| Last Monday Sept 15th, one Wall Street bank, Lehman Brothers, filed for bankruptcy protection and another, Merrill Lynch, sought salvation 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. |
Today, Wednesday Sept 17th, the Federal Reserve (rather the American taxpayer) bailed out the mega-giant American International Group Inc. insurance company with a two-year, $85 billion loan. The Federal Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers over 90. Since the California IndyMac Bank, which was declared insolvent in July, was not on the FDIC list a week before it collapsed, the number of "problem" banks might be greater than the FDIC currently understands.
| Sen. John McCain (R-AZ) continues to insist that the “fundamentals of our economy are strong.” As Eric Rauchway notes in the American Prospect, McCain’s response to this economic crisis is reminiscent of President Herbert Hoover’s “the fundamentals are strong” response to the Great Depression. On October 25, 1929, a day after what is now known as Black Thursday, President Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis." |
Financial system failures such as we are experiencing more and more frequently as 2008 progresses 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.
By 1932 after a decade of Republican laissez-faire government and unregulated "anything goes" excesses in the banking and securities and commodities trading systems, many banks at the time were badly wounded by their personal and financial ties to Wall Street. President Roosevelt and a wave of Democratic Senators and Congressmen won election in 1932 on the promise of a "New Deal" to clean up the economic mess left by the laissez-faire Republicans. 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, insurance and securities markets.
The Conservative "No Government Regulation Philosophy," that was the root cause of the 1929 Black Thursday crash, did not die out on Black Thursday 1929. Conservatives like President George W. Bush's grandfather Prescott Bush never forgave President Franklin Roosevelt for pushing the 1933 Glass-Steagall Act and other financial reform acts through Congress during the 1930's New Deal Era. Conservatives like Republican incumbent for the U.S. 3rd Texas Congressional District, Sam Johnson, age 78, Republican incumbent for the U.S. 4th Texas Congressional District, Ralph Hall, age 85, Republican incumbent Senator John Cornyn and Republican presidential candidate Senator John McCain, age 72, have never stopped their push to return the American financial system to the unregulated "anything goes" era of the 1920's.
Through this election year we have heard Senator McCain repeat time and time again,"I’m always for less regulation. But I am aware of the view [of Democrats] that there is a need for government oversight. … But I am a fundamentally a deregulator. I’d like to see a lot of the government regulations eliminated." And so, most of the government regulation that fostered a secure and robust American financial system from 1933 to the 1980's has been dismantled by conservatives, including some conservative "blue dog" Democrats.
Ronald Reagan finally led the conservative "no government regulation" movement to power in 1980 proclaiming faith in free markets and mistrust of government. That conservative philosophy of "no government regulation" has dominated America for the past 28 years. Over these last 28 years conservatives have systematically dismantled the "New Deal" and returned the American financial system to its unregulated "anything goes" status of the 1920's.
Even after taxpayers had to rescue deregulated savings and loans, or S&Ls, with a $200 billion bailout in the late 1980s, the push to loosen regulation paused only briefly.
In 1999, President Clinton signed the Financial Services Modernization Act passed by a Conservative controlled Congress, which tore down Glass-Steagall's reforms by removing the walls separating banks, securities firms and insurers. McCain joined with other Republicans to push through landmark legislation sponsored by then U.S. Senator from Texas, Phil Gramm, who is now an economic adviser to McCain's campaign. The Financial Services Modernization Act (also identified as the Gramm-Leach-Bliley Act) aimed to make the country’s financial institutions competitive by removing the Depression-era walls between banking, investment and insurance companies.
| It is the Financial Services Modernization legislation written by McCain adviser Phil Gramm and pushed by McCain himself that helped pave the way for the very financial companies and banks that have failed during 2008 to become behemoths laden with bad loans and investments. |
Then, in 2000, the Republican controlled Senate Banking Committee, controlled by Congress and Phil Gramm who is McCain's current financial advisor, pushed through a deregulatory exemption on electronic commodities trading without a Senate hearing or debate.
After President Bush took office his administration and the Republican controlled Congress turned their back on any responsibility to oversee the financial system.
With interest rates pushed to the floor after the events of September 11, 2001, the market grew for loans to borrowers with weak credit and private-sector mortgage bonds boomed. About 38 percent of those bonds were backed by sub-prime loans. These sub-prime loans loans, made possible by Republican deregulation, are at the root of today's financial crisis.
A generation ago, banks, credit unions and S&Ls issued home mortgages that they retained on their books as an asset. The lenders had a stake in receiving full repayment of the loans from credit-worthy borrowers.
But after deregulation, mortgages began to be sold to firms that cobbled the loans together to create mortgage-backed securities, or mortgage bonds. Loans to the least credit-worthy borrowers carried the highest risk but gave the highest returns, so banks and other institutional investors bought loads of them. Except no one was policing or even gave a second thought to the creditworthiness of the borrowers. Exactly the conditions behind the the 1929 Black Thursday crash.
Republican deregulation has cause other turmoil for American investors and consumers.
The so-called "Enron Loophole" deregulation legislation allowed Enron to speculatively exploit and manipulate electricity commodity trading in California energy markets in the summer of 2001, spawning artificial electricity shortages, steep climbs in electricity prices and rolling brownouts across California.
The "Enron Loophole" legislation was created and attached to U.S. Senate legislation in December 2000 by McCain campaign co-chair Senator Phil Gramm at the behest of Enron executives. In fact, internal Enron documents, which were released in 2002, revealed that the Houston-based company wrote the legislation for Gramm.
In 2006, the “Enron Loophole” allowed Amaranth Advisers hedge fund to shift its trades from the regulated New York Mercantile Exchange (NYMEX) to the unregulated Intercontinental Exchange (ICE) in Atlanta.
That let Amaranth corner the natural gas market, betting that futures prices would rise. The hedge fund lost about $6 billion and imploded as natural gas prices fell to a two-year low in September 2006.
The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission charged that Amaranth manipulated prices paid in the physical natural gas markets. FERC has proposed $291 million in penalties and the forfeiture of “unjust profits.”
| | In 2008, the “Enron Loophole” has allowed a speculative free-for-all that helped drive oil prices over $135 per barrel last summer. As much as 99 percent of the market for U.S. premium crude oil is dominated by big financial firms, hedge, pension and index funds seeking short-term profits from oil's rise. Some analysts believe that as much as $70 of that $135 a barrel price was speculative froth. |
In addition to commodity trading manipulation, regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate, people familiar with the regulators' thinking say. Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand.
Republicans, including Texas Senator John Cornyn, have threatened to filibuster U.S. Senate business to block the efforts of Democratic Senators to close the "Enron Loophole." Obama Vows To Close "Enron Loophole."
Senate Democrats Discuss Eight Years Of Failed Bush-McCain Economic Policies
