WONDERING ABOUT THE BESPECTACLED OLD WHITE GUY on the campaign plane with Senator John McCain? Former Texas senator Phil Gramm is McCain’s economic brain, doing much of the policy thinking in regard to that subject for the Republican presidential nominee, who admits that finance and the economy are weaknesses he needs to master.
If most of the public has forgotten Gramm, Wall Street hasn’t. As chair of the Senate Banking Committee in 2000, Gramm attached a complex, 262-page amendment to an omnibus appropriations bill moving toward passage as Congress was moving toward Christmas recess. Written by Wall Street investment-bank lawyers, the Commodity Futures Modernization Act had no hearing before any committee and was unread by almost every member of Congress. It mandated sweeping deregulation of investment banks, declaring off-limits to regulators most over the counter derivatives, credit derivatives, credit defaults, and swaps.
In 2000 those terms were known only to a small circle of investment bankers and brokers who created and traded the complex financial instruments they describe. They are familiar today because the unregulated trading of them had a great deal to do with the near-death experience of the Bear Stearns investment bank, which was only avoided when the Federal Reserve provided JPMorgan Chase with $30 billion in backing to acquire Bear Stearns and avoid the international financial disaster that would have followed the bankruptcy of a large investment bank.
The current economic crisis is not the first one made possible by Phil Gramm’s commodity futures act. Gramm’s wife, Wendy, served on the Commodity Futures Trading Commission from 1983 to 1993. As a commissioner, she helped develop many of the trading rules her husband turned into law in 2000. When Mrs. Gramm left the commission, she joined the corporate board of Enron, when the Texas-based gas-pipeline company was reinventing itself as a commodities trading combine, with its own “trading floor” in Houston. In his book Pipe Dreams, Robert Bryce describes Enron’s on-line commodities trading, which could not have developed as it did without a key provision in Senator Gramm’s commodities futures act.
The “Enron exception” that Senator Gramm included in the act protected all on-line derivatives from federal regulation, even when they were designed to defraud investors. It did seem like a conflict of interest that Senator Gramm was passing a law that would benefit his spouse, who was being paid by a corporation that would reap enormous benefits from its passage. And although the glaringly evident conflict was reported in some news outlets, the Gramms emerged unscathed from the situation.
Enron, on the other hand, didn’t do so well. Enron board chair Ken Lay is dead, even if conspiracy theorists claim he is living under an assumed name in Vail, Colorado. Jeff Skilling is in prison, appealing his Enron-related convictions. And tens of thousands of Enron employees and investors saw their pensions disappear when the company collapsed. Today, Bear Stearns shareholders have been put in a similar position; shares worth $145 two weeks before the company’s collapse were acquired by JPMorgan for $10.
But the Gramms are all right. When he is not advising John McCain, Phil Gramm is ensonced in the New York offices of UBS, where he is a vice chairman of the Swiss investment banking giant. On April 2, UBS announced that it had sustained $19 billion in losses, which were doubtless exacerbated by the deregulation that Gramm had pushed through Congress eight years earlier.
Fortune magazine describes John McCain’s economic policy as “vintage Gramm.” McCain’s recent argument against government relief for homeowners facing foreclosure recalls Phil Gramm’s killing of a deregulation bill in 2000 that he had otherwise supported—because it would have provided reduced-rate mortgages for low-income government employees.
The former Texas senator (who ran for the presidency himself in 1996, ending up with only one delegate to show for the $20 million he spent) is frequently mentioned as the next Secretary of the Treasury, if John McCain is elected president. No speculation thus far on any Cabinet or board appointment for Wendy Gramm, who currently chairs the Regulatory Studies Program at the Mercatus Center, a free-market think tank housed at George Mason University in the D.C. suburbs.