Matthew Yglesias » The Difference on Finance

Sep 16th, 2008 at 7:26 am

The Difference on Finance

Based on a lot of John McCain’s rhetoric about the financial crisis, you’d think that he and Barack Obama basically have similar views — out of control greed, regulators asleep at the switch, need to do better — but he’s a grizzled veteran whereas Obama just showed up yesterday. But a good Jackie Calmes article in The New York Times manages to eschew words like “lie,” “mislead,” or “deceive” while still driving home the fact that McCain’s presentation of his views on the subject is at odds with his record, his policy proposals, and his team of advisers:

The crisis on Wall Street will leave the next president facing tough choices about how best to regulate the financial system, and although neither Senator Barack Obama nor Senator John McCain has yet offered a detailed plan, their records and the principles they have set out so far suggest they could come at the issue in very different ways.

On the campaign trail on Monday, Mr. McCain, the Republican presidential nominee, struck a populist tone. Speaking in Florida, he said that the economy’s underlying fundamentals remained strong but were being threatened “because of the greed by some based in Wall Street and we have got to fix it.”

But his record on the issue, and the views of those he has always cited as his most influential advisers, suggest that he has never departed in any major way from his party’s embrace of deregulation and relying more on market forces than on the government to exert discipline.

While Mr. McCain has cited the need for additional oversight when it comes to specific situations, like the mortgage problems behind the current shocks on Wall Street, he has consistently characterized himself as fundamentally a deregulator and he has no history prior to the presidential campaign of advocating steps to tighten standards on investment firms.

Calmes notes that McCain leans heavily on arch-deregulator Phil Gramm, whose legislation bears some specific responsibility for this mess, for economic policy guidance. And Pat Garofalo’s profile of the overall economic team shows that it’s more of the same after Gramm.

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29 Responses to “The Difference on Finance”

Jay Says:
September 16th, 2008 at 7:56 am
Fellow readers,

Please stop having useless debates with the likes of E. O’Neal. The more time we spend arguing about whether Palin is average or whether she reformed Alaska or whether she supported the Bridge, the less time we spend focusing on the real point of the Palin selection, namely, that she isn’t qualified to be VP even if everything positive thing ever said about her is TRUE.

Zero foreign policy experience. Conspicuous lack of world knowledge. Very limited knowledge of our national economy. But we are involved in two wars and our economy is on the verge of a meltdown.

We’ve got real issues in this country and the goal of TROLLS such as E. O’Neal is to start up meaningless debate after meaningless debate to distract from the real problems.

Please stop feeding the troll. And I must say, Matt’s post about tanning beds (who the fuck cares) doesn’t help the situation.

Let’s talk about what McCain/Palin are going to do about our economy. What experience do they have? What knowledge do they have? What credibility do they have? Let’s talk about the 45 million people who don’t have healthcare. Let’s talk about why our country has the highest prison incarceration rate in the industrialized world. Let’s talk about why the U.S. has the highest violent crime rate in the developed world. Let’s talk about why wages are down over the last 8 years. Let’s talk about why unemployment is so high. Let’s talk about how utterly ignorant it is to think drilling for more oil is the US is going to do anything to address our foreign oil dependency.

The Republicans have wrecked this economy, made our country less safe, and propose nothing to address the problems going forward. And we spend our time talking about bridges and tanning beds, which is exactly what idiots like E. O’Neal want us to talk about.
Adrian Says:
September 16th, 2008 at 7:57 am
“Phil Gramm, whose legislation bears some specific responsibility for this mess,”

This puzzles me. It seems to me that if Gramm-Leach-Bliley were the problem, Merrill would be buying BoA, not the other way around.

The Glass-Steagall Act, which Gramm-Leach repealed, said depositary banks and investment banks couldn’t be siblings. It did not thereby prevent depositary banks from selling a bunch of mortgages to an i-bank’s cayman vehicle that then issued several tranches of debt. (Merrill managed to set up a whole load of CDOs even though it never had a bank sibling.)

The only way Gramm-Leach could be the problem, it seems to me, would be if i-bank failures were dragging down their depositary affiliates. But it’s the stand-alone broker-dealers that are dying. And BoA, despite being waist-deep in Big Shitpile, has enough spare cash to buy Merrill.

What am I missing?

(A lot of depositaries are going down (FDIC list), but that’s coz they own crap MBS, not because they have i-bank siblings. And, again, the MBS SIVs could have existed without Gramm-Leach.)
El Cid Says:
September 16th, 2008 at 8:12 am
There is far more to Phil Gramm than 1999:

Gramm’s most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act. Written with the help of financial industry lobbyists and cosponsored by Senator Richard Lugar (R-Ind.), the chairman of the agriculture committee, the measure had been considered dead—even by Gramm. Few lawmakers had either the opportunity or inclination to read the version of the bill Gramm inserted. “Nobody in either chamber had any knowledge of what was going on or what was in it,” says a congressional aide familiar with the bill’s history…

…For starters, the legislation contained a provision — lobbied for by Enron, a generous contributor to Gramm — that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed…

…But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash. Credit default swaps are essentially insurance policies covering the losses on securities in the event of a default. Financial institutions buy them to protect themselves if an investment they hold goes south. It’s like bookies trading bets, with banks and hedge funds gambling on whether an investment (say, a pile of subprime mortgages bundled into a security) will succeed or fail. Because of the swap-related provisions of Gramm’s bill—which were supported by Fed chairman Alan Greenspan and Treasury secretary Larry Summers—a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed…

…In 2003, he left the Senate to take a highly lucrative job at ubs, Switzerland’s largest bank, which had been able to acquire investment house PaineWebber due to his banking deregulation bill. He would soon be lobbying Congress, the Fed, and the Treasury Department for ubs on banking and mortgage matters. There was a moment of poetic justice when ubs became one of the subprime crisis’ top losers, writing down $37 billion as of this spring—an amount equal to its previous four years of profits combined. In a report explaining how it had managed to mess up so grandly, ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been “key to the growth” of its out-of-control CDO business.

http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
DTM Says:
September 16th, 2008 at 8:16 am
This is one of many areas in which Obama is going to need to make the case that McCain is prone to empty expressions of concern. That can be a tricky argument to make, but the good news for Obama is that people are predisposed to believe that Republicans are in bed with big business, and McCain’s former reputation as a straighttalker is now in tatters.
Don Williams Says:
September 16th, 2008 at 8:31 am
We all know McCain is lying –but the voters do not because Obama is NOT criticizing McCain for being part of the cause of this mess.

Not criticizing McCain for being part of the Republican Leadership that caused this mess with their “get government off the back of big business” stance.

Not criticizing McCain for triggering the S&L crisis and for then failing to prevent the same mess 20 years later. All the time enjoying the privileges of a being Senator.

McCain’s BIGGEST weakness is the fact that he has served as Senator for so long , has done so little, and has aided and abetted so much.

Why is Obama so fucking timid?

Does he think voters elect cowards to be President?

Does he have the Harvard disease — the idea that all he has to do is show up, give a charming smile and the masses will coronate him and give him the power his diploma deserves?
Don Williams Says:
September 16th, 2008 at 8:40 am
I myself blame our financial crisis on the widespread availability of good quality cocaine.

It’s a useful tool –but it has to be treated with respect. Looking at some of the bets that have been made, I’d say the party go out of hand.

Or maybe someone tossed some meth into the mix.
El Cid Says:
September 16th, 2008 at 8:41 am
Don — it is Obama, but it’s not just Obama. I have not heard a single elected Democratic official being willing to truly pin any blame on McCain for anything other than lying. I just heard a Democratic Congressman on the radio nailing Phil Gramm for his role in trying to bring apocalypse to the financial system. Yet this guy too had to preface everything with ‘how much he respects Sen McCain and had served with him on’ blah blah blah. Apparently It’s The Law.
Don Williams Says:
September 16th, 2008 at 8:43 am
“The invisible hand”. “Animal Spirits”

heh heh heh
nukev Says:
September 16th, 2008 at 8:55 am
I caught Biden on CNBC this am. He was dead on. Really good stuff. McCain was on too. He must have forgot he wasn’t that good on economics. Now he’s an expert.
RKU Says:
September 16th, 2008 at 9:05 am
Well, I *still* say that Don Williams would have been 1000x as good a candidate as Speechifyin’ Saint Barack…

As I pointed out during the primaries, poor Obama’s never really held a normal job during his entire life, the closest exception being the one or two years he’d worked at that tiny newsletter in NYC. And the toughest candidate he’d ever faced was Alan Keyes, who was just dumped by the Constitutionalist Party this time round.

I saw some news report that McCain’s now within a few points of Obama in New York State(!), which hasn’t gone Republican since Reagan in 1984.

For the Democrats to lose this election, in the midst of the worst financial meltdown since 1929 makes Dukakis look like a political genius.

Boy, I really hope that President McCain doesn’t start a nuclear war…
Anderson Says:
September 16th, 2008 at 9:10 am
he has no history prior to the presidential campaign of advocating steps to tighten standards on investment firms.

Douglas Holtz-Eakin was on NPR this morning, asserting that McCain supported the House’s proposed Fannie/Freddie reforms in 2005. (Not “investment firms” of course, but such support would tend to contradict Calmes’s thesis.)

The truth of this assertion, I leave as an exercise to the reader.
Adrian Says:
September 16th, 2008 at 9:11 am
El Cid, thanks. Putting some blame on the CFMA makes more sense to me than blaming Glass-Steagall repeal.
El Cid Says:
September 16th, 2008 at 9:20 am
I actually think this week’s events are going to change the electoral landscape a bit from the last couple of weeks of freakish Palin fancy. Maybe I’m wrong, but I think the absurdity of the level of McPalin lies and the crumbling of lordly Wall Street into frightened gnomes demanding to be assisted by evil Big Gubmit brings different concerns to the field. I’ll wait to see if polls change. I actually think they’re about to.
Don Williams Says:
September 16th, 2008 at 9:49 am
Re the Mother Jones’ excerpt provided by El Cid:
“ubs noted that two-thirds of its losses were the fault of collateralized debt obligations—securities backed largely by subprime instruments—and that credit default swaps had been “key to the growth” of its out-of-control CDO business. ”
—————
What’s hilarious is that Enron Phil’s UBS firm is sueing a hedge firm over failing to deliver on its committments to insure UBS against loss.

Amount of insurance: $1.5 Billion
Amount of assets possessed by hedge fund: $200 Million

Hee hee hee. It’s like seeing one con artist being ripped off by another con artist.

Fortunately, there is real insurance. For example, I assume all those Fannie Mae/Freddie Mac mortgages now held by the Fed/Taxpayer are on insured homes.

So even if Hurricane Ike caused $16 Billion in property damage, those “assets” are insured. Right?
http://www.nytimes.com/2008/09/16/us/16insure.html
Don Williams Says:
September 16th, 2008 at 9:55 am
What’s interesting is wondering how many of the homes covered by the Fannie Mae/Freddie Mac mortgages are insured by AIG.

The government is speaking of a “controlled unwinding” but I get a sense of a snake starting to eat its own tail.
a Says:
September 16th, 2008 at 10:24 am
i´d also point out the rhetoric they use…mccain talks about greed because he doesn’t see, or doesn’t want to see, the issues as systemic and thus susceptible to….greater regulatory oversight. greed has moralistic overtones that suggest that there are a few bad apples that need to be rooted out every once in a while. but the fact is that we take ‘greed’ for granted as part of the system of capitalism. lehmann isn’t guilty of outright avarice, they only do what all wall street companies do — try to make as much as possible within the constraints of the law. blaming greed may be satisfactory emotionally [and he is probably trying to reach out to high minded liberals here] but the fact is that this emotional satisfaction does nothing to prevent these problems from being repeated.
Peter K. Says:
September 16th, 2008 at 11:18 am
Adrian:

“This puzzles me.”

What puzzles me is why you are so obtuse.

“a” #16 may be right, but I’d just point out that people go to work on Wall Street because of greed and to make money (perhaps you know some) so I’m enjoying a little schadenfreude at the moment, which is emotionally satisfying.

The regulatory apparatus of our democratically accountable government needs to be given new power and oversight over these institutions. The Republicans have always been against this sort of thing. Many powerful Democrats are also complicit in the current disaster (which is why some pure anti-Republican Democrat partsians bother me; they won’t criticise their own side).

How would you categorize the upper level management of many of these failed and failing institutions? Greedy? Dishonest? Dishonorable?

No doubt they contributed a ton of campaign contributions to politicians who would keep government regulators off their backs, like Phil Gramm for instance.

What was your point again Adrian?
SLC Says:
September 16th, 2008 at 2:08 pm
Re Don Williams

As I stated on another thread, the Democrats needed Harry Truman and they got Michael Dukakis.
Brian Says:
September 16th, 2008 at 2:51 pm
Crucial question going forward:

Did McCain vote for Phil Gramm’s deregulation of the banking industry in the 1990s? (And can someone with Lexis/Nexis find any statements McCain might have made on the subject?)
E. O'Neal Says:
September 16th, 2008 at 4:44 pm
I just opened this thread for the first time and see that Jay is complaining about me. I’m starting to think my work is done here, and that I should move on to Kos or Huff.

Seriously though, this interactive chart from the NYT is the most fascinating thing I’ve seen on the financial crisis. No political point, just amazing how much the topography of Wall Street has changed in eleven months.
http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html
Adrian Says:
September 16th, 2008 at 4:50 pm
Peter K, that Gramm-Leach-Bliley’s repeal of Glass-Steagall isn’t responsible for the present mess.

But it seems at least one other Gramm baby did contribute to the mess. So, except for the bit about me being obtuse, I think you and I are in agreement.
E. O'Neal Says:
September 16th, 2008 at 4:53 pm
I heard someone today say that great fortunes are built at the end of bear markets, and great fortunes are lost at the end of bull markets. Hank Greenberg, the brilliant financier who built AIG into one of the great companies of the world before being forced out in a phony scandal a few years ago, has lost $6 billion due to the nitwits who are running it now. AIG guaranteed the risks of banks and other institutions holding crap mortgage securities. I guess it seemed like a good idea at the time.
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Matt Yglesias

The Difference on Finance

29 Responses to “The Difference on Finance”

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