Recently there was an interesting article related to one of the main culprits of the financial crisis. Below is a summarized version of the article. Thought it would be interesting to share as it demonstrates what members of Congress have the ability to do when not working in the best interests of citizens.
In the waning days of the 106th Congress and the Clinton administration, Congress met in a lame-duck session to complete work on a variety of appropriations bills that were not passed prior to the 2000 election. There were other, unmet priorities of some lawmakers that were under consideration as well. One of those priorities was a 262 page deregulatory bill, the Commodity Futures Modernization Act. An act that basically removed regulations that had been in place since the 1930’s to avoid a financial meltdown. The Commodity Futures Modernization Act of 2000 essentially made trading in derivatives and credit default swaps legal and unregulated. The Act was tucked into a bloated 11,000 page conference report as a rider, with little consideration and no time for review. This bill would be viewed only eight years later as part of the failure of our political system bringing on a historic, global financial crisis.
The saga of the Commodity Futures Modernization Act begins in 1998. At the time, the economy was booming, stocks soared, and new instruments of trading were found to make more money while evading the oversight of regulatory bodies. Two of those growing instruments were derivatives and credit default swaps.
The chairman of the Commodity Futures Trade Commission (CFTC), Ms. Brooksley Born wanted her regulatory commission to have power to oversee financial derivatives. While previous legislative attempts had been made earlier, Born’s efforts were the most direct and threatening to the financial industry. During an April 1998 meeting of the President’s Working Group on Financial Markets, Federal Reserve chairman Alan Greenspan, Clinton Treasury Secretary Robert Rubin (and later Secretary Larry Summers), and Securities and Exchange Commission (SEC) chairman Arthur Levitt opposed Born’s efforts for regulation.
Soon afterwards, Born released a “concept” paper with ideas of what regulation of derivatives and swaps could look like under the CFTC’s oversight authority. The response to Born’s paper was swift. The financial industry responded fiercely in opposition to Born’s ideas. Born felt that an unregulated derivatives market could “pose grave dangers to our economy.” In the end, Born lost her battle and, in May 1999, asked to be replaced as CFTC chairman. The new chairman, William Rainer, was more amenable to the positions of financial industry leaders and the major government officials.
Later that year, the President’s Working Group on Financial Markets released a report calling for “no regulations” of derivatives and swaps and began crafting a program to make that possible. Meanwhile in Congress, lawmakers were still up-in-arms over Born’s attempts to regulate the financial derivatives market and began working to pass their own set of deregulatory language. Leading the charge in Congress were Sens. Phil Gramm (R-TX) and Richard Lugar (R-IN) and Rep. Thomas Ewing (R-IL). In May of 2000, Rep. Ewing introduced his Commodity Futures Modernization Act of 2000. While Ewing’s bill sailed quickly through the House, it stalled in the Senate, as Sen. Gramm desired stricter deregulatory language be inserted into the bill. Gramm opposed any language that could provide the SEC or the CFTC with any hope of authority in regulating or oversight of financial derivatives and swaps. Gramm’s opposition held the bill in limbo until Congress went into recess for the 2000 election.
During a lame-duck December session, Gramm and Ewing sought to strike a compromise on the Commodity Futures Modernization Act. The day after the Supreme Court ruled in favor of Gov. Bush, December 14, Ewing introduced a new version of the Commodity Futures Modernization Act. On December 15, with little warning or fanfare—aside from the overshadowed discussions on the floors of Congress—the new, compromise version was included as a rider to the Consolidated Appropriations Act for FY 2001, an 11,000 page omnibus appropriations conference report.
The final language contained some new sections not in the original Ewing bill that, for all intents and purposes, exempted swaps and derivatives from regulation by both the CFTC, which had already implemented rules that it would not regulate swaps and derivatives, and the SEC. Also, hidden within the bill was an exemption for energy derivative trading, which would later become known as the “Enron loophole” – this loophole would provide the impetus for Enron’s nose dive into full blown corporate corruption.
While the unregulated market in derivatives and swaps did not cause the economic downturn itself, it was a propellant of the crisis, accelerating the collapses of major financial companies across the globe. As of June 30, 2008, the global derivatives market had exploded to roughly $600 trillion by some estimates. When the credit crisis and the mortgage meltdown began to take hold, major firms found out the swaps made their investments far riskier than they could handle.
Bear Stearns, Lehman Brothers, and American International Group (AIG) all collapsed due to problems with the unregulated market of credit default swaps. The major banks were also heavily involved with credit default swaps. A report from the Comptroller of the Currency recorded in the third quarter of 2007 that the top banks in the credit default market were JP Morgan Chase, Citibank, Bank of America and Wachovia.
In the end, the country would have been better served had Congress not taken the 262-page Commodity Futures Modernization Act and inserted it into a bloated 11,000 page conference report. There was a reason the laws were passed in the 1930’s and if there was a case where Congress should have given more time and debate to an act, this was it.
Click to link to news article regarding Brooksley Born and her vindication -
http://www.bloomberg.com/apps/news?pid=20601109&sid=aXcq.r6xLf4g&refer=home
