Newspapers and web sites are crammed with reaction to the news that New York Governor Eliot Spitzer dallied with a call girl in Washington, D.C. While Wall Street cheers the demise of its hated nemesis, most people sympathize with his wife and daughters. But of all the reactions, there's one you won't read anywhere but here: Former heroes get cut down to size in a bear market.
The demise of the Crusader – as Spitzer was known for his dogged pursuit of Wall Street turpitude – is a perfect example of what Bob Prechter has discussed as a trait of bear markets. Through his study of socionomics, which is the science of predicting financial and economic outcomes based on changes in social mood, he has observed that former iconic companies and business and political leaders often fall hard from their pedestals once the good feeling of a bull market turns to the negative feeling of a bear market. People are simply more forgiving during bull markets.
Here's how The Elliott Wave Financial Forecast explained the phenomenon last April:
"Bear markets bring recrimination. Practices that were routine during the bull market suddenly become vilified. The 2000-2002 downturn gave us Enron, Tyco, Martha Stewart and Adelphia. We cannot say exactly who the culprits will be this time, but they will probably be some of the most successful and aggressive exploiters of the old uptrend. Their transgressions will be common bull market practices, and the accused will defend themselves by saying “Everyone else was doing it.” In the interest of justice, however, (and the enforcement of a whole new social mood), many will be punished." [Elliott Wave Financial Forecast, April 2007]
In what has got to be my favorite lead-in to any of the stories I've read about Spitzer, a New York Times reporter explained how the whole tawdry story first came to light:
"The rendezvous that established Gov. Eliot Spitzer’s involvement with high-priced prostitutes occurred last month in one of Washington’s grandest hotels, but the criminal investigation that discovered the tryst began last year in a nondescript office building opposite a Dunkin’ Donuts on Long Island, according to law enforcement officials." [New York Times, "Rendezvous Began in Routine Tax Inquiry," 3/11/08)
It turns out that investigators in an IRS office in Long Island noticed in some routine reports from banks about financial transactions that the governor had shifted large amounts of cash to a shell corporation. They suspected political corruption, and so FBI agents joined in the investigation. Little did they think that they would end up uncovering a prostitution ring, called the Emperor's Club VIP.
Now, there will be more fall-out: Spitzer is said to be ready to resign from his office by the end of this week. Wall Street types will continue to enjoy their schadenfreude at Spitzer being brought low. More seamy details will emerge about the business of paying for sex. And the governor will have to negotiate with the U.S. attorney about his violation of the Mann Act. But as all of this drama plays out, remember that the underlying social mood is as much responsible for Spitzer's downfall as his own arrogance.