The Man Who Wrecked The Economy

[BigLouie]

A lot has been written on whose fault it is that the economy is in bad shape and the banks almost collasped just as Bush was leaving office. Both parties say the other party is responsible but really it was just one man and a Republican. A little something from the web, read on.

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. 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 cochaired Sen. John McCain's presidential campaign and advised the Republican candidate on economic matters. He was been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could have end up in charge of US economic policy. Talk about a market failure.

Gramm's long been a handmaiden to Big Finance. 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.

No one in Washington apologizes for anything, so it's no surprise that Gramm has failed to issue any mea culpa. Post-Enron, says Greenberger, the senator even called him to say, "You're going around saying this was my fault—and it's not my fault. I didn't intend this."

Whether or not Gramm had bothered to ponder the potential downsides of his commodities legislation, having helped set off an industry free-for-all, he reaped the rewards. In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland's largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis' top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been "key to the growth" of its out-of-control cdo business. (Gramm declined to comment for this article.)

[LexusLover]

I love it when folks slap around Bush-Cheney with Enron ....

"
Clinton's first treasury secretary, Lloyd Bentson, yet another Texan, was a major recipient of Enron largesse-$14,000 for just one of his Senate campaigns-before his appointment. He was replaced in 1994 by Robert Rubin, whose relationship to the company dated to his work as an investment banker. When Rubin first joined the Clinton administration, he wrote to his former client, saying that he "looked forward to continuing to work with you in my new capacity."

Cultivating such relationships apparently paid off. Clinton officials publicly helped Enron win contracts in India and Indonesia, and cleared the way for government subsidies to help build power plants in China, the Philippines, and Turkey. Enron officials accompanied US diplomats on trips to Pakistan and Russia, returning from both with additional deals.

Still, perhaps the most controversial intervention during the Clinton era involved Mozambique. According to John Kachamila, that nation s natural resources minister, while he was negotiating a 1995 agreement with Enron to build a gas pipeline to South Africa, US administration pressure included outright threats to withhold development funds "if we didn't sign, and sign soon." The Houston Chronicle reported at the time that Clinton s National Security Advisor Anthony Lake, along with USAID and the US Embassy, were involved in high-powered, commercially driven diplomacy.

"Their diplomats, especially Mike McKinley [deputy chief of the US Embassy], pressured me to sign a deal that was not good for Mozambique," said Kachamila. "He was not a neutral diplomat. It was as if he was working for Enron."

BEYOND THE HYPE

Before dawn on June 3, 1997, police stormed the homes of several women in western India who had led a massive protest against Enron's new natural-gas plant near their fishing village. According to Amnesty International, the women were dragged from their homes and beaten by officers paid by Enron. Predictably, the company denied any knowledge of the incident. But India isn't the only place where Enron was accused of wrongdoing. Charges of influence peddling, corruption, and environmental damage followed it around the world.

In Brazil, where Enron was a major stakeholder in a 2000-mile pipeline to Bolivia, the plan was to open up pristine Amazon forests to unsustainable development. The livelihoods of indigenous communities in both countries hung in the balance. In India, villagers protested that the Dhabol power plant, approved without an environmental impact statement, would pollute local waters, destroy the fishing economy, and threaten delicate plantations of mango and other fruits. That India deal also threatened to inflate electricity prices, while the company stood to make a 32 percent after-tax rate of return, three times the US average. Nevertheless, in exchange for $20 million in "educational gifts"-basically bribes-the details were initially kept secret."

http://www.thirdworldtraveler.com/Co...obal_Game.html

The now infamous Sugarland meeting with the Taliban in 1996 with the Enron folks, at the direction of Ken Lay, to get the "deal" struck for the gas line across Afghanistan to India .... was NOT during the Bush administration .... Clinton tossed some missiles into some goat herds and sand piles .... pissed off Enron.

[rwksl]

Most of the deregulation of the financial industry and the relaxation of lending standards for mortgages happened under President Clinton's watch.

[macksback]

Originally Posted by rwksl

Most of the deregulation of the financial industry and the relaxation of lending standards for mortgages happened under President Clinton's watch.

+ 1,525,952 every one should know that by now.

[pyramider]

The collapse happened after Enron went away.

What was there to stop others from oversight on Wall Street?

[wallstreet]

corruption

not party

[enderwiggin]

Originally Posted by rwksl

Most of the deregulation of the financial industry and the relaxation of lending standards for mortgages happened under President Clinton's watch.

Yup, championed by blowhards like Barney Frank and Chris Dodd. There's plenty of blame to go around and neither party has a recent track record of responsible spending.

But only one party is talking about tax-cuts, budget reduction and minimizing the size of government. I'll give you a hint: it ain't the folks who voted to spend ~$950,000,000,000 on one government program over the next decade...

[dearhunter]

So, he read it and new what was in it before he inserted it into the bill....then, went out on the floor and told everyone what was in it.....how novel....then Bill Clinton signed it.

[LexusLover]

Originally Posted by BigLouie

.... on whose fault it is that the economy is in bad shape and the banks almost collasped just as Bush was leaving office.

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.

I am not a fan of Wiki, but it is a nice easy source for a timeline ...

http://en.wikipedia.org/wiki/Enron_scandal
“Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
“Shareholders lost nearly $11 billion when Enron's stock price, which hit a high of US$90 per share in mid-2000, , plummeted to less than $1 by the end of November 2001.”
….
JEDI and Chewco

Main article: Chewco
“In 1993, Enron set up a joint venture in energy investments with CalPERS, the California state pension fund, called the Joint Energy Development Investments (JEDI).[26] In 1997, Skilling, serving as Chief Operating Officer (COO), asked CalPERS to join Enron in a separate investment. CalPERS was interested in the idea, but only if they could be removed as a partner in JEDI.[27] However, Enron did not want to show any debt from taking over CalPERS' stake in JEDI on its balance sheet. Chief Financial Officer (CFO) Fastow developed the special purpose entity Chewco InvestmentsL.P. which raised debt guaranteed by Enron and was used to acquire CalPER's joint venture stake for $383 million.[25] Because of Fastow's organization of Chewco, JEDI's losses were kept off of Enron's balance sheet.
In fall 2001, CalPERS and Enron's arrangement was discovered, which required the discontinuation of Enron's prior accounting approach for Chewco and JEDI. This disqualification revealed that Enron's reported earnings from 1997 to mid-2001 would need to be reduced by $405 million and that the company's indebtedness would rise by $628 million.[28]
[edit] Whitewing

“The White-winged Dove is native to Texas, and was also the name of a special purpose entity used as financing vehicle by Enron.[29] In December 1997, with funding of $579 million provided by Enron and $500 million by an outside investor, Whitewing Associates L.P. was formed. Two years later, the entity's arrangement was changed so that it would no longer be consolidated with Enron and be counted on the company's balance sheet. Whitewing was used to purchase Enron assets, including stakes in power plants, pipelines, stocks, and other investments.[30] Between 1999 and 2001, Whitewing bought assets from Enron worth $2 billion, using Enron stock as collateral. Although the transactions were approved by the Enron board, the assets transfers were not true sales and should have been treated instead as loans.[31]
“[edit] LJM and Raptors

Main article: LJM (Lea Jeffrey Michael)
“In 1999, Fastow formulated two limited partnerships: LJM Cayman. L.P. (LJM1) and LJM2 Co-Investment L.P. (LJM2), for the purpose of buying Enron's poorly performing stocks and stakes to improve its financial statements. LJM 1 and 2 were created solely to serve as the outside equity investor needed for the special purpose entities that were being used by Enron.[28] Fastow had to go before the board of directors to receive an exemption from Enron's code of ethics (as he held the title of CFO) in order to run the companies.[32] The two partnerships were funded with around $390 million provided by Wachovia, J.P. Morgan Chase, Credit Suisse First Boston, Citigroup, and other investors. Merrill Lynch, which marketed the equity, also contributed $22 million to support the entities.[28]
“Enron transferred to "Raptor I-IV", four LJM-related special purpose entities named after the velociraptors in Jurassic Park, more than "$1.2 billion in assets, including millions of shares of Enron common stock and long term rights to purchase millions more shares, plus $150 million of Enron notes payable" as disclosed in the company's financial statement footnotes.[33][34][35] The special purpose entities had been used to pay for all of this using the entities' debt instruments. The footnotes also declared that the instruments' face amount totaled $1.5 billion, and the entities notional amount of $2.1 billion had been used to enter into derivative contracts with Enron.[34]
“Enron capitalized the Raptors, and, in a similar matter to when a company issues stock at a public offering, then booked the notes payable issued as assets on its balance sheet while increasing the shareholders' equity for the same amount.[36] This treatment later became an issue for Enron and its auditor Arthur Andersen as removing it from the balance sheet resulted in a $1.2 billion decrease in net shareholder equity.[37]
“Eventually the derivative contracts worth $2.1 billion lost significant value. Swaps were established at the point the stock price hit its high points. Over a year the value of the portfolio under the swaps fell by $1.1 billion as the stock prices dropped (the loss in value meant that the special purpose entities technically now owed Enron $1.1 billion under the contracts). Enron, which used a "fair value" accounting method, claimed a $500 million gain on the swap contracts in its 2000 annual report. The gain was responsible for offsetting its stock portfolio losses and was attributed to nearly a third of Enron's earnings for 2000 (before it was properly restated in 2001).[38]”

___________ End of quoted material______________________ _______________

From 1993 until 2000, Bush-Cheney were not in the White House, not running any agency that could conduct oversight investigations, and not authoriing legislation directed at financial institutions.

BL: Give it a rest.

[dearhunter]

So, Enron's shady shit started under Clinton......well, it must be his fault.

[BigLouie]

*sigh* you people. This is not about Clinton or really that matter about the Republicans but about the result of one bill that was pushed through.

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....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.

One important note:

I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause

As Mark Twain once said,
"No one's life, liberty, or property is safe while the legislature is in session."

[LexusLover]

Originally Posted by BigLouie

*sigh* you people. This is not about Clinton or really that matter about the Republicans but about the result of one bill that was pushed through......

I could take the time to "fact check" ... but you are more familiar with your original cut and paste ...

Did I see the name of ONE Democrat mentioned in the material you posted ... ?

With all due respect ... "IT" is not about Party affiliation at all ....

... so why did some lame-ass, half-ass so-called reporter in propoganda garb ....

intentionally omit ALL references to members of the Democratic Party?

Like the President of the United States ...

except to say:

"President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown."


The economy was already tanking ..... for months ... the bubble was collapsing in the last year of the Clinton administration and the Clinton-Gore hot-air dog and pony show were desparately trying to keep up the bubble through the elections even to the length of changing the reporting methodology of labor statistics to give the appearance of continued job production ... a "fact" that the AFL-CIO criticized in December 2000 with a "revised" jobs report .... remember Cheny saying their first real task in 2001 was to address the downturn in the economy and Clinton going off on him ...???

Clinton handed Bush a failing economy ... Clinton was in denial or lying ...

Bush handed Obaminable a failing economy .. but Bush had admitted it and sought council with him to begin a course correction ....

... BFD

[gnadfly]

BL, why do you dislike Phil Gramm so? This isn't the first or second time you written about this incident. You are a long way from proving that he's 'The Man Who Wrecked The Economy.'

What are your feelings on the the $600 billion dollar poison pill the Fed just took?

[LittleSpike]

It's not the Democrats, and it's not the Republicans, it's the international Bankers and Globalists who dictate to both parties. Audit the Fed, throw the bankers in jail, and get our Constitution and Bill of Rights back. Don't just close your eyes while they steal what is left of your freedom, and turn America into an even bigger police state.

LS

[BigLouie]

Originally Posted by gnadfly

What are your feelings on the the $600 billion dollar poison pill the Fed just took?

As Mark Twain once said,
"No one's life, liberty, or property is safe while the legislature is in session."

People who think this country is better off because one party is in power rather than the other is not facing reality. The end result is the same. The rest of us get screwed in some fashion.