A problem 30 years in the making

Back in the early 1980’s when John McCain first entered the Senate, the Reagan administration was encouraging savings and loans to compete with banks without having to abide by the same regulations that banks had to. It started a real estate boom fueled by cheap mortgages and risky investments. Commercial office developments sprang up in cities like Phoenix and Dallas and Denver like weeds, but they remained empty.

The Federal Home Loan Bank Board saw the potential for a mess and set rules to limit the amount and kinds of investments that S&Ls could get involved in. Lincoln Savings and Loan Association of Irvine, California, run by Charles Keating III was one of many S&Ls that choose to ignore the rules.

In 1985 Reagan appointed Edwin Grey, a friend of Keatings to the FHLBB. John McCain and four other senators (the “Keating 5”) meet with the FHLBB and the management of Lincoln S&L. Alan Greenspan and McCain both thought that Lincoln should be allowed to keep on conducting business as usual, ignoring the rules. They pressured the board to let Lincoln get by.

In 1987 Lincoln Savings and Loan Association failed, leaving at least 21,000 investors, mainly elderly and retired, loose their life savings. The Resolution Trust Company was formed by the Federal government to bail out Lincoln and hundreds of other S&Ls, The whole bail out cost us tax payers $125 billion.

One of the other S&Ls was Silverado S&L in Denver that cost $1 billion to bail out itself. Neil Bush, one of President George W. Bush’s brothers was on Silverado’s board of directors. Neil settled out of court when the FDIC filed a civil action against him for fraud and conflict of interest.

McCain and Keating were close friends for years. They took vacations together in the Caribbean on Keating’s private jet. McCain failed to report these trips until the Keating 5 came under investigation. Meanwhile, Keating and Lincoln S&L contributed as much as $112,000 to McCain’s senate campaign.

In 1999 Senator Phil Gramm of Texas (up until recently, one of McCain’s “senior” advisors) co-authored the Gramm-Leach-Billey Act which repealed important regulations imposed back in 1933 to control rampant speculation that led to the banking collapse in the Great Depression. Thanks to Gramm, banks could now get directly involved in the stock market and insurance and encouraged mass mergers so that banks like Goldman Sachs and Lehman Brothers could become “too big to fail.”

Within days of the Supreme Court declaring George W. Bush president in 2000, Gramm added the Commodity Futures Modernization Act into the budget bill. The Modernization Act was designed to keep regulators from controlling new financial tools described as credit "swaps,” like sub-prime mortgages bundled up and sold as securities. Under the Gramm law, neither the Securities and Exchange Commission (SEC) nor the Commodities Futures Trading Commission (CFTC) were able to examine financial institutions like hedge funds or investment banks to guarantee they had the assets necessary to cover their potential losses.

Much of the Commodity Futures Modernization Act was written by lobbyists, including a loophole which exempted companies that trade energy futures, like Enron, from being regulated. CFMA also let banks accept lower down payments on homes and offer loans without having to run credit checks, salary checks or asset checks on customers first. Keep in mind that Phil Gramm has been John McCain’s chief economic adviser.

In 2003 Bush tried to privatize regulation of the financial industry, fortunately he couldn’t get it past the Republican majority held Congress. In 2005 John McCain sponsored a Senate bill which would have created an independent (private, non-government) agency to “regulate” the Federal Home Loan Bank Finance Corporation, Fannie Mae, and Freddie Mac. Once again, a Republican Congress knew better than to eliminate all regulation whatsoever.

Now the Bush Administration proposes spending $700 Billion to support banks. And John McCain throws a “hail Mary” by “suspending” his campaign and begging to cancel the Presidential debates.

Incidentally, as of last week, the Iraq war has cost us in the neighborhood of $557 Billion. By the way, Treasury Secretary Henry Paulson is the former CEO of Goldman Sachs. Could it be that or are the very people in government making these decisions looking out for their own personal wealth?

Paulson’s proposal to Congress insists that any decisions he makes with this $700 Billion must be “Non-reviewable and committed to agency discretion, and may not be reviewed by any court or law or any administrative agency.” What? Is he setting himself up to be the banking Czar?

Republicans should be appalled by the bail out proposal because it amounts to socialism, with the federal government taking control of billions of dollars of private assets. Democrats should be vigilant because that much concentrated power in the executive branch in the interest of corporations and billionaires basically meets all the criteria of fascism except the racism.

Be certainly do need to do something, but it should be carefully crafted in a bi-partisan manor and it needs to include more, not less oversight and regulation. CEOs shouldn’t be paid 500 times as much as workers and they certainly shouldn’t be entitled to millions of dollars in compensation packages or pensions when they’ve driven their banks into the ground.

Working stiffs facing foreclosure need to be helped more than Wall Street speculators. Trusting John McCain to get us out of this mess would be like trusting the fox to guard the hen house.