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The Plot Thickens

It’s bad enough that former Texas Sen. Phil Gramm worked for a major player in the subprime market and lobbied Congress on the mortgage crisis at the same time he was advising presumptive Republican nominee John McCain on economic matters. That revelation this week from MSNBC prompted more talk of McCain’s tangled relationships with lobbyists.

But it gets even worse, according to an insightful piece by David Corn in Mother Jones magazine. In "Foreclosure Phil," he recounts Gramm’s role eight years ago in pushing through Congress something called The Commodity Futures Modernization Act.

As boring as its name sounds, the law led to deregulation of the credit default swaps market. With no one to look over their shoulders, banks and hedge funds began using the swaps to bet that subprime loans would pay off, and that they’d have the capital to support their bets, Corn explains. Of course, it didn’t work out that way, and as subprime mortgages began defaulting, those same banks and hedge funds were hit with huge losses. Ironically, Gramm lobbied for UBS, the Swiss investment bank that recently wrote down $37 billion in losses tied to subprime securities.

Here’s Corn’s perspective on all this:

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

The subprime meltdown has a lot of layers to it, and it probably will turn out that more people than just Gramm were entangled in them. When profits were rolling in, it may have seemed like a smart move to play the subprime game. Now it’s a scandal.

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