ELIOT SPITZER is that most devastatingly effective of creatures: a lawyer who plays the game like a politician. His lean and hungry look suggests a man on a mission and so it proved in 2002.

The 43-year-old Princeton and Harvard-educated New York attorney-general came from nowhere to take on the world’s most powerful financial institutions this year — and won.

“This was the most shocking betrayal of trust,” he said at a spring press conference blasting Merrill Lynch, the world’s biggest stockbroker, for encouraging private investors to buy shares in firms that in internal e-mails its analysts privately denigrated as “pieces of shit”.

It was the opening salvo in a battle that would haul some of the biggest, most respected and most powerful names on Wall Street over the coals and would lead, in Spitzer’s words, to a “shattering of the patina surrounding investment-banking research”. He was on a mission to expose and stamp out corrupt practices in the financial system.

“Merrill Lynch grossly underestimated his skill,” says one banker who has spent the past year on the receiving end of Spitzer’s crusade. “He’s a political animal and was prepared to use all the weapons in his armoury to get what he wanted. In its initial dealings with him Merrill displayed naivety and arrogance. Spitzer suspected that same arrogance existed at other places.”

Spitzer’s next obvious targets were CSFB, a leading underwriter of “hot” technology flotations in the late 1990s, and Citigroup, home to the biggest star telecoms analyst of the era, Jack Grubman. The sizeable market shares of both Morgan Stanley and Goldman Sachs put them under scrutiny, too.

Ten days ago, under the lights of an 18ft Christmas tree at the New York Stock Exchange, Spitzer’s campaign to protect those “who might not understand the ways of Wall Street” culminated in one of investment banking’s biggest shake-ups.

Wall Street firms are to pay a record $1.4 billion (£874m) to settle claims that they misled investors. The practice of “spinning” — giving shares in new flotations to favoured clients — is to be banned. And investment analysts, who recommend which shares to buy and sell, will be separated from investment bankers. As well as splitting their analysts from bankers, 10 firms must also fund independent research.

The real damage inflicted on the firms, however, has been to their reputations. As Charles Elson, Woolard professor of corporate governance at Delaware University, says: “It’s a business that depends on integrity and it will take years to restore their reputations. The structural reforms are the best you could hope for but they won’t guarantee protection for the private investor. The changes themselves won’t bring back confidence.”

The crackdown is targeted at Wall Street, but given the dominance of American firms in global financial services, there is little doubt that the Spitzer effect will be felt around the world.

In New York the effectiveness of the attorney- general’s work also exposed a woeful lack of rigour and leadership at the investment watchdog, the Securities and Exchange Commission (SEC). Had Harvey Pitt, who started 2002 as SEC chairman and ended the year out of a job, done his work properly, there would have been no need for Spitzer.

But New York’s attorney-general has made waves beyond the financial world. Office e-mails took on a whole new meaning in 2002. A once-innocuous communication medium became every litigator’s favourite tool as Spitzer dropped his e-mail evidence of wrongdoing at Merrill Lynch like a bomb on Wall Street and pushed the firm to a $100m settlement.

The past 12 months have thrown the previously little-known attorney-general onto a global stage. Accused by some of being hellbent on furthering his own political career — he is thought a likely future candidate for New York state governor — Spitzer was inspired to investigate Wall Street in September 2001 after receiving letters from New Yorkers angry about what they argued was poor investment advice from the banks.