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betrayed by his actions as co-author of Ronald Reagan’s austere first budget. Former House Speaker Jim Wright recalls in his memoir, Balance of Power, that he learned to his “chagrin and sorrow” that Reagan sought counsel from a fellow Democrat who “was the beneficiary of my help and recipient of my naive faith. His name was Phil Gramm.” In 1981, Gramm pleaded with fellow Texan Wright to help him win a seat on the powerful House Budget Committee, a privilege he had been denied by his Democratic peers, who found him unreliable. “Phil Gramm promised me … that if he were favored by a Budget Committee assignment, he would make his arguments within the committee and then would close ranks and back whatever budget resolution the committee majority approved:’ the former speaker wrote. “That sounded fair enough” Later, Wright would be “flabbergasted” to learn that Gramm met clandestinely with Reagan budget guru David Stockman to strategize and defeat a Democratic budget plan. Reagan’s “Gramm-Latta” budget would prevail. Having led the charge for a Republican president’s budget plan that, among many other things, drastically cut Social Security benefits, Gramm resigned in 1983 and forced an election for his House seat, which he won as a Republican. In a 1984 special election hastily called by then-Gov. Bill Clements, he waltzed to victory in the contest for longtime Republican John Tower’s seat in the U.S. Senate. When his new party won control of the Senate, Gramm rose to chairman of the Senate Banking Committee, where he was able to put his anti-regulation views into law. The GrammLeach-Bliley Act of 1999 repealed laws put in place after the Great Depression setting up protective barriers between commercial banks, investment banking firms, and insurance companies. Consumer groups strenuously opposed the landmark legislation. “It was strongly deregulatory and … did not address safety and soundness,” says lobbyist Ed Mierzwinski of the public interest group U.S. PIRG. But more powerful interests were pushing for the law, and they had a deadline. In 1998, Citicorp Inc. purchased Traveler’s Insurance Group. Under the old law, the new company had a two-year grace period to divest either its insurance or banking functions. Instead, it went to Washington, D.C., and got the law changedwith Gramm’s help. “Some people jokingly refer to it as the Citigroup Relief Act,” says University of North Carolina law professor Lisa Broome. “Normally, they would have had to spin off their insurance activities” Another beneficiary: Gramm’s future employer, UBS, which was able to absorb the brokerage house Paine Webber. \(As of March 31, UBS employees and company-related PACs have given the McCain campaign $82,865, according to the Center Banks had been chipping away at the barriers through Federal Reserve rules for decades. But Gramm’s sweeping deregulation “stripped away restraint:’ says Broome. While Gramm denies any link between the current subprime “Gramm is not against government at all. His career has been finding ways to make money for his friends. It’s a predator relationship. Government is his food supply.” mortgage crisis and his legislative efforts, Mierzwinski, Broome, and even some Wall Street analysts trace a direct connection. Michael Panzner, a Wall Street veteran and author of Financial Armageddon, says the massive deregulation encouraged “aggressive, swashbuckling, high-risk practices that might have been frowned upon in the banking industry, but which were viewed as typical, say, on Wall Street” Eventually, those practices “became the modus operandi throughout the financial services industry.” Panzner also believes that Gramm-Leach-Bliley “may have even set the stage for both the collapse and the subsequent `rescue’ of Bear Stearns by the Federal Reserve.” The deregulated financial services industries were “encouraged to push the envelope in terms of risk-taking, and were not entirely dissuaded from thinking that the public purse would be available if things went horribly wrong!’ Still others blame Gramm’s Commodity Futures Modernization Act. Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of credit default swapswhich in theory insure the banks against bad debtsthose risks are passed along to insurance companies and other investors. Maryland law professor Greenberger believes credit default swaps “were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight” Before passage of the modernization act, the Commodity Futures Trading Commission was attempting to regulate the swaps market through rule-making. The modernization act, Gramm noted in his remarks on the Senate floor, provided “legal certainty” for the growing swaps market. That was necessary, Greenberger says, because at the time, “banks were doing these trades in direct violation of federal law” Greenberger has also been critical of former Clinton Treasury Secretary Robert Rubin, who supported Gramm’s banking deregulation. But Greenberger insists that it was Gramm’s slick legislative move that prevented government regulators from halting the spread of the risky financial instruments. “Without Phil Gramm adding that 262-page bill onto an 11,000 page appropriations bill in 2000, it never would have seen the light of day,” Greenberger says. “It was a lame duck Congress … racing off to Christmas recess. It was not an orderly process:’ 6 THE TEXAS OBSERVER MAY 30, 2008