandal will make it more difficult to conduct the state's business, several lawmakers and political scientists said. A budget is due for the fiscal year starting April 1. The state's schools need improvement, and its health costs continue to rise. As the economy slows and revenue decreases, the political environment will become more challenging, said Hunter College political science professor Kenneth Sherrill.

``Until the governor's future is determined, the state's finances will be limbo or worse,'' Sherrill said in a telephone interview. ``The New York budget process is in flames.''

U.S. January Trade Deficit Rises 0.6%; Exports Gain (Update3)

March 11 (Bloomberg) -- The U.S. trade deficit was smaller than forecast in January as a weaker dollar propelled gains in exports that will prevent a deeper economic slowdown, while oil imports jumped to a record.

The gap grew 0.6 percent to $58.2 billion from a revised $57.9 billion in December that was narrower than previously estimated, the Commerce Department said today in Washington. Overseas demand increased 1.6 percent to the highest level ever.

The slump in the U.S. currency and sales in overseas markets including Asia may avert a deeper decline at American factories as escalating job losses hurt consumer spending. Exports are one of the few bright spots remaining in an economy that is heading toward, or may already be, in a recession.

``Trade is shaping up to be one of the few drivers of growth this year,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who forecast a deficit of $58 billion. ``Exports are remaining very strong because of the weak U.S. dollar and continuing healthy global demand.''

The trade gap was estimated to widen to $59.5 billion, from an initially reported $58.8 billion in December, according to the median forecast in a Bloomberg News survey of 71 economists. Deficit projections ranged from $57.5 billion to $62.4 billion.

After the report, the dollar rose versus the yen and was little changed against the euro. Separately, the U.S. Federal Reserve said it will hold auctions to lend as much as $200 billion in Treasury securities and increase swap lines with two foreign central banks to try to ease renewed turmoil in credit markets.

Exports, Imports

Exports climbed to a record $148.2 billion as sales of corn, refined petroleum products, computers and pharmaceutical preparations strengthened. Imports increased 1.3 percent to $206.4 billion, also the highest ever.

Imports rose as purchases of crude oil jumped, reflecting increases in the number of barrels bought and a record price of $84.09.

Excluding petroleum, the $32.1 billion trade gap was the smallest since October 2002. The oil deficit exceeded the non- petroleum shortfall for the first time since 1992.

Demand for foreign-made consumer goods slumped reflecting the slowdown in U.S. economic growth. Purchases of televisions, clothing, appliances and toys dropped.

Demand for capital equipment, such as computers and machinery, made overseas also fell.

The trade gap with China, which in 2007 passed Canada to become the U.S.'s largest source of imported goods, increased to $20.3 billion from $18.8 billion in the prior month.

GDP Outlook

After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit widened to $49.4 billion from $49 billion in December.

The narrower than previously estimated December gap may prompt economists to revise up projections for fourth-quarter growth. The price-adjusted deficit in January was smaller than the average for the last three months of 2007, indicating trade may again contribute to GDP.

The trade gap narrowed to an annualized $506.8 billion in the fourth quarter, adding 0.9 percentage point to growth. Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since 2001, when the U.S. was last in a recession.

`Cushioning' Weakness

``Trade is on track to continue cushioning the unfolding weakness in U.S. economic activity,'' economists at Goldman Sachs Group Inc. in New York, wrote in a note to clients. Goldman forecasts trade will contribute a percentage point to growth from January through March.

Higher fuel costs are making imports more expensive. Crude oil prices surpassed $100 a barrel on the New York Mercantile Exchange in January for the first time and exceeded $108 yesterday.

Exports are getting a lift from the weaker dollar, which makes American-made goods less expensive for overseas buyers. The dollar has declined about 10 percent over the past year against a trade-weighted basket of currencies from major U.S. trading partners, Federal Reserve data show.

Asian economies are buying more U.S. aircraft and industrial engines. Boeing Co., the second-largest U.S. defense contractor, last month said it plans to sell 50 helicopters to India and Malaysia this year as the two nations boost defense spending.

Caterpillar Inc., the world's largest maker of bulldozers and excavators, said overseas sales contributed to a 20 percent jump in exports of machinery and engines last year.

Foreign Investment

``What is driving it is the strength of the global mining industry, the global oil-and-gas industry and the emerging markets,'' Caterpillar Chief Executive Officer Jim Owens said in an interview on Feb. 14. ``They are investing now in big infrastructure projects and expanding mining capacity.''

The trade gap with China remains a political issue. Group of Seven policy makers in February urged China to allow its currency, the yuan, to climb against the dollar and other currencies.

Treasury Secretary Henry Paulson, answering questions after a speech in Chicago on Feb. 29, said while Chinese officials ``have been appreciating their currency much more recently,'' they are ``not ready to float'' the yuan. China ``should move faster,'' he said.

U.S. Stocks Rally on Fed's Plan to Lend Up to $200 Billion

March 11 (Bloomberg) -- U.S. stocks rallied the most since January after the Federal Reserve announced plans to lend up to $200 billion to reinvigorate the financial system.

Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. led financial shares to their steepest advance in seven weeks on expectations the Fed's move will stem credit-market losses. Nine of 10 industry groups in the Standard & Poor's 500 Index gained as the benchmark for U.S. equities rose for the first time in four days.

The S&P 500 climbed 26.94 points, or 2.1 percent, to 1,300.31 at 10:25 a.m. in New York. The Dow Jones Industrial Average added 260.27, or 2.2 percent, to 12,000.42. The Nasdaq Composite Index increased 50.06, or 2.3 percent, to 2,219.4. Fourteen stocks gained for every one that fell on the New York Stock Exchange.

``What the move really did is begin to provide some liquidity back into credit markets,'' said Kevin Cronin, head of investments at Putnam Investments in Boston, which manages $185 billion. ``It's provided some oil to the engine on the credit side, that's one of the things the equity market has recognized.''

Financial shares in the S&P 500 gained 3.5 percent as a group, rebounding from the lowest level since May 2003. Treasuries plunged, pushing the two-year note's yield up the most since 1996, as investors dumped holdings of government debt and bought stocks. The dollar rose the most in three months against the yen and rebounded from a record low versus the euro.

$200 Billion Plan

The Fed plans to make the loans in exchange for private mortgage-backed securities and other debt that has plunged in value as homeowners defaulted on their payments. Banks around the world have posted $188 billion in writedowns and credit losses stemming from the collapse of the subprime mortgage market. The S&P 500 Financials Index had lost 20 percent this year through yesterday.

Citigroup, the largest U.S. bank, rallied $1.26 to $20.95. Bank of America, the second-biggest, climbed $2.03 to $37.34. JPMorgan, the No. 3, increased $2.17 to $38.65.

Fannie Mae, the biggest mortgage-finance company, jumped $1.13, or 5.7 percent, to $20.94. Freddie Mac, the second largest, soared $1.29, or 7.4 percent, to $18.68. Countrywide Financial Corp., the biggest U.S. mortgage lender, climbed 28 cents to $4.64. Washington Mutual Inc., the largest U.S. savings and loan, added 8.9 percent to $10.93. Bear Stearns Cos. gained 8.6 percent to $67.65 and Lehman Brothers Holdings Inc. rose 8.7 percent to $46.70.

Mining Shares Gain

Newmont Mining Corp., the world's second-biggest gold producer, gained 89 cents to $50.27. American depositary receipts of Harmony Gold Mining Co., Africa's third-largest gold producer, climbed 37 cents to $13.32.

Gold advanced in London, snapping a three-day slide. Copper and silver also rose.

Weyerhaeuser Co., the largest U.S. lumber producer, climbed $3.20 to $62.19 after UBS raised its recommendation on the stock to ``buy'' from ``neutral,'' saying risk from the housing slump ``is starting to be priced in as market expectations have become more realistic.''

Texas Instruments Inc. slumped 19 cents to $29.46. The second-biggest maker of chips that run mobile phones cut its sales and profit forecasts because of slowing handset demand.

Health-care companies lost 0.3 percent, the only decline among 10 industry groups in the S&P 500. WellPoint Inc. dropped $16, or 24 percent, to $49.92 after the second-largest U.S. health insurer cut its per-share profit prediction for 2008 due to unexpectedly high medical costs. WellPoint also said weakness in the U.S. economy has limited enrollment gains.

The economic slowdown in the U.S. will be deeper and the recovery weaker than previously forecast, according to a Bloomberg News monthly survey. The world's largest economy will grow at an annual rate of 0.3 percent from January through June, a half point less than projected in February, according to the median estimate of 62 economists polled from March 3 to March 10.

Fed to Lend $200 Billion, Take on Mortgage Securities (Update3)

March 11 (Bloomberg) -- The Federal Reserve, struggling to contain a crisis of confidence in credit markets, plans to lend up to $200 billion in exchange for mortgage-backed securities.

The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. The Fed said in a statement it will hold auctions of Treasuries in exchange for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks.

Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. While they fall short of the calls by some analysts for the Fed to make outright purchases of mortgage debt, the central bank left the door open to expanding the effort.

``This is the most significant step the Fed has taken so far,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``This relieves some of the pressure'' in the credit markets, he said.

Today's steps are the latest in Chairman Ben S. Bernanke's effort to alleviate increasing strains in financial markets that are curtailing credit to homeowners and companies, even after the Fed lowered its main interest rate by 2.25 percentage points.

Last week, the Fed said it would make up to $200 billion available to banks in a separate initiative to help boost liquidity.

New Tool

The Fed today set up a new tool, the Term Securities Lending Facility, to lend Treasuries to primary dealers for 28- day periods through weekly auctions. The Fed also said it's increasing the amount of dollars available to European central banks through swap lines.

The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB's line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.

The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold another auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days.

Treasuries slid after the announcement, with yields on 10- year notes rising to 3.60 percent at 10:32 a.m. in New York, from 3.46 percent late yesterday.

Rate Expectations

Traders removed bets on the Fed to lower its benchmark rate by a full percentage point, to 2 percent, by the end of the next meeting on March 18, futures showed. The contracts indicate a 60 percent chance of a 0.75 percentage-point reduction.

The Fed's auctions of Treasuries, which will begin March 27, may be secured by collateral including agency and private residential mortgage-backed securities, the Fed said. The central bank ``will consult with primary dealers on technical design features'' of the new tool.

Primary dealers are a group of 20 banks and securities firms that trade Treasuries directly with the Fed Bank of New York.