New York Governor Eliot Spitzer's political career may have been fatally undermined, but the use of litigation to catalyse regulatory and policy change that he pioneered will endure.
New York state Attorney General Andrew Cuomo continues to follow Spitzer's example in this respect, despite complaints about his aggressive tactics.
These initiatives have filled a regulatory gap opened by President George Bush's generally hands-off, market friendly approach.
Cuomo's investigations cover a broad spectrum of policy areas, which, following the Spitzer pattern, tend to target conflicts of interest whereby companies have allegedly exploited consumers.
Some Cuomo initiatives emphasise key Democratic electoral themes, including healthcare, and reflect a more pro-active approach to the sub-prime crisis.
Mortgage appraisals investigation. In November, Cuomo filed a lawsuit against mortgage lender First American for allegedly conspiring with Washington Mutual to inflate its real estate appraisals. Although Fannie Mae and Freddie Mac were not targets of that lawsuit, their practices were spotlighted -- involuntarily -- as part of the investigation, when Cuomo subpoenaed the two entities, triggering wide criticism. Cuomo believes that fraudulent real estate appraisals were a key factor in artificially inflating real estate values, and contributed to the sub-prime crisis.
Freddie Mac, Fannie Mae, and the Office of Federal Housing Enterprise Oversight (OFHEO) on March 3 agreed a deal with Cuomo to require lenders to change their practices, so as to curb inflated mortgage appraisals. The deal would:
establish a New Home Valuation Protection Code to ensure accurate appraisals, including prohibiting in-house appraisers from completing appraisals, disallowing mortgage brokers from selecting appraisers, and forbidding financial firms from using wholly-owned subsidiaries to conduct appraisals;
require all banks to adhere to the code beginning on January 1, 2009; and
create the Independent Valuation Protection Institute to monitor adherence to the code, providing a vehicle for consumers to lodge complaints.
Health insurers inquiry. Cuomo announced on February 13 his intention to sue UnitedHealth, an insurance company, as part of a probe into insurance company billing practices for 'out-of-network providers'. He has subpoenaed 16 of the largest health insurers that operate in New York, including Aetna and Empire BlueCross BlueShield. Cuomo has yet to file a formal legal complaint, but is aggressively negotiating a possible settlement with insurance companies.
Typically, private US insurers negotiate set payment schedules with healthcare providers who participate in their networks; for out-of-network providers, the insurer sets allowable payments based on its assessment of 'reasonable charges'. In UnitedHealth's case, the insurer pays 80% of either the doctor's full bill or the 'reasonable and customary' rate for the service, whichever is cheaper. The consumer is responsible for any charges above these levels.
'Reasonable and customary' charges are set by reference to an industry-wide database, which is operated by Ingenix, a subsidiary of UnitedHealth. Cuomo has characterised the database as "a conduit for rigged data" to insurers:
UnitedHealth contends it has done nothing wrong, and is cooperating with the investigation.
The investigation is unlikely to result in any significant legal judgment -- although it could trigger a settlement, in which UnitedHealth agrees either to spin off Ingenix, or at minimum, submit it to outside monitoring. This probe will spotlight attention on insurance company practices at a time when healthcare looms as a major political issue, particularly emphasised by the Democrats.
Sub-prime probe. Cuomo has played a leading role in several sub-prime investigations. Notably, his interest seems to be in forward-looking policy change, rather than narrower, retrospective assignment of legal blame for past transgressions:
Resource/jurisdictional barriers. Cuomo's office lacks the resources to mount intensive investigations of sub-prime legal violations. Moreover, federal rather than state level statutes are at issue in many of these probes.
'Watchdog' role. Much of the heavy lifting in multiple ongoing probes is now being done by the Securities and Exchange Commission , the US Attorneys' offices in Manhattan and Brooklyn, and the Federal Bureau of Investigation. Cuomo and other state attorneys-general -- in Connecticut, Maine, Massachusetts and Ohio -- are playing an unofficial watchdog role, informally overseeing the activities of federal officials.
Substantive interest. Cuomo has great understanding of housing issues, stemming from his stint as Secretary of Housing and Urban Development in former President Bill Clinton's cabinet. Therefore, as the sub-prime crisis continues to unfold, he can be expected to launch further investigations, capitalising on ongoing political fallout.