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 June 3, 2008
By: PHIL GRAMM: THERE'S MORE... Recently, two more articles about Phil Gramm, "McCain's Economic Brain", have appeared. MSNBC had reported a week ago that Gramm was a paid lobbyist for UBS, one of the banks most heavily involved in the subprime scandal, until six weeks ago. Now Newsweek adds this: "NEWSWEEK has learned that UBS is also currently the focus of congressional and Justice Department investigations into schemes that allegedly enabled wealthy Americans to evade income taxes by stashing their money in overseas havens, according to several law-enforcement and banking officials in both the United States and Europe, who all asked for anonymity when discussing ongoing investigations. In April, UBS withdrew Gramm's lobbying registration, but one of his former congressional aides, John Savercool, is still registered to lobby legislators for UBS on numerous issues, including a bill cosponsored by Sen. Barack Obama that would crack down on foreign tax havens. "UBS is treating these investigations with the utmost seriousness and has committed substantial resources to cooperate," a UBS spokesman told NEWSWEEK, adding that Gramm was deregistered as a lobbyist because he spends less than 20 percent of his time on such activity. Hazelbaker said the McCain campaign "will not comment on the details ... of ongoing investigations and legal charges not yet proved in court."" A new article in the Texas Observer is even more interesting, and worth reading in its entirety. It begins: "In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call "a stunning departure from normal legislative practice," the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm. One part of that bill was what's called the 'Enron Loophole': "The impact of the "Enron loophole" has been enormous. Since its passage, the Senate Permanent Subcommittee on Investigations has concluded that the loophole contributed to inflated energy prices for American consumers. In 2006, its report found credible expert estimates that the loophole -- by encouraging speculation -- accounted for $20 of the price of a barrel of oil, then at $70. In 2007, the same committee blamed the loophole for price manipulation of the natural gas market by a single hedge fund, Amaranth Advisors." But Gramm's legislation also seems to have legalized what are known as 'credit default swaps': "Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of credit default swaps -- which in theory insure the banks against bad debts -- those risks are passed along to insurance companies and other investors. There's a decent explanation of credit default swaps here. As I understand it, the basic idea is this: Suppose I have a risky loan, and I want to insure against losses. I agree with someone else -- call him or her X -- that she will pay back my loan if the person I made it to defaults. In exchange for this insurance policy, I will pay her -- maybe I'll send her the loan payments, suitably adjusted for risk. In any case, X gets cash, and I (supposedly) get peace of mind. In a normal, regulated insurance market, there would be requirements that (for instance) X have enough capital to make good if my loan defaults. X would also not be able to sell the contract to make good my losses to just anyone, and X would certainly have to tell me about any such sale. But in the world of CDSs, neither requirement exists. CDS contracts can be sold and resold, and I might have no idea who is actually supposed to repay me if my loan goes into default. Moreover, there are no capital requirements on some of the people who can buy them. So if a lot of CDSs require payment from X all at once, there's no guarantee that X will be able to pay up. As the NYT puts it: "It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim." But it gets worse: in a lot of cases, X is a hedge fund. Hedge funds are highly leveraged, and therefore a relatively small downturn in their underlying assets (like some of their CDSs needing to be paid up) can wipe them out. Moreover, the alternative to a CDS, normally, would be to buy the underlying risky asset. CDSs allow people to assume the risks and benefits of owning that asset without actually putting money down. Instead, they get money: a cash stream, which they can then use to make more highly leveraged bets. This is just a recipe for instability: for allowing unregulated financial institutions to place themselves, and the rest of the financial universe, at risk through unregulated, highly leveraged, and deeply risky maneuvers. And the CDS market is huge: "The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "It could be another — I hate to use the expression — nail in the coffin," said Miller, when referring to how this troubled CDS market could impact the country's credit crisis." If Gramm basically legalized credit default swaps, then his involvement in the subprime crisis goes far beyond his work for UBS. And John McCain should have to explain why he thinks that Phil Gramm is a good person to turn to for economic advice. —Hilzoy 12:36 PM Permalink | Trackbacks | Comments (29)Comments
Well, as McCain has repeatedly said, he doesn't know much about economics. And since Phil Gramm signed on to his campaign, he knows even less. The Democrats need to be on TV every day nailing Phil Gramm and tying him firmly to McCain. Did Obama vote for it? Maybe that is the bombshell. Posted by: the fake fake al on June 3, 2008 at 12:57 PM | PERMALINKI can't believe the conservatives actually want John McCain to become president. The people just have no clue what they are doing. Posted by: Swan on June 3, 2008 at 12:58 PM | PERMALINKHilzoy, The list of reasons why Phil Gramm should not be turned to for economic advice goes far further back, and would need to include suggesting that the 1993 tax increases would kill the economy stone dead. We all remember the Great Depression of 1994, don't we? Posted by: Dantheman on June 3, 2008 at 1:00 PM | PERMALINKfake fake al, RIF: In April, UBS withdrew Gramm's lobbying registration, but one of his former congressional aides, John Savercool, is still registered to lobby legislators for UBS on numerous issues, including a bill cosponsored by Sen. Barack Obama that would crack down on foreign tax havens. Posted by: ack ack ack on June 3, 2008 at 1:01 PM | PERMALINKA pox on our representatives who allowed this to occur, and a double pox on Gramm for having submitted it. Posted by: iggy on June 3, 2008 at 1:05 PM | PERMALINKAs I understand it (and I really don't understand it completely), the swaps come back up for auction every thirty days. This means the interest rate can fluctuate wildly, mostly upward. It turns a bond issue into the equivalent of an exploding escalator mortgages. Lately no one has been bidding at all on the swaps as no one wants them anymore. This forces the bond issuer to refinance or accept punitive interest rates. All because Greenspan and Gramm read too much Ayn Rand at an impressionable age. Posted by: fafner1 on June 3, 2008 at 1:06 PM | PERMALINK"fake fake al," Obama wasn't in office in 2000. Posted by: Cassidy on June 3, 2008 at 1:21 PM | PERMALINK"Enron Loophole" ? and Phil's wife served on the board at Enron... Wow, those Gramm's really have the Midas Touch, everything they touch goes to $hit. What Stephen said. How anyone can have an ounce of respect for conservative "voodoo economics" any more is beyond me. "Trickle down" economics has just proven to be an utter and complete failure. Giving big tax breaks to the wealthy and to corporations doesn't juice up the economy, in fact, the evidence is that it does just the opposite. The last eight years have given us two recessions, massive price increases in staple goods, anemic job creation, a thoroughly devalued currency and malaise like you ain't never seen it before. Laissez-faire deregulation has also proven to be a disaster, with crap like this Phil Gramm scam destabilizing markets across the world. Some government regulation is healthy - or the pirates like Gramm take over and the whole world starts circling the drain. This liver-lipped, no-necked Yertle the Turtle impersonator belongs in a federal prison!!! Posted by: The Conservative Deflator on June 3, 2008 at 1:58 PM | PERMALINKDavid Corn tackled this in MoJo last week; here’s my take. Corn’s story is also good for having a sidebar explaining some of the alphabet soup of investment “vehicles.” Posted by: SocraticGadfly on June 3, 2008 at 2:00 PM | PERMALINKYou'd think the mainstream liberal media would be all over this! Can't wait to see....never mind. Posted by: jvoe on June 3, 2008 at 2:05 PM | PERMALINKTexans Make Good Sheriffs ... not much else ... When Are We Gonna Learn? Posted by: billgee on June 3, 2008 at 2:06 PM | PERMALINKEspecially per the Observer article, there's one or two other things to note: For Democrats to pile on Gramm about the Gramm-Leach-Bliley Act of 1999 is hypocritical. A majority of Democrats in both House and Senate voted for the bill. President Clinton was behind it from the start. And, as the Observer story notes, Clinton Treasury Secretary Robert Rubin was a strong supporter of the Commodity Futures Modernization Act’s provisions. Gadfly is, as usual, perfectly correct. This was perpetrated by wholly owned corporate representatives (aka 'whores') on both sides of the aisle and in both the executive and legislative branches. Michael Hudson: “Free enterprise under today's financial conditions threatens to bring about an unprecedented centralization of planning, not in the hands of government but by the financial conglomerates and money managers. Whatever government planning power is destroyed becomes available for them to appropriate, with plenty of vigorish left for the politicians whose campaigns they back and who will "descend from heaven" into high-paying private-sector jobs, Japanese style, after having performed their service for the new regime."Posted by: MsNThrope on June 3, 2008 at 2:22 PM | PERMALINK Socratic Gadfly: I am a registered Democrat. Am I therefore not able to criticize things other Democrats do without hypocrisy? I'm not criticizing Gramm because he's a Republican. I'm criticizing him because he helped make disastrous economic policy. Posted by: hilzoy on June 3, 2008 at 3:15 PM | PERMALINKIt's even more corrupt than this. Phil Gramm also lobbied John McCain (on behalf of UBS) against passage of the most recent Farm Bill because there's a passage in their that would effectively close the 'Enron Loophole' - and lo and behold, John McCain did not support the bill. "A McCain aide told me that the Arizona senator opposes the farm bill because it rewards lobbyists by granting rich farmers lucrative subsidies, although he would support a reasonable level of assistance and risk management to farmers when they need America's help. "But the aide, who spoke on condition of anonymity, acknowledged that the presumptive Republican presidential nominee also opposes the farm bill because Gramm advised McCain that he should resist its regulatory language on the energy futures market." http://www.baltimorechronicle.com/2008/051908Leopold.shtml Posted by: eric on June 3, 2008 at 4:20 PM | PERMALINKI was surprised to learn Edwards did not vote for the Gramm-Leach-Bliley Act. Posted by: Brojo on June 3, 2008 at 4:29 PM | PERMALINKAfter years of privatizing anything and everything possible, some pushback is in order. I think we need to recognize that modern monetary systems are primarily a medium of exchange and only as a function of that can they store value. What determines the amount of savings isn't the desire for wealth, but the amount of productive investment. Therefore money is actually a public utility, not private property. While it is government backed, licensing rights are granted to a private sector banking system that consumes profits while government insures major risks. This business about UBS abetting tax evasion, you've got it all wrong. When the GOP steals this election too, and America descends into one final apocalyptic fascist paroxysm, we will all need UBS to spirit our money out of the country so we can escape before we are put in the camps. After all, Swiss banks saved Jews from Hitler (for a price) and they'll be here to save so-called liberals from GOP eliminationists. Money follows freedom, which is not here anymore, and the US subversion of financial privacy is just another tool of totalitarian control. The gnomes of Zurich are your only hope. Let us hope that they can crack the US economy before the GOP consolidates its control. Posted by: joe blow on June 3, 2008 at 8:45 PM | PERMALINKphil and wendy were stellar crooks. and the msm avoided discussing it as stringently as they avoided analyzing a niger yellow cake story. the real interesting story, which no one will discuss, is the role of the harvard corporation in the deregulation of electricity[the creation of enron]. how the harvard endowment[think herb winocur]orchestrated electricity deregulation under the auspices of the kennedy school of government[gangsterism]. i think that the harvard endowment was a major shareholder in enron. herb winocur, running the harvard endowment, on the board of the harvard overseers[a lovely word, think simon legree], a director of enron. funny isn't it how the harvard endowment sold out at the enron top. i think herb eventually resigned from the board of overseers. and harvard moved its endowment management to another bunch of gangsters. by the way, i think herb also sat[may still sit] on the board of dyncorp. which ought to make you think about where harvard's $35billion endowment is invested. war profiteers? does the harvard endowment love killing iraqis? and all the other wogs that the us war criminals targets for the enhancing of their profits? Posted by: albertchampion on June 3, 2008 at 8:48 PM | PERMALINKPhil Gramm's retirement was among the biggest improvements to the Senate in all its history. Posted by: Aatos on June 4, 2008 at 2:00 AM | PERMALINKDon't forget Gramm's role as a 'death bond salesman'. http://tinyurl.com/3ztasc Posted by: Zane Safrit on June 4, 2008 at 2:13 PM | PERMALINKI am so glad this is finally out. As a former Texan, I can tell you Phil Gramm would sell his soul to the devil, and it looks like he has. I am outraged that this guy is even allowed to talk economics, much less be Treasury Secretary. America, if you like losing your home and living in "Tent Cities" and paying $10/gallon for gas, vote John McCain. Posted by: Shari Mattingly on June 4, 2008 at 5:32 PM | PERMALINKI am so glad this is finally out. As a former Texan, I can tell you Phil Gramm would sell his soul to the devil, and it looks like he has. I am outraged that this guy is even allowed to talk economics, much less be Treasury Secretary. America, if you like losing your home and living in "Tent Cities" and paying $10/gallon for gas, vote John McCain. Posted by: Shari Mattingly on June 4, 2008 at 5:33 PM | PERMALINKI heard that Obama is friends with William Ayers a known Domestic terrorist. Posted by: Mary Stemrolm on June 7, 2008 at 4:09 PM | PERMALINKLast time I saw stuff like this Baghdad Bob had a job. Ever think of working for Air America? Posted by: Thomas Jackson on June 7, 2008 at 6:05 PM | PERMALINKWhat President signed this bill into law? (Hint: his last name was not Bush) The Democrats have been in control of Congress for 2 hears. Why haven't they repealed or amended it? Posted by: Stu707 on June 7, 2008 at 6:39 PM | PERMALINKPost a comment
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