INSIDE II - The Emperor Had No Clothes

Leave it to Eliot Spitzer, erstwhile scourge of Wall Street, to demonstrate conclusively that politics makes for strange bedfellows.

As this magazine went to press, the New York governor was reported to be on the verge of resigning after word surfaced of his involvement in a prostitution ring shut down by federal authorities. The ring, known as the Emperors Club VIP and operating out of several cities in the U.S. and Europe, catered to the desires of wealthy men. According to published reports, the Emperors Club ranked its call girls, many of them models during the day, from the least expensive “one diamond” to the most expensive “seven diamonds,” who commanded $5,500 per hour. Shortly after the New York Times broke the story on its Web site, Spitzer called a press conference, apologized for his conduct and said: “I have disappointed and failed to live up to the standard I expected of myself. I must now dedicate some time to regain the trust of my family.”

Spitzer’s apology at least puts to rest any thought that he might try to argue that he had gone undercover, as it were, to see whether the ratings assigned by the Emperors Club to its employees were accurate in much the same way that he and his minions once investigated the accuracy of reports written by Wall Street’s research analysts — and found them wanting.

Spitzer eventually wrung a $1.435 billion settlement out of the biggest securities firms for their misleading research, but that was in a gentler time, when a $1.435 billion loss seemed like a big number to captains of finance. Now that sum works out to a little less than what some of the biggest firms — like Citigroup, Merrill Lynch and UBS — lost on average each month last year in their subprime-mortgage-induced debacles. If the bankers’ cheers that greeted the fall of their adversary seemed less exuberant than they might have been, that may be because nearly all of the Wall Street leaders who signed the landmark settlement with Spitzer are gone. Many were victims once again of bad research — this time their own into the complex and illiquid securities that they ill-advisedly hoarded on their balance sheets and have been remorsefully writing down quarter after quarter to their shareholders’ distress.

One wants to reach for a lesson in all of this, something beyond, say, live by the swordsman, die by the swordsman. Let’s be clear: Few will mourn the fall of Spitzer. But what appears to have brought him down — arrogance, intelligence run amok, ambition unrestrained — seem to be the very faults that have brought the financial giants to their knees and may trigger a painful economic recession. In the bitter laughter on Wall Street we can hear perhaps the strains of recognition, that critical component of comedy. Spitzer and the fallen leaders of Wall Street may not be one and the same, but they nonetheless deserve each other.