Eliot Spitzer's rough justice

(Fortune) -- The former New York governor recently spoke with Fortune editor-at-large Peter Elkind about politics, family, Wall Street, and how he thinks the Obama administration has bungled regulatory reform. Questions and answers have been edited for space.

In hope of resolving this matter, once and for all: Is there any possibility you will run for political office in 2010?

I love the substance of government. I dedicated most of my career to it ... [But] the notion that I would be running for office in the next couple of months is just hard to see ... I love politics, the substance, the debate about the issues, and I like the raw politics. All that being said, I just don't see running for office this year. There are many ways to do things, and I have a lot of things to do.

You haven't given up on it for the long term?

I've never said I would never consider running for office again. But it's not as though I wake up in the morning to say, 'How do I position myself to run for office?' ... That's not how I lead my life right now. I've been lucky enough to find things that are important over the last two years, such as going with my daughter to visit a college today. Such as going on a couple of vacations with my kids. Things that -- it sounds so cliché-ish -- but I failed to do enough of when I was in government.

Shame on me for that. I don't want to sound like a Hallmark card, but you realize over time what matters ... I'm loving all that stuff. Does that mean I'm not incredibly frustrated and in agony over not being where I would like to be? No, that is unceasing agony.

Where would you be right now if the scandal hadn't happened?

Where every governor is: In a very difficult position, trying to square a circle that may not be squareable, with declining revenues, aspirations that exceed our revenues ... trying to squeeze efficiencies out of government programs that are difficult to reform without enormous political pushback ... New York state is closing state parks! ... So where would I be? Struggling with all of that, but loving it, because that's what I love to do.

You'd prefer to be dealing with such problems?

Absolutely. Being in the arena's much better than not being in the arena. Anybody who says disengaging from it in any way is easy is not being straightforward. Obviously removing myself the way I did is that much more painful -- and rightly so.

You take flak every time you do an interview. You're not in public office anymore. Why do you keep doing it?

Maybe I have developed a thicker skin ... You get enough calluses that you say, 'I know what the pushback will be, but I'm not going to silence myself if I feel I can say something ... The article in Slate [I wrote] a year ago now, about the AIG bonuses really being a secondary issue to the counterparty payments, I think, helped focus on a critical issue ... Maybe I kid myself that I helped in a small way. That's why I take the incoming missiles ... Listen, it's hard stuff, it's not easy, but there's no way to avoid it, and I'm not going to run away from the debate.

But you're a private citizen now. You could avoid the incoming missiles by simply not giving interviews.

That's running away. I'm not sure I believe in running away. No matter how painful it may be, running away may be to concede defeat, and these issues matter too much.

How have your three daughters dealt with all of this? Is your continuing public role difficult for them?

I'm trying to do it in a way that is sensitive to that ...You try to figure out what is the right balance ... They're mature in a way that is a testament to the resilience of good, smart kids who have inevitably been put through a really tough situation by my actions ... It's been painful. And as a consequence, I owe them ... They're at a stage where I think they deserve a voice in what I do.

Do they want you to return to politics?

I don't want to pull them into this, beyond what I've said. Their general sense is you try to do what you can to contribute, and that is what matters in the long run. [But] there are many ways to do that. I remember answering a Newsday reporter two years ago who asked: Who has changed the world? Who do I admire most?

The expected answer would have been a list of politicians ... I said no, other than one or two of them, they really haven't changed the world. It's Einstein who's changed the world. It's Bill Gates. Or Steve Jobs ... Politicians, by and large, have not been the change agents that they should be ... The ability to be a change agent in politics is limited ... There are a lot of ways to be involved and change things. Running for office is not the only one.

Yet that seems what you're still drawn to.

Listen: It was great. But that doesn't mean I'm drawn to it again ... What you're drawn to is not leaving in a way that is the wrong way. So you have to deal with the question of: How do you move forward?

Do you know what you'll do next?

No. I know what I'm doing now, which I love. Teaching. Writing. Working in the company that my dad built ... It's less stressful than it used to be.

Are you happy?

Other than the obvious agony, life is great. One thing I will never do, I hope, is wallow in self-pity. I've got an amazing wife who has been forgiving in ways that are beyond human. Three great kids. I'm loving what I do day to day. You pick yourself up and go on.

How should we assess the personal conduct of our political leaders? How much weight should we give to their personal failings? Where do we draw the line?

It's a tough question, which obviously I don't have the answer to right now. And which evokes different answers in different parts of the world. Certain types of behavior should be viewed as unacceptable, but I can't give you the precise parameters. I don't know what the right answer is.

Do you regret having resigned?

No. I regret not being governor. I still believe it would have been too painful for my family and it would have thrown the state into greater political disarray. So it was the right thing to do. Right now, I can tell you I have a family that is in one piece ... That's a measure of success after what we went through.

Some people have suggested your behavior reflected a sexual addiction. In your view, was this a compulsion or something you made a deliberate choice to do?

I believe in free will ... Addiction is a huge problem; it takes many forms ... Free will is what I believe in in my case.

If that's the case, given the stakes and the risks that you faced, how does a rational personal end up doing something so irrational?

All I can say is I made an egregiously horrendous judgment at every level. Not just in terms of the risk-reward calculus, which seems like a very antiseptic way of thinking about it, but also in terms of what it meant to my family. I talk all the time about fiduciary duty. What more fundamental duty is there than to a spouse?

Does the public understand the pressures on political leaders?

I don't think they appreciate what is like to be constantly second-guessed, scrutinized, critiqued, down to the smallest minutiae ... There is no privacy anymore ... there is a debate that we're going to have to have at some point about what privacy is ... You can look at anybody's life, I venture, and dig at it long enough to find something that will be a wedge-opener. That's not a healthy way to live.

Why was David Paterson so unsuccessful as governor?

David was initially embraced, and everybody loved him ... When he first ascended to the governorship, everybody loved him, because he wasn't me ... at the time I picked him, everybody said it was a great choice.

You've seen some of the major actions you orchestrated as attorney general rolled back or under attack in one way or another. Independence of Wall Street stock research. Contingent commissions for insurance brokers. The Grasso case has ended. What do you make of this happening at a time when there's a Democratic congress, a Democratic president, and we just survived a near-meltdown of the global financial system?

The lesson I would take away is that we were right in our fundamental premise. Which is that the structure of finance was increasingly hazardous to our economy ... Having said that, the power of capital to push back and get what it wants continues almost unabated ... Look at how weak the proposals for financial services reform really are...look at the unbelievable subsidy we've given to the banks ... [Yet] they continue to be incredibly powerful and successful ... in getting what hey wish ... conflicts of interest are so pervasive and so deleterious to the economy and consumers that we haven't even begun to unravel them ... Most people aren't willing to stand up and say, Enough! Reform is incredibly tough ... It's not very often you can really create a movement that really pushes back on these things.

I don't believe the Grasso case would have come out the way it did if I'd still been governor. Those judges would not have had the guts to issue that opinion ... That was politics ... This was not a dispassionate legal judgment. And the failure to appeal that case [by Attorney General Andrew Cuomo], where there's an automatic right of appeal, was malpractice.

How do you make economic reform happen?

It should be happening, but it's not. I really do think the next movement should be using the power of ownership as a way to reform. There are real limits to what litigation and regulation can do. But where have the shareholders been? Where have the state comptrollers been, in saying, 'We own you guys, here's how we want you to reform [corporate] compensation' ... That is ultimately where the buck stops.

You've talked about the potential of the job of state comptroller. What's there?

It is the great underutilized position in government right now. If there has been some substantial perceived increase in what AGs have done, comptrollers should be the next powerful voices. Those who control the big pools of equity.

How does it feel to see former AIG CEO Hank Greenberg publicly rehabilitated?

Oh, I'm all in favor of rehabilitation. [Laughs]. Maybe we'll go out to dinner some night ... God bless him ... Obviously I had some disagreements with things he did, but life goes on.

Disagreements?

I disagree with his take on the history of AIG (AIG, Fortune 500), and I've made that pretty clear. The accounting issues we looked at [there] went to the top. The effort to rewrite the issues relating to financial products, I disagree with ... [Yet] he has been successful for whatever reason. He has megaphones that are sympathetic, whether it's the [Wall Street] Journal or others. And his relationships run deep. I've often said that AIG was in the center of the web. I said it years ago ... [But] it won't get me anywhere to begrudge him.

You're sounding unusually mellow.

It's late in the day. Maybe they gave me decaf.

If you could go back and do things over as AG, what would you do differently?

I'd be much tougher. Much tougher. I'm now more persuaded than ever that we were right ... that the structural issues on Wall Street were so dangerous to our economy and the way business was being conducted that I would have pushed harder for greater resolution, greater transparency, and greater disclosure of what was going on, and moved at even a faster pace ... I say this with hindsight.

It took me a while to develop either the evidentiary base to persuade myself that I was right or the credibility to be able to bring these cases. And we had no allies at the beginning ... So now it's easy to look and back and say 'I wish been tougher from the get-go.'

But I would be tougher -- I wish we had. I could have tried ... The regulatory process was even worse than I imagined. I was butting heads with the SEC and the OCC and all of them on a regular basis. But it went even deeper. If there's a critique I have, it's that we should have done more, not less.

Would you have a different tone?

Would I change a few conversations? Absolutely. Would I change the larger tenor of my conversation with Wall Street in which I was saying, 'You're not living up to your duty to the public'? Not at all.

You've been sharply critical of the Obama administration for failing to accomplish more in reining in Wall Street. Why?

When you've got Larry Summers and Tim Geithner at the top, who gave away the opportunity for fundamental reform at the very moment when they had Wall Street there begging for trillions of dollars and then, after the fact, have to argue for an independent consumer protection agency -- or don't push Wall Street to agree to the reformation of mortgages when Wall Street is receiving trillions of dollars -- something is wrong.

\I read a transcript of Geithner on [MSNBC's] Rachel Maddow the other night where he said we couldn't negotiate the counterparty payments from AIG to Goldman (GS, Fortune 500) because there was a contract. The taxpayer wasn't a party to that contract. That is an absolutely moronic answer. Moronic. It's stupid.

A first-year associate who came into me and said that, 'I'd fire them him'. I'd say 'Show me the contract! What contract did a taxpayer sign that obligated us to give Goldman 12.9 billion dollars? None.' He misunderstood his position and his job. And he's still parroting those words. That's what I'm amazed at. But that's where we are.

What led you into the world of prostitution? Did anyone introduce you to it?

No. Nobody but me ... When something snaps, it snaps. But it was me. It was nobody else ... This is, 'you seek an outlet' ... That's it ... Sad ... There it is.