How Spitzer made the markets tumble

When Gov Eliot Spitzer's humiliation was revealed 10 days ago, Wall Street cheered. Their scourge had been undone in the most demeaning way. Scarcely had the party balloons popped than Bear Stearns followed Spitzer into oblivion. With both the arch-regulator and the arch-free-marketeers now whirling down the drain of history, no one knows where to turn for answers.

It is customary in the wake of a financial blow-up to see a whip-saw effect. It happened after the tech bubble imploded in 2000, exposing corporate fraud at Enron, Tyco and Worldcom, and the willing deception of investors by Wall Street analysts. Washington reacted with Sarbanes Oxley, a burdensome new set of accounting laws intended to create more corporate transparency.

Spitzer used his job as Attorney General

of New York to do the work he felt was being neglected by the Bush administration. He went after Wall Street's bosses with ferocious prosecutions, vowing to bring down the individuals and institutions which crossed him. He championed investors who felt misled during the late 1990s into buying worthless stocks.

But one thing Spitzer and other politicians did not do was look forward. They were so intent on mopping up the mess leading up to 2000 that they failed to stop the mortgage business spinning out of control. The problems we see in the American economy today were seeded as Spitzer, Sarbanes and Oxley chastised yesterday's villains instead of foreseeing tomorrow's crises.

If you go back further, you find that the dreaded 'mark-to-market' accounting rule, which is now wreaking such havoc in America, was introduced in the early 1990s after another market collapse. The rule was intended to force companies to value their financial assets more rigorously. At the end of each trading day, those assets now had to be valued at their market value.

In stable markets, this works fine. In the