Published Sunday, Sept. 28, 2008 | 2 a.m.
Updated Sunday, Sept. 28, 2008 | 10:20 a.m.
As home values tank and retirement funds disappear, it’s hard not to want to find someone to blame.
As in so many cases, the sins of omission can cause just as much problem as the ones actually committed, a fact that is apparent from a cursory review of the legislative record leading up to the current economic troubles.
A decade ago, a Washington official raised a red flag over the emerging brisk market for swaps — a burgeoning form of insurance sold as a backup to high-risk securities, which later included many subprime mortgages.
Michael Greenberger, then director of the Commodities Futures Trading Commission’s trading division, suggested regulating those swaps.
He lost the argument spectacularly in the face of a Congress doggedly and righteously heading the other way. Lawmakers wanted less regulation, not more.
Within two years, Greenberger had moved on to the Justice Department, and Congress was passing sweeping legislation to ensure that swaps trading remained unregulated. With little debate, legislation was slipped into a spending bill approved one December evening, on the final day of the legislative session in 2000.
Greenberger, it turned out, was right to be alarmed. This month, industry giant AIG toppled. It had sold many of the insurance policies on those high-risk securities and couldn’t afford to pay the claims when the mortgage market collapsed. (Note to taxpayers: You now own AIG.)
Looking back, the swift passage of that 2000 legislation, known as the Commodity Futures Modernization Act, tells the story of the breakdown in Washington. In the face of warnings, lawmakers were unwilling — and some were unable — to stop the deregulation trend that triggered so much of the meltdown we see today.
Ever since the Republican-backed push for so-called regulatory relief under President Reagan, which was nurtured as the Clinton administration shifted the Democratic Party to the center, Congress has failed to mount much of a counter thrust.
The commodities bill was actually part of a double-play in the 106th Congress engineered by then-Sen. Phil Gramm, who until recently was a paid economic adviser to the presidential campaign of Republican Sen. John McCain. (Gramm stepped down from the campaign after saying the country’s economic problems were a “mental recession.”)
The Gramm-Leach-Bliley bill, passed in 1999, tore down the Depression-era wall that had long separated financial houses into commercial banks and investment firms as a way to protect bank deposits from uncertainties of the stock market.
At that time, Travelers, the big insurance company, and banking giant Citibank announced a merger in defiance of the ban. Washington was under great pressure to bless the marriage by overturning the restrictions.
It did — with overwhelming support in the Senate and only a modest number protests, from Democrats, in the House.
Nevada had a different congressional roster at that time. Republican Sen. John Ensign was out of Washington, in between leaving his House seat in 1998 and becoming a senator in 2001. Republican Reps. Jon Porter and Dean Heller were not yet in office.
Gov. Jim Gibbons, then a Republican representative, voted for both bills.
Senate Majority Leader Harry Reid has criticized McCain’s support for the Gramm-Leach bill as part of the Republican-led deregulatory push that has left us with today’s nightmare. Reid opposed the bill at the outset, but he ultimately voted for it after negotiating changes to reduce redlining — the banking practice of discriminating against poor or minority communities.
Democratic Rep. Shelley Berkley was also in office at the time, and voted for both bills. Berkley’s spokesman said last week the congresswoman “was among the hundreds of Republicans and Democrats who did vote for the bill in 1999. But any discussion of today’s crisis must focus on the subprime mortgage industry and the dereliction of duty by Bush administration officials who failed to use their regulatory powers to prevent the abuses we have witnessed over the past eight years under this White House.”
Others spread the blame across both parties. Travis Plunkett, legislative director at the Consumer Federation of America, says although deregulation has been “a Republican mantra for 20 years, truth is it wouldn’t have happened without bipartisan support.”
Let’s be honest, we all saw warning signs. Home prices in our neighborhoods were rising beyond belief, and neighbors wondered how the new folks on the block could afford to move in.
After just having witnessed the tech stock market bubble burst, we were wary of another popping sound. We learned about adjustable rate mortgages and zero down payments, and scratched our heads at how none of it made sense.
Watchdog groups tried to sound the alarm during the Bush years. But with a committed deregulator in the White house and a Republican Congress for most of those years, Plunkett says, most of the time was spent “trying to stop bad proposals.” If you can’t stop the systematic erosion of the regulatory apparatus, what chance do you have to win approval for regulation of exploding new markets?
One victory for consumers — a success in stopping “bad proposals” — came when the watchdogs halted a bill by then-Rep. Bob Ney, a Ohio Republican who has since served prison time for corruption. Ney’s legislation promised to rein in predatory lending, which is the deceptive practice of persuading borrowers to take out loans they will have difficulty repaying.
Ney’s bill purported to rein it in by doing away with the patchwork of state laws in favor of a national one. Watchdog groups swatted it back as a ruse to allow predatory lending to flourish.
Former Sen. Paul Sarbanes, a Democrat of Maryland, was among those lawmakers who tried to take the offensive on regulation. He chose predatory lending as a target.
When Democrats briefly took control of the narrowly divided Senate in mid-2001, Sarbanes took over for Gramm as chairman of the Senate Banking Committee. The New York Times wrote about the new regulatory agenda Sarbanes would bring, and Sarbanes himself said one of his highest priorities as chairman was to “shine a bright light on the deceptive and destructive practices of predatory lenders.”
Sarbanes’ bill would have halted hidden mortgage fees and helped borrowers fight unscrupulous lenders. But it never got a hearing. “He was running against the tide on his own committee,” Plunkett said.
Such was the climate in the decade before the meltdown.
Now to one more point. Any discussion of why members of Congress behave as they do is not complete without mention of the potential influence of campaign donations on policy.
The financial services industry has been the largest contributor to lawmakers since the Center for Responsive Politics started compiling electronic records in 1989.
The industry, which includes Wall Street, mortgage lenders and insurance companies, has given nearly $100 million this year, almost evenly split between Republicans and Democrats. It gives more than agriculture, communications, construction, defense and transportation industries combined.
Every week, Ensign, who is also chairman of his party’s efforts to elect Republican senators this fall, heads to New York City to raise money in the financial sector.
Nevada’s delegation has benefitted handsomely from industry contributions. Every member of the Nevada delegation ranks in the top 100 lawmakers receiving industry funds — except Heller, who was just elected in 2006.
What is surprising is not that Reid leads the delegation with $2.6 million in donations, perhaps expected as Nevada’s longest-serving and highest-ranking lawmaker, but that Ensign is not far behind with $2.3 million in donations with a decade less in office.
Equally notable is that Porter, with $1.6 million in financial services industry donations, outpaces Berkley, with $1.1 million.
Just two weeks ago, the industry threw Heller, a new member of the Financial Services Committee, a $500-a-plate lunch ($1,000 for political action committees), the Sunlight Foundation reports. Heller has raised $440,000 from the industry so far.
Lawmakers routinely say they are not influenced by campaign donations, as most did for this story. Heller declined to comment.
Here’s Porter: “When I receive a donation, whether it’s individual or PAC, I make it clear I’m going to do what’s best for Nevada. They may not like the decision, but that’s the way it goes.”
Here’s another view, from Massie Ritsch at Center for Responsive Politics: “If money had no influence, then executives at these companies and their political action committees have been wasting millions and millions of dollars for many years.”
On that December night eight years ago when the second of the two Gramm bills was approved, the one that ensured swaps trading would not be regulated, the Texas senator spoke from the Senate floor. He predicted the two bills would make history.
“The work of this Congress will be seen as a watershed, where we turned away from the outmoded, Depression-era approach to financial regulation and adopted a framework that will position our financial services industries to be world leaders into the new century.”
(Editor's note: This story has been corrected to say the Commodity Futures Modernization Act was passed by Congress in 2000.)