Before the Bailouts
Angry about AIG? Here's how some in New Mexico's congressional delegation helped open the financial Pandora's box in the first place.
The outrage last month over the $218 million in bonuses paid out by AIG, while understandable, was a bit like complaining about a splinter when you've just been run over by a semi. The bonus payments are chump change compared to the $170 billion and counting the government has spent to prop up AIG — not to mention the trillions of dollars in Americans' personal wealth sucked into a black hole by the financial meltdown triggered in part by the reckless greed of AIG and its ilk. Americans ought to be asking who was behind the wheel of that semi-load of greed and, to stretch and mix the metaphor, who gave them the license to drive our economy off a cliff in the first place.
The answer to the latter question traces all the way back to the 106th Congress and to legislation introduced by then-Sen. Phil Gramm (R-Texas) and Sen. Richard Lugar (R-Ind.). (Gramm, it's worth recalling, was a key financial advisor to GOP presidential nominee Sen. John McCain, and likely would have been McCain's treasury secretary.) The "Commodity Futures Modernization Act of 2000," according to Gramm at the time, "will allow new and important financial products." Coupled with the earlier Gramm-Leach-Bliley Act, the Texas senator said, the nation "turned away from the outmoded, Depression-era approach to financial regulation and adopted a framework that will position our financial-services industries to be world leaders into the new century."
Instead, the "modernization" act unfettered Wall Street to pursue a feckless, headlong rush into a new type of gambling that would make Vegas blush. Trashing that "Depression-era approach to financial regulation" brought us, eight years later, to the brink of a brand-new Depression.
In particular, the 2000 legislation cleared the way for a boom in "credit default swaps," which ballooned from $900 billion in 2000 to more than $45.5 trillion — roughly twice the size of the entire US stock market. AIG, previously a rather boring insurance company, used these arcane financial instruments to become an insurance company with a hedge fund attached to it like a rapidly growing tumor.
As money manager Michael Lewitt explained the "swaps" in a New York Times op-ed, they "are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument." Lewitt added, "The insurer is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small. As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized."
Lynn Stout, a UCLA professor who specializes in corporate governance and securities regulation, told MSNBC, "For at least 150 years, these sorts of gambling contracts were unenforceable if they weren't traded on an exchange." With the Commodity Futures Modernization Act, Stout said, "we eliminated 150 years of insurance regulation and derivatives regulation all in the name of rocket science and financial engineering."
So, you may now be wondering, who among the New Mexico congressional delegation back then voted to let companies like AIG play roulette with the economy in the first place? And where can we get some boiling tar and a whole lot of feathers with which to thank them?
The answer isn't as easy to find as you might think. The Congressional Record details no votes at all on the Commodity Futures Modernization Act of 2000, despite the hoopla with which Gramm and his cronies heralded its passage.
In the arcane way by which Congress gets things done, if they get done at all, Gramm's measure was subsumed into a substantially similar House version, HR 5660, sponsored by Rep. Thomas W. Ewing (R.-Ill.). And that bill was folded into the gigantic HR 4577, an appropriations bill for three cabinet departments that became a Christmas tree of "ornaments" affecting everything from Medicare to the Small Business Administration. Appropriately, President Clinton signed the bill into law just before Christmas 2000.
So if you're looking for who started the semi rolling that, eight years later, helped flatten our economy, you can only look at how New Mexico's congressional delegation voted on HR 4577. It narrowly passed the House, 217 to 214, making the support of two-thirds of New Mexico's members crucial: Then-Rep. Heather Wilson and the late Joe Skeen, both Republicans, voted yea; only Democratic Rep. Tom Udall, now a US Senator, voted no. The Senate then passed its version, 52 to 43, with GOP Sen. Pete Domenici voting aye and Democrat Sen. Jeff Bingaman voting nay.
Udall and Bingaman both supported the final conference report funding those departments, which passed the House by 292 to 60 and the Senate unanimously. The Commodity FuturesModernization Act rode along, like a tick.
Did any of our Congressional representatives at the time fully understand the implications of the "modernization" about to be unleashed? Perhaps not — but isn't that their job? And isn't that why they have all those staff members?
Hindsight is 20-20, the saying goes. Unfortunately, taking responsibility for one's mistakes doesn't always enjoy such a crystal-clear rearview mirror. There's plenty of blame to go around from the regulatory ball-dropping that got us into this mess, but much of it belongs to those whose fingerprints were on that pivotal 2000 legislation.
Maybe we need to save some of ire over bailouts and bonuses for the folks who put Wall Street in the driver's seat to begin with.
Your Opinion, Please
It's your turn — our 7th annual reader survey.
This issue marks our sixth anniversary at the helm of Desert Exposure, and includes our seventh annual reader survey asking your help in charting the future of "the biggest little paper in the Southwest." As usual, the survey — found on page A7 or online at www.desertexposure.com/survey — lets you rate our columnists and other regular features. (Tell us how often you read each, then pick your ONE favorite.) You can also tell us what you think of some possible future features, along with letting us know a little about your Desert Exposure reading habits and what other publications you peruse.
Does your opinion really make a difference? For an answer, look no further than page A29 of this very issue, on which Vivian Savitt's Southwest Gardener column appears. A previous reader survey gauged interest in a gardening column, and when the response was a resounding call to get our hands dirty and plant such a column, Southwest Gardener was born. It returned last month, after a winter hiatus, for a second full growing season of Savitt's tips and lively prose.
Reader interest expressed in earlier surveys has prompted us to devote more pages to topics ranging from regional history (such as Jerry Eagan's popular "Hiking Apacheria" series, which returns this month after its own brief breather) to restaurants. And yes, truth be told, we watch the statistical squiggles of reader responses to questions about the time you spend on each issue or how many people share your copy like stock traders tracking the Dow. (Do they like us? Do they really, really like us?)
So take a moment and tell us what you think. You won't (ahem) get a similar opportunity with any other area publication, after all, so don't pass up this chance to play editor.
As if that's not incentive enough, 10 lucky survey respondents will be picked at random to receive a brand-new Desert Exposure mouse pad as a thank-you.
The deadline for responding, on paper or online, is May 8, but why wait? Those mouse pads need new owners who will fill their little lives with the happy sounds of clicking.
David A. Fryxell is editor of Desert Exposure.