George Washington once said, “Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.” While this might have been true in Washington’s day, as advice for the modern politician, it is hardly practical. In Texas politics, a rising star has to associate with a lot unsavory types, with a lot of money and political clout, the right connections etc. Yet, Governor Rick Perry’s association with Mr. and Mrs. Gramm is much more than a casual acquaintance. If Perry’s close relationship is anything to go by, Rick must not esteem his reputation at all.
Former senator and current banker Phil Gramm of Texas — well-connected to big donors but controversial for his role in preventing tighter regulation of Wall Street — told The Huffington Post ...that he is endorsing his former student and political protege, Texas Gov. Rick Perry...”I’m for Rick and I will do what I can to help,” Gramm said in an interview in Detroit. “He has been an effective governor. He is a determined guy from a small town who knows how to get things done.”This kind of back slapping- a milder term than I would prefer- is merely an exchange of favorable reviews. Back in February of 1995, when Perry was the commissioner of agriculture in Texas, he stood at Phil Gramm’s side during his unsuccessful run for the presidency. Mother Jones states:
Years later, Perry would claim that the country "made a huge mistake" by not electing Gramm president. "I can't fathom," Perry said, "where we would be as a country had Phil Gramm led this country for eight years."There's a ten gallon hat's worth of irony in that statement to be sure. In any event, getting Gramm into the White House was unnecessary. As far as the power brokers of the 1% were concerned, Phil Gramm and others like him didn’t need to to be president at all. They had George W. Bush to manage things for them, thank you very much. For them, Gramm found his place in a slightly less high-profile (but critically important) role. As any Texan would tell you, there was more than one way to skin a cat.
“Enough To Convict Us All”
Phil Gramm was once described by Economics Nobel Laureate Paul Krugman as "the high priest of de-regulation" and listed him as one of the top persons responsible of the economic crisis of 2008, second only to Alan Greenspan. Krugmann was not alone in that assessment either. The New York Times, noted economist James K. Galbraith, The Texas Observer, Warren Buffet and many others have agreed.
Before we get into that, it would be helpful to see how such a person found himself in a position of influence.
First some biographical notes:
In addition to teaching, Gramm founded the economic consulting firm Gramm & Associates (1971–1978) Ambitious Gramm had his eyes set on a much larger prize. In 1976, he challenged Texas Democratic Senator Lloyd M. Bentsen, in the party's senatorial primary and lost but ran successfully two years later as a Democrat for Representative from Texas's 6th congressional district.
Let’s push fast forward here.
- 1981 - worked on Budget negotiations on a draft budget submitted by President Reagan.
- 1982 - was dismissed from the House Budget Committee for supporting Reagan's tax cuts.
- January 5 1983 - Resigned from his seat
- returned to the House of Representatives as a Republican.
- 1984 - was elected as a Republican to represent Texas in the U.S. Senate
- 1989- 2003 Gramm served on the Senate Budget Committee
Mind you, none of this time was wasted. Step by step, Gramm was making all the necessary contacts with corporations in the banking and financial sectors an contacts with the power players like Rove.
Between 1995 and 2000, Gramm was the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.The agency oversees matters related to: banks and banking, price controls, deposit insurance, export promotion and controls, federal monetary policy, financial aid to commerce and industry, issuance of redemption of notes, currency and coinage. As Time magazine puts it:
As chairman of the Senate Banking Committee from 1995 through 2000, Gramm was Washington's most prominent and outspoken champion of financial deregulation. He played the leading role in writing and pushing through Congress the 1999 repeal of the Depression-era Glass-Steagall Act.
And it was in this position that Gramm really came into his own.
Now that we know the steps Gramm took to get into the position, it’s time for a word about Gramm's sense of ethics and moral judgement. Certainly Phil Gramm’s history of questionable (putting it mildly) ethics runs back decades.
Back to his early days, for example, Gramm was investigated by the Federal Election Commission (FEC). It began investing Gramm's campaign finances when it was learned that he had accepted a suspiciously low price on construction of a waterfront home in rural Maryland. The builder, Jerry Stiles, also ran three troubled savings and loans. About that same time, Gramm ushered through a bill that allowed sick Texas S&L's (such as the ones Stiles owned) to stay open. He later urged regulators to give Stiles waivers -- even after they found irregularities that led to Stiles' conviction -- and advised Stiles on new banking regulations. The Senate after an investigation, accepted Gramm’s explanations.
And, if this were but one example in a long political career, it would be easy to give the man the benefit of the doubt.
However, this is a politician with more than the usual skeletons in his closet.
In 1985, Gramm was linked to a campaign contribution shakedown run out of a Small Business Administration (SBA) office in El Paso. He was never subjected to a complete investigation or negative press coverage, however, because on February 19, 1988, a leased Rockwell Aero Commander 680 crashed and exploded shortly after taking off from El Paso International Airport. All aboard, the pilot, his wife and son, were killed. The pilot was local businessman Don McCoy who, a day earlier, had agreed to give testimony in an FBI investigation that had threatened both Senator Gramm's protégé at the SBA, and some of the city's most prominent business leaders.
Clearly, Gramm could pull in the financing, whether it was proper and legal or not. In fact, Gramm’s fundraising capabilities made him a valued commodity in the Republican party. According to NY Times news piece from September 9, 1995,
When Gramm was head of the Republican's Senate campaign fundraising effort in 1992, Oregon Republican Senator Bob Packwood, running for re-election, recorded in a infamous diary of a March 6 meeting in which Gramm promised to funnel $100,000 in party "soft" money to Packwood's campaign. Despite the fact the party contributions, limited to $17, 500, had already been supplied. "What was said in that room would be enough to convict us all of something," Packwood wrote in his diary.
(Packwood’s career was soon to unravel when the Washington Post published a series of articles chronicling accusations against Packwood of sexual harassment. After the Senate Ethics Committee recommended his expulsion, on October 1, 1995, Packwood resigned from the Senate.)
All of this, as grimy and low-down as it may be, is nothing more than corrupt politics in action. Garden-variety dirty dealing. However, Phil Gramm’s real claim to fame is to be the one of the leading authors of legislation which would led to one of the worst economic collapses since the Great Depression.
Laying the Foundation
"Tonight we have laid the foundation to make history."
Laying the Foundation
"Tonight we have laid the foundation to make history."
So stated, quite accurately, Senator Phil Gramm back in 1999 when both parties had slaved feverishly to work out a compromise on a bill-one of a series- that would effectively repeal the last of the post-Depression era banking regulations. Additionally, the banking industry- with an eye on the prize- had lobbied for the greater part of two decades to de-regulate the sector which, they explained had made America less competitive in the global arena.
At the time, this newest piece of legislation was explained like this:
The new law would repeal parts of the 1933 Glass-Steagall Act, which prevented banks from moving into the securities business, and was considered an archaic symbol of government regulation no longer relevant in a high technology world.
From his high position in The Senate Banking Committee, Phil Gramm, starting in 1999, led the drive to de-regulate the finance industry through a series of critical legislative manuevers.
As Time magazine puts it:
As chairman of the Senate Banking Committee from 1995 through 2000, Gramm was Washington's most prominent and outspoken champion of financial deregulation. He played the leading role in writing and pushing through Congress the 1999 repeal of the Depression-era Glass-Steagall Act.Of course, there was a very good reason why those regulations had existed and why they once were considered paramount. Furthermore, as an economist, Phil Gramm also knew the history of the Glass-Steagall Act and why it had been created in the first place. He simply didn’t care.
|Franklin Roosevelt Signs The Glass Steagall Act -1933|
In the days after the Great Depression, when one out of every five banks in the US closed, the survivors of the crash began taking a sober look at the factors that led to this economic collapse. Unregulated market speculation by banks, it was decided, was the chief cause and in 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) drafted historic legislation in order to prevent a disaster like this from ever happening again. It was known at that time as the The Banking Act of 1933. Investigative hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass–Steagall Act.
In an interesting article from LIFE magazine January 7 1946 issue about Wall street as "the Citadel to US Capitalism,” the new approach to banking and investing- brought about by this legislation- examines why this piece of legislation was so fundamental in making the country a source of dependable investment:
On Wall Street there are two principal kinds of bankers: Commercial bankers and investment bankers. The commercial banks, such as Chase and National City, make loans, accept deposits, finance foreign credits, buy government and state bonds. They also usually have a trust department which executes wills and acts as trustee. The investment bankers, such as Morgan Stanley and Kuhn, Loeb underwrite and distribute new security issues for corporations. They also have a brokerage department which buys and sells securities.
The Banking Act of 1933 made it illegal for one firm to act both as a commercial act and investment banking house. Until then, the two were often combined. In his triumphant days, J.P. Morgan, a banker, merged railroads and steel companies into nationwide corporations. In the 1920s, Wall Street made idols of men like Charlie Mitchell, chairman of National City Bank, who was also the greatest securities salesman in history and an adroit market manipulator. The 1929 crash exposed the dangers of these dual functions, With one hand, banks were taking deposits. With the other, they were financing new securities. When the business they were promoting failed, the depositors, security holder and the bank itself were in trouble. Today the very nature of Wall street bankers has changed. In place of the speculators and market manipulator there are sound, deliberate investors who by choice as well as by law are more interested in government bonds than in a flier in market.In addition to the Banking Act of 1933- now known as Glass-Steagall, the Bank Holding Company Act was passed in 1956 which extended the restrictions on banks. According to this, bank holding companies owning two or more banks could no longer engage in non-banking activity and could not buy banks in another state. This prohibited banking institutions from becoming “too big to fail.” The law generally prohibited a bank holding company from engaging in most non-banking activities or acquiring voting securities of certain companies that are not banks. (Another protection that Gramm was responsible for repealing.)
All of this post-Depression legislation represented a “conservative” approach to banking along with a fair tax system. It served the nation well and was to lead to the longest sustained era of American prosperity. Government regulation of financial institutions, in effect, created a aura of trust and dependability. The stock market would no longer be a casino where precious few- especially those with inside information- would reap astounding fortunes while the vast majority would lose everything.
Still the temptation proved too great. The lessons of history soon faded from memory and the financial sector, for the sake of greater profits, began its campaign to remove the regulations that had safeguarded the nation. But it had not been an easy struggle and much of it had to be done step by step and by stealth.
These efforts really kicked into high gear under Reagan’s administration. Through lobbying pressures J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp throughout the 1980s, aggressive and unrelenting attempts were made to repeal the major restrictions in Glass-Steagall. In 1984 and 1988, the Senate passed bills that would castrate much of the regulatory powers of the law, but in each case, the House blocked passage. Back to the drawing board, or should I say, board room?
It had been a long slow chipping away of the restrictions, along with installing former executives of the major financial institutions in positions of power such as the Federal Reserve Board. For example, In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- became the chairman of the Federal Reserve Board. Treasury Secretary Robert Edward Rubin, (January 11, 1995 – July 2, 1999 ) had served 26 years at Goldman Sachs eventually serving as a member of the Board, and Co-Chairman from 1990-1992. Gary Gensler who was Secretary of the Treasury had spent 18 years at Goldman Sachs.
In 1991 under George Bush Snr., new repeal efforts had passed both the House and the Senate Banking Committee but died in a full vote.
Finally all of the pieces fell into place at the 106th United States Congress (1999–2001).
While it's true that, over the years, most of the provisions in the Glass Steagall Act had been eroded, the Gramm-Leach-Bliley Act (GLB), otherwise known as Financial Services Modernization Act , was really the final nail in the coffin.
An Introduction to Investment Banks, Hedge Funds and Private Equity, by David Stowell, gives us this summary:
On November 12, 1999, the US Congress passed the Gramm-Leach-Bliley Act, which overturned the mandatory separation of commercial banks and investment banks required by the Glass-Steagall Act of 1933. The original reason for the separation was the concern that depositors' holding would be used aggressively in risky endeavors by the investment banking side of the firms. The argument for joining the two types of firms is that it would provide a more stable business model irrespective of the economic environment.Another argument.. was that non US headquartered universal banks, such as Deutsche Bank, UBS and Credit Suisse, were not encumbered by the Glass Steagall Act. The banks had a competitive advantage over US-headquartered banks, such as Citigroup, JP Morgan, and stand-alone investment banks, such as Goldman Sachs and Morgan Stanley, because the non US headquartered banks could participate in both commercial banking and investment banking activities.But it didn’t take a genius to predict the possible problems. Back in 2000 only a few months following the bill’s passage, J. Alfred Broaddus, president of the Hampton Roads Chapter of the Robert Morris Associates, a risk management firm, writing an analysis of the legislation, observed:
This brings me to the question of regulating and supervising the new structure the Gramm–Leach–Bliley Act (GLBA) will create. I think it's worth noting at the outset that GLBA broadens the opportunities for diversification for large financial companies. Therefore, not all of the Act's fallout will necessarily increase risks. But the potential size and complexity of at least some of the new financial holding companies could well increase risks in some cases, including not only risk to the company and its shareholders, but broader risks to the financial system and the economy. Too-big-to-fail is already a major public policy issue - perhaps the major public policy issue in banking and finance - and GLBA is not likely to change this.On that occasion, the jubilant Phil Gramm declared to the American public:
We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.
After that bill was signed into law by Bill Clinton, it took less than a decade to demonstrate what some economists had known all along and what our grandfathers had learned the hard way. Regulations, while they might seem to restrict an industry, serve to protect and prevent abuse; in this case a curb on wild speculation and, in turn, a disastrous collapse.
Passage of the bill set off a wave of mega-mergers among banks, insurance and securities companies. The party had really begun and after the celebration was finished, the country would be faced with the biggest economic hangover in its history. By then, however, this champion for regulation would have moved on to greener pastures in the private sector.
For Phil Gramm personally, the passage of the bill justified the $4.6 million he reportedly received by the Finance, Insurance, and Real Estate industries over the previous decade. And, furthermore, Phil Gramm hadn't even hit his peak yet.
In part two of the series, I will examine Gramm's adventures in the private sector, following his retirement as Senator.