# How did we get here from there



## Bob Kellam (Apr 8, 2004)

Written by Adam

Wednesday, 24 September 2008 
This is a must-read. I read this over the weekend and it is an article that explains as best as I have seen yet what went wrong in our financial system.

On Saturday, DailyKos contributing editor Mark Sumner(Devilstower) wrote this piece on the wall street meltdown. I requested and recieved his permission to post the contents here in full. So here it is...

_"Once is happenstance. Twice is coincidence. Three times is Enemy Action."
-- Auric Goldfinger_

James Bond's wealthy nemesis may have had an obsession with gold, but he judged, quite correctly, that if people keep putting your plans awry, that was likely their intent.

In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the Savings and Loan industry. The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry -- including John McCain's warm-up speaker at the convention, Fred Thompson. The official description of the bill was "An act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." Considering where things stand in 2008, that may sound dubious. It should.

Seven years later, the S&L industry was collapsing. What was the cause? Garn-St. Germain handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it didn't give them the bank's regulations. Left to operate in an anarchistic gray area, S&Ls chased profits, indulged in amazing extravagances, and cranked out enough cheap mortgages to fuel a real estate boom. They also experimented with lots of complex, creative -- and risky -- investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?

It wasn't a foregone conclusion. In 1985, three years after the deregulation of the S&Ls, the chairman of the Federal Home Loan Bank Board saw that the situation was already looking shaky, with the potential to become much worse. He instituted a rule to limit the amounts and types of investments S&Ls could carry on their books in an effort to head off disaster. However, many savings and loans -- among them Lincoln Savings & Loan Association of Irvine, CA, which was headed by a fellow named Charles Keating -- promptly ignored these rules.

Now enters a familiar cast of characters. First to pop up was the universally beloved Fed-chief-to-be, Alan Greenspan. Greenspan argued against the loan board's new rules, and persuaded Reagan to appoint one of Keating's pals to the board to blunt the requirements. A quintet of senators, among them John McCain, began having meetings with both the management at Lincoln and the regulators at the loan board. ] Alan Greenspan also helped out with a letter to the regulators, asking that Lincoln be exempt from the new rules. With their help of Greenspan and their pet senators, Lincoln was able to stay in business an additional two years, at the end of which they failed -- taking the life savings of 21,000, mostly elderly, investors with them.

How involved was John McCain? McCain and Keating had known each other since 1981 and had become fast friends. Of all the "Keating Five," it was McCain who moved into the life of the Lincoln S&L chief. The two men vacationed together multiple times, with the whole McCain clan (babysitter included) heading out for Keating's private Caribbean property on Keating's private jet. McCain didn't think to actually report these trips, or pay for them, until the investigators were breathing down his neck. And McCain took his payment in the form of more than just vacations. Keating and other members of Lincoln's parent company padded McCain's pockets with $112,000 in campaign contributions.

In John McCain's biography, he called his meetings with Keating and regulators "the worst mistake of my life," though from the text you'd think this was a spur of the moment decision, not something that McCain did repeatedly over a space of years. Still, you might think that a "worst mistake" would stay fresh in his memory.

It certainly didn't fade quickly for the country. Following the S&L crisis, the Resolution Trust Company was formed to swallow up the debt of Lincoln and 746 other S&Ls gone wild, and taxpayers were left with the $125 billion bill. The resulting budget deficit forced cutbacks in other programs. The artificial real estate boom collapsed and housing starts fell to their lowest levels in decades. Finally, the whole nation settled in for a period nasty enough that three years later someone could still campaign around the idea "It's the economy, stupid."

Even so, by 1999 Phil Gramm -- who had entered the Senate two years after McCain and quickly become the economic guru of the Keating Five maverick -- put forward the Gramm-Leach-Bliley Act. This Act passed out of the Senate on a party line vote with 100% Republican support, including that of John McCain. (To be fair, the bill eventually passed again with a wide margin following revisions in the House.)

This act repealed part of the Glass-Steagall Act. This may sound like a bunch of Congressperson soup, but the gist of it is that Glass-Steagall was put in place in 1933 to control the rampant speculation that had helped cause the collapse of banking at the outset of the depression, and to prevent such consolidation of the banks that the nation had all its eggs in one fiscal basket.

Gramm-Leach-Bliley reversed those rules, allowing not only more bank mergers, but for banks to become directly involved in the stock market, bonds, and insurance. Remember the bit about how S&Ls failed because they didn't have the regulations that protected banks? After Gramm-Leach-Bliley, banksdidn't have that protection either.

Gramm wasn't done. The next year he was back with the Commodity Futures Modernization Act, which was slipped into a "must pass" spending bill on the last day of the 106th Congress. This Act greatly expanded the scope of futures trading, created new vehicles for speculation, and sheltered several investments from regulation.

As with both Gramm-Leach-Bliley and Garn-St. Germain, large parts of this bill were written by industry lobbyists. This famously included the "Enron Loophole" that exempted energy trading from regulation and was written by (big suprise) Enron Lobbyists working with Gramm. Not coincidentally, Senator Gramm, the second largest recipient of campaign contributions from Enron, was also key to legislating the deregulation of California's energy commodity trading.

Thanks to this fortunate trifecta of Gramm-crafted legislation, Enron was able to create "EnronOnline" and trade electricity in California with absolutely no oversight or transparency. They quickly worked out how to game the system. Previously, there had been only one Stage 3 rolling blackout in the history of California. Within months, the system had been manipulated by traders to generate 38 such blackouts and wholesale electrical prices had gone up more than 3000%. Despite production capacity equal to four times the demand during winter, energy traders even engineered a blackout in mid-January.

During the confusion of these deliberate "shortages" and "price spikes," the California administration of Gray Davis -- blind to speculator manipulations because of the walls erected by Gramm's legislation -- was forced to sign energy contracts at enormous rates. There was little choice, because most of California's public utilities were on the brink of bankruptcy from the rising wholesale prices.

In a single year, Gramm's legislation allowed speculators to bring the state to its knees. Enron alone looted California of $11 billion. The manipulations of the energy market were also a major factor in Davis getting the hook, helped usher the governator into power, and they still have repercussions in California's budget battles today. By the end of that year, the depth of Enron's deception could no longer be hidden, and the whole company came crashing down in the largest bankruptcy in history -- at the time. This brought more billions lost in mutual funds and pension funds across the country, and played a major role in the economic downturn of 2001.

But that was only the second act. The combination of Gramm-Leach-Bliley and the Commodity Futures Modernization Act was a toxic cocktail whose total damage was greater than the sum of its parts.

The first Act promoted bank buyouts and mergers that reached such an insane pitch that the average consumer could only keep up by tracking the changing names on their checks and credit cards. Mercantile buys Ameribanc and Mark Twain. Firstar buys Federated and First Colonial. US Bancorp buys Mercantile and Firstar. And, because it allowed brokerages and insurance companies to mingle with banks, the Act cemented a trend that was already (and illegally) underway in which all those terms had become rather quaint. Is Wachovia a savings bank, an investment bank, a brokerage, or an insurance provider? The answer is "yes."

In allowing financial institutions to grow to Godzilla-sized proportions, Gramm-Leach-Bliley helped ensure that we would have financial entities that were "too big to fail." Rather than choosing to enforce rules that kept these institutions apart, the deregulators chose to create monster bankeragasurances whose downfall (and existence) was enough to threaten the whole system.

But if Gramm-Leach-Bliley removed the limits on size and scope, these new institutions still neededfuel. With many financial transactions operating on razor thin margins, and increasing automation sapping the profits from trading of all sorts, they needed a new way to generate the funds required to swallow their brethren in the merged fiscal corporation pond. For that, the Commodity Futures Modernization Act was a godsend.

Among those instruments which the CFMA sheltered from regulatory scrutiny was something called the "credit default swap." A kind of insurance one bank could exchange with another, credit default swaps supposedly made it safe for banks to take on ever riskier forms of debt. The Act didn't invent these swaps, though they were relatively new. Instead, by placing them in a state where they were not only unregulated but almost perfectly opaque, credit default swaps were turned into the perfect vehicle to fuel a Wall Street revolution. No one had any idea what these things were actually worth, they were traded "over the counter" without being administered by any exchange, and even the SEC could monitor their existence only indirectly.

Who would cheer for a new kind of financial instrument that was difficult to understand, invisible to regulators, and impossible for even the whizziest of Wall Street whiz kids to value? Guess.

More recently, instruments that are more complex and less transparent--such as credit default swaps, collateralized debt obligations, and credit-linked notes--have been developed and their use has grown very rapidly in recent years. The result? Improved credit-risk management together with more and better risk-management tools appear to have significantly reduced loan concentrations in telecommunications and, indeed, other areas and the associated stress on banks and other financial institutions.
--Alan Greenspan, 2002

Get that? Greenspan loved credit default swaps. He opined again and again that such instruments would be the salvation of the industry by spreading around risks. To the mighty Greenspan, both their complexity and their lack of transparency were good things, since swaps would only be handled by the big boys who knew how to play with fire.

When questioned about his support of Gramm's legislation, John McCain called his friend (and by then, campaign co-chair) Gramm "one of the smartest people in the world on the economy" and pointed out that Greenspan also favored the acts Gramm and his coalition of lobbyists had authored. If both Gramm and Greenspan were on his side, McCain couldn't possibly be in the wrong.

Except, of course, that he could.

From the beginning, there were plenty of people in the financial community whose opinion of these unregulated credit swaps was not as rosy as that of Gramm, Greenspan, and McCain. Chief among those speaking in opposition was SEC Chairman, Arthur Levitt. Levitt argued that what the industry needed was more transparency, especially when it came to complex instruments like default swaps, and he testified to this before Gramm's Senate Banking Committee,.

_"In my judgment, the risk of this regulatory approach is simply unacceptable for America's investors."
--Arthur Levitt, 1999_

Gramm paid no attention.

Credit default swaps did allow the banks to share risks. So much so, that banks raced each other in an effort to find more risks. They made it possible for the down payment on homes to become 3%, 1%,0%. Skip the credit check, avoid the employment requirements, damn the torpedoes, full speed ahead! We've got a credit default swap, we can do anything!

The encouragement and "safety" that credit default swaps provided made the sub-prime mortgage market possible. Just as with the deregulation of S&Ls in the 1980s, the market was suddenly flooded with easy credit. The result was a real estate boom, soaring home prices, and a plague of "Flip that House!" shows on cable.

As the banks piled up crappy mortgages, they heaped on ever more of the credit default swaps -- and they still had no idea how to value the things. Worse, they began to trade the swaps themselves as if they were an investment, treating them like something worth holding instead of a big bundle of cartoon bombs whose fuses were already lit. Since very few loans were falling into default at the time, owning a default swap seemed like a way to collect fees without ever paying out. Banks wanted more, and more, and more.

A secondary market for trading swaps exploded into existence, and swaps were traded with absolutely no consideration for the nature or quality of the underlying investment. Swaps changed hands a dozen or more times, growing in "value" as they went. Worse still, no one regulated who could buy a swap, so it was (and is) perfectly possible for a company to acquire swaps that theoretically cover billions of dollars in loans, even if that company doesn't have a red cent on hand to cover those swaps should the loans default.

How big did this market become? Here's business correspondent Bob Moon and host Kai Ryssdal on American Public Media's Marketplace from back in the spring.

_BOB MOON: OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

KAI RYSSDAL: That's a lot of money, Bob._

As in three times the whole US gross domestic product, Bob. And the truth is that Moon probably underestimated. The unregulated and poorly reported credit default swaps may have actually passed $70 trillion last year, or about $5 trillion more than the GDP of the entire world.

So, are you starting to get an idea of just how big a genie Phil Gramm and his pals unleashed?

With some regularity over the last eight years, fiscal whistle blowers have tried to raise their hands and register a protest. Um, sirs? Is it altogether a good idea to run up debts exceeding all the assets it's even possible to hold? But so long as no one actually had to pay off on the swaps, the party went on. Even usually conservative (in the fiscal sense) companies like AIG started to worry that they were being left behind and leapt headlong into the swap pool.

Shortly after Greenspan's departure in 2006, the Federal Reserve took the unusual step of issued a joint statement along with the SEC to warn about the risks associated with credit default swaps. But by that point, the damage was already severe. If swaps lost their value, most of those who had played the game would find their giant firms abruptly valued in pocket change. The only solution was to cover the problem with still more swaps and keep moving.

Then a funny thing happened. After years in which banks had handed out loans willy-nilly, guarded by the indestructible swap, people and companies started to really default on those loans. Credit slowed, home prices fell, and the whole snake started to eat itself tail first. Suddenly, credit default swaps were not sources of limitless cash. It turns out that an insurance policy -- even a secret, unregulated policy -- is occasionally expected to pay. Speculators started to look at the paper they were holding and for the first time realized it could all be worthless. Worse, it could (and did) represent a massive debt; one that no one had the funds to cover.

When Bear Stearns fell apart last March, it was only suspected that a big part of the effort in saving the giant investment bank was keeping their holdings in credit default swaps from unraveling and spreading to other institutions. Naturally, part of solving this problem involved creating a new credit default swap to cover Bear Stearn's potential debt. But the all-purpose swap was starting to lose its power. Shortly after Bear Stearns went belly up, AIG reported the largest quarterly loss in the company's history, taking a $11 billion hit on revaluing its holdings of swaps. The party was definitely coming to a close.

When AIG finally collapsed this week, there was no doubt about the primary cause of its failure. The previously well grounded company had "gotten itself involved with something called credit default swaps." Point of irony alert: Arthur Levitt now serves on the AIG board... or at least he did until the government had to take over most of AIG to salvage the company from the very idiocy Levitt had warned of in 1999.

This week, the Bush administration announced the beginnings of a plan to salvage what remains of the financial markets. At first glance, it appears that the plan will consist mainly of creating a kind of "garbage pit," a fund or group of funds -- cousins of the Resolution Trust that was created during the S&L crisis -- into which those people who have dabbled in bad debts can toss their problems. Only this time the cost to the taxpayers is at least $700 billion... and a big bite out of representative democracy.

The expansion of unregulated Savings and Loans in the 1980s brought on the collapse of that industry, a crippling of the economy, and left taxpayers holding the bag. Maybe that was only happenstance. Those pushing for the Garn-St. Germain Depository Institutions Act may not have known what they were doing.

The deregulation of the California electricity market, along with the protections provided to Enron through Phil Gramm's lobbyist-written legislation brought blackouts, fiscal and political chaos, and left taxpayers holding the bag. But the people who engineered that event -- people like Gramm and Greenspan -- had already seen what happened with the S&Ls. They should have known better. Still, perhaps that was only coincidence.

The sub-prime mortgage crisis that has not only come so close to utterly destroying the markets, but has ruined the value of many people's homes and left millions with mortgages they can't pay, was also the outcome of the deregulation created by these men. The very predictable outcome. When taxpayers are left holding the bag for $1 trillion this time around, it's hard to believe it's any sort of accident.

This is enemy action. This is a bullet deliberately fired into the economy by men willing to exercise their ideology regardless of the cost to taxpayers. Men who have every expectation that they can plunder the system again and again, while the public picks up the tab. John McCain may not have had his finger directly on the trigger, but he was there. He assisted. These were his personal friends and philosophical comrades. He may not be the high priest, but he has been a loyal acolyte in the cult of deregulation.

It may come as a surprise to the champions of deregulation, but nobody likes regulation. The restrictions that were placed on banks, S&Ls, and other institutions in the 1930s weren't put there because someone thought it would be fun. They were put in place because they addressed problems that had just been clearly and painfully revealed. They were put in place because they were necessary.

It's bad enough if John McCain didn't know that. It's far worse if he did.


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## Bgunit68 (Dec 26, 2006)

I'm sorry could you repeat that? J/K


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## Lil Sand Bay (Feb 2, 2005)

Thanks Bob
Thats as a concise, historical perspective piece as I've ever read on the subject.


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## DecoyDummy (May 25, 2005)

Is it just me or were there no Democrates mentioned in that piece?

I Absolutely agree with Lil Sand Bay ... the most concise piece I've read on the subject.

I had not realized it was a problem brought on by Republicans and that not a single Democrate had a thing to do with it.

Thanks Bob that's something everyone should know. Great Post!


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## buckseye (Dec 8, 2003)

Yeah it was the Republicans fault until the Democrats got in then it became their fault. Then back to Republicans to carry the torch again up to the present time.

It's all professional politicians fault, I'm pretty sure we all know that.


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## Bobm (Aug 26, 2003)

uke:

DailyKos contributing editor Mark Sumner(Devilstower) are you kidding me????????? thats the biggest bunch of horse squeeze I've ever read.

Typical historical rewrite that the ultra left wing nutcases are famous for.

The Daily Kos is the most left wing biased posible source for info


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## buckseye (Dec 8, 2003)

:lol: Damn Bob I like the way you have been letting it out. Get'er done!! :lol:


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## zogman (Mar 20, 2002)

Bob K..........

Have you been ready on the wrong side of the play book :lol:

Bob M, Thanks I just about was going to swollow :koolaid:


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## DecoyDummy (May 25, 2005)

Definately a piece of creative writing.

Goes to show you can say about anything you want just by refusing to say things you don't want to say.

I'm not sure that made sense, but it made about as much sense as the topic article


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## Plainsman (Jul 30, 2003)

I see O'Reilly calls the The Daily Kos a hate site. Many consider much of their literature fabricated, and comparable to moveon.org.


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## Bob Kellam (Apr 8, 2004)

I really don't think there is anyone naive enough (I sure as hell hope there isn't) to think that it was strictly a one sided all the GOP's fault deal. There was and is enough blame to go around for all. Bob M, Plainsman It probably is a left wing rag, however if you do a little research you will find much of the historical information is factual.

Senator McCain was indeed a member of the "Keating five"
Pages and pages of info on the scandal on the web.

The Gramm-Leach-Bliley Act is easily found in a google search

http://banking.senate.gov/conf/grmleach.htm

The the Commodity Futures Modernization Act,(yes it was signed into law by Clinton) Was just as easily found

http://www.stroock.com/SiteFiles/Pub134.pdf

The Garn-St Germain Depository Institutions Act was easily found as well

http://www.answers.com/topic/garn-st-ge ... utions-act

I will not argue the fact that it is written with a left wing slant It does, however, give a little insight into how we got where we are, Right up to the walkout on the bailout talks of tonight. You guys can bash me and frame your political ideological remarks with all the vile you want. My posting of this was not intended to cast all of the blame for anything on anyone. I thought it was an interesting historical (factual) account of why we are at this point.

Quite frankly I may go into the voting booth and write in "Decoy Dummy" as my pick to lead our nation. I sure as hell don't think we could do it worse than the current herd of idiots we hired to represent us.

You all have a good night


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## Plainsman (Jul 30, 2003)

> You guys can bash me and frame your political ideological remarks with all the vile you want.


Bob, I have nothing but respect for you and I am not going to bash you. I would guess any site has some truth, but I don't trust hardly any of them, and I don't trust Daily Kos at all. It's good you didn't either. I see you checked other references.



> Quite frankly I may go into the voting booth and write in "Decoy Dummy" as my pick to lead our nation. I sure as hell don't think we could do it worse than the current herd of idiots we hired to represent us.


I don't know how often you check the political form, but your last statement pretty much puts you in the same frame of mind as both Bobm and I.



> You all have a good night


and you too.


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## Bob Kellam (Apr 8, 2004)

> Bob, I have nothing but respect for you and I am not going to bash you. I would guess any site has some truth, but I don't trust hardly any of them, and I don't trust Daily Kos at all. It's good you didn't either. I see you checked other references.


I have a lot of respect for most on this forum. There is a ton of information presented some of it is good clean entertainment other stuff is heart attack serious it is up to us to separate the wheat from the chaff.

I check in on many political sites because the decision we need to make in November is a very big one, to big for me or anyone else to absorb information from a single source or political slant.

I have shied away from the forum here because of one reason people on here seem to take all of this to a personal level. when that happens the threads seem to degrade to a point of an us versus them mentality. A person has to believe in what they wish to believe in for whatever reason they chose, that in no way should get so muddled up that we lose respect for what another person believes in.

There is no political ideology that has a lock on the moral fabric of this nation simply because it is within us and it comes forth in the decisions we make and the affiliations we make. It is simply human nature to polarize with those of similar beliefs it is prevalent in every sector of society. IMO it is equally important to question and try to understand the societal sectors with different philosophies. I picked the topic of this thread because it is always fun for me to find out how we did get from point A to point B via point Z.

Twins won!!!!!! it has been a fun evening.

See y'all later!!


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## wiskodie1 (Sep 11, 2006)

Well I got to say that that was an excellent article!

Nice find Bob K.

I just love the fact that no one in here would ever attempt to argue against the fact that our government and the politicians that run it are corrupt. But they will fight to the bitter end when it comes to which side is less corrupt. LOL like it makes a hill of beans, corrupt is corrupt. That everyone is willing to tolerate this behavior is the problem.

All the world is a stage


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## PSDC (Jul 17, 2003)

The Gramm-Leach-Bliley Act was passed in November of 1999,
thus did Clinton sign off on the act?


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## Bobm (Aug 26, 2003)

Bob K

I bashed your source Daily Kos, not you. Neither plainsman nor I allow personal bashing we've been cracking down on it as hard as possible without becomeing censors of opposing viewpoints, no personal attacks are allowed.

highly critical attacks of the comments people put on here are fine.

And its not a "factual acccount" unless it had all the players included, thats not the case.

Some how the Daily Kos seemed to miss all the Dems in the research on this.

Without doing into the details on all of it, because I don't have the time.

Bob,do some reading on the following 
Take a look at clinton signing it, the congressional black causcuses' involvement in it, and the topic of "redlining" as it applied to granting loans. And these are just three examples there are many more.

The truth is they are all up to there necks in this and you want to know the easiest way to see that,

*they are all cooperating in an attempt to fix it quick, they all Dems and Reps have a vested interest to sweep it under the rug*

HOW often do we see cooperation like that? Never!

that fact alone should tell anyone that follows this stuff they are all to blame. These guys would be using this as a political football if one side was clean!!!!!!

Lastly using anything the Daily Kos writes as a source is akin to using the Ku Klux Klan to write a article on the history of Civil Rights. They are equally extreme in their points of view and I am serious


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## willythekid (Jan 21, 2008)

I think Daily Kos in relation to Fox News would be a much more accurate as far as being one-sided, extreme points-of-views. Maybe not as dramatic sounding though...


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## Bobm (Aug 26, 2003)

Hillary Clinton actaually said that Fox News was the only network that treated her fairly.

We all know what a right wing extremeist Hillary is


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## Robert A. Langager (Feb 22, 2002)

Now that this has gotten off track...

The fact of the matter is that people can post articles and opinion from the likes of Dick Morris, Ann Coulter, Newsmax, The Intellectual Conservative, etc.......no problem, but god forbid someone reference something that is not on the approved reading list.


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## Longshot (Feb 9, 2004)

Robert A. Langager said:


> Now that this has gotten off track...
> 
> The fact of the matter is that people can post articles and opinion from the likes of Dick Morris, Ann Coulter, Newsmax, The Intellectual Conservative, etc.......no problem, but god forbid someone reference something that is not on the approved reading list.


That may be, but I, or anyone else, has to believe what any of them write. It is also our duty as citizens to point of what is not fact, or that they are not telling the whole truth. Many of them are good at leaving our key information.


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## Bobm (Aug 26, 2003)

Robert A. Langager said:


> Now that this has gotten off track...
> 
> The fact of the matter is that people can post articles and opinion from the likes of Dick Morris, Ann Coulter, Newsmax, The Intellectual Conservative, etc.......no problem, but god forbid someone reference something that is not on the approved reading list.


????noone said anyone couldn't reference anything.

I just said what I think of that source and its painted as a personal attack something I absolutley did not do. I clearly attacked the credibility of Daily Kos did not attack not Bob.


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