The Measure of a Maverick, Pt. 1

Guess who finally took his finger out of his ass and stuck it in the breeze.

Rarely have I seen or heard a candidate do a 180° so quickly, and then act as though the skid-marks and the smell of burning rubber aren’t obvious to just about everyone. But then came candidate John McCain (circa 2008).

On Monday morning, as Wall Street was absorbing one of the biggest shocks to the financial system in generations, Senator John McCain said he believed the fundamentals of the U.S. economy were “strong.”

Hours later he backpedaled, explaining that he meant that American workers, the backbone of the economy, were productive and resilient. By Tuesday he was calling the economic situation “a total crisis” and decrying “greed” in Wall Street and Washington.

McCain’s sharp turnabout in tone and substance reflected not only a recognition that he had struck a discordant note at a sensitive moment, but that he had done so on the very issue on which he can least afford to stumble.

As economic conditions have worsened over the course of this year and voter anxiety has increased, McCain has had to work to counter the impression – fostered by his own admissions as recently as last year that the economy is not his strongest suit – that he lacks the experience and understanding to address the nation’s economic woes.

We could take comfort in the idea that a president doesn’t have to know much about the economy. (Or foreign policy, for that matter, but that’s another discussion.) Or at least he doesn’t have to be an expert in the subject, so long as he surrounds himself with knowledgeable experts, and heeds their advice. Much depends, then, on the experts the president leans upon, their agendas, and their track records.

On a day when everyone else in the country was having an economic “Oh shit” moment, McCain basically said “everything’s just fine.”

Then, I guess he started talking to actual, everyday people. Or maybe he got wind that recent events have rattled even the very rich. Under conservative economics wealth may have failed to “trickle down” — instead remaining concentrated in the pockets of a narrow few — but they have managed to make the economic anxiety caused by their policies “trickle up.” Maybe that’s why the call for regulation has been sounded. This is starting to affect really important people.

Maybe they told him how they are hurting. And he figured out why.

Well, gee, John. If you want to start in on corporate greed and regulatory failure, you might schedule some “face time” with your economic advisor, Phil Gramm. Last I heard he’s back on your campaign, and still calling people “whiners” (the ones you just figure out are “hurting”). He’s actually charter member of that “old boy network” you said helped this happen. In a sense, as I mentioned before, he kind of got the ball rolling on this crisis.

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Who’s to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain’s presidential campaign and advises the Republican candidate on economic matters. He’s been mentioned as a possible Treasury secretary should McCain win. That’s right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.

…But Gramm’s most cunning coup on behalf of his friends in the financial services industry-friends who gave him millions over his 24-year congressional career-came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead-even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. “Nobody in either chamber had any knowledge of what was going on or what was in it,” says a congressional aide familiar with the bill’s history.

It’s not exactly like Gramm hid his handiwork-far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act’s inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps-and would thus “protect financial institutions from overregulation” and “position our financial services industries to be world leaders into the new century.”

…Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It’s like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm’s bill-which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers-a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

In essence, Wall Street’s biggest players (which, thanks to Gramm’s earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino. “Tens of trillions of dollars of transactions were done in the dark,” says University of San Diego law professor Frank Partnoy, an expert on financial markets and derivatives. “No one had a picture of where the risks were flowing.” Betting on the risk of any given transaction became more important-and more lucrative-than the transactions themselves, Partnoy notes: “So there was more betting on the riskiest subprime mortgages than there were actual mortgages.” Banks and hedge funds, notes Michael Greenberger, who directed the CFTC’s division of trading and markets in the late 1990s, “were betting the subprimes would pay off and they would not need the capital to support their bets.”

And having set the ball in motion, Phil got in line for his cut as he financial services industry entered the “new century” ushered in by his deft legislative maneuver.

With the U.S. economy now battered by a tsunami of mortgage foreclosures, the $30-billion Bear Stearns Companies bailout and spiking food and energy prices, many congressional leaders and Wall Street analysts are questioning the wisdom of the radical deregulation launched by Gramm’s legislative package. Financial wizard Warren Buffett has labeled the risky new investment instruments Gramm unleashed “financial weapons of mass destruction.” They have fed the subprime mortgage crisis like an accelerant. While his distracted peers probably finalized their Christmas gift lists, Gramm created what Wall Street analysts now refer to as the “shadow banking system,” an industry that operates outside any government oversight, but, as witnessed by the Bear Stearns debacle, requiring rescue by taxpayers to avert a national economic catastrophe.

While the nation’s investment bankers are paying a heavy price for their unbridled greed (in billions of dollars of write-offs), Gramm has fared quite nicely. He currently serves as a vice president at UBS AG, a colossal, Swiss-owned investment bank, the post, no doubt, a thank you for assiduously looking out for Wall Street interests during his 23 years in public office. Now, with the aid of his longtime friend Arizona Sen. John McCain, Gramm may be looking at a quantum leap in power and influence.

But, in a sense, he earned it.

When his new party won control of the Senate, Gramm rose to chairman of the Senate Banking Committee, where he was able to put his anti-regulation views into law. The Gramm-Leach-Bliley Act of 1999 repealed laws put in place after the Great Depression setting up protective barriers between commercial banks, investment banking firms, and insurance companies.

Consumer groups strenuously opposed the landmark legislation. “It was strongly deregulatory and … did not address safety and soundness,” says lobbyist Ed Mierzwinski of the public interest group U.S. PIRG.

But more powerful interests were pushing for the law, and they had a deadline. In 1998, Citicorp Inc. purchased Traveler’s Insurance Group. Under the old law, the new company had a two-year grace period to divest either its insurance or banking functions. Instead, it went to Washington, D.C., and got the law changed—with Gramm’s help.

…Another beneficiary: Gramm’s future employer, UBS, which was able to absorb the brokerage house Paine Webber. (As of March 31, UBS employees and company-related PACs have given the McCain campaign $82,865, according to the Center for Responsive Politics.)

Where is Phil, by the way? Donald Luskin is out there, going to bat for the team. (I’m guessing he wrote his column before you learned that “people are hurting now,” and — unlike the economy — that situation won’t get better if we just pretend it was fine all along.) Of course, Luskin’s own predictions about the subprime market alone shouldn’t inspire much confidence, though his statement that “as far as I know, the senator has never taken one word of my advice,” offers some relief.

Let’s see, you’ve got one advisor who not only enabled the subprime boondoggle, but is also one of it’s biggest beneficiaries (you might say, he’s not just a members of the “old boys club,” he’s the president), and another who didn’t seek the truck coming that’s hit the economy just recently. The former doesn’t speak for you, and you don’t take the latter’s advice. Given your self-confessed lack of knowledge regarding economics — which may be an asset in these interesting political times — you’re either going to take advice from these guys, join your running mate’s cramming sessions, or fly by the seat of your pants. None of these possibilities are reassuring.

But it’s really the John McCain in the second video that’s most intersting, with his talk of greed and corruption that goes a long way to revealing why his party doesn’t want this election to be about the issues. It triggers a cognitive dissonance that probably unavoidable when you’re this election’s standard bearer for a philosphy you also have to figure out a way to run against. and you have no other ideas. The last eight years, after all, are merely the culmination of a 28-year movement.

On Monday, one Wall Street bank, Lehman Brothers, filed for bankruptcy protection and another, Merrill Lynch, sought comfort by selling itself to Bank of America for $50 billion. Earlier this year, the government helped enable the sale of faltering investment bank Bear Stearns to J.P. Morgan Chase, and more recently took over mortgage giants Fannie Mae and Freddie Mac.

Such troubles were supposed to have been prevented, or at least mitigated, by regulatory systems that the nation began to put in place after the banking system collapsed at the start of the Great Depression.

Many banks at the time were badly wounded by their personal and financial ties to securities trading. The 1933 Glass-Steagall Act, and later the 1956 Bank Holding Company Act, mandated the separation of banks, insurance companies and securities firms.

Those and many other federal laws stabilized the banking and securities markets, but by the 1970s, a stumbling U.S. economy led to a change in America’s political-economic values. Ronald Reagan led a movement that came to power in 1980 proclaiming faith in free markets and mistrust of government. That conservative philosophy has dominated America for the past 28 years.

With control of the legislative and executive branches for most of the last eight years, conservatives had a chance to show us their version of “the world as it should be, and this is where we ended up. Either they couldn’t get it right, even with the White House and Congress under their control, or our current economic situation is the inevitable result of their policies and philosophy. The former they can never admit, and the latter they must somehow believably bemoan.

And in the case of John McCain, it’s a whiplash-inducing turnaround from that 28-year movement that he was a part of, and from his former self. As recently as March 2008, the old John McCain spoke out against bailouts for communities and homeowners floundering in the same deregulated  financial surf in which Gramm and others surfed the waves. 

Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

“Rampant speculation” on both sides is the root cause of the crisis, Mr. McCain said. He placed part of the responsibility for the mortgage mess on lenders, who he said had grown “complacent” in a rising market and as a result acquired a “false sense of security” that caused them to “lower their lending standards.”

…But in a departure from Democrats, who have focused on the lending industry’s role in the crisis, Mr. McCain suggested that some homeowners had also engaged in dangerous practices, including borrowing too much in hopes that a rising market would cover their mortgages.

But when it comes to financial institutions that engaged in dangerous financial practices like carrying hundreds of dollars in debt for every dollar of capital they actually had, in hopes that the market would cover their bad debt, the new John McCain sees things a bit differently. 

Republican presidential candidate John McCain, a day after flatly rejecting the idea of a taxpayer bailout for American International Group Inc., said Wednesday that the government had been “forced” into proposing an $85 billion loan to the nation’s largest insurer.

McCain appeared to soften his opposition to the bailout proposed by the Federal Reserve, treating the plan as a necessary evil to protect ordinary Americans with finanical ties to AIG – and asserting that such a financial collapse should not be allowed to happen again. He also called for an investigation to uncover any wrongdoing.

“The government was forced to commit $85 billion,” McCain said in a statement. “These actions stem from failed regulation, reckless management and a casino culture on Wall Street that has crippled one of the most important companies in America.”

That “reckless management and casino culture,” however, was enabled by the conservative movement actively smashing regulations intended to protect the very same “ordinary Americans,”  and  McCain was undeniably part of it all. 

The John McCain who declared in 2003, “I am a deregulator. I believe in deregulation,” was in 1987 part of the Keating Five, embroiled in the Savings & Loan crisis that echoes in today’s financial crisis, and lending his influence to warding off regulators and getting rid of the direct investment rule that was intended to counter the industry’s risky investment practices. (Thus sparing taxpayers the bill for the inevitable disaster.)

The John McCain who told the Wall Street Journal earlier this year, “I’m always for less regulation… I am fundamentally a deregulator,” in 1999 voted with the rest of his party for the Gramm-Leach-Bliley Act, which repealed part of the the Glass-Steagall Act, opening up the possibility of blurring the line between banks and investment houses, or erasing it altogether; arguably, another step towards the current crisis.

His record as a deregulator includes supporting more lax rules for financial institutions — perhaps best expressed in his declaration that the best thing the government could do for business is to “stay out of its way.” — and though he supported a few regulatory measures, he later claimed to deeply regret doing so. Until recently, he has campaigned as a deregulator, making statements like this one along the way.

I don’t think anyone who wants to increase the burden of government regulation and higher taxes has any real understanding of economics and the economy and what is needed in order to ensure the future of this country.”

There may have been moments in his long Washington career when John McCain bucked party orthodoxy, but in terms of the issue of deregulation, it’s impact on the economy, and on working Americans he has mostly toed the deregulating party line. If he has truly found religion where regulation are concerned, then he may have finally become a maverick. But only just now.

Crossposted from The Republic of T..