McCain Blasts Wall Street Failure, Neglects To Mention His Adviser Helped Cause It

David Corn
Mother Jones blog

As the news broke of the Lehman Brothers meltdown and the rest of the latest financial crisis, John McCain, speaking at a campaign rally in Florida on Monday, angrily declared,

We will never put America in this position again. We will clean up Wall Street. This is a failure.

And in a statement released by his campaign, McCain called for greater "transparency and accountability" on Wall Street.

If McCain wants to hold someone accountable for the failure in transparency and accountability that led to the current calamity, he should turn to his good friend and adviser, Phil Gramm.

As Mother Jones reported in June, eight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm's legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions.

Lehman's collapse threatens the financial markets because of swaps. From Bloomberg:

Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern than the $62 trillion credit-derivatives market will unravel....

Lehman, the fourth-largest securities firm until last week, has been one of the 10 largest counterparties in the market for credit-default swaps, according to a 2007 report by Fitch Ratings. The market, which is unregulated and has no central exchange where prices are disclosed, has been the fastest-growing type of so-called over-the-counter derivative, according to the Bank for International Settlements.

"The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,'' Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with Bloomberg Radio yesterday. "It induces a tremendous amount of volatility and uncertainty.''

(Continued here.)