Spitzer's Spotty Record as Wall St. Reformer

He highlighted abuses and named names, but always seemed to have bigger fish to fry.

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Photo Gallery: Spitzer Resigns

NEW YORK—His press conferences were often the best show in town. On Dec. 20, 2002, for instance, Eliot Spitzer, then New York attorney general, took the podium at the New York Stock Exchange to announce his intention to protect the small investor, "Joe Smith in Utica" and "Jane Smith in Topeka." "The one thing they deserve," he thundered, "is honest advice and fair dealing."

Defending the little guy is stock political theater, but Spitzer's genius was the ability to transform arcane transgressions into stark morality plays with villains, victims, and plenty of drama. And the leading man administering justice was Spitzer himself.

Ego and ambition always costarred in the Spitzer Show—but seemingly as forces for good. On that day in 2002, Spitzer, outshining the CEO of the stock exchange, announced a landmark settlement that would hold Wall Street's most prominent banks accountable for hyping weak stocks that later collapsed—costing investors billions—and steering sweetheart offerings to favored clients. Ten white-shoe firms would pay $1.4 billion in penalties, and new rules would forbid shady practices. "It's easy to go after scam artists," says Barbara Roper of the Consumer Federation of America. "But he went after the powerful people."

The "Sheriff of Wall Street" became a political steamroller, elected New York governor in 2006 with a record 69 percent of the vote. His next stop, supporters figured, would be Washington—hopefully the White House.

Hooker habit. When it all came crashing down last week, the hubris was so stunning that Shakespearean analogies seemed trite. The politician who busted a prostitution ring in 2004, it turned out, had a hooker habit himself, spending at least $80,000, according to news reports, on pricey call girls over a number of years. Resigning and dealing with a trashed marriage may be just the start of Spitzer's downfall. He could be prosecuted for a felony, disbarred, and forever scorned as a hypocritical pariah.

In barely a year as governor, Spitzer chalked up few lasting accomplishments; now his legacy as a Wall Street reformer may wither, too. There's no doubt he cast a spotlight on abuses that favored inside money at the expense of small investors. Spitzer obtained internal E-mails that showed, for instance, a Merrill Lynch analyst deriding one stock as a "POS" [piece of s - - -], even though it carried Merrill's highest rating. The E-mails revealed a system in which lucrative tips were passed to those able to generate huge fees for the banks, while retail investors often got bogus stock recommendations. "He took very modest resources and used them to tremendous effect," says securities lawyer Greg Bruch. "Is Wall Street cleaner and more highly regulated because of Eliot Spitzer? Absolutely."

But Spitzer was always in a hurry to make a splash, thinking more, perhaps, about his own political arc than about Joe and Jane. Unlike more methodical regulators, he never prosecuted some of the villains he identified, and he sometimes used press leaks and innuendo to insinuate guilt that he never went to the trouble to prove. "The downside," says Bruch, "is that he introduced disrespect for the rule of law."

Even some of Spitzer's natural allies, such as plaintiffs' attorneys, feel he sold them out. After the 2002 settlement, Spitzer pledged to fully disclose all the material from his investigation, yet his office redacted much of the juiciest information, effectively protecting the banks. "The guy talked about fundamental institutional reform," says lawyer Jeff Liddle. "The problem is, he never did it."

Last year, as governor, Spitzer took a more accommodating view of Wall Street—whose donations he courted as a candidate—endorsing a consultant's report that called for less regulation of the financial industry. Meanwhile, fresh scandals now pervade Wall Street, most notably the devastating subprime-loan crisis. The sheriff, it seems, split town. And now it's clear he won't be coming back.