In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the sec's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an sec rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the sec chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

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."

It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. 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."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

Now, belatedly, the feds are swooping in—but not to regulate the industry, only to bail it out, as they did in engineering the March takeover of investment banking giant Bear Stearns by JPMorgan Chase, fearing the firm's collapse could trigger a dominoes-like crash of the entire credit derivatives market.

dajafi wrote:

jerseyhoya wrote:http://joshkahn.files.wordpress.com/2008/05/may-memo-to-gb-list.pdf

Interesting leaked memo from a respected GOP pollster. Glen is good friends with my old boss, and is also a huge Giants fan. I had a nice chat with him the week of the Super Bowl, as he came into our office and I was sitting at my desk wearing my Derrick Ward jersey. Anyhow, I thought it was an interesting read about how effed we are, and the internal advice members are getting.

That is interesting. Thanks for posting. To me, as a Democrat who hates Bush/Rovism but wants to see a Republican revival (albeit not this year--the Bush/Rove/DeLay model has to be thoroughly discredited first), it's also tremendously encouraging.

Here's another take on Bolger's findings, going into the underlying data, from another Republican strategist.

Let’s take a deeper look into the data and see how our messages play when voters know where they’re from and when they don’t know which party is saying what. If you want the exact wording of both parties’ message and the full data, go back and take a second look at the poll.

Let’s start with the economy. When voters know what party each message comes from, we lose 37% to 58% and trail among independents by 18%. Ouch. However, when you read both messages without telling voters who they come from, the story gets worse.

Republican voters like the Democrat’s message more than their own party’s message by a large 14% margin when they don’t know which party it comes from. Just as disturbing, numbers among independents drop by another 10%... giving the Democrats a massive 28% advantage. Even our horrifically damaged image is better than our message on the economy. Independents and even Republicans simply like the Democrats’ plan more than ours.

Iraq and trade both follow the exact same pattern. We’re getting smashed on both issues on the partisan test, but when you look at the nonpartisan test where our damaged image isn’t a factor, the numbers get even worse among Independents and Republicans. A few Democrats (and in the case of trade a bunch of Democrats) move our way on the nonpartisan ballot, but Independents actually agree with our messages more when they know the messages came from Republicans.

On taxes, the picture gets more complex. On the partisan text, Independents like the Democrats’ message by significant 14% margin, but Republicans still like our message and give us a resounding 39% advantage. That changes drastically on the nonpartisan test.

When the party’s names are removed, Independents are almost evenly split, giving the Democrats’ message a small 5% advantage. However, Republican voters stampede away from the GOP message. Among Republicans, support for the GOP message on taxes drops by a gargantuan 53% when the party’s names are removed, leaving the Democrats with a 14% advantage. You read that right, on the nonpartisan test, Independents like the GOP message on taxes more than Republicans do and even Independents slightly favor the Democrats.

The takeaway? Our message right now is electoral poison and this isn’t all about “brand.”

I know you don't want to hear this as an operative, but there really is a great opportunity here for Republicans to reinvent themselves. It might not fully manifest until the Ds get real power and (as they inevitably will) screw it up. And the Republicans themselves might not fully get it until they get their clocks cleaned this November. (In that sense, it could be argued that a McCain win actually would be counterproductive.) But I think the Jindal/Pawlenty/Douthat/Salam musings are a good start.

jerseyhoya wrote:How was Obama supposed to know that $#@! crazy preachers preached at his church? I mean, just that it seemed that preachers said crazy $#@! at his church on a regular basis.

dajafi wrote:... it's probably too inside-baseball to do this, but the Republicans could do a lot worse than taking clips from that thing, in all its process-fetishistic glory and mind-numbing detail, and voice-overing "Seriously--you'd trust these guys to run the country?!?"

Warszawa wrote:

drsmooth wrote:

Warszawa wrote:

this pic has to have been staged. However, if its provenance can be confirmed, it should be a front-runner for a Pulitzer

jerseyhoya wrote:How was Obama supposed to know that $#@! crazy preachers preached at his church? I mean, just that it seemed that preachers said crazy $#@! at his church on a regular basis. How's he supposed to know?