DEREGULATION THAT OPENED THE DOOR FOR 'BIG MONEY' TO RIP OFF AMERICA
FAR WORSE THAN ENRON DID
Even as the housing bubble took Wall Street down for the first market
bottom in the spring, McCain preached "less regulation" as the solution.
McCain's solution to an era in which financial deregulation set
the stage for federal bailouts, rampant speculation, and reckless
lending is ... less regulation. "Our financial market approach
should include encouraging increased capital in financial
institutions by removing regulatory, accounting, and tax
impediments to raising capital."
http://www.slate.com/id/2187570/pagenum/all/
Deregulation/Foreclosure Phil - McCain's economic policy advisor
...In 1999, Phil Gramm pushed through a historic banking deregulation
bill that decimated Depression-era firewalls between commercial banks,
investment banks, insurance companies, and securities firmssetting
off a wave of merger mania.
But Gramm's most cunning coup on behalf of his friends in the
financial services industryfriends who gave him millions over his
24-year congressional careercame on December 15, 2000.
It was an especially tense time in Washington. Only two days earlier,
the Supreme Court had issued its decision on Bush v. Gore. President
Bill Clinton and the Republican-controlled Congress were locked in a
budget showdown.
It was the perfect moment for a wily senator to game the system. As
Congress and the White House were hurriedly hammering out a
$384-billion omnibus spending bill, Gramm slipped in a 262-page
measure called the Commodity Futures Modernization Act.
Written with the help of financial industry lobbyists and cosponsored
by Senator Richard Lugar (R-Ind.), the chairman of the agriculture
committee, the measure had been considered deadeven by Gramm. Few
lawmakers had either the opportunity or inclination to read the
version of the bill Gramm inserted. "Nobody in either chamber had any
knowledge of what was going on or what was in it," says a
congressional aide familiar with the bill's history.
It's not exactly like Gramm hid his handiworkfar from it. The balding
and bespectacled Texan strode onto the Senate floor to hail the act's
inclusion into the must-pass budget package. But only an expert, or a
lobbyist, could have followed what Gramm was saying.
The act, he declared, would ensure that neither the SEC nor the
Commodity Futures Trading Commission (CFTC) got into the business of
regulating newfangled financial products called swapsand would thus
"protect financial institutions from overregulation" and "position our
financial services industries to be world leaders into the new century."
It didn't quite work out that way.
For starters, the legislation contained a provisionlobbied for by
Enron, a generous contributor to Grammthat exempted energy trading
from regulatory oversight, allowing Enron to run rampant, wreck the
California electricity market, and cost consumers billions before it
collapsed.
(For Gramm, Enron was a family affair. Eight years earlier, his wife,
Wendy Gramm, as CFTC chairwoman, had pushed through a rule excluding
Enron's energy futures contracts from government oversight. Wendy
later joined the Houston-based company's board, and in the following
years her Enron salary and stock income brought between $915,000 and
$1.8 million into the Gramm household.)
But the Enron loophole was small potatoes compared to the devastation
that unregulated swaps would unleash.
Credit default swaps are essentially insurance policies covering the
losses on securities in the event of a default. Financial institutions
buy them to protect themselves if an investment they hold goes south.
It's like bookies trading bets, with banks and hedge funds gambling on
whether an investment (say, a pile of subprime mortgages bundled into
a security) will succeed or fail.
Because of the swap-related provisions of Gramm's billwhich were
supported by Fed chairman Alan Greenspan and Treasury secretary Larry
Summersa $62 trillion market (nearly four times the size of the
entire US stock market) remained utterly unregulated, meaning no one
made sure the banks and hedge funds had the assets to cover the losses
they guaranteed.
In essence, Wall Street's biggest players (which, thanks to Gramm's
earlier banking deregulation efforts, now incorporated everything from
your checking account to your pension fund) ran a secret casino.
"Tens of trillions of dollars of transactions were done in the dark,"
says University of San Diego law professor Frank Partnoy, an expert on
financial markets and derivatives. "No one had a picture of where the
risks were flowing."
Betting on the risk of any given transaction became more importantand
more lucrativethan the transactions themselves, Partnoy notes: "So
there was more betting on the riskiest subprime mortgages than there
were actual mortgages." Banks and hedge funds, notes Michael
Greenberger, who directed the CFTC's division of trading and markets
in the late 1990s, "were betting the subprimes would pay off and they
would not need the capital to support their bets."
These unregulated swaps have been at "the heart of the subprime
meltdown," says Greenberger. [...]
Gramm's record as a reckless deregulator has not affected his rating
as a Republican economic expert. Sen. John McCain has relied on him
for policy advice, especially, according to the campaign, on housing
matters.
The two have been buddies ever since they served together in the House
in the 1980s; in 1996, McCain chaired Gramm's flop of a presidential
campaign. (Gramm spent $21 million and earned only 10 delegates during
the gop primaries.)
In 2005, McCain told a Wall Street Journal columnist that Gramm was
his economic guru. Two years later, Gramm wrote a piece for the
Journal extolling McCain as a modern-day Abraham Lincoln, and he's
hailed McCain's love of tax cuts and free trade.
Media accounts have identified Gramm as a contender for the top slot
at the Treasury Department if McCain reaches the White House. "If
McCain gets in," frets Lynn Turner, a former chief SEC accountant,
"we'll have more of the same deregulatory mess. I like John McCain,
but given what I know about Phil Gramm, I wouldn't vote for McCain."
As a thriving bank exec and presidential adviser, Gramm has defied a
prime economic principle: Bad products are driven out of the market.
In John McCain, he has gained an important customer, so his stock has
gone up in value. And there's no telling when the Gramm bubble will burst.
http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
