Eliot Spitzer’s departure as New York governor raises questions about whether the state’s regulators will be able to maintain the pivotal position in global financial regulation they have had since Mr Spitzer’s days as attorney-general.
Mr Spitzer sharply increased the scope of what states could try to do. His investigations of biased Wall Street research and sleazy mutual fund trading uncovered dramatic e-mails and wrung billions of dollars in penalties from financial services firms.
The probes embarrassed the Securities and Exchange Commission and gave him national prominence – he was dubbed the “Sheriff of Wall Street” and “Crusader of the Year”.
He also waded into other areas usually left to the Federal government, filing lawsuits against out-of-state polluters, challenging George W. Bush’s environmental policies and seeking to investigate racial patterns in lending.
Other state officials began to follow Mr Spitzer’s example. California, for example, passed a law that granted its attorney-general new powers to investigate financial services, which was modelled on New York’s Martin Act, an important Spitzer tool.
Mr Spitzer was key to keeping alive the US system of competing regulators, in which states and the national government have overlapping responsibilities.
”There’s always in the past been a reluctance among state officials to take on these financial cases. They were complicated. He provided the model for effective state action,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
One area in the spotlight upon his departure is the role of New York as the most powerful regulator of the US insurance industry.
Highlighting the political importance of the theme, which is growing as municipal borrowers face funding difficulties due to the confidence crisis around bond insurers such as Ambac, the congressman Barney Frank told a hearing on Wednesday: “This has not been a traditional Federal role – insurance has been state-regulated. That’s not going to continue. I think the government has to be a partner with state regulators.”
In recent weeks, Mr Spitzer played a vital behind-the-scenes role in persuading banks to pitch in on the rescue of Ambac, one of the world’s biggest bond insurers.
The effort was led by Eric Dinallo, the New York insurance superintendent, a regulator appointed by Mr Spitzer. A $1.5bn (€970m, £750m) Ambac deal was completed on Friday, just days before the scandal broke about Mr Spitzer’s liaison with a prostitute. If the news had come earlier the deal might not have scraped through as it did, say bankers involved.
Mr Dinallo described a January meeting he held with banks urging them to step in to help fix the bond insurance crisis as “like Nixon going to China” and asked them last month to “reward the risk I am taking”.
“Only by rewarding regulators who take these risks will we be able to change the regulatory paradigm,” Mr Dinallo said.
Mr Dinallo on Wednesday said that he did not expect his department’s work to change after Mr Spitzer’s resignation. Yet without the backing of a risk-taker such as Mr Spitzer, many financial industry executives are wondering whether that will be possible.
Additional reporting by Stacy-Marie Ishmael in New York
