I'm late getting to John McCain's speech on the housing crisis, in which he promised to do next to nothing to help homeowners, to convene a meeting of accountants, to cut taxes, and, in a surprising break with most economists here on planet earth, to respond to the present financial problems by cutting regulation [UPDATE: as von notes, this is McCain's response to what he calls "an explosion of complex financial instruments that weren't particularly well understood by even the most sophisticated banks, lenders and hedge funds" As von correctly notes, McCain does propose new regulation on mortgage lenders. END UPDATE.] The idea that overregulation is at the heart of our present predicament might seem counterintuitive. But the fact that McCain believes it is a lot easier to understand when you realize that his chief economic advisor and general campaign co-chair is Phil Gramm, who seems never to have met a financial regulation he didn't want to destroy.
Gramm, who has been described as "McCain's econ brain" and "the expert he turns to on the subject," didn't just oppose financial regulations in general. He helped to create the conditions for the mortgage crisis, and others, in quite specific ways. Lisa Lerer at Politico has more:
"The general co-chairman of John McCain’s presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today’s economic turmoil. (...)
A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS’s new investment banking arm.
Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and Treasury Department about banking and mortgage issues in 2005 and 2006.
During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.
For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS’s American subsidiary. In the past year, UBS has written down more then $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs."
The 1999 bill that Gramm sponsored overturned the Glass-Steagall Act, which (among other things) separated investment banks from ordinary banks. Gramm's bill was an enormously important piece of financial legislation, and by allowing banks and brokerages to merge, it set in place some of the conditions that hampered scrutiny of mortgage-backed securities, and made the damage from the present meltdown harder to contain. As Paul Krugman wrote last week:
"I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible."
Isn't that comforting?
But Gramm isn't just involved in this economic meltdown...
He and his wife had important roles in the Enron collapse as well:
"Mr. Gramm, a Texas Republican, is one of the top recipients of Enron largess in the Senate. And he is a demon for deregulation. In December 2000 Mr. Gramm was one of the ringleaders who engineered the stealthlike approval of a bill that exempted energy commodity trading from government regulation and public disclosure. It was a gift tied with a bright ribbon for Enron.
Wendy Gramm has been influential in her own right. She, too, is a demon for deregulation. She headed the presidential Task Force on Regulatory Relief in the Reagan administration. And she was chairwoman of the U.S. Commodity Futures Trading Commission from 1988 until 1993.
In her final days with the commission she helped push through a ruling that exempted many energy futures contracts from regulation, a move that had been sought by Enron. Five weeks later, after resigning from the commission, Wendy Gramm was appointed to Enron's board of directors.
According to a report by Public Citizen, a watchdog group in Washington, ''Enron paid her between $915,000 and $1.85 million in salary, attendance fees, stock options and dividends from 1993 to 2001.''
As a board member, Ms. Gramm has served on Enron's audit committee, but her eyesight wasn't any better than that of the folks at Arthur Andersen. The one thing Enron did not pay big bucks for was vigilance."
"In June 2000, Senator Gramm co-sponsored the Commodity Futures Modernization Act, a measure aimed at deregulating certain kinds of futures trading, but not energy futures. That bill never made it to the floor, and thus quietly died. Six months later, on December 15, Gramm curiously turned up as co-sponsor of a bill with the same name, the Commodity Futures Modernization Act, which did deregulate energy futures and which, without undergoing the usual committee hearings and preliminary votes, was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Bill Clinton six days later. Few lawmakers had likely perused the rider carefully, if they even knew it was there. And at any rate, Enron had given to the campaigns of over 200 legislators.
That's not to say no one opposed Enron's aims. An economics advisory group to Clinton—with representatives from the Federal Reserve, SEC, and Commodity Futures Trading Commission—had come out against deregulated energy trading. They argued the market was ripe for manipulation. Yet the bill passed, setting Enron free to run what amounted to an energy auction, which Public Citizen claims "gained control over a significant share of California's electricity and natural gas market."
All during this period there was a series of remarkable coincidences. Between June and December 2000, the California energy situation was worsening but still not in crisis. After the Gramm bill went through, all hell broke loose, with one emergency rolling blackout after another. There were charges that out-of-state suppliers were withholding gas and running up the price. Finally, in June 2001, public pressure forced the Federal Energy Regulatory Commission, or FERC, to reassert price controls."
In the aftermath of Enron's collapse, Wendy Gramm was named in a number of lawsuits against the company, at least one of which was settled on terms that required her to pay part of the settlement from her personal assets. Did the collapse of Enron make Gramm rethink his views on financial regulation in any way? Apparently not:
"Republicans led by Senator Phil Gramm of Texas and the accounting industry's trade group are working to kill a Democratic measure that would impose new rules on auditors, companies and investment banks in the wake of Enron's collapse.
The bill was drafted by Senator Paul S. Sarbanes, Democrat of Maryland and the chairman of the Senate Banking Committee, and is scheduled to be considered on Tuesday by Mr. Sarbanes's panel. It was endorsed today by a group that included Paul A. Volcker, the former chairman of the Federal Reserve.
But Congressional officials said today that Republicans, led by Mr. Gramm, were preparing to use parliamentary maneuvers to delay the measure and either water it down or have it killed."
[UPDATE: See footnote at end.]
Phil Gramm was also a hypocrite:
"Mr. Gramm should be remembered for perfecting one of the more duplicitous roles in politics -- the anti-government welfare queen. He has run his every campaign as a scourge of government spending and a champion of the beleaguered little taxpayer. At the same time he has built a great money sluice from Washington to his home state and pandered to the energy, banking and insurance lobbies that underwrite his political ambitions. His politics could be called hypocrisy, but only in a language that places a huge premium on understatement.
Contrast Mr. Gramm with Representative Dick Armey, another Texan with a mean streak, a Ph.D. in economics and a professed distaste for government spending. Mr. Armey, who is also retiring after this Congress, had the intellectual integrity to fight federal farm subsidies and to engineer the closing of unneeded military bases, including one serving his home district. Not so Mr. Gramm, who once boasted, ''I'm carrying so much pork, I'm beginning to get trichinosis.''"
While I was researching this, I realized that Gramm is one of those politicians who is both quotable himself and attracts marvelous quotes to him. (In both cases, the driving force seems to be his meanness.) Herewith, some examples:
"Two favorite Gramm jokes.
1)"People say I don't have a heart. I do. I keep it in a quart jar on my desk."
2) Gramm claimed he was so popular among a certain group of voters that they offered "to buy me an artificial heart." Gramm said he refused, telling them, "I'm doing fine without one.""
"In a recent interview with The New York Times, Mrs. Gramm recalled her initial response to his subsequent marriage proposal: "Yuck.""
"Before you feel a jot of sympathy for Gramm, however, recall that he is the kind soul who once wrote to a vanquished opponent. "I feel so sorry for your many problems, but you deserve them.""
And then there's the late and much lamented Molly Ivins, who is, as usual, so wonderful that I have to quote her at length:
"Hail and farewell to two of the meanest guys ever to serve in the U.S. Congress -- Senator Phil Gramm and House Majority Leader Dick Armey, both from Texas. What a barrel of knee-slapping fun they have been. As each winds up his final year in office, we could have a fine time recalling their Meanest Moments: The side-splitting occasion when Armey referred to Rep. Barney Frank of Massachusetts as "Barney Fag." The rib-tickling time Gramm wanted to deny food stamps to elderly legal immigrants on the splendid grounds that extending aid would only foster dependency, thereby inflicting "a new personal tragedy on the most vulnerable among us." (...)
Gramm both looks like a snapping turtle and has the personality of one. When he ran for president in 1996 and finished fifth in Iowa, all the profiles written of him included the line "Even his friends don't like him." Self-righteous and strident, Gramm demonized his opponents and used bitter, polarizing rhetoric. During a Senate debate over Social Security, a member pointed out that the proposal under consideration would hurt 80-year-old retirees. "Most people don't have the luxury of living to be 80 years old," Gramm scoffed, "so it's hard for me to feel sorry for them." Well, there is that.
On another occasion, Gramm ridiculed a newspaper photo of poor people who were forced to cut corners to put food on the table. "Did you see the picture?" Gramm asked a crowd. "Here are these people who are skimping to avoid hunger and they are all fat!... We're the only nation in the world where all our poor people are fat." During the fight over health care reform, Gramm said, "We have to blow up this train and the rails and the trestle and kill everyone on board." When an elderly widow in Corsicana told him that cutting Medicare would make it more difficult for her to remain independent, Gramm said, "You haven't thought about a new husband, have you"
When he first ran for Senate in 1984, Gramm's main attack ad focused on how his opponent, a young state senator, had received a check for $600 raised by a gay group at a male strip joint in San Antonio. He had not solicited the contribution and promptly returned it, but Gramm ran lurid ads about the gay strip show for months.
His tactics have not won him any friends among Texas politicians. Gramm is notorious for letting Texas congressmen do all the work of getting federal projects in their districts and then stepping up to claim credit when the project is approved. The noun for this is "Grammstanding," and it is now part of the political lexicon.
Gramm, the great crusader against government spending, has spent his entire life on the government tit. He was born at a military hospital, raised on his father's Army pay, went to private school at Georgia Military Academy on military insurance after his father died, paid for his college tuition with same, got a National Defense Fellowship to graduate school, taught at a state-supported school, and made generous use of his Senate expense account. In 1987, a Dallas developer named Jerry Stiles flew a construction crew to Maryland to work on Gramm's summer home. Stiles spent $117,000 on the project but was kind enough to bill Gramm only $63,433. When Stiles got in trouble for misusing funds from a savings and loan he owned, Gramm did him some "routine" favors with regulators. Stiles was later convicted on 11 counts of conspiracy and bribery.
As a member of the Senate Finance Committee and the recipient of enormous banking contributions, Gramm did an even bigger favor for the financial industry in 1999 when he sponsored the Financial Services Modernization Act allowing banks, securities firms, and insurance companies to combine. The bill weakened the Community Reinvestment Act, which requires banks to help meet the credit needs of low- and moderate-income neighborhoods. Gramm described community groups that use the CRA as "protection rackets" that extort funds from the poor, powerless banks. The bill is also a disaster for the privacy of bank customers and weakens regulatory supervision. As Gramm proudly declared, "You're not going to find a single bank, insurance company, or securities company that will say they were hurt financially by this bill.""
John McCain's chief economic advisor and campaign co-chair. What a delightful thought.
If you liked Herbert Hoover, you'll love Gramm and McCain.
UPDATE: Footnote on Gramm and Sarbanes-Oxley: In response to this quote:
"Republicans led by Senator Phil Gramm of Texas and the accounting industry's trade group are working to kill a Democratic measure that would impose new rules on auditors, companies and investment banks in the wake of Enron's collapse."
In comments, JayS noted that this measure became Sarbanes-Oxley, and that Phil Gramm voted for it. This is true: Sarbanes-Oxley passed the Senate 99-0, and became law; and Phil Gramm was one of the 99 Senators who voted for it.
I hadn't remembered that Gramm voted for the bill, so I went back to check. I'd summarize what I found as follows: Gramm tried to defeat S-O, but in the end the various scandals that kept exploding made it impossible for him to vote against it. (Though he did vote against it in committee.) In any case, here's some history, so you can judge for yourselves rather than taking my word for it. On May 18, 2002, the article I cited said that Gramm was working to defeat what would become Sarbanes-Oxley. On May 21:
"Facing enormous opposition from the financial services industry and some Republican lawmakers, the chairman of the Senate Banking Committee postponed a meeting scheduled for Tuesday at which lawmakers would have considered an overhaul of accounting industry regulations inspired by the collapse of Enron.
House Republicans have already passed an accounting bill that is favored by the accounting industry and business groups, but Senator Paul S. Sarbanes, Democrat of Maryland and the committee chairman, has proposed a competing bill that would go further in tightening oversight of the industry.
His bill is supported by consumer groups and institutional investors, as well as some leading figures in finance.
Republicans, led by Senator Phil Gramm of Texas, had sought to delay consideration of Mr. Sarbanes' bill, and they have flooded the committee with proposed amendments."
On June 19, 2002:
"Overcoming fierce lobbying by the accounting industry, the Senate Banking Committee approved legislation today that would ban accounting firms from selling many forms of consulting services to their audit clients, limit the time an individual partner could review one company's books and create a regulatory board made up mostly of people outside the industry. (...)
Three days after the guilty verdict in the obstruction of justice trial of the accounting firm Arthur Andersen, the committee passed the bill, with 6 Republicans and all 11 Democrats voting for it. Four Republicans voted no: Rick Santorum of Pennsylvania, Michael D. Crapo of Idaho, John Ensign of Nevada and the former committee chairman, Phil Gramm of Texas, who had led efforts to defeat the measure." (Emphasis added.)
"In the clearest sign thus far that Republican Congressional leaders are moving far beyond the White House in supporting stiff penalties for corporate wrongdoing, House Speaker J. Dennis Hastert endorsed a Senate proposal today that called for tough new criminal sanctions and expanded prison terms.
One after another, lawmakers in both parties seemed intent on one-upping one another.
''In the environment we are in, virtually anything can pass,'' Senator Phil Gramm of Texas told reporters tonight after a dizzying day of legislative maneuvering over new measures to address corporate malfeasance. ''Everybody is trying to outdo everybody else.'' (...)
Mr. Gramm, who is closer to the president, made it clear today that he supported the Democratic-backed Senate proposals on criminal penalties. But Mr. Gramm said he still hoped to drastically scale back broad Democratic proposals for accounting and corporate-governance reforms."
"House and Senate negotiators agreed today on a broad overhaul of corporate fraud, accounting and securities laws aimed at curbing the rampant abuses that have shaken Wall Street. Final approval in Congress is expected within days, and President Bush has said he will sign the bill into law. (...)
The legislation has enjoyed extraordinary momentum in the last three weeks, but its outlook had been cloudy until mid-June. While Mr. Sarbanes had managed to get the bill out of his committee on a bipartisan vote, lobbyists and some leading Republicans had pledged to rewrite it when it got to conference committee.
That changed, however, as the scandals at Tyco, Adelphia and WorldCom, and the perception that the fall in the stock market stemmed from a loss of investor confidence, made it increasingly risky for any politician to object to the measure.
Last week, President Bush undercut efforts by some Republicans to modify the legislation by demanding a final bill before Congress departs Washington for the August recess.
''When you are working under those circumstances, it's hard to work out the practical details that often need to be worked out, so that a couple of years from now you end up saying, 'You know, this has worked pretty well,' '' Senator Phil Gramm, Republican of Texas and the chief critic of Mr. Sarbanes's bill, said this afternoon.
''The focus of these kinds of debates is more on the sort of rhetoric and media response than it is on practicality,'' Mr. Gramm said. ''That's just the very nature of the process when you've got a crisis atmosphere.''
Tonight, at the conference meeting, Mr. Gramm added that he feared that the bill ''will do more harm than it should,'' citing what he said were provisions that would encourage ''predatory'' lawsuits and other language that he said would prove onerous for thousands of smaller publicly traded corporations."