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Advisers to both Obama, McCain created market mess
By Lisa Lerer
Politico, Arlington, Virginia
Saturday, September 20, 2008
The presidential campaigns went after each other's economic advisers this week -- and they're both right in claiming that the other camp deserves a share of the blame.
John McCain and Barack Obama are each taking advice from people who created, passed, and implemented the laws that paved the way to the market meltdown.
Democrats point to two Republican-backed bills -- the Gramm-Leach-Bliley Act, passed in 1999, and the Commodities Futures Modernization Act, passed in 2000 -- that broke down the firewalls between Wall Street and commercial banks and banned regulation of credit default swaps, an insurance-like product bought by financial services companies to cover their risky subprime mortgage investments. American International Group, rescued by the Federal Reserve on Tuesday, is one of the biggest sellers of these swaps.
"You can't erase 26 years of support for the very policies and people who helped bring on this disaster with one week of rants," said Obama, slamming McCain at a Thursday rally in Espanola, N.M. "What we've seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed."
McCain has taken economic advice from his longtime political friend, former Texas Sen. Phil Gramm, who left his role as co-chairman of McCain's campaign after he called Americans a "nation of whiners" in a "mental recession." McCain aides say he is no longer officially advising the campaign.
An avowed deregulator, Gramm sponsored and shepherded the 1999 bill to passage.
"I am proud to be here because this is an important bill. It is a deregulatory bill," Gramm said at the bill signing. "I believe that that is the wave of the future."
According to regulators involved in the process, Gramm buried the swaps measure in an 11,000-page omnibus spending bill.
"There are plenty of other people's fingerprints on it, but as I read the legislative record without [Gramm's] support the CFMA would have never happened," said Michael Greenberger, who directed the Commodity Futures Trading Commission's division of trading and markets in the late 1990s. "It was a very non-transparent legislative process, and Gramm was part of that maneuvering effort."
Also on McCain's economic team is John Thain, the chief executive of Merrill Lynch who engineered the sale of the firm to Bank of America this week, and Harvard professor Martin Feldstein, an AIG board member.
Several Obama advisers played a role in securing the passage of both bills.
Former Iowa Republican Rep. Jim Leach was another sponsor of the 1999 legislation. Leach co-founded Republicans for Obama and spoke at the Democratic National Convention last month in support of the Illinois senator.
Leach defended his bill in an e-mail sent to Politico, pointing out that the Gramm-Leach-Bliley measure also allowed commercial banks to rescue troubled investment banks this week.
Without the law "the taxpayer would either be more on the hook or American assets would find themselves in non-American hands," wrote Leach. "The issue is principally bad judgment rather than the right to compete. Legislation did not dupe Wall Street."
Former Clinton Treasury Secretaries Robert Rubin and Lawrence Summers, both Obama advisers, supported and helped negotiate the bill. At the November 1999 signing of the legislation, Summers praised it as "a major step forward to the 21st century."
Summers also submitted a letter to Congress backing the swaps bill, Greenberger said.
The McCain campaign argues that inaction is more to blame for the country's current economic woes. For over a decade, Congress ignored calls to increase scrutiny of Fannie Mae and Freddie Mac. Last week the government seized control over the two mortgage giants in hopes of strengthening the U.S. housing market.
McCain is slamming Obama for his connections to the two companies.
"When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent," McCain said Thursday in Cedar Rapids, Iowa. "While the leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of their financial crisis."
On the campaign trail, McCain argues that he called for reform of the mortgage giants, while Obama stayed silent. McCain's opposition, however, came years after critics first called for heightened scrutiny and followed a highly publicized 27-month investigation of Fannie Mae that resulted in the company's paying a $400 million fine for manipulating earnings.
Even if McCain had succeeded in strengthening oversight, it might not have prevented the subprime crisis. The oversight effort focused on executive earnings and accounting, not the company's loan holdings.
The two government-sponsored companies have deep links to both campaigns.
Arthur B. Culvahouse Jr., picked by McCain to vet his vice presidential nominees, and Jim Johnson, initially picked by Obama to perform the same function, once worked for the mortgage giants. Johnson stepped down early in the process after controversy surfaced over his tenure.
Obama collected the second-highest amount in donations from the firms' employees and political action committees of any member in Congress.
McCain campaign manager Rick Davis served as president of an advocacy group led by Fannie Mae and Freddie Mac that defended the two companies against increased regulation.
And least 20 McCain fundraisers have lobbied on behalf of Fannie Mae and Freddie Mac, netting at least $12.3 million in fees over the past nine years.
This summer, Democrats pushed through housing legislation that created stronger regulation and provided temporary authority for the Treasury to lend a financial hand to the government-chartered mortgage companies, if needed.
President Bush threatened to veto the legislation, but dropped his objection after a meeting with Treasury Secretary Henry Paulson. Six weeks later, the government seized control of the two companies and, soon after, developed a massive government intervention to buy up hundreds of billions in troubled assets throughout the marketplace.
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