Phil Gramm's Role in Ongoing Economic Collapse
March 22, 2009
In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?
Written by Katherine Haenschen, Burnt Orange Report
From the oft-linked and must-read article by Matt Taibbi in Rolling Stone about our ongoing economic collapse, a look at how then-Senator Phil Gramm played a hand in the tumbling-down of AIG's house of cards: in short, by forcing financial deregulation.
In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?
The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks - which, thanks to Gramm, were now competing directly with investment banks for customers - were driven to buy credit swaps to loosen capital in search of higher yields.
In short, Gramm's deregulation paved the way for mega-firms to ultimately invent the kind of financial "products" like credit default swaps which eventually sent AIG tumbling to the ground, only to be cushioned with our taxpayer dollars.
Basically, instruments like credit default swaps let institutional investors bet on loans (like, say, billions in sub-prime mortgage loans to people who could never pay them back) going bust, with AIG left holding the bag. Except there isn't anything in the bag to pay out -- enter your tax dollars.
The worst part is that this deregulation allowed the financial industry to take advantage of regular, hard-working Texans just trying to live the dream of home ownership. Now, thanks to the work of Phil Gramm and friends, regular folks have lost their homes, their jobs, and their hope for any sort of economic stability in the near future.
As Treasury Secretary Timothy Geithner stated, folks like Gramm essentially created a "huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision."
Texas Republicans: gambling away your hard-earned money, without any adult supervision.
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