The Mortgage Crisis, Phil Gramm, and John McCain

"Bubble", the WaPo series explaining how the mortgage mess came to be from the vantage point of the guys who did the selling, is excellent and you ought to read it if you want to understand just how big a part standard corporate greed - the everyday kind that Reagan told us over and over again didn't exist any more - played in the downfall of our shaky Bush economy (whole series here). But I was struck by what they left out because they followed it from the floor - the critical part played by a rip-off enabling Republican Congress. Without them clearing the way for the brokers' fraud and theft, it wouldn't have - couldn't have - happened.

Then, quite by accident, following an entirely different link, I stumbled on this story at Campaign for America's Future in a blog by Terrance Heath that names names - mainly Phil Gramm's - and lays out the whole maddening story with commendable clarity, considering how confusing it is. And who do you suppose Phil's advising on financial policy? You guessed it.

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

…But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came 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 dead—even 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.

***

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 important—and more lucrative—than 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.

(emphasis in the original)

Why? Because they allowed and led directly to this:

Zimmer saw the mounting problems as head of the department that worked with Wall Street to package mortgage loans into securities to be sold to investors. Such securities had fueled the housing boom by pumping trillions of dollars into the mortgage market.

***

Now he was trying to make sure People's Choice could continue to raise money by pooling subprime loans. Zimmer and some other executives urged the company to tighten its lending standards. That could lower the rate of defaults. And the better the quality of the loans, the more investors would want them, he figured.

But "there was always push back" from sales executives when he advocated more conservative lending, Zimmer said. Like most big lenders, well over half of the loans made by People's Choice came not from its own employees but from independent mortgage brokers. If the company stopped taking the brokers' riskier loans, the brokers might take both those and their higher-quality loans elsewhere. What's more, People's Choice's own loan sales force -- at about 1,000 employees, the bulk of the company -- worked largely on commissions from loans they made.

***

As his team analyzed the individual loan files, Zimmer said he was struck by evidence of fraud, such as doctored bank statements. "Fraudulent loans were a big part of the subprime mess," he said. Mortgage brokers forged borrowers' signatures and pumped up their income, he said. People seeking to buy and sell a home for a quick profit lied that they were going to live in the home -- qualifying for a lower interest rate. But People's Choice calculated that it would have been too complicated and expensive to go after fraud, Zimmer said.

(emphasis added)

And, of course, they wouldn't have made as much money if they could just sell off the bad paper before anybody figured out the scam. Only they couldn't.

Even as People's Choice sought to preserve its business, the housing climate continued to deteriorate. Many borrowers were defaulting so quickly that the company did not have time to pool those mortgages and sell them off as securities.

Heath's got a good point: Gramm and the whole wretched Republican Congress deserve to have it known that without their legal connivance to shoot down the laws that protected us from financial scavengers and bottom-feeders, none of this would have - could have - happened.

Comments

[eRobin]

They look for areas of wealth and they loot it. It couldn't be simpler. We exist to accumulate and produce wealth, they exist to steal it.

[mick arran]

We exist to accumulate and produce wealth, they exist to steal it.

Nicely put. You should have it embossed on t-shirts. "We" in blue, "they" in red.