The Few Who Won't Say 'Sorry' for Financial Crisis
Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.
--former U.S. Senator Phil Gramm
Many elected or appointed officials have a specific belief system that they act upon in the implementation of policies. When the policies that flow from those beliefs go terribly wrong, it is natural to want to learn why. As is so often the case, that underlying ideology is usually a good place to begin looking.
In the aftermath of the great credit crisis, we have seen all manner of contrition from responsible parties. Most notably, former Federal Reserve Chairman Alan Greenspan admitted error, saying as much in Congressional testimony. Greenspan was unintentionally ironic when he answered a question about whether ideology led him down the wrong path when it came to preventing irresponsible lending practices in subprime mortgages: "Yes, I've found a flaw. I don't know how significant or permanent it is. But I've been very distressed by that fact."
Other contributors to the crisis have been similarly humbled. In "Bailout Nation," I held former President Bill Clinton, and his two Treasury secretaries, Robert Rubin and Larry Summers, responsible for signing the ruinous Commodity Futures Modernization Act that exempted derivatives from regulation and oversight. The CFMA was passed as part of a larger bill by unanimous consent, and that Clinton signed on Dec. 21, 2000. Clinton joined Greenspan in admitting his contribution to the credit crisis, as well as saying the advice he received from his Treasury secretaries -- Rubin and Summers -- was wrong.
The CFMA removed the standard regulations that all other financial instruments follow: reserve requirements, counter-party disclosures and exchange listings.
Bloomberg reported that Clinton said his advisers argued that derivatives didn't need transparency because they were "expensive and sophisticated and only a handful of people will buy them and they don't need any extra protection. The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency."
Even the American Enterprise Institute changed the name of its "Financial Deregulation Project" to the more benign "program on financial policy studies." That is as close to an apology as we can expect for its part in pushing for market deregulation.
The exception to any post-crisis self-reflection is former Senator Phil Gramm. Although he was one of the chief architects of the radical gutting of financial regulations and oversight rules during the two decades that preceded the financial crisis, the former senator remains a stubborn believer that banks and markets can regulate themselves.
Perhaps more than anyone else, Gramm drove the legislation that allowed banks to get much bigger and derivatives to run wild. His name is on the law -- the Gramm-Leach-Bliley Act of 1999 -- that overturned the Glass-Steagall Act, a Depression-era law that forced commercial banks to get out of the risky investment-banking business.
How responsible was Gramm for the financial crisis? Consider the following from the New York Times in 2008:
In one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the financial crisis that has rattled the nation.
He led the effort to block measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home foreclosures that would undermine the financial markets. He advanced legislation that fractured oversight of Wall Street while knocking down Depression-era barriers that restricted the rise and reach of financial conglomerates.
And he pushed through a provision that ensured virtually no regulation of the complex financial instruments known as derivatives, including credit swaps, contracts that would encourage risky investment practices at Wall Street's most venerable institutions and spread the risks, like a virus, around the world.
The causes of the crisis are complex and developed over many years. But if you want to hold a single elected official responsible for the collapse of American International Group -- if any one event could have taken down the entire financial system, that was it -- it would have to be Gramm.
Today, we will see the former Senate deregulator in chief defend his actions in testimony before the House Financial Services Committee. Don't expect a Greenspan-like moment of self-criticism.
Other actors who have yet to come clean include Harvey Pitt, Hank Paulson and George W. Bush. Don't hold your breath waiting for their mea culpas.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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