As someone who first made a name for himself by stretching the racketeering laws to go after investment bankers, former New York City Mayor Rudy Giuliani has decided the allure of the silly money they make is too much to pass up, so he will now join their ranks. His private consulting firm, Giuliani Partners, will buy the investment banking arm of Big Four accounting firm Ernst & Young and be rechristened Giuliani Capital Advisors.
Giuliani was a federal prosecutor in the 1980s who used the federal Racketeering Influenced Corrupt Organizations (RICO) statutes to go after the likes of investment banking firm Drexel Burnham Lambert. Originally designed to bust up gangsters and the Mafia, Giuliani twisted the concept and used it to bludgeon the investment banking firm into submission. The RICO statutes give the government the right to seize all of the assets of the defendant before any guilty verdict is found and without any due process. That's why Drexel ended up paying a fine of $650 million and pleading guilty to six felony counts -- a simple RICO indictment would have allowed Giuliani to seize all of the firm's assets. As it was, Drexel Burnham Lambert was out of business.
Michael Milken was the Drexel financier who raised the bar on using junk bonds to finance mergers and acquisitions. So successful was he that Drexel went from earning $1.2 million in fees on such deals to more than $4 billion in 1986. Milken himself earned a Guinness Book of World Records salary and bonus of $550 million -- a record that still stands today. Giuliani got him indicted on 98 counts of racketeering and fraud, but they were eventually thrown out, and Milken subsequently pleaded guilty to five counts of securities fraud. His sentence of 10 years in jail was ultimately reduced to 22 months with a lifelong ban on working in the securities industry.
While Giuliani Capital Advisors will undoubtedly attract business if for no other reason than Giuliani's name recognition, it will probably not take away much business from the likes of industry giants Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), or Morgan Stanley (NYSE:MWD).
Some have speculated that this foray into investment banking is a prelude to a run for president in 2008 for the former mayor. Following the terrorist attacks of Sept. 11, Giuliani gained national prominence for his assumed leadership skills. He was recently touted as a possible successor to Tom Ridge, who will step down as Homeland Security secretary early next year.
The new firm will still have Ernst & Young operating in the background, doing the deals and working up the financials; Giuliani will be the "star power" to attract clients. The accounting firm had previously been a financial backer of Giuliani's consulting firm and is expected to bring its current client list along when the deal is closed.
As a firm that has been embroiled in some of the accounting scandals of the past few years, one can't help but wonder at the possibility of Wall Street's newest crusader, New York Attorney General Eliot Spitzer, eventually taking on Ernst & Young. As he has been wont to stretch a concept to prove a point, it would be an interest matchup.
Prosecuting has turned into quite a racket these days.
Fool contributor Rich Duprey plays tennis with a racket in one hand and a Krispy Kreme doughnut in the other. He does not own any of the stocks mentioned in this article.
