Information you won't be given by the mainstream media certainly includes a discussion of John McCain's economic guru - former Sen. Phil Gramm - and his unsavory role in how our unraveling economic mess got so messy. Remembering that Phil Gramm has been speculated about as McCain's choice for Secretary of the Treasury, let's take a little trip down economic memory lane, starting with trying to understand what in the world a "credit default swap" is...If the third party defaults on its debt, the second party (the insurer) will have to purchase the defaulted asset from the first (the CDS buying) party. The insurer will have to pay the insured the remaining interest on the debt, as well as the principal.
For example, Bank Not Many Brains gives a rather shaky mortgage to Joe Sixpack. Because Joe is not the greatest credit risk in the world, Bank Not Many Brains goes to Hedging Las Vegas LLC and gets a credit default swap from them. Bank Not Many Brains promises to pay Hedging Las Vegas an agreed-upon sum each quarter to insure against Joe Sixpack defaulting on his mortgage.
As luck would have it in a world of sub-prime mortgages and cowboy finances, Joe Sixpack gets laid off from his job, falls behind on his payments and defaults on his mortgage. Bank Not Many Brains expects Hedging Las Vegas to take over Joe's mortgage, principal and interest.
Well, lo and behold, Hedging Las Vegas doesn't have the assets to cover the default bet it had made! (It's sort of like somebody deciding to set up a business selling flood insurance to residents of New Orleans but not having assets to pay off the inevitable claims.)
Now, let's say Hedging Las Vegas did raise some money to partially cover itself by "bundling" all its credit default swaps together and selling other suckers a piece of the action - as well as a piece of the risk. Thus, not one hedger but many are now involved.
Even so, none of them can cover the liability they all now have to Bank Not Many Brains. So, the bank gets scared and decides it shouldn't give credit to anybody. Result? Credit crisis.
O.K., so, what did Phil Gramm and his cohorts in the then-Republican-controlled Congress have to do with all this mess?
It seems that good ole Texas boy Phil Gramm, when he chaired the U.S. Senate Committee on Banking, Housing, and Urban Affairs, took advantage of the Supreme Court naming good ole Texas Boy George Bush president and sneaked a provision into the budget bill passed that year to run the United States.
That provision said that Uncle Sam couldn't regulate these new-fangled financial instruments, like credit default swaps, that were being devised by the greedy good ole boys in pin stripes on Wall Street.
Thanks to Gramm and all the other "free marketeers" let loose on the world, there is now an unregulated multi-trillion-dollar system of credit swaps, hedging, short selling, etc., that has crashed down all around them. They don't have to worry, though.
Guess who is now forced to buy the biggest credit default swap of all? You.
That's right. The American taxpayers and their government are now going to have to pick up the pieces once again, compliments of the greed of all those Ayn-Rand-worshipping (yes, that's you, Alan Greenspan), "government-is-the-problem" Reagan lovers who got us where we are.
By the way, you can thank Phil Gramm for another little "gift." Gramm also slipped in a provision that prevented the government from regulating energy trading markets. Can anyone say, "Enron"?
The issue of regulating electronically traded energy futures had been a pitched battle at the Commodity Futures Trading Commission throughout the '90s. One chairman advocated so passionately for deregulating energy futures that she persuaded her fellow commissioners to agree to a rule exempting them from oversight. Who was that? Wendy Gramm, the senator's wife, who served on the commission from 1988 to 1993. Shortly after her resignation, she was welcomed onto the Enron board of directors
The article below has some great details on mccain/graham
http://www.texasobserver.org/a...
John McCain: Nothing But More Of The Same
By the way, UBS - which gave Gramm that plush job - is itself in hot water in this mess.
Also, I want to learn more about the reported piles of money that British firm Barkley's is supposed to be setting aside to give to the top dogs at Lehman as their "bonuses" because they are "vital" to the so-called smooth workings of the part of Lehman Bros that Barkley's is buying.
http://talkingpointsmemo.com/a...
The BBC mentioned last week that UBS alone has more debt obligations right now than the entire yearly GDP of Switzerland (i.e. it would bankrupt the Swiss to bailout out UBS).
Here's a petition to Congress.
Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
Different World
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190 , the bill that would have averted this mess.
This was written by Kevin Hassett, a McCain economic advisor. Any see anything to refute this?
...by 1999 Phil Gramm -- who had entered the Senate two years after McCain and quickly become the economic guru of the Keating Five maverick -- put forward the Gramm-Leach-Bliley Act. This Act passed out of the Senate on a party line vote with 100% Republican support, including that of John McCain. (To be fair, the bill eventually passed again with a wide margin following revisions in the House.)This act repealed part of the Glass-Steagall Act. This may sound like a bunch of Congressperson soup, but the gist of it is that Glass-Steagall was put in place in 1933 to control the rampant speculation that had helped cause the collapse of banking at the outset of the depression, and to prevent such consolidation of the banks that the nation had all its eggs in one fiscal basket.
Gramm-Leach-Bliley reversed those rules, allowing not only more bank mergers, but for banks to become directly involved in the stock market, bonds, and insurance. Remember the bit about how S&Ls failed because they didn't have the regulations that protected banks? After Gramm-Leach-Bliley, banks didn't have that protection either.
Gramm wasn't done. The next year he was back with the Commodity Futures Modernization Act, which was slipped into a "must pass" spending bill on the last day of the 106th Congress. This Act greatly expanded the scope of futures trading, created new vehicles for speculation, and sheltered several investments from regulation.
[...]
It may come as a surprise to the champions of deregulation, but nobody likes regulation. The restrictions that were placed on banks, S&Ls, and other institutions in the 1930s weren't put there because someone thought it would be fun. They were put in place because they addressed problems that had just been clearly and painfully revealed. They were put in place because they were necessary.
It's bad enough if John McCain didn't know that. It's far worse if he did.