The Gramm-Leach-Bliley Act and the Financial Crisis

[one...two...tree 2,762]

In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the savings and loan industry. The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry--including John McCain's warm-up speaker at the Republican National Convention, Fred Thompson. The official description of the bill was "An act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." Considering where things stand in 2008, that's enough to make you wince. It should.

Seven years later, the S&L industry was collapsing. What was the cause? Garn-St. Germain had handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it hadn't handed them the bank's regulations. Left to operate in an anarchistic gray area, S&Ls had chased profits, indulged in amazing extravagances and cranked out enough cheap mortgages to fuel a real estate boom. They had also experimented with lots of complex, creative--and risky--investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?

It wasn't a foregone conclusion. In 1985, three years after the deregulation of the S&Ls, the chairman of the Federal Home Loan Bank Board saw that the situation was already looking bad, with potential to get much worse. To try to head off disaster, he instituted a rule to limit the amount and types of investments S&Ls could carry on their books. However, many savings and loans--among them Lincoln Savings & Loan Association of Irvine, California, which was headed by a fellow named Charles Keating--promptly ignored these rules.

Now enters a familiar cast of characters. First to pop up was the universally beloved Fed-chief-to-be Alan Greenspan. Greenspan argued against the loan board's new rules, and persuaded Reagan to appoint one of Keating's pals to the board to blunt the requirements. A quintet of senators, among them John McCain, began having meetings with both the management at Lincoln and the regulators at the loan board. With their help, Lincoln was able to stay in business an additional two years, at the end of which they failed--taking the life savings of 21,000, mostly elderly, investors with them.

How involved was John McCain? McCain and Keating had known each other since 1981 and had become fast friends. Of all the "Keating Five," it was McCain who really moved into the life of the Lincoln S&L chief. The two men vacationed together multiple times, with the whole McCain clan (babysitter included) heading out for Keating's private Caribbean property on Keating's private jet. McCain didn't think to actually report these trips, or pay for them, until the investigators were breathing down his neck. And McCain took payment in more than just vacations. Keating and other members of Lincoln's parent company padded McCain's pockets with $112,000 in campaign contributions.

In John McCain's biography, he called his meetings with Keating and regulators "the worst mistake of my life," though from the text you'd think this was a spur-of-the-moment decision, not something that McCain did repeatedly over a space of years. Still, you might think that a "worst mistake" would stay fresh in his memory.

It certainly didn't fade quickly for the country. Following the S&L crisis, the Resolution Trust Company was formed to swallow up the debt of Lincoln and 746 other S&Ls gone wild, and taxpayers were left holding a $125 billion bag. The resulting budget deficit forced cutbacks in other programs. The artificial real estate boom collapsed, and housing starts fell to their lowest levels in decades. Finally, the whole nation settled in for a period nasty enough that three years later someone could still campaign around the idea "It's the economy, stupid."

Even so, by 1999 Phil Gramm--who had entered the Senate only a couple of years after McCain and become friends with 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 percent 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.

As with both Gramm-Leach-Bliley and Garn-St. Germain, large parts of this bill were written by industry lobbyists. This included the "Enron loophole" that exempted energy trading from regulation, and was written by (big surprise) Enron lobbyists working with Gramm. Not coincidentally, Senator Gramm, the second-largest recipient of campaign contributions from Enron, was also key to legislating the deregulation of California's energy commodity trading.

Thanks to this fortunate trifecta of Gramm-crafted legislation, Enron was able to create "EnronOnline" and trade electricity in California with absolutely no oversight or transparency. They quickly worked out how to game the system. Previously, there had been only one Stage 3 rolling blackout in the history of California. Within months, the system had been manipulated by traders to generate thirty-eight such blackouts and wholesale electrical prices had gone up more than 3000 percent. Despite production capacity equal to four times the demand during winter, energy traders even engineered a blackout in mid-January.

During the confusion of these deliberate "shortages" and "price spikes," the California administration of Gray Davis--blind to speculator manipulations because of the walls erected by Gramm's legislation--was forced to sign energy contracts at enormous rates. There was little choice, because most of California's public utilities were on the brink of bankruptcy from the rising wholesale prices.

In a single year, the legislation allowed speculators to bring the state to its knees. Enron alone looted California of $11 billion. The manipulations of the energy market were also a major factor in Davis getting the hook, helped usher the governator into power, and they still have repercussions in California's budget battles today. By the end of that year, the depth of Enron's deception could no longer be hidden, and the whole company came crashing down in the largest bankruptcy in history--at the time. This brought more billions lost in mutual funds and pension funds across the country, and played a major role in the economic downturn of 2001.

http://www.thenation.com/doc/20081006/sumner

[mawilson 2,133]

Your friend Barney Frank is the biggest crisis enabler.

[one...two...tree 2,762]

Your friend Barney Frank is the biggest crisis enabler.

If he was acting on behalf of the lobbyists of Fannie Mae and Freddie Mac, then probably so. I don't think the full understanding of the facts point to anything Congressman Frank has or hasn't done that led to this crisis.

[HAL 9000 96]

Why does it seem the GOP is desperately seeking a non-GOP scapegoat in all of this?

[one...two...tree 2,762]

Why does it seem the GOP is desperately seeking a non-GOP scapegoat in all of this?

Because McCain's numbers took a dive in recent weeks over the escalating financial crisis and they know he's got a snowball's chance in hell of winning the WH for the Republicans again unless they can convince enough voters that even though they've been running things for the last 8 years, it's not their laissez-faire policies that failed, but incompetent Democrats.

[IAMX 3,055]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

[HAL 9000 96]

Why does it seem the GOP is desperately seeking a non-GOP scapegoat in all of this?

Because McCain's numbers took a dive in recent weeks over the escalating financial crisis and they know he's got a snowball's chance in hell of winning the WH for the Republicans again unless they can convince enough voters that even though they've been running things for the last 8 years, it's not their laissez-faire policies that failed, but incompetent Democrats.

Do you also have a weird feeling McCain is going to implode tomorrow night?

I am chuckling at this, given their newfound dedication to play smear politik instead of campaigning to the issues. All that babble about suspending their campaign to work out the economical bailout and yet they seem to not want to address a solution to the mess they have contributed to.

[IAMX 3,055]

All that babble about suspending their campaign to work out the economical bailout and yet they seem to not want to address a solution to the mess they have contributed to.

Haha. That was the biggest fcking joke I've seen yet in this election.

HAY GUYS, I'M SUSPENDING CAMPAIGN. FORGET THE DEBATES *nudges Palin*. WE NEED TO WORK FOR AMERICA NOW!

So I suppose these last few decades he's been working for.. who, again?

That dude just needs to to live out the rest of his life doing something else. Maybe playing bingo in an old folks home or something.

Edited October 6, 2008 by SRVT

[one...two...tree 2,762]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

[HAL 9000 96]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

Even if it were something in causality to only blame a liberal Democrat agenda of wanting more low income people to have their own property, one can only imagine that this agenda would only work IF they could follow it up with economic policy that increased income levels.

And we know where things went after the Clinton Administration.

[IAMX 3,055]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

But, the word "subsidy" will make erratic conservatives cry "socialism".

However, little is there much an understanding since the housing project would be directly relative to the costs of living, thus not giving a house to a person living beyond their means (they can sell it, do whatever they want, if they can later afford a better one), but owning a house would end up creating a class with less debt, more money circulating around, more small businesses, more competition, better products that are currently in the masses.

Keeping people poor and in debt helps foster supergiant "service" (retail, for one) corporations as it then suppliers then shift their resources to them, rather than distributing around, and out goes competition. This seems to me to be the common sense economic model that we -were- headed toward, but instead decided to take it up the a$$ from the free market. No idea who exactly to blame for that though.

[one...two...tree 2,762]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

Even if it were something in causality to only blame a liberal Democrat agenda of wanting more low income people to have their own property, one can only imagine that this agenda would only work IF they could follow it up with economic policy that increased income levels.

And we know where things went after the Clinton Administration.

I agree. Income level doesn't equal to credit worthiness. Micro-loans have proven very successful in Third World countries and have helped lift many out of destitution. Secondly, home ownership is a corner stone of the American Dream. We can't really call ourselves an Ownership Society if we don't support and regulate a financial system that allows lower income families from owning their own home provided they are credit worthy and can afford it.

[HAL 9000 96]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

But, the word "subsidy" will make erratic conservatives cry "socialism".

However, little is there much an understanding since the housing project would be directly relative to the costs of living, thus not giving a house to a person living beyond their means (they can sell it, do whatever they want, if they can later afford a better one), but owning a house would end up creating a class with less debt, more money circulating around, more small businesses, more competition, better products that are currently in the masses.

Keeping people poor and in debt helps foster supergiant "service" (retail, for one) corporations as it then suppliers then shift their resources to them, rather than distributing around, and out goes competition. This seems to me to be the common sense economic model that we -were- headed toward, but instead decided to take it up the a$ from the free market. No idea who exactly to blame for that though.

And looking at the retail sector these days (including the last couple of years), we can see mass firings like two years ago with Circuit City as well as slow firings and hiring freezes. Its not looking good for job creation.

[HAL 9000 96]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

Even if it were something in causality to only blame a liberal Democrat agenda of wanting more low income people to have their own property, one can only imagine that this agenda would only work IF they could follow it up with economic policy that increased income levels.

And we know where things went after the Clinton Administration.

I agree. Income level doesn't equal to credit worthiness. Micro-loans have proven very successful in Third World countries and have helped lift many out of destitution. Secondly, home ownership is a corner stone of the American Dream. We can't really call ourselves an Ownership Society if we don't support and regulate a financial system that allows lower income families from owning their own home provided they are credit worthy and can afford it.

Ironic indeed that many Republicans claim ownership of the Ownership Society motto.

Besides... isn't home ownership supposed to be a fundamental investment in anyone's financial well-being?

You can't do that if we are being taken for a ride by those providing the means to ownership just because they can get away with it.

[one...two...tree 2,762]

Next thing you know they're going to suggest Obama is Satan and a vote for him is a vote for the antichrist.

Anyways, even before it happened the Gramm-Leach-Bliley Act was scrutinized for the lifting it did upon regulations, and Clinton's wet dream of lending to people who would have the most difficult time buying houses.

Clinton certainly made lots of mistakes, but if he was really that generous or genuinely for the working class, he'd have have the government subsidize lower income homes at a fairly small size, so they at least get a home, even if it may not be of equivalent size and features. And it is directly relative to how much income and credit they have.

Good points. I'm not sure what the logic behind offering subprime mortgages to people who couldn't afford their mortgage payments once the principal kicked in. That would require the most optimistic outlook that the housing market can go nowhere but up and that income levels would also continue to grow.

On the supply side of things - if the housing market didn't have these avenues to include people who really couldn't afford these homes then values would not have continued to climb. Home values could have then stagnated or started to fall but not crash as hard as it did.

But, the word "subsidy" will make erratic conservatives cry "socialism".

However, little is there much an understanding since the housing project would be directly relative to the costs of living, thus not giving a house to a person living beyond their means (they can sell it, do whatever they want, if they can later afford a better one), but owning a house would end up creating a class with less debt, more money circulating around, more small businesses, more competition, better products that are currently in the masses.

Keeping people poor and in debt helps foster supergiant "service" (retail, for one) corporations as it then suppliers then shift their resources to them, rather than distributing around, and out goes competition. This seems to me to be the common sense economic model that we -were- headed toward, but instead decided to take it up the a$ from the free market. No idea who exactly to blame for that though.

Interesting points. Our economy has shifted from a working class economy to one that is driven by debt.