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What Cuomo wants from Wall Street

When Andrew Cuomo was elected New York State attorney general, Wall Street thought he would take a page from Eliot Spitzer's playbook and put bankers' heads on a pike. So far, he'd rather settle than fight.

By James Bandler with Doris Burke
December 8, 2008: 7:32 AM ET

(Fortune Magazine) -- On Oct. 15, New York State Attorney General Andrew Cuomo informed American International Group's board that he would be launching an investigation into the insurance company's "unwarranted and outrageous" expenditures and that he would sue unless his office received "immediate cooperation." Cuomo, 50, was tapping into populist ire over a $440,000 corporate retreat less than a week after the government rescued AIG with an $85 billion loan.

AIG's legal team informed their boss, general counsel Anastasia Kelly, that in their opinion Cuomo did not have a leg to stand on. Cuomo was invoking New York's fraudulent-conveyance statute, a law used in bankruptcy proceedings. It seemed to have little or no bearing on AIG, since the insurance company had never filed for bankruptcy. Still, if Cuomo filed suit against AIG (AIG, Fortune 500), the fight could be long and ugly. So at 9:30 the next morning, Kelly spoke with Cuomo and agreed to meet. "Would 2 p.m. work?" she asked.

"That may be too late," Cuomo said darkly. "My expectation is we'll be meeting this morning."

At 11 A.M., AIG CEO Edward Liddy, Kelly, and a third AIG executive entered Cuomo's Manhattan office in the Financial District. After taking a seat on the couch, Liddy struck a plaintive tone. He'd been on the job less than four weeks, he said, and he wasn't responsible for AIG's problems, but he wanted to be part of the solution. Sounding more like a public relations man than a prosecutor, Cuomo suggested how Liddy could use the pressure from the attorney general's office as a means of distancing AIG from past practices. "If I were you, I would use us as a foil," Cuomo said before adding, "Look, as I see it, you have two options." He then spent about ten minutes describing the steps AIG would have to take to comply with the first option.

After Cuomo was done, Liddy hesitated. "You mentioned another option. So what's option B?" Cuomo fixed his brown eyes on Liddy as the room fell silent.

"You don't want option B," Cuomo's chief of staff, Steven Cohen, replied. The room erupted in laughter.

Within hours AIG agreed to all of Cuomo's terms. There would be no more junkets. In the joint statement issued after the meeting, AIG also agreed to assist Cuomo in recovering "illegal expenditures," including any that may have been part of the $20 million in compensation paid to AIG's former chief executive Martin Sullivan. Never mind that there was nothing out of the ordinary about the compensation. Later that afternoon, back at AIG's offices, Liddy expressed shock at the harsh tone of the press release. His general counsel tried to reassure him. "This is a very good outcome," she said. Added another executive in the room: "They could have really nailed you."

If Eliot Spitzer was a prosecutor who viewed politics as a necessary evil, his successor, Andrew Cuomo, is an activist and politician who views the law as a tool. Spitzer, a Harvard Law Review man, loved immersing himself in the intricacies of a case. He was also an Inspector Javert-like obsessive, willing to wage total war on financial institutions in his efforts to humble his targets, who included AIG chief executive Maurice R. Greenberg and former New York Stock Exchange chairman Richard Grasso. Judging by his cases to date, Cuomo is handling the office differently: He'd rather have a quick and easy settlement than a protracted legal fight. The Albany Law School graduate sees the attorney general's office as a policymaking position first.

During the past year Cuomo has dug into a lot of issues that are at the heart of the country's economic collapse: banks that misled investors about exotic securities, conflicts of interest at rating agencies, corrupt real estate appraisers, and executive compensation run amok. Citigroup (C, Fortune 500), Merrill Lynch (ML), and Goldman Sachs (GS, Fortune 500) have all taken turns sashaying down Cuomo's settlement conga line. The dance often goes like this: After a threat of litigation, the companies pay smallish fines and adopt codes of conduct pledging to mend their ways.

After AIG knuckled under, an emboldened Cuomo issued requests for compensation information from all the major financial institutions that are receiving federal aid. When Bank of America (BAC, Fortune 500) did not comply as fully as the AG's office wished, Cuomo slapped the Charlotte bank with subpoenas. In November, when Goldman Sachs announced it was suspending bonuses for senior executives, Cuomo praised Goldman. He then sent a broadside across Citigroup's bow: "It would send exactly the wrong message for Citigroup's top brass to collect bonuses while investors, taxpayers, and now Citigroup's own employees suffer," Cuomo thundered in a press release.

His approach has won Cuomo, a Democrat, acclaim from some surprising quarters. On 60 Minutes this fall, Senator John McCain said that if he were elected president, he'd replace Securities and Exchange Commission chairman Christopher Cox with Cuomo. (Cuomo's reaction to McCain's bombshell was "Huh?") Nevertheless, the pat on the back from the Republican nominee underscored the way Cuomo has used the attorney general's office to reignite his prospects for higher office - something that appeared to be beyond the realm of possibility when he suffered the one-two punch of withdrawing from a gubernatorial primary race in 2002 and then undergoing a bitter split from Kerry Kennedy a year later.

***

The template for the fast and furious style Cuomo's office would use to go after targets grew out of a case involving student-loan companies. One day soon after Cuomo was sworn in as New York attorney general on Jan. 1, 2007, he sat talking to chief of staff Cohen. As the two chatted about the pace of traditional prosecutions, Cuomo likened them to the Gordian knot that Alexander the Great famously cut through with a stroke of his sword. "Do you know what this is?" he asked Cohen, pointing to a tool on his desk. "It's a marlin spike. A marlin spike is what a sailor uses to untie knots. We need to be more like marlin spikes here."

Not long after that talk, Cohen and another top lieutenant, Benjamin Lawsky, became interested in an ongoing investigation into a company called Education Finance Partners, which was allegedly paying colleges to be put on their preferred-lender lists. "How many schools is EFP paying off to get on the preferred list?" Lawsky asked one of the prosecutors working on the case. "Hmm," she replied, "100 to 120 across the country." The rank-and-file prosecutors wanted to build a deep case against EFP first before looking wider, but Cohen and Lawsky knew they had their marlin spike.

On March 15, just three months into his tenure, Cuomo held a press conference to alert students that his office had uncovered kickbacks from student-loan providers to colleges. The conference was a nervy move: How could Cuomo make an announcement like this so early in the investigation?

Immediately after the press conference, phones started ringing in the AG's office, with calls pouring in from worried parents. A few days later big banks and colleges started coming clean. The first in the door was Citigroup. Citi's lawyers listed Syracuse University, the University of Pennsylvania, and New York University as recipients of the bank's sweetheart deals. Soon Citi and the universities agreed to change their practices, institute a code of conduct, and contribute to a fund overseen by the AG's office that would educate students about the student-loan process.

Following the settlement with Citi, Cuomo went into overdrive. First he testified before Congress. Then the New York State legislature, with guidance from Cuomo, unanimously passed legislation to protect students from conflicts of interest. In June 2007, at Spitzer's birthday party, Eliot quipped, "You know, Andrew, a lot of people kept saying and using the cliche of big shoes to fill.... Let me say very clearly you are stretching those shoes in a very real way." (This accolade occurred before Spitzer resigned as New York's governor amid a call-girl scandal last March.)

***

Unlike Spitzer, Cuomo never set out to clean up Wall Street. In fact, when his staff proposed investigating problems that investors were having with auction-rate securities, Cuomo yawned. Look for an issue, he commanded, that affects regular people. In an attempt to get his senior staff to start thinking like policymakers, Cuomo ordered them to accompany him to community meetings around the state. His father, Mario, who was governor of New York from 1983 to 1994, had instilled in his son the importance of these vox populi (literally, "voice of the people") trips, and Andrew had made them a regular part of his schedule when he was Secretary of Housing and Urban Development (HUD) during the second Clinton administration.

At first Cuomo's prosecutors grumbled about having to schlep to night meetings in Buffalo and Schenectady, where constituents barraged them with complaints about misleading hammer warranties and the injustice of having to buy a dozen bagels at Sam's Club when you wanted just one. Eric Corngold, the rumpled chief of Cuomo's economic-justice unit and a former federal prosecutor, resented the trips - until he started hearing recurring complaints about auction-rate securities.

At one meeting, an office manager described how her husband had invested their pensions in auction rates. But now that the markets for them had frozen up, she couldn't retire. Brokers had sold them as safe money-market-type investments. Buyers, including wealthy and middle-class investors, believed they could be sold at will. But in reality they were long-term financial instruments, and when the market collapsed, thousands were unable to access their money.

After several community meetings in which Corngold heard similar complaints about auction rates, he told Cuomo that they should revisit the matter. "These people who are being hurt - they're not people who drive up in limousines," Corngold told Cuomo. "They're middle-class." Cuomo was sold. Other regulators were already looking into the auction-rate matter, but Cuomo would steal the show. In late March the Secretary of the Commonwealth of Massachusetts, William Francis Galvin, had slapped UBS Securities and Bank of America Investment Services with subpoenas for information about auction-rate securities. A few weeks later Cuomo upped the ante, hitting 18 banks that underwrote and/or brokered the investments. Galvin pulled ahead by filing civil fraud charges against UBS in late June. A month later Cuomo filed a multibillion-dollar lawsuit against UBS (UBS).

Soon Cuomo's office was announcing settlements, with Citi once again taking the lead, followed by UBS. In mid-August, Merrill - caught between the Massachusetts and New York regulators - tried to use its negotiations with Galvin as leverage with New York. But Cuomo threatened to sue Merrill because he and Merrill disagreed about the timing of the buybacks and the size of its fines. After a tense but cordial meeting between Cuomo and Merrill CEO John Thain, Merrill buckled, agreeing to a $125 million fine and to buy back, no later than Oct. 1, auction-rate securities from retail investors who had purchased them from the investment bank.

One of the biggest complaints about Cuomo's office is that his settlements have an improvised quality - occurring long before investigations are complete and sometimes covering just a slice of a corporation's bad acts rather than its systemic abuses. The fines tend to be small. In addition, the actual cooperation agreements aren't always made public, which makes it hard to judge whether the deals have teeth. (The attorney general's office refused to provide Fortune with certain cooperation agreements for its probes, and Cuomo, citing a general policy against participating in profiles, declined to comment for this story.)

An example of a quick and dirty settlement would be Cuomo's reckoning with the credit-rating agencies. Corporate-transparency experts were overjoyed when he announced that he was taking on Standard & Poor's, Moody's, and Fitch. The issue: Investment banks were paying rating agencies fees to bless the mortgage-backed securities the banks created and sold for huge profits. And the agencies weren't getting paid unless the deals happened. This business arrangement smacked of a conflict of interest. Cuomo's reforms changed the compensation system so that rating agencies would be compensated regardless of whether the bank selected them to rate a residential mortgage-backed security.

But even though the rating agencies have settled with Cuomo's office, issuers still pay for ratings. What's more, Cuomo's settlement covers only residential mortgage-backed securities and not commercial or other asset classes, including credit cards. "The so-called reforms announced to date are inadequate" is the way one former Moody's executive described the settlement to Congress. Even Cuomo's top aides acknowledge that his reforms are not meant to be the final word, because the deals don't preclude changes made through civil litigation or congressional reform.

***

Cuomo's own political future remains a big question mark, but politics and policymaking have been the constants in his career. As a young man, he was known primarily as his dad's campaign manager and chief enforcer. After law school he served for just a year in the Manhattan D.A.'s office. He eventually started a nonprofit devoted to housing the homeless, and in 1997, at the age of 39, he became the youngest HUD Secretary in history. A few years earlier he had married the late Robert Kennedy's daughter Kerry, putting a dynastic sheen on the Cuomo name. That all changed: In the 2002 governor's race, he came across as arrogant, hot-tempered, and angry. When the dissolution of his marriage became public, details of his wife's infidelities with a polo-playing fast-food-chain heir leaked out. It appeared his political life was over.

Today, friends and associates say Cuomo is a changed man - less egocentric and less mean. His tenure as attorney general has been a deft balancing act. Publicly he has positioned himself as a crusader against greed, a champion of the little guy. In private dealings with Wall Street power brokers (the sort of folks who could bankroll a campaign), he comes across as a reasonable reformer.

Whatever course Cuomo's political future takes, he's clearly enjoying the latest Wall Street crusade. When an aide recently worried that the AG's office was spending too much time on Wall Street matters, Cuomo reminded him of the larger mission. "The goal is to be a force for positive change," Cuomo said. "As long as that's what we're doing, we can't do anything wrong." Maybe. But it's cunning politics, for sure.  To top of page

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