More Secrets and Lies of the Bailout

By Matt Taibbi, Rolling Stone

09 January 13

have a feature in the new issue of Rolling Stone called "Secrets and Lies of the Bailout," which focuses in large part on the seemingly intentional policy of deception in the government's rescue of the financial sector. The government didn't just bail out Wall Street with money: It also lied on Wall Street's behalf, calling unhealthy banks healthy, and helping banks cover up just how much aid they were getting in secret.

Proponents of the bailouts will say that whatever the government did, it worked. The economy didn't collapse as it appeared it might in late 2008, and the stock markets are puffed up all over again, as financial companies in particular are back making huge profits.

But in the course of researching the magazine piece, we discovered definite victims of the myriad deceptions that became a baked-in feature of the bailouts. One of those victims was a southern investment broker who lost lots of his own money, lost money for family members who'd invested with him, and (maybe worst of all) lost plenty of his clients' money, when he made investment decisions based on what turned out to be incomplete information.

If this particular broker had known exactly how far the bailouts reached, neither he nor his clients would ever have lost so much. But during the crisis it was decided, by people deemed more important than small-town investment advisers and their clients, that the full story of the bailouts didn't need to be told.

As a result, George Hartzman and his clients got creamed. In recent years we've heard a lot about how the bailouts saved the world. This is the other side of the story.

George Hartzman is easy to like. The easygoing North Carolinian has every salesman's ability to grab you from the first moment with humor and charm, but what makes him a little bit of a different kind of cat - and I suspect some of this change developed after he joined the growing population of financial crisis-era whistleblowers, dismissed from a Wells Fargo brokerage after making complaints about what he felt were bailout-related abuses - is that the humor is often self-directed. He loves to tell stories about all the goofy, sometimes-dicey sales jobs he's taken over the years, and the hard work he put in to get really good at each and every one of them.

"Hell, I even sold encyclopedias," he says, laughing. "You just look 'em in the eye and say, 'Listen, do you want your kids to go to college, or not?'" He laughs again. "What are they going to say?"

Now 45 years old, George as a younger man sold it all - copiers, above-ground aluminum swimming pools, even vinyl siding, a job which he describes as selling "relatively bad things to the relatively elderly." In down times, he waited tables and tended bar at a restaurant/nightclub in a tough section of Greensboro, where he said the rule was, "you don't take out the trash through the back door without somebody with a gun."

But throughout it all, he wanted to be in finance, wanted to buy stocks and bonds and actually make money for people, as opposed to just talking old folks into buying stuff they maybe didn't need. Eventually he got his chance, working at several national brokerage firms through the 2000s, paying his dues as the guy who sucked it up for the endless cold calls.

"Do you have any money, anywhere, that's earning less than 7 percent right now?" he says, chuckling as he quotes his old self. "I must have said that line, I shit you not, not less than 100,000 times."

Eventually, George found himself selling retirement and investment plans as a broker for the granddaddy of Carolinian megabanks, Wachovia. Working out of the Greensboro, North Carolina area, he handled dozens of clients, including himself and several of his family members, and by 2007 had settled in to what he thought was the good life working for Wachovia Advisors, managing tens of millions in assets for the huge national brokerage firm.

In hindsight, it's ironic - given that the vast federal bailouts were what ultimately sank George's career as a broker - that when Wachovia went belly-up in 2008, George's job was initially saved by a bailout. After its collapse (caused in large part by its disastrous 2006 acquisition of subprime-laden Golden West financial), the giant bank was swallowed up in a state-aided merger by Wells Fargo, which received as much as $36 billion in cash and special tax breaks as it was finishing the merger deal.

When the merger was finished, Wells Fargo was the fourth-largest commercial bank holding company in America, and George Hartzman found himself working essentially the same job, only with a new name on his letterhead - Wells Fargo Advisors.

While brokers in most places started taking the big bath in 2007 and 2008 as the subprime market collapsed, George was quietly killing it. In both those years he made very good money for his clients, his family and himself, mainly by shorting the very companies that had inflated the subprime bubble, firms with names like Goldman, Sachs, MBIA and Merrill Lynch.

"I saw it early," he says, a bit immodestly, but with perspective, too. "I was doing great, right up until the time I wasn't."

When I called former clients of George's to check his story, they confirmed that he took a much different and more aggressive approach than your average broker. George's clients seemed to like him a lot, and were impressed by how hard he worked at a job that a lot of storefront brokers just mail in.

"A lot of guys will just tell you that you just have to stay in the market, that in the long run, things always go up," says John Mandrano, a former CPA who trusted a sizable portion of his retirement fund with George. "George was different. He really put a lot of thought into what he was doing. And he invested his own money, and his family's money, so you know he had a stake in what he was doing."

Having made money betting against Wall Street in 2007 and 2008, George planned on continuing the same strategy in 2009, even after the bailouts. In early 2009, he placed a series of short bets against the market, among other things betting against an index of real estate trusts and the S&P 500. He explained to his clients that even though the government and the talking heads in the financial press kept insisting the worst was over, he still thought a lot of firms, particularly financial firms, were in deep trouble.

"I thought they were screwed," he says. "The numbers just didn't add up."

What happened instead is that the stock market went into a prolonged and seemingly miraculous rebound, with the NYSE soaring from the mid-6000s in February of 2009 to over 13,000 in recent months. George couldn't figure out how so many seemingly insolvent companies were doing it - where was the money coming from?

He and his clients started taking a beating in early 2009 as the stock market crept upward. He kept waiting for another crash to come, but a March 2009 news story freaked him out, leading him to worry if maybe he wasn't seeing the whole picture.

George remembers reading about a remarkable incident in which President Barack Obama took time out in the middle of an Oval Office photo-op with British Prime Minister Gordon Brown to essentially urge Americans to buy stocks. This is from an old ABC News report:

"What you're now seeing is ... profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," the president said on a day that trading continued to hover under 7,000.

When the president of the United States starts going out of his way to tell America to buy into the stock market, you have to wonder about any decision you might just have made to bet heavily against him.

"I was like, 'What the hell is that?'" George says. "That had me worried, for sure."

Sure enough, the markets rose, and George eventually pulled all of his short bets and "went to cash," taking his portfolio to money market accounts and other safe harbors, but the damage was done. As well as he'd done shorting Wall Street in 2007 and 2008, he did just as badly in the years afterward.

He lost personally, he lost his family's money, and he was heartbroken to lose money for his clients, with whom he'd consulted closely throughout, evangelically insisting that the fundamentals on Wall Street couldn't possibly hold up for long.

"I'm 68 years old," says one woman who invested a significant part of her retirement fund with George. "I should be retired right now, but I'm not."

George agonized over his mistake, poring over news reports as well as the SEC disclosures and annual reports of all the big banks in search of an explanation, but didn't find one. It wasn't until August of 2011 that George saw a partial explanation.

Bloomberg earlier that year had taken the Federal Reserve to the Supreme Court and won the right to have a historic Freedom of Information Act request honored. The news agency in its FOIA hunt had demanded access to the data from congressionally-mandated one-time audit of America's quasi-public Federal Reserve System.

When the Supreme Court rejected the Fed's demands for secrecy, Bloomberg was handed over the data. The news agency learned that Wall Street companies like Goldman, Citigroup and even Wachovia/Wells Fargo had collectively borrowed upwards of $7 trillion from the Fed through a variety of programs that were never intended to be disclosed to the public. This meant that the government had extended a secret lifeline to Wall Street upwards of ten times the size of the TARP program. The agency reported the sensational news in August 2011 and eventually shared all of its data with the public.

When George saw the Bloomberg story, he was floored. He felt like a fool, having bet against companies that essentially had limitless charge cards with the government all along. Had he known, he insists, he would never have stayed short so long.

Moreover, he believes that many companies that took that secret lending would have been saved if investors knew how much credit they had with the government. He points to his own former firm, Wachovia, which (for example) according to the Bloomberg data borrowed $3.5 billion from the Fed's TAF program on March 27, 2008, never announcing the move. The next day, Wachovia's stock plunged 4 percent.

"I believe that if Wachovia had announced the loan details at the time," George says, "the stock price might have gone up instead."

Even worse, when George checked the SEC disclosures and annual reports of other banks and financial companies, he found something interesting. Some banks, in particular smaller regional banks, did disclose their emergency financing from the Fed. He points as an example to the Carolina-based Union Bank and Trust, which announced its relatively small $5 million lifeline with the Federal Reserve on page 16 of its 2009 Annual Report.

"If some did disclose and some didn't, what the hell was going on?" he wondered.

George wasn't alone in asking that question. As I learned during the course of researching the "Secrets and Lies" piece, the SEC seemingly wondered the same thing when it saw the Bloomberg reporting in 2011. From the feature:

Two former high-ranking financial regulators tell Rolling Stone that the secret loans were likely subject to a 1989 guideline, issued by the Securities and Exchange Commission in the heat of the savings and loan crisis, which said that financial institutions should disclose the "nature, amounts and effects" of any government aid. At the end of 2011, in fact, the SEC sent letters to Citigroup, Chase, Goldman Sachs, Bank of America and Wells Fargo asking them why they hadn't fully disclosed their secret borrowing. All five megabanks essentially replied, to varying degrees of absurdity, that their massive borrowing from the Fed was not "material," or that the piecemeal disclosure they had engaged in was adequate.

In any case, when George thought about the issue, he suddenly realized he was in a bind ethically. He wanted to tell his clients about the non-disclosure problem, and how that might have helped cause their losses, but as the SEC's letters make plain, there was really no way to do that without pointing out that his own company, Wells Fargo, was one of the firms that had not disclosed its billions in secret borrowing.

He called the Wells Fargo ethics hotline for guidance, but says he got no help. George says the only response he got from his company was that they had conducted an investigation and months later, closed the matter. Wells Fargo, for its part, declined to address George's situation specifically other than to say that "all Wells Fargo team members are encouraged to express their concerns and can expect that those concerns will be taken seriously, reviewed and addressed if appropriate."

As for George's concerns about the disclosure issue vis-a-vis Wells Fargo, the bank believes it was never obligated to disclose the borrowing highlighted in the Bloomberg piece. In its response to the SEC on the issue in December of 2011, the company insisted that "our participation in the referenced programs did not materially affect, and was not reasonably likely to have a material future effect upon our financial condition or results of operations."

In early 2009, Wells Fargo had a balance of over $45 billion with the Fed, but apparently even that sum of money fell short of being material.

Anyway, George was eventually fired, for making noise about this issue and one other (more about that some other time). After his dismissal, he began a new life, familiar to many in the crisis era, as a perennially-frustrated whistleblower unable to elicit any serious response from either the authorities or the news media. He appealed to the self-regulating organization that governs investment advisers, FINRA, and also appealed to the SEC, but says he got no help in either place.

The real import of Hartzman's story is that he and his clients lost money when they made what in retrospect turned out to be poor investment decisions, because they were denied access to the same information many of America's leading banks (and, by extension, its leading bankers) had in the years after the crash.

Most galling of all to Hartzman was Bloomberg's analysis which showed that the banks receiving secret bailout monies earned some $13 billion in profits by taking advantage of the Fed's below-market rates.

It was one thing when he'd merely lost money betting against firms without all the data at his fingertips - it was another when companies like his very own former firm Wells Fargo could make (according to Bloomberg) $878 million in profits by availing itself of the secret aid.

"When I saw they made so much profit from this, that's when I got really angry," Hartzman says. "I was like, 'They made $878 million? Hell, no.'"

"That's the thing that really hurts," says the 68 year-old client of George's who lost retirement money. "It's that the banks made money on this, and it really came out of my pocket."

Mandrano, another of George's clients, runs a business restoring historic homes. "It's funny, all this talk about the small businessman, that's who I am," he says. "I've got crews out there. I'm paying people, I'm churning money through the economy, for cleaners, and plumbers, and haulers, and carpenters, and so on. I'm making my contribution. But when you sit there and you lose 20 percent of your retirement because there's no full disclosure, it's a real kick in the gut."

This is the real problem with the bailouts, and the issue we tried to underscore with the "Secrets and Lies" piece. With their hide-and-seek policies, bogus stress testing and stubborn insistence on calling failing banks healthy and publicly endorsing other such fibs, the architects of the federal rescue (from both the Bush and Obama administrations, as well as from the Federal Reserve) created a two-tiered market. The new economy has two classes of investors: those who know the real numbers, and those who don't.

So while the proponents of the bailout will argue they were a success, and the covert and overt federal support helped bring the Dow all the way back from below 7,000 to above 13,000 - seemingly a good thing no matter how you look at it - there's another bitter reality, which is that the bailouts officially created a sucker class.

When banks started making fortunes again in 2009 and beyond, it wasn't a victimless situation. There were losers in this trade, too. Hartzman and his clients are examples of the kind of people who lost when the government made decisions about who's entitled to the truth and who wasn't. As one former hedge fund manager put it to me recently, "Joe Sixpack has no chance in this market."

Eric Schneiderman, Liberal Gatekeeper

By Chris Smith, New York Magazine

08 January 13

Attorney General Eric Schneiderman has taken on the role of liberal gatekeeper - trying to goad Barack Obama and Andrew Cuomo away from the Democratic center.

ric Schneiderman is nervous. He has delivered hundreds of speeches in front of audiences ranging from friendly to bored to openly hostile. On this Sunday morning in early December, though, Schneiderman faces a standing-room-only crowd of nearly 1,000 people, many of whom are weeping. Schneiderman has been crying, too. This is a memorial service for Jon Kest, a legendary liberal political organizer and one of Schneiderman's closest political friends. Kest got his start in the city leading squatter takeovers of abandoned apartment buildings, then helped launch the Working Families Party, and he spent his final days crusading for the unionization of car-wash workers. The memorial service, inside the headquarters of the United Federation of Teachers, begins with "Joe Hill" and concludes with a rendition of "This Land Is Your Land."

The stalwarts of New York's progressive political coalition join in the singing, along with Patrick Gaspard, the former White House political director under President Obama, Senator Chuck Schumer, and the four Democrats running for mayor. When it's Schneiderman's turn to speak, he starts haltingly. Kest had died three days earlier, of cancer, at the age of 57. Compounding the agony: In October, Kest's daughter, Jessie, 24, and a friend were killed by a falling tree during Hurricane Sandy. Jessie Streich-Kest helped lead Schneiderman's 2010 attorney-general campaign in Brooklyn. "It has frankly come as sort of a jolt - Jon and Jesse together - and, uh, Jon and I were pretty much exactly the same age," Schneiderman says. Then, as he shifts from the personal to the political, his tone grows confident. "To the extent that there is a progressive political movement here in New York, Jon Kest built that movement," he says. "Over the last few decades, we had extraordinary successes together, but the work goes on. You can't beat a movement with short-term, transactional politics. You can't beat a movement with ego-driven politicians thinking they own the movement. You can only beat a movement with another movement … We cannot honor Jon really with words. But we can honor Jon with our work." Now the sound of sobbing is overwhelmed by the roar of applause.

Eliot Spitzer is at heart a prosecutor. Andrew Cuomo is a pol. Eric Schneiderman shares some qualities with each of his immediate predecessors as state attorney general - but Schneiderman's core is quite different. He has the soul of an activist - he sees himself as a movement progressive. And halfway through his term as A.G., Schneiderman, 58, has become New York's definitive liberal, using the national prominence his predecessors brought to the office to try to yank an increasingly centrist Democratic Party back toward its progressive roots. He's become a gatekeeper for the left.

Schneiderman carved out his new role by taking on the president. In the summer of 2011, the Obama administration was crafting a settlement with the banking industry to resolve claims resulting from dubious foreclosure practices after the collapse of the housing market. The deal, however, needed the support of the 50 state attorneys general. Schneiderman balked, calling it a giveaway to Wall Street, and led a drive to toughen the penalties. Last January, the administration compromised, increasing the industry's payment to homeowners by billions and preserving a broader ability to sue over the causes of the crisis. The White House also created an investigative task force with Schneiderman in charge, and gave New York's A.G. a prime seat behind Michelle Obama at the 2012 State of the Union address. Cutting a more generous mortgage deal with Schneiderman helped protect the president's left flank just as he headed into a tough reelection year. Schneiderman was suddenly a darling of the national left, a cover boy for The American Prospect, and a favorite guest on MSNBC.

His newest good-government initiative is probing the "dark money" groups that flooded the 2012 elections with cash - the threat of "bought" elections being an especially popular liberal cause. Schneiderman's cred with the left is so solid that he has made himself an indispensable progressive validator, a stature that may result in an ironic political twist closer to home. Lately, Governor Andrew Cuomo has been under attack by liberals, just as his 2016 presidential prospects heat up. "Those on the left and in liberal circles that have questions about Andrew will certainly be watching for any kind of signal from Schneiderman," the Reverend Al Sharpton says. And that may be an interesting drama, because both were raised in the playground of progressive New York politics, but Eric Schneiderman and Andrew Cuomo haven't grown up to be the best of friends.

Schneiderman's father was a classic - and now nearly extinct - Upper West Side type: the socially left-wing wealthy corporate lawyer. Irwin Schneiderman, a partner at the Wall Street titan Cahill Gordon & Reindel, helped Michael Milken invent the junk-bond industry; he also became a pivotal financial and strategic backer of naral, WNYC, and City Opera. The teenage Eric graduated from the Trinity School and worked one summer as a clinic escort at a women's health center before Roe v. Wade legalized abortion. Then it was on to Amherst for college and - after two years as a deputy sheriff in Pittsfield, Massachusetts, where Schneiderman created a drug-and-alcohol treatment program for inmates - Harvard for law school.

"I grew up in the sixties with the sense that things aren't perfect but we keep moving toward greater equality and greater justice," Schneiderman says, sitting at his desk in the A.G.'s office, just around the corner from Wall Street. "That was the way the world seemed to me. My grandfather never made it through elementary school. My father went to law school on the G.I. bill. He didn't get where he got because of small government. He got where he got because of a government that was going to invest in its people."

He seemed ready to follow in his father's career footsteps, taking a job at Kirkpatrick & Lockhart and working in private practice for twelve years representing clients including the American Stock Exchange and Merrill Lynch. But Schneiderman also took on public-interest work, counseling tenants trying to evict crack dealers from their buildings and health clinics being picketed by anti-abortion protesters. Schneiderman began working his way up the political ladder, first as a Democratic district leader, then, in 1998, running for the State Senate seat vacated by Franz Leichter. Six terms in Albany produced a reliably progressive résumé. Schneiderman worked to pass tougher ethics and hate-crimes legislation; he led a successful push to ease the Rockefeller drug laws and end "prison gerrymandering," which counted inmates as local residents upstate and weakened downstate Democratic districts. He also showed an increasing aptitude for the inside game, steering the 2002 coup that installed David Paterson as Senate minority leader. In 2009, Schneiderman led the successful push to oust Senator Hiram Monserrate over allegations that Monserrate had abused his girlfriend.

The next year, Schneiderman won a narrow victory over a crowded, talented field of fellow Democrats seeking to succeed Cuomo as attorney general. Democratic primaries, particularly for down-ballot races, are usually decided by city voters - and a subset of city voters, the most dedicated liberals, at that. So even though Schneiderman had no prosecutorial experience, he was in perfect political position. He'd become a favorite of labor unions and of minority leaders. The Working Families Party backed Schneiderman as a progressive counterweight to Cuomo. He squeaked past Cuomo's preferred candidate in the primary, then dispatched the Republican nominee. Schneiderman had a new title, but in fundamental ways his campaigning never ended.

The office of the New York State attorney general used to be a fairly dull place, manned quietly, and mostly competently, for long stretches by Louie Lefkowitz and Bob Abrams. Things got more exciting in 1999 when Eliot Spitzer took over, and the high-stakes action continued through Cuomo's four years as A.G. The first half of Schneiderman's term has often seemed like a return to the low-key model. He's pursued important but unglamorous cases, like winning restitution for construction workers cheated out of wages, but he hasn't generated the run of headlines his predecessors enjoyed. "The shift in expectations for the office has been so vast that it's a little unfortunate for Eric," Spitzer says. "He'll perform, and it will all be good over time. He is doing very well."

And Schneiderman has selectively exploited the office's expanded footprint. In the aftermath of the financial crash, the Wall Street bailouts were the hottest progressive button. Schneiderman flew out to meet with California attorney general Kamala Harris in the summer of 2011 to try to get her to join his opposition to the mortgage settlement taking shape in Washington. California was crucial, not only because the state had the greatest number of underwater homeowners but because its decision would get outsize media coverage. Harris was inclined to go along with the majority of A.G.'s, who wanted a faster resolution for homeowners and weren't equipped to pursue protracted investigations.

So Schneiderman mounted a behind-the-scenes effort to change her mind. He'd hired as his chief of staff Neal Kwatra, who had turned the city's hotel-workers union into a potent political force. Kwatra sees life as a campaign, and now he went about organizing the ground troops, including a group called Californians for a Fair Settlement. Calls and letters were dispatched to pressure President Obama, members of Congress, and most immediately Harris. By late September, though, Harris still hadn't budged. Schneiderman's team turned to Gavin Newsom. The telegenic former mayor of San Francisco is now California's lieutenant governor. Newsom is also expected to be Harris's main Democratic competitor in a future run for U.S. Senate or governor of California. Schneiderman's forces enlisted Newsom to oppose the settlement. Coincidentally, the same day that the Los Angeles Times wrote about Newsom's move, Harris sided with Schneiderman.

In Washington, Schneiderman's team pointed to the rising populist anger about the lack of accountability for the crash, represented most vividly by Occupy Wall Street. They highlighted key swing states with large numbers of underwater homeowners. "The two of us had heated moments at the beginning," says Shaun Donovan, secretary of Housing and Urban Development, who was the administration's chief negotiator with Schneiderman. "We're both opinionated New Yorkers. What has been good about working with Eric is that he is clearly a progressive, but he's pragmatic too. Ultimately, it wasn't just about sending a message. It was about getting help to homeowners." The final arrangement contained startling numbers: In exchange for being released from culpability over the robo-signing of mortgage documents, banks would cough up $25 billion worth of relief for struggling mortgagees. The fine print, however, brought howls from some on the left because only about $5 billion was cash directly from banks. "Eric comes out of the progressive movement that is used to pressuring elected officials, but now he's a statewide official, so there's a tension," says David Sirota, the liberal writer and commentator. "It's not easy to go up against the administration and say I think you should do more, and to tell grassroots movements we should take half the loaf. But I think he's done a damn good job of balancing that."

Schneiderman hinted for months that his investigation would deliver serious legal action against mortgage fraudsters. The results have so far been modest: In October, Schneiderman announced a civil lawsuit against JPMorgan Chase for the alleged mortgage misdeeds of Bear Stearns, which the firm acquired in 2008 at the behest of the Feds. A month later, he unveiled a similar suit against Credit Suisse, alleging that it deceived investors when securitizing packages of mortgage loans. Yet no criminal charges have been filed. Schneiderman says he hasn't given up on criminal prosecutions, but says it would have helped if more groundwork had been done before he arrived as A.G. "I'm not averse to cases against individuals," he tells me. "I wasn't here in 2008, 2009, 2010. We started our investigation last spring." Left unsaid is that the state A.G. in the early days of the financial crisis was Andrew Cuomo.

In mid-December, Schneiderman is perched on a stool in a chilly TV studio in Chelsea; to his left in the otherwise barren room is a flimsy kitchen, the set for a cooking show. He stares into a TV camera and, for two hours, gives repetitive answers to repetitive questions coming into his earpiece from reporters all over the state asking about the attorney general's new proposal to crack down on political groups masquerading as charitable organizations. Schneiderman has some quirks - he practices yoga and is a fastidiously healthy eater - but his public style is dry and factual. Though he does perk up when WNYC comes on the line, telling Amy Eddings he's a big fan of "All Things Considered."

As A.G., Schneiderman has indicted a former Senate colleague on corruption charges, cracked down on illegal sales of prescription drugs, and sued a Buffalo furniture retailer for allegedly ripping off customers. But he's most energized about reforming the political system. "The public's confidence has been badly shaken in the idea that there's one set of rules for everyone in America," he tells me. "My understanding of the idea of free speech, of equal protection under the law, and equal justice under the law, is completely inconsistent with the notion that a multibillionaire has that much more speech than someone who is just a regular working American. [Citizens United] was a terrible decision. Just because the Supreme Court says it's right doesn't mean you have to think it's right. And I think it will eventually be overturned. But it takes time to build these movements."

Schneiderman's plan to expose who is spending campaign money is a good and necessary one. Yet within an hour after the attorney general leaves the TV studio, Governor Cuomo announces he's got an even better idea - it won't just cover charities registered in New York, but anywhere. The best part, though, is that Cuomo manages to expound on the subject for a long three minutes without once mentioning Schneiderman by name.

Ego and rivalry are not exactly new in politics. Cuomo threw a brushback pitch at Schneiderman shortly after becoming governor: He proposed transferring the attorney general's strongest weapon, the Martin Act - which gives New York's A.G. greater powers in fighting financial fraud than those possessed by any other state regulator - to a new agency controlled by Cuomo. Schneiderman fended off the maneuver. Part of the Cuomo-Schneiderman tension is that they're very different personalities. "Andrew has an extraordinary facility to him: He can be the intellectual, or the tough pol, or the regular guy who fixes his car," a Democratic insider says. "But Eric is a pretty one-way guy. Superintelligent and committed, but he's not much fun. I don't think they hate each other, but they're not natural buddies." The small world of New York politics has also given them a peculiar overlap. Schneiderman's ex-wife, Jennifer Cunningham, is one of New York's savviest political strategists, and she's become a key adviser to Cuomo. In 2010, Cunningham advised both men as Cuomo ran for governor and Schneiderman for A.G.

The larger split is philosophical. "Eric has a very different view of the political landscape than Andrew does," a Schneiderman associate says. "He thinks the divide between right and left has never been bigger, so that trying to be in the middle, as Andrew is doing, makes no sense." Schneiderman believes liberal Democrats are on the right side of both the issues and of history. "An extreme conservative movement has taken over the Republican Party, but they have a policy problem and a demographic problem," he says. "They finally had a chance to implement their policies during the Bush years, and foreign policy was a catastrophe, criminal-justice policy was a catastrophe, and we ended up with the worst economic crisis since the Great Depression. And they've run and won on an appeal to fear, but last year they woke up in a country where the ‘other' had become the majority. They're appealing to an increasingly small portion of the electorate."

Cuomo's partisans make a strong case that he's delivered progressive results, from legalizing gay marriage to rejiggering the tax code. The attorney general measures his words carefully when it comes to the governor. "Our office is very much entwined with the executive branch," Schneiderman says. "We are the lawyers for the executive branch. We work together every day. That's the core of the relationship, and I think on that front we're doing very well." For two years, Schneiderman has made his biggest splashes nationally, on issues that fit both his liberal convictions and his local need to stay out of Cuomo's orbit. The deft balancing act has won Eric Schneiderman a following on the national left and political peace at home. Keeping the two realms separate, though, could become progressively more challenging.