Is Virtue What We Buy or What We Sell?

If we judge politicians by what they buy, then Eliot Spitzer has clearly violated the public’s trust: he purchased the services of a high-priced prostitute, and may well end his political career as a result. But what if we judge politicians by what they sell? On this score, Spitzer may be one of the few politicians who has not prostituted himself to special interests.

An insightful new contribution to the emerging “forensic economics” literature by my frequent co-author Eric Zitzewitz makes the case that Spitzer is extraordinary because of the high price he placed on his integrity. Let me explain.

Spitzer made his name politically as New York’s attorney general, where he launched a number of high-profile investigations into the securities industry. The trouble with evaluating an attorney general’s performance is that it is very difficult for outsiders to make any inferences about the most important power used by the office — prosecutorial discretion. It may be that an attorney general settles for small fines against a wrongdoer because he is in their pocket; but equally, it may be that the evidence was weak, or the conduct at issue wasn’t that egregious.

Zitzewitz’s analysis focuses on analyzing the set of cases involving mutual fund market timing and late trading. Using available data, he develops some useful proxies of what he calls “the dilution of long-term fund shareholders from arbitrage trading.” Eric is too polite: this is a measure of how much money unsavory fund managers allowed to be diverted from our mutual fund savings. This all occurred because select friends of these managers were given the right to buy into the fund at this morning’s low price, rather than this afternoon’s higher price (even after the markets had risen).

In these cases, the evidence was uniformly strong, and by measuring this “dilution,” Zitzewitz can measure how egregious the misconduct by these firms was. All told, he compiles estimates of the harm — and public records on the restitution ordered — in 20 SEC-negotiated settlements. Of these, 16 involved the New York attorney general, and the resulting restitution typically amounted to about 80 percent of the harm — pretty close to full restitution. But in the 4 settlements in which Spitzer’s office was not involved, the SEC was willing to settle on a figure closer to 7 percent of the total harm.

What causes this different treatment? It can’t be the expertise and manpower of the New York Investor Protection Bureau, which has only about 30 employees, relative to the 1,200 folks working in the SEC’s Enforcement Division. And it isn’t that Spitzer was only interested in the big fish or big headlines: the finding of differential treatment is robust when controlling for the fund’s ability to pay or the timing of the settlement. Zitzewitz also obtains similar results when he uses two useful instrumental variables for whether the New York attorney general will be involved: whether a firm is headquartered in New York, and the percentage of its investors who are residents.

So what explains this disparity? Zitzewitz’s analysis suggests that the key is the SEC’s laxity, rather than Spitzer’s excess zeal. Often we economists worry about “regulatory capture,” and I’m concerned about the SEC’s “revolving door” personnel policy, in which young securities lawyers spend a few years at the SEC before moving on to greener pastures (e.g., working for financial firms against the SEC). Given these incentives, it seems pretty likely that these young lawyers don’t really want to upset potential future employers.

It seems to me that the truly important violations of the public trust are when the power we give our government officials is sold, rather than what government officials choose to buy. Yet our political scandals are too often dominated by private mistakes, rather than public misdeeds. This is why I’m more worried about what the SEC is selling than what Eliot Spitzer has been buying.


Hmmm. What might Spitzer have been selling? While he was patronizing the Emperor's Club, he apparently found the time to prosecute a few other prostitution rings. What, I wonder, did the Emperor's Club do in order to ensure that its rivals were prosecuted, giving it more control of that market? One can only speculate so far - but it's quite interesting to do so.


The market reacts to quality and what we saw were shoddy products whose producer arguably induced fraud on its buyers, regardless of product. Now most of the world knows what skeptics of securities regulation and Republicans already knew: that like many politicians, he wielded intrusive and unnecessary laws to further his own career, not to help the so-called public interest.

Tom Wilson, Broomfield, CO 80021

I agree 100% with the article.


Funny how late trading and market timing mutual funds are still lumped into one act. The former (trading on a stale NAV after the post-market NAV has been calculated) is and was an illegal activity that was perpetrated by wrong-doers and allowed by the funds. The latter (rapid buying and selling of MF shares as if of a stock), in contrast, was a legal - if unethical - activity (often done in conjunction with late trading). The dilution caused by market timing was at the expense of the long-term shareholders and the onus was on the funds to protect them. The funds include penalties for rapid buying and selling of shares in their prospectuses. To the extent that they allowed activity in violation of their prospectuses, they were breaking the rules. To the extent that they didn't sufficiently protect against market timing, however, they were simply exposing their funds to savvy (read "unethical") investors and hedge funds.

Many firms had specific Market Timing desks in full view of the funds, the regulators and the public. Spitzer lead the charge in shutting these down and leaving many traders jobless, unlicensed, fined, or imprisoned. Some of them broke the laws and the rules, to be sure, but all of them? Which begs the question: what was unethical about market timing? The answer, I think, was that it goes against the very nature, purpose, intent and philosophy of a mutual fund. And many low- or mid-income and unsophisticated investors were left financially wronged.

What Spitzer SOLD was a tenacious intolerance for both the illegal late trading and the unethical market timing. What he BOUGHT was illegal and unethical. What he BOUGHT was hypocrisy.

The answer to your question, "is virtue what we buy or what we sell?" is, without question: BOTH.



The basic issue that many seem to be missing is that Spitzer abused the power of the office, seemingly without thought. That is the transgression that cannot be forgiven, not the sex, or the prostitute.


@41 "As George Carlin says, "Sex is the only thing that is legal to give away, but illegal to sell.""

What about body parts?


Spitzer got more benefit by refusing to sell. It was cost/benefit. Not integrity

Saying that Spitzer put a high price in his integrity with the mutual fund prosecutions is too much of a reach. The reward that he got from sticking it to Wall Street -- headlines and the advancement of an already successful political career -- was huge. No one ever lost votes for sticking to "fat cats."

Given his transgression, I would bet that Spitzer didn't "sell out" because he didn't have to. I mean, the guy had a Fifth Avenue apartment after only a couple of years of private practice, so there seems to be some money in the background. He probably had resources beyond the average pol who has to beg investment bankers to support their campaign.


Good point. There is nothing quite as invigorating as spending a few hours with a twenty something; especially if you have to spend the next day in front of a Congressional committee.


Dear Mrs. Spitzer,
I am very sorry for what your husband, the media and our Puritan culture are putting you through. But if you decide to leave him, please let me know. I would be very very good to such an impressive and beautiful woman.
sincerely ,


The problem, as many have pointed out, is that he prosecuted the same people he patronized. I'm personally more than willing to believe there was some sexual need that he couldn't satisfy in his marriage that he resolved with money rather than by being emotionally unfaithful; I'd give him a pass on it; monogamy requires a willingness to work hard to meet your spouse's sexual needs. But I no longer trust anything he says, and I don't care if hypocrisy is the compliment vice pays to virtue. Anybody else except an ex-AG who busted hookers and bragged about, fine; but not him.

dave sillars

Perhaps Spitzer will consider the virtues of the Libertarian position, which is that "victimless 'crimes'" should be de-criminalized.
As George Carlin says, "Sex is the only thing that is legal to give away, but illegal to sell."
Let's go to the root of the problem, instead of swimming on the surface.


What's that old saying about "he who protesteth the most..."???

Anybody who's that outspoken (on any subject) is probably full of **it.

John Fowler

Does the solemn oath he took to honor and cherish his wife have anything to do with the solemn oath he took when he was elected governor? If you can't believe the first, how can you believe the second?


Is Virtue What We Buy or What We Sell? It is both.

The argument you're making has more to do with sound fiscal or monetary-judicial leadership than it ever will actual human virtue.


The bigger they are--the harder they fall.

I'm disappointed [inordinately so.] I bought what he was selling with his integrity speak--but there is always that equal and opposite POTENTIAL, I believe. And yet he is human among us--or at least NOW he is.

He is competent; a superlative even. He owes us his horsepower. We 'bought' that, so I do want him back to work.


I don't care what Mr. Spitzer does between the sheets at night or with whom. I care about his ability to act in the best interest of New Yorkers and this article clearly points to the fact that he has in the past (as opposed to Messrs. Silver and Bruno in the case of the comptroller appointment). I for one would encourage him to stay in office.


Be strong, Eliot!! You know the drill....apologize, do the right thing, and get back on the horse.

Bring a little philosophical wisdom to the table and grow up a little. We didn't ask you to be our priest, for heaven's sake!!!

There's the home of a deep moral malady,the irony being that the church loves and embraces a sinner.

And ladies, if your own husband's throwing stones, follow HIS money trail for a change!! Too much unvarnished projection in this country.


@glennvirt: what you're saying means I can come over and shoot ya in the head. Then I should be left alone because shouting ya in the head would be almost zero in scale compared to destroying countries, ignoring the geneva conventions, being responsible for the immiseration of millions, allowing the global climate change to run on unhindered, doing everything possible to boost the price of oil, etc.

Jeff C

@anna, #13: *shrug* You cared enough to answer. The man's wife can't trust him. You'd be willing to trust him with the power of a governor? I guess my philosophy isn't as sophisticated as yours, since it can be summed up in a slogan.

@omzidar, #21: Uber-moralization? Is it too much to ask that a married man keep it in his pants? Sheesh.

@Hannah, #22: I think his wife might care. That said, I do not think we should spend public money investigating his marital infidelity. That is not an issue for criminal law enforcement. I'll leave it to New York to figure out if any crimes were committed that should be investigated.


You live by the sword, you die by the sword. If he doesn't go down for this, he shouldn't have brought all the others down to make a name for himself. Maybe it's possible we shouldn't care. But it's people like Spitzer who made us care about exposing hypocrisy in the first place.