Obama to Repeat Foreclosure Phil's Mistakes?

| Fri May. 15, 2009 10:39 AM PDT

Is the Obama administration about to make the same mistakes in regulating Wall Street that led to the current crisis? That's what Frank Partnoy, a professor at the University of California, San Diego and a finance expert, says in a piece in Friday's New York Times. Partnoy would know. Back in the summer of 2008, he told Mother Jones about how the deregulation of financial markets championed by Phil Gramm, the former Senator and John McCain adviser, created a casino-like atmosphere on Wall Street. "Tens of trillions of dollars of transactions were done in the dark," Partnoy said. "No one had a picture of where the risks were flowing.... There was more betting on the riskiest subprime mortgages than there were actual mortgages."

The Obama administration has promised to reign in that kind of reckless, unregulated speculation. They're off to a bad start, Partnoy warns in the Times: the White House's plan calls for derivatives to be split into two categories. The first category, so-called "standardized instruments," would be exchange-traded and regulated. The second category, privately negotiated "swaps," would not be. Only a small amount of aggregate data about the swaps would be released to the public.

Why is it bad to split the "standardized" derivatives off from the swaps? Because the same idea failed before, Partnoy says. Who was responsible for turning that idea into law? Take one guess:

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In 1989, the Commodity Futures Trading Commission, a federal agency then led by Wendy Gramm, an economist and the wife of Senator Phil Gramm, a Texas Republican, issued a policy statement splitting derivatives into these same two categories. Standardized derivatives would be traded on exchanges, but individually negotiated contracts would not. Four years later, Ms. Gramm signed an order making this policy official, a sort of farewell gift to the derivatives industry before she left government service and took a place on Enron’s board.

The exception swallowed the rule, as regulators deemed more derivatives “individually negotiated.” In December 2000 Senator Gramm led a lobbying effort to cement his wife’s approach. It paid off: one of President Bill Clinton’s last official acts was to sign the law largely deregulating derivatives.

The leading derivatives lobbying group, the International Swaps and Derivatives Association, is already looking to exploit the Treasury’s proposal to split derivatives markets in two. As part of its lobbying campaign to protect negotiated instruments, it insists that last year “the derivatives business — and in particular the credit default swaps business — functioned very effectively during extremely difficult market conditions.”

Congress should not be fooled by such talk again. The current crisis is proof that although most people do not trade derivatives, everyone is subject to their risks. All derivatives, exchange-traded or private, must be in the sunlight. If institutions want to negotiate individual derivatives contracts, they should tell investors the full details of their exposure.

For decades, the American financial markets attracted capital because investors believed they were getting the information they needed. That faith has been shaken. To restore it, Congress should enact all of Mr. Geithner’s proposals, except one: it should not permit any private derivatives to grow in the dark. Otherwise, today’s exception will become tomorrow’s rule.

The worry that Obama might repeat one of Phil Gramm's biggest mistakes isn't that far-fetched. The new president's nominee to head the Commodity Futures Trading Commission, which would derivatives, is a man named Gary Gensler. Along with top Obama adviser Lawrence Summers, Gensler was a top cheerleader for non-regulation of derivative trading in the 1990s. Will history repeat itself?

Nick Baumann covers national politics for Mother Jones' DC Bureau. For more of his stories, click here. He can also be found on twitter.

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Comments

Summer of 2008?!?!

Submitted by Crow T. Robot (not verified) on Fri May. 15, 2009 12:04 PM PDT.

Boy, that shows a lot of foresight and insight, to "explain" what was happening in the summer of 2008! For a look at someone who could see what was coming before it got here, you Smart, Fearless Journalists need to have a look at what Ron Paul was saying years before the bubble burst. Here, let me help you with the research: Ron Paul Was Right

Yeah, Paul was right - wayyy right

Submitted by SocraticGadfly (not verified) on Fri Jun. 19, 2009 11:29 AM PDT.

Yep, Goldbug Ron has the simplistic solution.

Funny, 100 years ago, people in places like "What's the Matter with" Kansas WANTED "fiat money."

What the problem is...

Submitted by SiliconDoc (not verified) on Sun May. 17, 2009 12:21 PM PDT.

Computers are a big problem and so is the worldwide internet backbone that connects all the worlds stock exchanges. Add to that the giant gambling casino concept - and you've got the most exciting worldwide hamfisted money raking off the top of the whole world ponzi scheme noone could even imagine decades ago. Same thing is going on in commodities markets - Same thing in urusry rates, totally gone skyward Anything goes MOB capitalism... It's not a free market either - the government sets rules and sets the protections - when it makes a fence and looks at one part, it also fences off the wilds and claims it's off limits. But it doesn't stick with that - atfer it's off limits, it steps in to bail it out. The government lies coming and going. If you're going to have a free in the wild market, the rule is, thats it - when the kill comes for food to keep the pristine wilderness going, noone marlin perkins government steps in to blowgun the wild beasts and save the downed prey... So... ___________________ Since the government can't keep it nose out of anything, it MUST have it's nose into everything. The solution is something the government WILL NOT DO. ________________________ If you don't have an equity in the loan, the bond, whatever the REAL ASSET is, you do NOT TO GET BET ON IT with a derivative or any other fancy instrument of pure speculation - and therefore there won't be giant players like Sorros and others making derivative bets down then COLLAPSING a real ASSET OR COMPANY in order to score big in the betting market. It's like betting AGAINST a HORSE - then secretly breaking it's ankle before the race, which the race track government has said is LEGAL to do. _______________ This government WILL NOT stop the practice, they support and encourage it - it gives them taxes from ballooning trillions of digital inflation dollars... THE GOVERNMENT LOVES MONEY FROM GAMBLING... Since the government GAMBLES in every state - it has a hard time telling the big money gamblers they are naughty sinners... YES CORRUPTION IS ENTIRE, AND SYSTEMWIDE. ___________ I'm sure some more devious perturbations can be devised - and implemented, and that will come after "this fix".... It will be as good and helpful as mccain feingold that quadrupled the out of control campaign spending, and silenced the little people for 60 days before elections, in TRUE COMMUNIST PIG FORM. ____________ see ya on the next gigantic wipeout man...