Spitzer: Huge Fan Of His. Have to be.

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On today’s edition of CNN's "Fareed Zakaria GPS," former Governor of New York Eliot Spitzer appeared on the program for his first television interview since resigning. A full transcript of the program is below.

Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

This has been another week of outrage over Wall Street. But mixed in with the outrage, there continues to be a bewilderment about how these problems in the financial industry could have been piling up without warning.

When being briefed by academics from the London School of Economics, Queen Elizabeth II asked a simple question: Why did nobody notice it?

In fact, some people did notice it. Warren Buffett, Paul Volcker and others did warn about the danger of derivatives and debt. Others warned about Fannie Mae and Freddie Mac.

But through all these warnings, the markets kept rising. Financial firms minted money. The naysayers looked like fuddy-duddies, and the risk-takers like geniuses. No one likes to fight success.

Actually, there was one guy who took on the financial firms at the height of their prestige and power when the country, the media and Washington were gushing with admiration.

That man was Eliot Spitzer.

And he is my guest today, for his first interview since resigning as governor of New York.

You remember him as the governor of New York who resigned after a scandal involving prostitution. But think back before then. He was the attorney general of New York who went after Merrill Lynch, prosecuted AIG and several other institutions for practices he argued were corrupt, fraudulent and illegal. Those prosecutions were deeply controversial, and Spitzer made most of Wall Street his enemy.

I'm going to talk to him about what he thinks about the world he's watching today.

ZAKARIA: So, now to my guest today, former governor of New York, former attorney general of New York, Eliot Spitzer.

Welcome.

ELIOT SPITZER, FORMER GOVERNOR OF NEW YORK: Thank you. A pleasure to be here.

ZAKARIA: When you saw the news about these AIG bonuses, what did you think? This was the company that you prosecuted way back when.

SPITZER: On the one hand, I was not surprised. Bonuses are part and parcel of Wall Street compensation. And I think if you looked at any company, you would see bonuses of an equivalent size.

So I think to a certain extent, what we are now doing is looking at what is a typical part of Wall Street compensation, voicing a visceral outrage that is legitimate, but is not particular to AIG.

ZAKARIA: But when you took on AIG, what troubled you about it?

What made you look at AIG and say something's wrong here?

SPITZER: Their fundamental accounting structure was wrong. And when we prosecuted them, we brought a case alleging that they had manufactured false, fictitious reinsurance contracts. It's a very technical issue, but there were false reinsurance contracts designed to create the appearance of capital on the books, which was not there. And this was a structure that had been designed and orchestrated at the very top of the company.

And as we dug into the accounting...

ZAKARIA: So, they were basically fudging the numbers to make it seem as though they had a stronger balance sheet than they had.

SPITZER: Precisely. That's exactly right.

And the underlying effort was to create an illusion of financial strength that was not there. And as we dug more deeply into the underlying structure and organization and accounting that was ongoing at the company, we knew there was a problem.

And just parenthetically, four people have been convicted of this.

The former CEO was called an unindicted co-conspirator in the federal courtroom by the federal prosecutor. So, this was a fundamental effort to alter the actuality and to lie to the public.

ZAKARIA: So, do you think that the problems that AIG got into later on stem from some of the same practices that you were trying to get at?

SPITZER: They stemmed from an effort from the very top to gin up returns whenever, wherever possible, and to push the boundaries in a way that would garner returns almost regardless of risk.

And so, to the extent that there is a discussion, did this begin before or after the tenure of Hank Greenberg, it's unambiguous -- unambiguous that the structures and the flaws and the policies began while he was there. That is why the board that he had controlled with an iron fist asked him to leave. It was their decision -- not my decision, their decision -- to ask him to step down, something that was then and is now very unusual.

He has invoked the Fifth Amendment, which, of course, is his right to do. But he was asked to leave by his own board, because they saw the flaws and the problems that have since multiplied and created this monster that can bring down the financial system.

Back then I said to people, AIG is at the center of the web. The financial tentacles of this company stretched to every major investment bank. The web between AIG and Goldman Sachs is something that should be pursued.

And as I have written...

ZAKARIA: Meaning what? Meaning that a lot of the money that we the taxpayers gave AIG has ended up being paid to Goldman Sachs...

SPITZER: Precisely. And...

ZAKARIA: ... and other companies.

SPITZER: The so-called counterparties to these very sophisticated financial transactions.

When AIG initially received $80 billion -- a decision that was the consequence of a very brief meeting of the president of the New York Fed, the secretary of the Treasury, perhaps Chairman Bernanke and arguably, some reports say, the chairman of Goldman Sachs -- $80 billion, virtually all of it flowed out to counterparties, $12.9 billion to Goldman Sachs.

Why did that happen? What questions were asked? Why did we need to pay 100 cents on the dollar on those transactions, if we had to pay anything? What would have happened to the financial system, had it not been paid?

These are the questions that should be pursued. Look, bonus is a real issue. It touches us viscerally. The real money and the real structural issue is the dynamic between AIG and the counterparties.

ZAKARIA: Because those payments are in the tens of billions of dollars. The bonuses are a few hundred million.

SPITZER: The bonuses we think are $164 million, give or take -- huge money. I mean, nobody should diminish that. These counterparty payments, tens and tens of billions of dollars.

ZAKARIA: And it, to your mind, it seems as though this taxpayer money may have been recklessly and unwisely paid off?

SPITZER: Well, it may be that a case could be made that it should have been paid.

But at a moment in our nation's history when everybody is being asked to bear a piece of the burden -- everybody -- people are being told work four days a week, not five. Sales taxes are going to go up.

Contracts are being broken and renegotiated for workers across America.

Our 401(k)s and our savings have been depleted by the recklessness of Wall Street.

For Goldman and the other counterparties not to be able to say, we can make do with only 50 cents on the dollar, 30 cents on the dollar, after we've already given Goldman a $25 billion cash infusion, they are sitting on vast amounts of cash on the sidelines -- which is their right, but they're going to invest it in due course, based upon their judgment -- for them, on top of all that to get another $12.9 billion in the dark without questions, after a meeting of this sort, is fundamentally wrong. And that is the nature of the inquiry that should be raised.

ZAKARIA: Is there, as far as you know, a congressional inquiry into these monies?

SPITZER: I do not know if there is or isn't. I certainly hope that Barney Frank, who is the chairman of the right committee, will do so.

He's a brilliant guy, a spectacular legislator and lawyer. I have absolute confidence that if he pokes at this, he will get to the bottom of it.

He is somebody -- there are many on Capitol Hill who are beating their chests so loudly, you know it's just a cover-up of their neglect and failure over the last decade. They sat there and watched and did nothing, as they clearly should have known that we were building a system that was a house of cards. And they enjoyed it and prospered from it, and there was a symbiotic relationship between them and Wall Street.

Barney Frank is not one of those. Barney Frank will ask the right questions, and I hope he does.

ZAKARIA: Was the regulation -- was the regulatory regime in place strong enough? And I'm thinking particularly of the New York Fed, which was headed by Tim Geithner, of the SEC?

Where do you see the flaw having been over the last few years?

SPITZER: Here's my answer to that. The regulatory system was structurally flawed, but that's not why this happened.

After the last round of scandals -- Enron, et al. -- we passed Sarbanes-Oxley. And we said, aha, we've solved the problem. Now we have another set of scandals.

There are enough laws, enough regulations on the books for smart, aggressive regulators and prosecutors to make all the cases. What was missing was judgment. And you can't legislate judgment. You can't regulate judgment.

Either the people who are the regulators will walk into a bank and say "Your leverage is too great. We are going to take actions to pull it back," or "This type of investment is flawed," or they won't. You can't pass a law that says, you must use sound judgment.

Bubbles have been there through history, through over-regulation and under-regulation. This is a question of judgment and of failure of judgment.

When I was attorney general, people said, "Oh, you're using this crazy little statute," the Martin Act in New York, "to bring all these cases." The Martin Act had a simple anti-fraud provision. That's all we used.

The federal government has exponentially more regulatory power than we did. What was lacking was the judgment, the tenacity, the desire to rein in a financial system that was spiraling out of control.

ZAKARIA: How do you think President Obama is handling this crisis?

SPITZER: Well, I think he is doing stupendously. I mean, I'm a huge fan of his. I think we all have to be and should be, if only because he has been thrust into a dynamic that is almost impossible.

He is trying to put out not 500 small fires, 500 forest fires simultaneously. And he is addressing them sequentially, trying to keep a political coalition together. But it's very hard.

And I think one of the largest, most difficult tasks that he has is to control the outrage that is brewing in the public -- sympathize with it and garner it, but use it to get good policy, not policy based upon anger.

Populism, if we go to the other extreme -- and we had libertarianism masquerading as capitalism for the past 30 years. That didn't work.

And we knew it wouldn't work.

I'm worried that we will go to the other extreme and end up with rank populism. That could be just as dangerous.

And it's very hard to craft the reasoned policies that make the market work without losing the support of the public. That's what he's trying to do. It's a very difficult task.

He is a brilliant communicator and a brilliant leader, and I think we all have to hope that he succeeds.

ZAKARIA: Do you worry about this kind of populist anger when you watch the outrage over the bonuses?

SPITZER: Yes, yes. The outrage is legitimate, but it is being fomented by sort of a faux populism by many on Capitol Hill who saw this coming, who knew this was going on.

And so, I look at them and I say, "Come on, guys. You're supposed to be more mature. Express the anger, but then say, how do we solve it? Don't just throw more oil on the fire."

And I am worried about that. And I'm worried that it will be destructive to our capitalist system. And I've said since the very beginning, that my energy was directed at preserving and protecting capitalism.

The libertarians didn't understand it. Populists don't understand it. But capitalism is what we want to preserve.

ZAKARIA: A simple legal question. If you were in a position where you could do something about it, what would you do about the bonuses?

Legally, what strategy would you employ?

SPITZER: I think I might go back to a very old tort theory of unjust enrichment -- contract theory, tort theory -- and say, you know what, guys? There's a theory in the law that says -- a couple of theories -- one impossibility saying, AIG just doesn't have the money to pay you. And absent the federal infusion, it wouldn't have it, so we can't pay.

And second I would say, unjust enrichment. You simply don't deserve it. It's an equitable argument. Some courts might go for it, some courts might not.

But as a practical matter, as the president of the United States, I think I would call the CEOs into the Oval Office. And I would say, "Guys, this is untenable. We're all going to have to suck it up a little bit and show the American people that we know what it means to be part of a community, and share the sacrifice. Let's see if we can't solve this without the legal wrangling."

And I bet he could. I have no doubt that President Obama could do that.

ZAKARIA: And we will be back with Eliot Spitzer right after this.

(BEGIN VIDEO CLIP)

ZAKARIA: You know there are a number of people watching who are going to say, Eliot Spitzer doesn't have credibility to talk about these issues, because of what happened over the last year with your own behavior.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: And we are back with Eliot Spitzer.

Eliot, you've spent a lot of time looking at Wall Street, battling with them often. What do you think is the fundamental thing that got us into this mess?

SPITZER: Recklessness, greed and a misunderstanding of what capitalism is all about, and a belief that financial services alone could generate wealth.

Financial services doesn't really generate wealth. Financial -- the capital markets are designed to raise money and then apportion it to industries that are creative, whether it's biotech or automotive, or anything else.

Financial services should be a conduit. Instead, we became enamored of the products themselves. And what resulted was this enormous bubble in assets, ginned up and supported by a financial services sector that, because of a series of improper incentives, got us to where we are right now.

ZAKARIA: And what should have been done? Should there just have been a lot more attorneys general like you kind of battling this?

SPITZER: We had one who was enough, I thought. But it was...

ZAKARIA: But should there have been a different kind of regulation? How should this have been prevented?

SPITZER: There should have been a very different regulatory framework. Not in the sense that we needed more words in the books. We needed more aggressive voices at the SEC, the FTC, the OCC -- this welter of federal agencies -- people who came to Wall Street and said, "Wait a minute. That leverage is crazy."

And it was -- it's kind of odd, because everybody derided leverage in public, but in private, participated to the hilt. And when you look back at these deals you say, this was crazy. We needed regulators who said it. We needed wiser voices on Wall Street.

This was sort of a disease that got into the bloodstream and the DNA of Wall Street leadership.

Now, there were some who were spectacular who disagreed with it, who said, "Wait a minute, guys. We can't afford this."

The more traditional, old-fashioned investment bankers -- you think of Felix Rohatyn, who said, "Wait a minute, guys. This doesn't work."

And...

ZAKARIA: Right, right. Or Warren Buffett or Paul Volcker...

SPITZER: Or Warren Buffett. Well, I love Warren Buffett. We all do. He also invested in some of these vehicles that had the leverage, but I think he always was a voice of modulation.

And we needed more of that and, frankly, less of the sort of, you know, hotdog, cowboy mentality that leveraged everything up, sent it out so that people would structure deals without retaining any of the ownership.

If you want a technical answer, all of the securitization that was done, where you had the rating agencies, you had the originators who would originate loans they knew were bad, securitize them, get AAA ratings, securitize it out into a market -- they didn't maintain any ownership.

So, a simple rule could be, if you securitize a stream of debt, you've got to retain 10, 15, 20 percent, so you are at risk. You evaluate deals very differently if you are actually at risk, rather than merely selling it to somebody else.

ZAKARIA: And that could have been part of the regulation.

SPITZER: Absolutely. The power of the federal agencies to do this stuff was unlimited.

And any time I hear the SEC say, we didn't have the power to do this or that, forget it. They had more people, more power, more money than was necessary. What they lacked was the creativity and the will.

ZAKARIA: In a sense, this is almost a greater failure of Washington than Wall Street.

SPITZER: Well, there have been debates -- Washington, Wall Street.

It's one of those debates where, of course, both were at fault.

Now, I happen, having been on the government side, to have a slightly more aggressive view of what government should do, perhaps.

And I believe that Wall Street was at fault for fostering an ideology, and imposing an ideology, or buying its way into an ideology in Washington that said, "Let us alone. We will self-regulate."

So, Wall Street created this notion of self-regulation, sold it to Washington with all of its tremendous capacity through fund raising and intellectual capital. Washington was happy enough to succumb to the temptation.

Self-regulation was a mirage. It was an abject failure. Some of us were saying, it always will be a failure.

So, Wall Street is to be blamed for creating the notion, Washington is to be blamed for buying into it. Who's more at fault is sort of a puerile debate, but I think both parties.

ZAKARIA: What about the media, CNBC? You actually know Jim Cramer. You know all the parties involved.

SPITZER: Full disclosure. Jim is a great and close friend. And I think he took his licks from Jon Stewart last week. And Jim said on the show, "Yes, we have to have done better."

And I think the media -- writ large. I mean, forget CNBC. I think the entire media -- print media, TV media, et cetera -- did not ask the hard questions as these deals were being structured, as the bubble was inflating.

We turned the Wall Street masters of the universe into these icons, who bestrode the universe and made no mistakes, when I think a more inquisitive attitude would have said, "Wait a minute, guys. This won't last."

And so, I think, yes.

We're all at fault, which is why the search for villains is emotionally satisfying, not terribly useful. The better effort is, OK, what do we learn? What do we do going forward?

ZAKARIA: Now, a lot of people look at your prosecutions, and they say, "Look. This was very unfair, very selective. You would threaten these companies, therefore plunging their stock price. In many cases you didn't get convictions. If this is the model, it's not going to work. It's unfair."

SPITZER: Well, I think they're wrong, needless to say. But I think if you look at the cases, the analyst cases where we highlighted -- you referred to the Merrill Lynch case where, at the end, we got Merrill, Goldman, Bank of America -- all the major firms, all of the bulge-bracket firms -- to agree to an entirely new structure of doing analytical work, which was necessary for the integrity of the marketplace.

Whether it was insurance, mutual funds, analytical work, on and on, each of the major areas we looked at, we sought to craft a solution.

ZAKARIA: But your real leverage was that, once you go out in the public, their share price starts dropping and...

SPITZER: No question about it. And I'll give you a real example of that, and you can evaluate it as you wish, with Merrill Lynch.

They wanted us to settle. They would have paid some money. But they said, you must keep all the evidence secret."

And I said, no, my job as a public prosecutor is to explain to the public what the problems are in Wall Street. I said, that is the only way we will get a remedy. And I said, we must present this to the public. It may be right, it may be wrong.

And we didn't do this to hurt individuals. And we took out the names of most of the individuals. But we said, the public has to understand why the market is flawed.

And I think it's fair to say we, several years ahead of time, were saying, be careful, beware of what is going on here. I'm not pretending to see everything. I'm not pretending to be smarter or better than anybody else, just saying, wait a minute. We have seen a problem that, if not addressed, will be the downfall of the market.

ZAKARIA: But you got very few convictions.

SPITZER: No, we -- well, first of all, most of the cases were civil cases. And there was a reason for that. I did not believe in taking one individual and making him the subject of all the venom. I said, this is a civil issue. Resolve it with the company.

I tried very hard not to vilify individuals, because it wasn't a mid-level executive who was the problem. It was the whole structure.

And that's why the global deal was with all the banks.

We didn't say to individual X, you're the problem. That's a mirage. That is an emotional, as I said, an emotionally satisfying effort, but it would not have solved the problem.

ZAKARIA: And we will be back with Eliot Spitzer right after this.

(BEGIN VIDEO CLIP)

SPITZER: I never held myself out as being anything other than human. I have flaws, as we all do, arguably. I failed in a very important way in my personal life, and I have paid a price for that.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: And we are back with Eliot Spitzer.

You know, there are a number of people watching who are going to say, Eliot Spitzer doesn't have credibility to talk about these issues, because of what happened over the last year with your own behavior.

What would you say to them?

SPITZER: I would say to them that I never held myself out as being anything other than human. I have flaws, as we all do, arguably. I failed in a very important way in my personal life, and I have paid a price for that.

I have spent a year with my family, with my wonderful and amazing and forgiving wife and three daughters, and have rebuilt those relationships, and hope to do that as time goes on.

I also feel that, to the extent, if I'm asked, and I can contribute to a very important conversation, I will do that as well. That is our right, arguably our obligation as citizens. I will do what I can, and with full awareness and heaviness of heart about what I did.

ZAKARIA: But it wasn't just a personal failing. There were also legal issues involved...

SPITZER: Well, those were not pursued by those who decided to pursue them.

But I have made no excuses. I have not shirked, and I will not do so. I failed. I resigned my position, because I said this is the appropriate step for me to take.

ZAKARIA: Do you feel like you wish, watching all this, you were back in office doing something about it?

SPITZER: Well, obviously, I, first and foremost, hope that we can solve the problems, because the future of our economy -- and without overstating it, our nation -- is at stake here. If I can contribute, I will do so in whatever way I can.

Obviously, I care deeply about these issues. They were central to what I did as attorney general. And so, I read the papers and say, sure, these are issues that I feel deeply about. But I am where I am, because of my own conduct. And as I said, I make no excuses.

ZAKARIA: Do you imagine you could ever be back in government?

SPITZER: I don't think about it. I don't worry about it. I focus on a family, on the issues. If I write an occasional column and speak occasionally, that is all I'm doing.

ZAKARIA: Eliot Spitzer, thank you for coming on.

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