Cleaning Up After the Conservatives

John McCain cheered Wall Street deregulation in the go-go ’90s. Now who picks up the check for a decade of abuses?

By Jim Cullen

The Bush administration had a little trouble lining up Republicans to support the government bailout of Wall Street as they tried to forestall the meltdown of global finance. The administration, with a cursory briefing of congressional leaders on Sept. 19, proposed to socialize losses for private investors as the White House sought $700 billion to take mortgage-related assets off the books of American financial corporations.

The “Republican Study Committee,” a group of more than 100 “conservative” lawmakers, released a letter asking Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to “refrain from conducting any additional government-financed bailouts for large financial firms,” even as the government was promising to fix the balance sheets of everyone on Wall Street who was coming down with the subprime flu. “Even those of us who rarely are in agreement with conservative Republicans confess, they might have a point when they complain about a climate ‘where companies are absolved, not punished, for excessive risk taking,’” Andrew Leonard noted at

But Paulson already had nationalized Fannie Mae and Freddie Mac, with combined assets over $5 trillion, on Sept. 8. Paulson obtained the authority to do so from Congress in July with the assurance that he would not have to use it. On Sept. 15, Lehman Brothers, with $600 billion in assets and 25,000 employees, declared the largest bankruptcy in US history after it was unable to obtain financing. The same day, Merrill Lynch agreed to sell itself at a fire-sale price to Bank of America. On Sept. 16, the Federal Reserve made a bridge loan to AIG, the largest insurance company in the world, with $1 trillion in assets and over 100,000 employees worldwide. The Fed got an option to purchase up to 80% of the shares of AIG, which needed the $85 billion loan to cover insurance it had written on subprime real-estate investments.

If the government did nothing, it risked plunging the world economy into a depression, we were told.

John McCain, who in March told the Wall Street Journal “I’m always for less regulation” and as late as Sept. 15 was insisting that the “fundamentals of our economy are strong,” a few days later said he would fire Securities and Exchange Commission Chairman Christopher Cox for failing to regulate the market. (Never mind that the president does not have the authority to fire Cox, since commissioners are appointed to fixed terms.) But Leonard noted at that Cox, a former Reagan administration lawyer and congressman from Orange County, Calif., has been doing exactly what his party wanted him to do. “George Bush did not appoint him commissioner in 2005 to crack down on Wall Street. The prevailing ideology of the Republican Party—and this is one area where the historical evidence, by his own admission, does not justify calling John McCain a ‘maverick’—has been to loosen control of Wall Street, not to tighten it. If our markets were turned into casinos, the majority of the blame has to go to the Republican Party, with some assistance from the Clinton administration.”

Obama said the Bush administration has “offered a concept with a staggering price tag, not a plan. Even if the US Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.” 

Congress should not give the administration a blank check, taxpayers should not reward Wall Street CEOs and taxpayers should be protected and should be able to recoup this investment, he said, adding that the plan also must help homeowners stay in their homes; the US must insist that other nations join in helping secure the financial markets; the US should “start putting in place the rules of the road I’ve been calling for for years to prevent this from ever happening again. And finally, this plan can’t just be a plan for Wall Street, it has to be a plan for Main Street. We have to come together, as Democrats and Republicans, to pass a stimulus plan that will put money in the pockets of working families, save jobs, and prevent painful budget cuts and tax hikes in our states.”

Bernie Horn, senior fellow of the progressive Campaign for America’s Future (, noted that the debacle is the direct result of conservative misrule. “To increase profits, finance companies sold subprime and nontraditional mortgages to millions of Americans who—the companies knew—could not afford to make the payments,” Horn wrote Sept. 15. “The brokers didn’t care; before the mortgages could become a problem, they sold the loans to investment houses that repackaged them into exotic securities and marketed them around the world. Now the entire financial system is reeling since no one knows what the toxic loans are worth.”

These follies were made possible when:

• Banking deregulation allowed the growth of a totally unregulated shadow banking system that borrowed heavily while inventing exotic securities to hide the value of underlying assets.

• The Office of the Comptroller of the Currency, which could have halted the sale of the worst of these loans by designating them “unfair and deceptive practices,” refused to do so.

• The Federal Reserve Board failed to regulate subprime and exotic mortgage loans, although it had the power to do so.

• The US Department of Housing and Urban Development allowed Fannie Mae and Freddie Mac to purchase large numbers of subprime loans.

“The banks went on a binge; the cops on the street turned a blind eye. The bankers pocketed billions until the housing bubble burst,” Horn wrote.

Americans are now paying dearly for the conservative folly. Across the nation, home values have dropped 16% over 12 months, the largest one-year decline on record, the New York Times reported. Almost one-third of US homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Bloomberg News. Homeowners without mortgage problems find themselves surrounded by boarded-up foreclosed houses. And taxpayers will ultimately have to pay hundreds of billions for all the recent government banking bailouts, according to US News.

Horn offered the following progressive solutions:

• Bring financial markets under control. Government must ensure that financial transactions are transparent and fundamentally fair. If a bank is too big to fail, then it must face public scrutiny and federal regulation. No private financial institution should be allowed to pocket its winnings and make the taxpayers responsible for its losses.

• Keep the secondary mortgage market under control. There is no reason to re-privatize Fannie Mae and Freddie Mac. Fannie Mae was a federal agency for 30 years before it was privatized in 1968. If it had remained a public body instead of a private one, the mortgage crisis would likely have been much less severe.

• Focus on the economic well-being of Americans instead of corporate profits. It is irrational to bail out giant corporations that willfully took imprudent risks, while refusing to help average Americans who are feeling their economic pain. We must jump-start the economy by investing in clean energy; better schools; and safer bridges, highways and levees, simultaneously creating millions of new jobs.

Sen. Bernie Sanders, I-Vt., who predicted this sort of disaster when Congress repealed the New Deal-era Glass-Steagall Act in 1999, said the meltdown shows that everything the right-wing theorists said about deregulation was not only wrong but fraudulent. On Thom Hartmann’s radio show Sept. 19, Sanders noted that the only people deregulation worked for were the wealthiest Americans—so they should be the ones who pay for the bailout with a five-year, 10% surtax on income of individuals above $500,000 a year, or $1 million a year for couples. During the Bush administration, he noted, “Four hundred people increased their wealth by $670 billion and they now own $1.5 trillion ... If a bailout is necessary, I don’t want the working people of America to pay for it. The people who made out like bandits should pay for it.”

In a press release he said the price the government pays for any mortgage assets should be discounted so that government can recover the amount it paid for them, and the government should receive equity in the companies it bails out so that when the stock of those companies rises after the bailout, taxpayers share in the resulting windfall.

Sanders also said the situation calls for re-regulation of the financial markets and enforcement of anti-trust laws. He noted that, with the acquisition of Merrill Lynch, Bank of America is on the way to becoming another bank that’s “too big to fail.” He added, “If a company is too big to fail, then my position is that company is too big to exist.” He said he would push for an economic stimulus package that puts people back to work.

He added, “we need to address the needs of working families in this country who are today facing very difficult times. If we can bail out Wall Street, we need to respond with equal vigor to their plight. That means, for example, creating millions of jobs through major investments in rebuilding our crumbling infrastructure and creating a new renewable energy system. We must also make certain that the most vulnerable Americans don’t freeze in the winter or die because they lack access to primary health care.”

Obama has centrist former Clinton advisers Lawrence Summers and Robert Rubin on his economic team, Sanders noted, but he also has more populist advisers from progressive think tanks and labor unions. “He’s listening to many points of view,” Sanders said, while McCain still listens to hard cases like Phil Gramm, the author of many of the deregulatory bills that got us into this mess. So while Obama might not go as far as Sanders would like, he said, “At this incredibly difficult point in time, the idea of having John McCain and his right-wing ideologues in charge is unthinkable.”

Sanders also said he does not think Democrats should let the bailouts take money from progressive initiatives. The Bush administration has borrowed hundreds of billions of dollars to pay for an open-ended war in Iraq and provided tax breaks for billionaires while the national debt has nearly doubled.

One way to make the robber barons pay for the bailout would be to repeal the Bush tax breaks that will cost $295 billion next year.

Obama doesn’t go that far, but he proposes to repeal the Bush tax cuts for the wealthiest 1%, raising taxes on those making $250,000 or more per year. He would reduce taxes for low- and moderate-income families, the Tax Policy Center reported.

McCain would continue the Bush tax breaks, which would lift after-tax incomes an average of about 3%, or $1,400 annually, for middle-income taxpayers by 2012. But, in sharp contrast to Obama, he would cut taxes for those in the top 1% by more than $125,000, raising their after-tax income an average 9.5%.

Dean Baker, in a column at (Sept. 16), proposed a financial transactions tax that could raise hundreds of billions of dollars per year. “The basic point is very simple. We impose a modest transactions tax on all financial transactions, for example a tax of 0.02% on the purchase or sale of a future contract or a tax of 0.25% on the purchase or sale of a share of stock. (The UK has had a tax of 0.25% on stock sales and purchases for many decades.) Such a tax could easily raise a $150 billion a year, enough to pay for a national health care program or a major clean energy initiative.

“A tax of this magnitude will have almost no impact on someone who intends to buy and hold a financial asset. No airline is going to be discouraged from hedging on jet fuel futures because of a 0.02% tax, nor will any farmer be dissuaded from hedging on her corn crop.

“Similarly, most long-term investors will not even notice the 0.25% tax when they buy or sell their stock. The reduction in transactions costs due to the development of computer technology over the last quarter century far exceeds the size of this tax. Most traders will be paying far less for their trades in 2009 with the tax, than they did in 1980 without the tax.

“The only people who will really be hit by the tax are speculators; people who buy futures at 2:00, with the intentions of selling at 3:00. Even a modest tax can put a serious dent in the profits of those whose business is short-term speculation. We will therefore see less of this speculation, but it is hard to see why we should care.”

Baker also proposed that Fed Chairman Bernanke place limits on the outrageous salaries drawn by the top executives at financial firms as a condition of their getting a bailout.

Matt Yglesias wrote at (Sept. 19) that it would be crazy to grant Wall Street the relief it demands without getting something for working people at the same time. “Every time progressives in Congress try to get something done for working people, conservatives either block it or else hold it hostage to some nutty tax cut. Why not tie this bailout to something like the second stimulus package of enhanced food stamps, extended unemployment insurance, and enhanced aid to state governments straining under the yoke of Medicaid payments?

“It’d be absurd for the government to be moving hundreds of billions of dollars around amidst an economic crisis while doing nothing for, say, janitors who get laid off from Lehman Brothers. The problems to worry about here are in the ‘real’ economy. Propping up the financial sector can help accomplish that, but we also need to prop up normal people trying to pay the bills and weather the storm.”

The prospects did not look good when Democrats failed to pass a bill that would inject $50 billion into the economy, including $20 billion for infrastructure projects, plus additional funding for food stamps, the Low-Income Energy Assistance Program and state Medicaid subsidies.

Andrew Leonard of noted (Sept. 19) that McCain proposed creation of a new Mortgage and Financial Institutions Trust. “This trust will work with the private sector and regulators to identify institutions that are weak and fix them before they become insolvent. The MFI is an early intervention program to help financial institutions avoid bankruptcy, expensive bailouts and damage to their customers. This will get the Treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after another.”

Leonard noted, “Let’s get this straight—the man who says he is fundamentally a deregulator and that government should get out of the way of the private sector is proposing an ‘early intervention’ system in which the government will be watching the books of all major financial institutions so as to steer them away from potential insolvency?! On the basis of this one paragraph alone, John McCain needs to renounce his membership in the Republican party. I give up: he is a maverick—he’s more radical than FDR!

“McCain also delivered one of the most ridiculous critiques of Wall Street I’ve heard so far this silly season: ‘Many in the financial services industry also either forgot or neglected their duty to act ethically and honorably.’”

Leonard noted, “The bedrock of the conservative belief in free markets is that independent actors pursuing their own economic self-interest create economic prosperity for us all. Honor and ethics have nothing to do with it. Greed is a feature, not a bug.”

McCain’s mentor on economic issues is Phil Gramm, a former Republican senator from Texas who is now a vice president at UBS Securities. Gramm is responsible for legislation that made it easier for banks to slice up subprime mortgages and bundle them with other mortgages to hide the credit risks and sell mortgage bundles to other investment firms. As a lobbyist, Gramm also lobbied last year to kill a bill that would have let bankruptcy judges adjust mortgages terms so American families facing foreclosure could repay their loans and keep their homes.

As a senator in the 1980s Gramm supported the Reagan-era deregulation of the savings-and-loan industry and later used his political clout to protect Texas operators whose crooked machinations helped to bankrupt the S&L industry at a cost to taxpayers of hundreds of billions of dollars. (McCain was caught in the “Keating Five” scandal after he tried to intervene with federal regulators on behalf of a campaign contributor with a failed S&L.)

When the Republicans took control of the Senate in 1994, Gramm became Banking Committee chairman. He wrote the Gramm-Leach-Bliley bill in 1999, which repealed New Deal laws that maintained barriers between commercial banks, investment banks and insurance companies. Gramm’s bill deregulated the financial industry—and now is blamed by many economists for the epidemic of speculation and fraud. In December 2000 Gramm slipped the “Commodity Futures Modernization Act” into an 11,000-page government reauthorization. His bill allowed banks to use now-infamous “credit default swaps” to pass mortgage risks to insurance companies and other investors.

The commodity bill also contained an “Enron loophole,” which allowed energy trading to escape federal oversight, a position favored by Wendy Gramm when she headed the Commodity Futures Trading Commission before she joined the Enron board in 1993. Enron’s electronic trading led to the California electricity crisis of 2000 and 2001 and the Senate Permanent Subcommittee on Investigations in 2006 concluded that the Enron loophole contributed to inflated energy prices for American consumers. Its report cited expert estimates that the loophole—by encouraging speculation—accounted for $20 of the price of a barrel of oil, then at $70.

Gramm gave up his formal role with the campaign in July after he said the US was only in a “mental recession” and had become a “nation of whiners,” but he reportedly is still close to McCain and is viewed as a likely McCain Cabinet appointee.

From The Progressive Populist, October 15, 2008

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