HOUSE REPUBLICANS INVITE ARCHITECT OF THE FINANCIAL CRISIS OVER FOR ADVICE

Jul 28, 2015 by

 

CREDIT: AP Photo/L.M. Otero

Former Sen. Phil Gramm (R-TX) with his wife and their son in 1996

Five years after the passage of a sweeping Wall Street reform package in the wake of the worst financial crisis in generations, lawmakers opposed to strict government policing of the financial industry are inviting two prominent deregulators back to the scene of the crime.

When the House Financial Services Committee (HFSC) hears from former Sen. Phil Gramm (R-TX) and longtime conservative analyst Peter Wallison on Tuesday, the pair will have their laissez-faire perspectives on the money business elevated once again.

Gramm will blast Dodd-Frank’s reforms as not just “shackling economic growth” but “imperiling our freedom,” according to a draft copy of his prepared testimony. Gramm’s central theme is the idea that Dodd-Frank created a system of rules that are too arbitrary and too subject to bureaucratic whimsy for bankers to know what they can expect and plan accordingly. But the draft remarks also make room for comparing the law’s creation of in-house regulatory positions at Too Big To Fail banks to the old Soviet Union’s habit of injecting party politics into even the smallest manufacturing concern.

The hearing is entitled “The Dodd-Frank Act Five Years Later: Are We More Prosperous?” The HFSC has been ground zero for efforts to undermine the parts of Dodd-Frank reform that are still in the works and repeal the ones that have gone into effect.

Gramm brings a history of interfering with America’s regulators to Capitol Hill just as lawmakers are trying to use the budget process to tear down the Consumer Financial Protection Bureau’s (CFPB) independence and remake it in the image of other regulators that are more subject to legislator influence. The attack on CFPB structures is just the latest in a long string of maneuvers to sabotage Dodd-Frank reform. House Republicans won repeal of a key provision of the law by inserting an amendment written by Citigroup lobbyists into last winter’s budget compromise. They have under-funded key regulatory agencies for years, weakening the government’s ability to make good on the law’s promises. They have tried to roll back new protections for people who buy mobile homes. Their Senate colleagues have drummed up momentum for rolling back elements of Dodd-Frank reform that would benefit the largest banks under the guise of seeking regulatory relief for small banks. And there are plenty more favors to the industry on tap, if past is prologue.

Over three terms in the Senate, Gramm played a critical role in the decades-long strip-mining of venerated financial industry laws that had restricted speculation and sought to link Wall Street’s interests to Main Street’s. The law that vaporized a Depression-era firewall between commercial banking and investment banking bears his name, and has already cropped up as a flashpoint in the 2016 election. Gramm also won passage for a law called the Commodity Futures Modernization Act in 2000 that ensured the government could not regulate complex derivatives. Derivatives are more like gambling tickets than traditional investments, and in the absence of regulatory control the on-paper value of the marketplace for just one type of derivative had grown to $45 trillion — twice the size of the entire American stock market.

When Gramm couldn’t conquer financial safeguards legislatively, he sought to undermine them culturally. He warned a Clinton-era Securities and Exchange Commission head that “unless the waters are crimson with the blood of investors, I don’t want you embarking on any regulatory flights of fancy.” Such abstract interventions against taxpayers’ financial police on behalf of private interests were common in the 1990s, and both Alan Greenspan’s Federal Reserve and the Clinton- and Bush-era SEC leadership erred catastrophically on the side of free-market analysis like Gramm’s at key points in the years prior to the housing market meltdown.

Gramm’s co-panelist Tuesday also has a track record that lends itself to Republican priorities in the finance world. Wallison’s work to discredit federal efforts to boost homeownership among families traditionally iced out by the industry makes him a politically useful witness for Republicans who oppose Obama administration efforts to reform housing finance and make lending to the poor more palatable.

Wallison’s contributions have mostly come in the wake of the crisis that Gramm helped foster. The American Enterprise Institute scholar was the only dissenter from the congressional Financial Crisis Inquiry Commission (FCIC) that produced the official history of the crisis. Wallison’s dissent furnishes an official document that blames the whole meltdown on government efforts to encourage mortgage lending to low-income borrowers. His numbers are wrong and made-up, and numerous other official and expert analyses have disproved his narrative. The actual FCIC report blames mortgage lenders, financial companies that repackaged and sold home loans, credit ratings agencies that neglected their duty and vastly overstated the security of subprime debts, and lax regulatory oversight for causing the dream of expanded homeownership opportunities to become warped into a high-profit, low-scrutiny paper mill. From the loan originators on the ground to the trading floors of Manhattan skyscrapers, individuals and corporations at every stage of the housing finance market knowingly sought to profit from processing loans that would never be repaid, knowing they’d be gone with their salaries and bonuses before the bottom fell out.

The version of recent financial history that Gramm and Wallison espouse amounts to an argument against renewed scrutiny and policing of Wall Street activity. Gramm himself has had close personal brushes with financial actors who took advantage of lax oversight to defraud the public, including the notorious energy trading firm Enron (his wife sat on the board, and company leaders fundraised for him), the Swiss bank UBS (Gramm worked there during the time UBS helped rig a key interest rate to enrich megabanks at the expense of the public), and a pair of Texas hedge fund managers named Charles and Sam Wyly who were convicted last year of concealing half a billion dollars in profits from the authorities using a network of offshore shell companies (the brothers

But not everyone who’s benefited from Gramm’s dedicated opposition to financial regulation has stayed onside for the free-market team. Sandy Weill, the first chairman of Citigroup after Gramm’s aforementioned legislative work made that megabank legal, has since said that Gramm’s signature achievement was a mistake. In 2012, Weill called for a return to the old, Depression-induced division between risky financial wagers and traditional banking services that he had helped Gramm destroy.

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