Alan Reynolds

In recent testimony before a Senate subcommittee, New York Attorney General Eliot Spitzer complained that "favoritism, secrecy and conflicts" rule the insurance industry. He says that about other financial businesses, too, particularly when middlemen (brokers) are involved. But favoritism, secrecy and conflicts amount to little more than name-calling -- subjective opinions, not proven crimes.

 Spitzer went on to explain how his latest investigation of the insurance industry relates to his previous accusations of bias among stock analysts and his fetish with active trading in mutual funds. "Similar to the small investor on Wall Street or in mutual funds," he said, "the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised ..."

 Spitzer divined "a very familiar pattern" among his highly publicized assaults against stockbrokers, insurance brokers and mutual fund brokers, such as "inadequate disclosure." The familiar pattern is not really in the way these industries go about their business, however, but in the way Spitzer goes about creating an illusion that his unproven accusations involving a few people in a few firms are symptomatic of some industry-wide "scandal" or "corruption."

 A state attorney general ought to take criminals to court, where they have the right to defend themselves. But crimes are committed by individuals, rather than by entire industries, and courts are a nuisance. There is far more publicity to be had by re-labeling longstanding, voluntary business arrangements as "corrupt."

 Fraud is a crime. Bid-rigging is a crime. But "secrecy" and "conflict" are imaginary crimes. One could as well accuse Spitzer of inadequate disclosure, because he carefully avoids the sunlight of public trials in favor of the secrecy of deal-making and plea bargains. One could also accuse Spitzer of a conflict of interest -- selecting "investigations" on the basis of publicity value in preparation for running for higher office.

 The New York prosecutor's latest accusations about insurance brokers have been criticized by myself, Henry Manne and William Holstein in separate Wall Street Journal op-eds. What I want to do here and now is highlight three themes common to Spitzer's attacks on financial industries.

Alan Reynolds

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