The real culprit in the financial meltdown
Aren't we all fedup!
Listening to the "wingnuts" out there, especially the "dittoheads" who revere every word spoken by Rush Limbaugh, you'd come to the conclusion that this financial crisis that threatens every household in this country was a result of the liberal leanings of past Democratic presidents (think Carter and Clinton) and their "obedient" cohorts in Congress.
But, wait a minute! Let's analyze that for a moment. When right wing conservative Republicans, hereinafter referred to as: "wingnuts", make that accusation, they back it up by pointing to a bill approved by the 95th Congress and signed in 1977 by President Jimmy Carter. Equally, they accuse President Bill Clinton of making changes to the original bill that "forced" lending institutions to make loans to unqualified buyers who would almost certainly default.
There are several unfortunate "facts" that put a lie to what these wingnuts are claiming. For example, the opening line of The Community Reinvestment Act that wingnuts point to as evidence that the democrats are "forcing" banks to make risky loans is:
"The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities...".
Note the phrase "designed to encourage", that doesn't sound like "force" to me.
Next they point to legislative changes signed into law by Bill Clinton. There's more than one problem with this claim. First off, if you think back, you'll remember that the republicans "impeached" President Clinton in 1998 and weren't being the least bit cooperative with him. Add to that the fact that in 1999, the makeup of the Congress was 45 Democrats and 55 Republicans. Not only did the Republicans have a large majority, they had things completely their way. Hell, Democrats were complaining that they couldn't offer amendments to bills and were even denied access to conference rooms in which to caucus.
No, liberals didn't create this problem, although they certainly cannot be held blameless.
The real culprit in creating this sick environment that allowed the banks and lending institutions to run rampant was the financial sector's favorite lapdog, Phil Gramm, retired senator from Texas. When Gramm was in the Senate, he was receiving millions of dollars from lobbyists representing the financial world. And, you can be sure he earned those millions of dollars. How, you ask? Well, it's a very interesting story.
On December 15, 2000, Gramm slipped into an omnibus spending bill, a little ditty called the Commodity Futures Modernization Act (CFMA) that had the effect of prohibiting any governmental regulation of a cute little financial instrument know as "credit default swaps". These swaps, known as CDS'S, were used by financial institutions to essentially guarantee the credit worthiness of huge securities that consisted of these sub-prime loans, bundled together and sold to hedge funds, big investors, banks and governments around the world. Simply, a CDS supposedly guarantees the buyer of these securities that they will be made whole in the event of a default.
A nice little package for everyone, don't you think? The investment houses could bundle up these sub-prime loans, relieving the originator of the loan of the obligation so they could continue loaning money, and sell them to unwary investors. And then, they sell to that investor a credit default swap, which would protect them. What they didn't reveal to these investors was what seemed to be an insignificant detail; there was no regulation in this market. No one kept track of the volume of these CDS's and worse, no one made sure that the sellers of these swaps had the resources to back them up. It has now been revealed that there are some $62 TRILLION dollars in the credit default swap market!! Now that the housing market is imploding, companies like AIG find themselves virtually insolvent, without enough capital to cover their bets on CDS's so they have turned to a very compliant Bush administration to bail them out with taxpayer money.
This CFMA bill that Gramm inserted into another bill in the dark of night had a provision lobbied for by Enron - a huge Gramm contributor - was the cute little provision that exempted energy trading from regulatory oversight which allowed Enron to virtually rape electricity consumer of California to the tune of billions of dollars. His wife, Wendy, who at the time was chairwoman of the Commodity Futures Trading Commission, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Her reward; a position with Enron that brought between $915,000 and $1.8 million to the Gramm family.
By the way, Phil Gramm is now the co-chair of the McCain presidential campaign and has been mentioned as a candidate to become Treasury Secretary. Ain't that grand!
Listening to the "wingnuts" out there, especially the "dittoheads" who revere every word spoken by Rush Limbaugh, you'd come to the conclusion that this financial crisis that threatens every household in this country was a result of the liberal leanings of past Democratic presidents (think Carter and Clinton) and their "obedient" cohorts in Congress.
But, wait a minute! Let's analyze that for a moment. When right wing conservative Republicans, hereinafter referred to as: "wingnuts", make that accusation, they back it up by pointing to a bill approved by the 95th Congress and signed in 1977 by President Jimmy Carter. Equally, they accuse President Bill Clinton of making changes to the original bill that "forced" lending institutions to make loans to unqualified buyers who would almost certainly default.
There are several unfortunate "facts" that put a lie to what these wingnuts are claiming. For example, the opening line of The Community Reinvestment Act that wingnuts point to as evidence that the democrats are "forcing" banks to make risky loans is:
"The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities...".
Note the phrase "designed to encourage", that doesn't sound like "force" to me.
Next they point to legislative changes signed into law by Bill Clinton. There's more than one problem with this claim. First off, if you think back, you'll remember that the republicans "impeached" President Clinton in 1998 and weren't being the least bit cooperative with him. Add to that the fact that in 1999, the makeup of the Congress was 45 Democrats and 55 Republicans. Not only did the Republicans have a large majority, they had things completely their way. Hell, Democrats were complaining that they couldn't offer amendments to bills and were even denied access to conference rooms in which to caucus.
No, liberals didn't create this problem, although they certainly cannot be held blameless.
The real culprit in creating this sick environment that allowed the banks and lending institutions to run rampant was the financial sector's favorite lapdog, Phil Gramm, retired senator from Texas. When Gramm was in the Senate, he was receiving millions of dollars from lobbyists representing the financial world. And, you can be sure he earned those millions of dollars. How, you ask? Well, it's a very interesting story.
On December 15, 2000, Gramm slipped into an omnibus spending bill, a little ditty called the Commodity Futures Modernization Act (CFMA) that had the effect of prohibiting any governmental regulation of a cute little financial instrument know as "credit default swaps". These swaps, known as CDS'S, were used by financial institutions to essentially guarantee the credit worthiness of huge securities that consisted of these sub-prime loans, bundled together and sold to hedge funds, big investors, banks and governments around the world. Simply, a CDS supposedly guarantees the buyer of these securities that they will be made whole in the event of a default.
A nice little package for everyone, don't you think? The investment houses could bundle up these sub-prime loans, relieving the originator of the loan of the obligation so they could continue loaning money, and sell them to unwary investors. And then, they sell to that investor a credit default swap, which would protect them. What they didn't reveal to these investors was what seemed to be an insignificant detail; there was no regulation in this market. No one kept track of the volume of these CDS's and worse, no one made sure that the sellers of these swaps had the resources to back them up. It has now been revealed that there are some $62 TRILLION dollars in the credit default swap market!! Now that the housing market is imploding, companies like AIG find themselves virtually insolvent, without enough capital to cover their bets on CDS's so they have turned to a very compliant Bush administration to bail them out with taxpayer money.
This CFMA bill that Gramm inserted into another bill in the dark of night had a provision lobbied for by Enron - a huge Gramm contributor - was the cute little provision that exempted energy trading from regulatory oversight which allowed Enron to virtually rape electricity consumer of California to the tune of billions of dollars. His wife, Wendy, who at the time was chairwoman of the Commodity Futures Trading Commission, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Her reward; a position with Enron that brought between $915,000 and $1.8 million to the Gramm family.
By the way, Phil Gramm is now the co-chair of the McCain presidential campaign and has been mentioned as a candidate to become Treasury Secretary. Ain't that grand!
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I have some acquaintances at my gym who have been retired for 5 to 10 years. They are a lot older than me and over this election season, we have agreed to disagree about our politics. I live in deep, red Louisiana, which is also ExxonMobil country, so most folks who retire early usually come out of Exxon or one of the local chemical plants.
I am not a Louisiana native, so I have been appalled at the people here for their love of the Republican party. I even heard on the radio today that while W. has a 25% approval rating nationally, it's about 50% in Louisiana.
Every time I talk to my acquaintances, I know they think I am an idiot for having progressive ideas. These folks obviously "had" money because they retired so early, and they are healthy. In addition, the folks from ExxonMobil have a strong sense of financial security because they keep buying ExxonMobil stocks. These folks are so republican that I have made a promise to myself not to engage in political conversation when I am around them, because it goes absolutely nowhere. When we have discussed the economy in the past, they use the same examples that you mentioned above, they say "both" sides are to blame in the current financial crisis, but you know they blame the democrats more.
Well today, I was walking on the treadmill next to two of them having a conversation and it was heart- breaking. They have watched their retirement savings evaporate over the past couple of weeks and now they are very worried. They are even talking about returning to work full-time because there is no way they will recover their money in their lifetimes (they are both in their 60's). These are not evil people. They just have different political ideas than I do. I kept my mouth shut, but I really wanted to blurt, "You get the government you vote for, and if you think John McCain is going to fix your problems, you're crazy".
I don't know who they will vote for. One of them is convinced Obama is a Muslim, but doesn't like McCain either, and the other was supporting John McCain. If things get much worse, I am sure universal health care will start looking pretty good to them, as well as Social Security. It is basically why I don't like living in a republican area. As of a few weeks ago, most people had money and no worries, so their mantra was "I got mine, screw you". However, I think that the "trickle down" effect of losing their money rather growing it and the fact that they are at an age where their health could decline rapidly and cost them tons of money they no longer have is doing some serious shit with their heads and with how they perceive the world. I don't know if they would ever vote for Obama, but if I were in their shoes, I think I might take a second look.
October 20, 2008 3:02 PM | Reply | Permalink
Good explanation of CDS and where they came from. In general the argument that laws had any effect on the markets is absurd. It's the application of laws that matter. So when the SEC turns a blind eye so often that it loses all sight, we should not be surprised that the market becomes overly leveraged on unsound instruments. Utlimately, we were one memo from avoiding this catastrophe. Had the SEC requested that all fixed income instruments be risk managed as vigorously as securities, we'd all be living in different times. By the way, the SEC did not need a law authorizing this; they were already authorized.
Oh well, I guess we can do without two key principles of the last twenty years: free markets and compounded interest.
October 20, 2008 4:34 PM | Reply | Permalink