Nader on deregulation timeline leading to crisis
Ralph Nader’s campaign blog has posted an article by the candidate detailing the history of regulatory choices which created the current financial crisis: banks and security investment firms hungry for new profits convinced the Republican controlled Congress and the Democratic White house to permit illegally aggressive lending to people who would not be able to pay off the loans at ruinous interest rates and securitizing the resulting mortages.
The villain in all this is Phil Gramm, with Bill Clinton and the leadership of both parties acting as his willing accomplices.
Nader is seeking to correct a Right-wing misinformation campaign that wants to put the blame on the regulatory practices put in place by the Community Reinvestment Act of 1977. The CRA compells banks to offer credit when feasible to low-income families and people of color. This was done to prevent banks from simply refusing to lend, a banking practice which reinforced informal racist ‘redlining‘ codes. Poor people getting credit did not cause this crisis, it was the speculation based on marginal mortgages that created first the housing bubble and then the securities bubble out of the first. For that we have to thank the two major political parties, Fannie Mae and Freddie Mac, and the regulatory agencies themselves.
Here is Nader’s pretty clear account of how it worked.
No “thank you” to former Senator Phil Gramm for pushing the repeal of the Glass-Steagall Act. This law was passed in the wake of the stock market crash of 1929 – and designed to separate banking from securities activities. In 1999, when Congress passed the Gramm-Leach-Bliley Act and in so doing repealed Glass-Steagall the banks strayed into rough waters by looking for fast money from risky investments in securities and derivatives.
As predatory lending mushroomed out of control, the regulators—key among them, the Federal Reserve and the Office of Comptroller of Currency—sat on their hands. The Federal Reserve took exactly three formal actions against subprime lenders from 2002 to 2007. Bloomberg news service found that the Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.
No “tip of the hat” to the Bush Administration for preempting state regulators and Attorneys General from using state consumer laws to crack down on predatory and sub-prime lending by national banks.And, let us not forget the folks at Fannie Mae and Freddie Mac. Imagine allowing these two government sponsored enterprises—that were weakly regulated by HUD—to claim they were meeting the national housing goals by counting the purchase of subprime loans. Back in May of 2000, our associate Jonathan Brown warned that it would be inappropriate and counterproductive to encourage Fannie and Freddie to meet the housing goals by purchasing subprime loans. Too bad our members of Congress and the regulators at HUD were infected with deregulatory zeal. Former Texas Senator and current UBS executive Phil Gramm—would-be President John McCain’s Treasury Secretary-in-waiting—pushed through the Commodities Futures Modernization Act of 2000, which deregulated the derivatives market. With help from his wife, Wendy, the former head of the Commodity Futures Trading Commission who went on to a post on the Enron board of directors, Gramm removed the controls on Wall Street so it could innovate all sorts of exotic financial instruments. Instruments far riskier than advertised, and now at the core of the financial meltdown.
The SEC, through its “consolidated supervised entities” program, decided that voluntary regulation would work for the investment banking sector. Not surprisingly, this was a scheme cooked up by Wall Street itself. The investment banks were permitted to double, triple and go 20 times (and more) down on their bets by using lots of borrowed money. They made minimal disclosures to the SEC about what they were doing, and the SEC didn’t bother to review those disclosures adequately. Too bad for the investment banks—and the rest of us—they made lots of bad bets. The SEC has now closed the voluntary program, though now there aren’t any major investment banks left (the two remaining ones have converted themselves into conventional banks).
Click here for the full account: “In the Public Interest: Behind the Deregulatory Curtain“. Posted by Ralph Nader on Friday, October 3, 2008 at 03:10:00 PM
References found for Nader’s article:
“Federal Reserve:Fed Says It Could Have Acted Sooner on Subprime Rout“. By James Tyson, Craig Torres and Alison Vekshin. Bloomberg News. March 22, 2007.
“Regulators Quiet as Lenders `Targeted’ Minorities“. by Craig Torres. Bloomberg News. June 13, 2007.
“The Wall Street Fix: The Long Demise of Glass-Steagall“. Frontline. PBS. May 8, 2003.
“Foreclosed: Blame Bill Clinton’s Repeal of Glass-Steagall“. The Strange Death of Liberal America, website. November 25, 2007.
The Wall Street Fix: The story of WorldCom and its investment bankers. Frontline, PBS. Broadcast, May 2003.
- Timeline: The Long Demise of Glass-Steagall.
Posted on October 4, 2008, in Analysis and tagged Commodities Futures Modernization Act of 2000, Commodity Futures Trading Commission, Community Reinvestment Act, consolidated supervised entities, Fannie Mae, Freddie Mac, Glass-Steagall Act, Gramm-Leach-Bliley Act, Office of Comptroller of the Currency, Phil Gramm, Ralph Nader, redlining, Securities and Exchange Commission, sub-prime lending, Wendy Gramm. Bookmark the permalink. 5 Comments.