Gramm’s Bundles of Greed
by state Sen. Eliot Shapleigh
Posted on September 26, 2008
What happened on Wall Street? Why is it that every working man and woman in America is now asked to
shoulder $2,300 in more taxes?
What happened is a familiar story—people borrowed more than they can pay; lenders hiked appraisals to lend more than homes were worth. And interest rates adjusted higher and higher such that fewer could pay at all. Then, this toxic package was bundled up and sold once, twice, several times to investment banks—as every middle man made a buck.
Why? Because rules created in the 1930s New Deal to protect Americans were removed by Phil Gramm under the Gramm-Leach-Bliley Act of 1999.
Now, Gramm’s bundles of greed so taint our financial markets that the U.S. Government must intervene to give confidence here and around the world—and taxpayers will pony up $700 billion dollars to pay for it.
Just yesterday, I heard that the City of El Paso’s sweep account at Lehman Brothers was caught up in the Chapter 11 bankruptcy. Already, a deal to build 14,000 new homes for thousands of soldiers on their way to Ft. Bliss is dead. Millions of depositors are calling banks and stock brokers to see if family savings accounts are safe. American investment houses, founded before the Civil War, have evaporated overnight. Even Swiss banks, like UBS, historically secured against overseas panics, now have huge and growing mortgage exposure.
America’s confidence has not been so shaken since the Great Depression.
Let’s review some history. After the Depression, President Roosevelt secured America from runs of greed with a bank safety net. Deposits were insured from loss by the Federal Government if, in return, a bank agreed to regulation.
To make a loan, banks had to follow rules. Homes needed honest appraisals—and home loans needed limits—usually 80 percent loan to value. Back then, in Texas, our founders limited interest rates too. State usury laws that limited interest rates between 8 and 12 percent lasted from 1836 to 1978. Our founders also kept banks from putting second mortgages against a homestead—except to buy the home, make repairs or pay taxes.
Then, Phil Gramm came along. More than any other person, Gramm represents the predatory interests that have placed America at risk.
In 1999, as Chair of the Senate Banking Committee, Gramm passed the Gramm-Leach-Bliley Act to repeal the safety network that Roosevelt had put into place in the 1930s. The bill removed the walls that had been put into place to separate banks, investment firms, and insurance companies.
Then, on December 15, 2000, on the last day of Session, with Senators wanting to go home for the holidays, Gramm tacked a 268 page amendment onto an 11,000 page bill to essentially transfer the rest of the risk of unregulated financial markets to the American taxpayer and unleash what Warren Buffett, one of America’s most respected investors, called "financial weapons of mass destruction." Gramm’s bill encouraged financial titans like Bear Stearns to push the envelope on risk taking. Sterns and others understood they would always be able to rely on the public purse if things went horribly wrong.
Gramm also slipped into the bill the "Enron Loophole," which allowed energy trading to avoid oversight by the FERC and other agencies. Several years later, Enron used that loophole to drive the California electricity crisis—and Enron itself into bankruptcy. Notably, Gramm’s wife served on Enron’s board.
Recently, the Senate Permanent Subcommittee on Investigations concluded that Gramm’s loophole fueled speculation that "increased by $20 the cost of a $70 barrel of oil."
How's that for taking money out of your pocket?
After he left the US Senate, Gramm went to work at UBS which recently announced losses of $19 billion in subprime mortgages. During my time in the Texas Senate, Gramm has tried to sell us the idea of dead peasant insurance, where UBS would sell life insurance policies on retired teachers, then keep the profits when teachers died. More recently, Gramm maneuvered Governor Rick Perry into asking us to sell the Texas Lottery to UBS for a price that can only be paid if Texas expands gambling.
With Gramm’s run on Wall Street near an end, we are now left with frozen credit, incalculable hidden risk, and financial panic to every market around the globe. That’s where we are today.
So, now we must put Main Street before Wall Street.
These are the principles that must guide us:
• Reflect and take time to do the right thing: The last time Congress was asked to rush a decision was on the Iraq War. Let's study options and do the right thing for America's next generation—not the right thing for the best lobbyist.
• Restore confidence: Markets work on confidence. If Hoover’s failed policies from the Depression taught us anything, it is that the US Government must act swiftly and confidently to restore consumer confidence. Every toxic loan needs to be taken off the market, the collateral marshaled and sold, and every single person responsible for breaking the law needs to be prosecuted. The final burden to the taxpayer will be much less if we act now, but taxpayers need to be paid first. Back in the '80s, in our last financial crisis, the Resolution Trust Corp. (RTC) took over institutions, placed risk with directors and shareholders, and profit with the taxpayers. That's what we need to do now.
• Re-regulate risk: The heart of Roosevelt reforms was a trade off: rules for deposit insurance. That system served us well—and we need it back. For four sessions, I have filed bills to regulate subprime and predatory lending in Texas—without support from a single statewide office holder. Gramm spent a career saying "government was the problem." Now, it’s the solution—so let’s do it right, in Austin too.
• Rein in usury: For 150 years, Texas had statutory provisions limiting usury and keeping interest rates between 8 to 12 percent. When that cap went away, interest rates went way up. On some predatory loans, the annual interest rate in Texas is now 1100 percent! States like Oregon, Georgia, Ohio, and North Carolina have capped predatory loans at 36 percent. So has the US government for all military men and women. Now, it’s time for all Americans to enjoy the same protections.
• Re-energize democracy: America needs a change. Gramm’s values of greed and unaccountability have run Austin and Washington into the ground.
Now is the time to close this chapter on America’s latest "Gilded Age" and the legacy of Phil Gramm.
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