Memo to Eliot Spitzer on AIG: Don't Just Read Email, Pick Up the Phone

In today's New York Times former New York Attorney General and Gov. Eliot Spitzer suggests one surefire way to find out the story behind the September 2008 deal that saved American International Group and, arguably, bailed out Goldman Sachs and other major banks: make public the emails that passed between these parties.

Not a bad idea. As Spitzer, a former prosecutor and current blogger put it: "Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story."

Spitzer has some expertise on the subject of reading other people's mail. He won a $1.4 billion settlement from 10 investment banks that put out phony, over-optimistic research touting companies that were arguably trash. His poster boy for this bad behavior was Merrill Lynch Internet analyst Henry Blodget, who is also now relegated to blogging - see a pattern here?

While recommending certain stocks as a "buy," privately Blodget described them in emails to privileged clients as a "POS," i.e. "piece of s__t." When this became public, Merrill and other Wall Street firms were happy to pay up, having previously made billions from investment banking deals with these same POS companies.

Ironically this success story came to Spitzer by way of Eric Dinallo, who served as Spitzer's head of investor protection. According to a New Yorker piece, Dinallo's father asked why so many stocks that analysts said to buy were really sells. When Dinallo couldn't answer the question he started an investigation that ended with the $1.4 billion fine and settlement. Dinallo then followed Spitzer up the ladder. When Spitzer became governor he appointed Dinallo superintendent of New York's insurance department.

Now the story comes full circle. Spitzer resigned after his infamous sex scandal, but Dinallo stayed on in his job through 2008. As such, he was a party to those September talks that led to the bailout of what was then the world's largest insurer. In testimony before the U.S. House of Representatives Committee on Oversight and Government Reform, just a month after the bailout, Dinallo emphatically defended the deal that gave AIG access to $180 billion. His argument: desperate times call for desperate measures. AIG, with its hydra-headed businesses that avoided any kind of regulation, was about to take down the financial system, and the risk of letting it to go into bankruptcy, as was the case with Lehman Brothers, was "too great."

"Was the bailout necessary?" Dinallo asked rhetorically in front of the committee. "I believe it was." At the time, no one challenged him, or at least, no one called him a "POS." So a phone call from Spitzer to his former colleague, assuming they are on speaking terms, could help straighten things out.

Dinallo is now running for Spitzer's former job as attorney general. And arguably Dinallo's proven that he's one of the most competent people to do it. His service under Spitzer, New York's take-no-prisoners attorney general, proves it. But what if Dinallo and all the other well-meaning regulators who approved the AIG settlement were sucker-punched by AIG employees and the investment bankers as Spitzer obliquely suggests? What if they unwittingly fell into a well-planned trap, taking taxpayers with them?

So perhaps Spitzer has the right idea after all. Let the full story unfold, let those thousand flowers bloom, and let the chips fall where they may. Everyone, including Dinallo, will be better for it.