John McCain: Crisis Enabler (Page 3)

This article originally appeared on DailyKos.com.

AP Images
John McCain presses the flesh in Cedar Rapids, Iowa.

A secondary market for trading swaps exploded into existence, and swaps were traded with absolutely no consideration for the nature or quality of the underlying investment. Worse still, no one regulated who could buy a swap, so it was (and is) perfectly possible for a company to acquire swaps that theoretically cover billions of dollars in loans, even if that company doesn't have a red cent on hand to cover those swaps should the loans default.

BOB MOON: OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.
 The value of the entire US Treasuries market: $4.5 trillion.
 The value of the entire mortgage market: $7 trillion.
 The size of the US stock market: $22 trillion.
 OK, you ready?
 The size of the credit default swap market last year: $45 trillion.

KAI RYSSDAL: That's a lot of money, Bob.

As in three times the whole US gross domestic product, Bob. And the truth is that Moon probably underestimated. The unregulated and poorly reported credit default swaps may have actually passed $70 trillion last year, which means that they were about $5 trillion more than the GDP of the entire world.

So, are you starting to get an idea of just how big a genie Phil Gramm and his pals unleashed?

With some regularity over the last eight years, fiscal whistleblowers have tried to raise their hands and register a protest. Um, sirs? Is it altogether a good idea to run up debts exceeding all the assets it's even possible to hold? But so long as no one actually had to pay off on the swaps, the party went on. Even usually conservative (in the fiscal sense) companies like AIG started to worry that they were being left behind and leapt headlong into the swap pool.

Shortly after Greenspan's departure in 2006, the Federal Reserve took the unusual step of issuing a joint statement along with the SEC to warn about the risks associated with credit default swaps. But by that point, the damage was already severe. If swaps lost their value, most of those who had played the game would find themselves in companies whose worth was valued in pocket change. The only solution was to cover the problem with still more swaps and keep moving.

Then a funny thing happened. After years in which banks had handed out loans willy-nilly, guarded by the indestructible swap, people and companies started to really default on those loans. Credit slowed, home prices fell, and the whole snake started to eat itself, tail first. Suddenly, credit default swaps were not sources of limitless cash. It turns out that an insurance policy--even a secret, unregulated policy--is occasionally expected to pay. Speculators started to look at all the paper they were holding and for the first time realized it could all be worthless. Worse, it could (and did) represent a massive debt. Only no one had the funds to cover it all.

When Bear Stearns fell apart last March, it was only suspected that a big part of the effort in saving the giant investment bank was keeping their holdings in credit default swaps from unraveling and spreading to other institutions. Naturally, part of solving this problem involved creating a new credit default swap to cover Bear Stearns's potential debt. But the all-purpose swap was starting to lose its power. Shortly after Bear Stearns went belly up, AIG reported the largest quarterly loss in the company's history, taking a $11 billion hit on revaluing its holdings of swaps. The party was definitely coming to a close.

When AIG finally collapsed this week, there was no doubt about the primary cause of its failure. The previously well-grounded company had "gotten itself involved with something called credit default swaps." Point of irony alert: Arthur Levitt now serves on the AIG board--or at least he did until the government had to take over most of AIG to salvage the company from the very idiocy Levitt had warned of in 1999.

This week, the Bush administration announced the beginnings of a plan to salvage what remains of the financial markets. At first glance, it appears that the plan will consist mainly of creating a kind of "garbage pit," a company--some new version of the Resolution Trust that was created during the S&L crisis--into which those people who have dabbled in bad debts can toss their problems. The cost to the taxpayers is expected to be in the area of $1 trillion.

The expansion of unregulated savings and loans in the 1980s brought on the collapse of that industry, a crippling of the economy, and left taxpayers holding the bag. Maybe that was only happenstance. Those pushing for the Garn-St. Germain Depository Institutions Act may not have known what they were doing.

The deregulation of the California electricity market, along with the protections provided to Enron through Phil Gramm's lobbyist-written legislation brought blackouts and failure, and left taxpayers holding the bag. But the people who engineered that event--people like Gramm and Greenspan--had already seen what happened with the S&Ls and they should have known better. Still, perhaps that was only coincidence.

The subprime mortgage crisis that has not only come so close to utterly destroying the markets but has also ruined the value of many people's homes and left millions with mortgages they couldn't pay was also the outcome of the deregulation created by these men. The very predictable outcome. When taxpayers are left holding the bag for $1 trillion this time around, it's hard to believe it's any sort of accident.

This is enemy action. This is a bullet deliberately fired into the economy by men willing to exercise their ideology regardless of the cost to taxpayers. John McCain may not have had his finger directly on the trigger, but he was there. He assisted. He not only cheered them on but claimed until last month that he was also "primarily a deregulator." These were his personal friends and philosophical comrades.

It may come as a surprise to the champions of deregulation, but nobody likes regulation. The restrictions that were placed on banks, S&Ls and other institutions in the 1930s weren't put there because someone thought it would be fun. They were put in place because they addressed problems that had just been clearly and painfully revealed. They were put in place because they were necessary.

It's bad enough if John McCain didn't know that. It's far worse if he did.

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