Phil Gramm's link to the Freddie and Fannie takeover
On April 3, 2008, Michael Greenberger explained on Fresh Air (starting at about 4:19) how a little noticed or understood bill called the Commodity Futures Moderinization Act, introduced by Phil Gramm and ushered through congress as it was recessing for Christmas in Dec 2000, allowed banks to place bets on their own mortgages and credit lines and then list the bets themselves as assets.
Instead of these bets being placed through a regular hedge fund, however, the law allowed them to use "offbook" entities called structured investment vehicles. So, when the banks started losing money not only from their mortgage investments, but from the bets they had made on them, they could postpone posting the full extent of their losses on their accounting sheets. Greenberger thinks that when these losses do finally start appearing on the books it will cause a cascading financial crisis bigger than the mortgage crisis itself.
Last week when the Feds took over Freddie and Fannie, they cited vague anomolies in their accounting practices as the trigger that caused the takeover. I immediately thought of this loophole provided by Phil Gramm's bill.
I'm hoping that someone can dig into this and see whether these offbook transactions, made possible by Phil Gramm, were the accounting practices that alarmed the Feds and triggered the Freddie/Fannie takeover. Anyone want to call up Michael Greenberger and ask? He's a law professor at University of Maryland School of Law.
(This post inspired by the discussion on this thread)
I've emailed Michael Greenberger to ask what he thinks. I will post his response if I hear back from him (and get his permission).
September 15, 2008 2:48 PM | Reply | Permalink
To me, this is the most important issue that John McCain's handlers want to avoid speaking about. Hence, The Palin miracle.
Phil Gramm is McCain's financial guru, and Phil Gramm was instrumental to enabling the looting of the US Financial System which has brought this crisis upon us all.
We are looking at a financial event that rivals Black Tuesday, and allowing the men who created this crisis to continue to manage our economy would be suicide.
September 15, 2008 7:40 PM | Reply | Permalink
Yes this is important as Phil Gramm is a primary economic advisor to McCain, the presidential candidate that has admitted that he does not really understand the american economy.
September 16, 2008 12:00 AM | Reply | Permalink
A smoking gun? It will be interesting to see just how much truth there is to the assertions of this post. It's certain, however, that the Bush conspiracy against America is responsible, however you look at it, and whoever was its chief enabler.
September 16, 2008 12:31 AM | Reply | Permalink
The point, raider, is that it is NOT just the Bush administration, but rather a decades-long effort to loosen or eliminate regulatory oversight in financial and commodities markets. Some Democratic politicians have participated, in most cases by acquiescing. But it's pretty clear that the measures have been most heavily promoted by Republicans, at the behest of wealthy supporters.
September 16, 2008 8:08 AM | Reply | Permalink
To be frank - I'm actually more concerned about the Bush administration's regulatory "reform" of the FDA.
I mean, sure, I'd like to see my 401k not disappear.
But, I EAT every day - it would be nice to feel comfortable believing that my food is, in fact, safe to eat.
September 16, 2008 8:13 AM | Reply | Permalink
You probably know this but what happened first was repeal of Glass-Steagall in 1999, which had barred depository banks from getting into the business of investment banks. Gramm was the sponsor of that bill. And was also the sponsor of the CFMA.
September 16, 2008 12:20 PM | Reply | Permalink