NEW YORK (Reuters) - Former New York Governor Eliot Spitzer hailed the Supreme Court’s decision on Monday that allows the state’s mortgage lending probe, one initiated by Spitzer in 2005, to finally proceed after a protracted legal battle with federal regulators.
Yet the former attorney general laments the lost opportunity regulators had to question and possibly halt subprime mortgage activities that ultimately caused massive damage to banks and the economy.
“This is a big win for law enforcement and for those who believe that banks need to have an appropriate level of scrutiny,” said Spitzer, who launched the investigation while attorney general and resigned as governor early last year.
Andrew Cuomo, the current New York attorney general, had brought the case wanting to revive Spitzer’s probe into possible lending discrimination. The nation’s highest court overturned an appellate court ruling that blocked the state from enforcing fair lending laws against national banks.
“The question that bothered us several years back when we began this case was whether banks were lending fairly and properly to people,” Spitzer said in a telephone interview. “It was very clear people were being offered loans they were financially incapable of repaying.”
While initially a case into lending practices biased against minorities, investigators were concerned that loans extended to people with weak credit were becoming problematic.
By the end of 2006, mortgage losses started to weigh on banks and by 2007, the housing market had collapsed, bringing mortgage markets and eventually the entire banking system down.
“We didn’t quite know how much or in what form, but there was much there that was troubling,” Spitzer said. “Obviously, it’s a little late to forestall the cataclysm that emerged when the subprime debt fuse finally exploded.”
Spitzer does not claim his mortgage probe would have prevented the credit crunch, but regulators squandered an opportunity to stop questionable lending practices, he said.
Back in 2005, Spitzer’s star was climbing. After taking on Wall Street conflicts of interest and mutual fund trading abuses, his prosecutors turned their sights on mortgages.
The probe was stopped by a group of powerful commercial banks backed by their supervisor, the Office of the Comptroller of the Currency, who as a federal bank regulator argued states had no jurisdiction to probe national banks.
The problem, Spitzer said, is the OCC left a void when it did not ask its own questions.
“The federal government under Bush, and unfortunately under President Obama as well, took the side of the banks, not only in saying states shouldn’t ask these questions but then in not directing the OCC to step into the void to ask the questions.”
Spitzer, whose career as attorney general was marked by stepping into regulatory gaps, said it remains to be seen how the Obama’s regulatory reforms turn out. For now, he contends the government is not doing enough.
“To a certain extent, I think were moving deck chairs on the Titanic. We’re not really doing anything fundamental,” he said. “They’re too modest. They don’t begin to confront the most significant issue, which is ‘Too Big to Fail.”
Spitzer’s public career came to halt early last year when he resigned after getting caught in a prostitution scandal. He has largely stayed out of the spotlight, writing articles for Slate magazine and helping run the family real estate business.
But the role of states in regulation and protection offered to consumers remains an important, personal issue.
Spitzer has strong concerns about the increased power Obama’s administration would thrust upon the Federal Reserve, which made its own share of mistakes ahead of and during the credit crunch.
“What we shouldn’t forget is the Fed has always been the systemic risk regulator. What we should be asking is ‘Why didn’t they get it right last time?’” he said. “Until we understand how it was so wrong about derivatives, leverage, the bubble, I don’t think we can give them additional power.”
Reporting by Joseph A. Giannone; Editing by Tim Dobbyn, Bernard Orr