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McCain guru linked to subprime crisis

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  • Greg Cannon
    http://news.yahoo.com/s/politico/20080328/pl_politico/9246;_ylt=AqcVPMbwXGTfdLG6EvY6pq8Gw_IE McCain guru linked to subprime crisis Lisa Lerer 2 hours, 41
    Message 1 of 1 , Mar 28, 2008
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      http://news.yahoo.com/s/politico/20080328/pl_politico/9246;_ylt=AqcVPMbwXGTfdLG6EvY6pq8Gw_IE

      McCain guru linked to subprime crisis

      Lisa Lerer 2 hours, 41 minutes ago

      The general co-chairman of John McCain’s presidential
      campaign, former Sen. Phil Gramm (R-Texas), led the
      charge in 1999 to repeal a Depression-era banking
      regulation law that Democrat Barack Obama claimed on
      Thursday contributed significantly to today’s economic
      turmoil.

      “A regulatory structure set up for banks in the 1930s
      needed to change because the nature of business had
      changed,” the Illinois senator running for president
      said in a New York economic speech. “But by the time
      [it] was repealed in 1999, the $300 million lobbying
      effort that drove deregulation was more about
      facilitating mergers than creating an efficient
      regulatory framework.”

      Gramm’s role in the swift and dramatic recent
      restructuring of the nation’s investment houses and
      practices didn’t stop there.

      A year after the Gramm-Leach-Bliley Act repealed the
      old regulations, Swiss Bank UBS gobbled up brokerage
      house Paine Weber. Two years later, Gramm settled in
      as a vice chairman of UBS’s new investment banking
      arm.

      Later, he became a major player in its government
      affairs operation. According to federal lobbying
      disclosure records, Gramm lobbied Congress, the
      Federal Reserve and Treasury Department about banking
      and mortgage issues in 2005 and 2006.

      During those years, the mortgage industry pressed
      Congress to roll back strong state rules that sought
      to stem the rise of predatory tactics used by lenders
      and brokers to place homeowners in high-cost
      mortgages.

      For his work, Gramm and two other lobbyists collected
      $750,000 in fees from UBS’s American subsidiary. In
      the past year, UBS has written down more then $18
      billion in exposure to subprime loans and other risky
      securities and is considering cutting as many as 8,000
      jobs.

      Gramm did not respond to an e-mail, and was
      unavailable for comment, according to a UBS spokesman.
      The bank has no official position on the subprime
      crisis, the spokesman said, but is a member of the
      Financial Services Roundtable and other industry
      groups that are actively lobbying Congress on the
      issue.

      Now, some housing experts and economists see Gramm’s
      thinking in the recent housing proposal from McCain,
      the Republican Party’s presumed presidential nominee.
      Gramm is often a surrogate for the Arizona senator,
      particularly in meetings focused on the economy. And
      McCain has hinted he’d consider the former Texas
      senator for Treasury secretary in a McCain
      administration.

      McCain delievered an economic speech Tuesday that had
      Gramm's input, but it was written by domestic policy
      adviser Douglas Holtz-Eakin.

      “Sen. Gramm was one of dozens of folks who Sen. McCain
      has consulted on the housing issue, including Carly
      Fiorina and Meg Whitman from eBay," said McCain
      campaign spokesman Brian Rogers. "They've been friends
      for years and he values Sen. Gramm's advice."

      In the speech, McCain rejected the type of aggressive
      government intervention in the economic meltdown that
      has been embraced by his Democratic opponents — and
      even some Bush advisers.

      “I have always been committed to the principle that it
      is not the duty of government to bail out and reward
      those who act irresponsibly, whether they are big
      banks or small borrowers,” McCain said. “Government
      assistance to the banking system should be based
      solely on preventing systemic risk that would endanger
      the entire financial system and the economy.”

      McCain’s campaign later clarified that he would
      support programs for “deserving” homeowners and
      reforms that would improve transparency and
      accountability in capital markets.

      Andrew Jakabovics, a housing expert at the liberal
      Center for American Progress, said McCain’s
      interpretation of the crisis puts little blame on
      investment banks for their role in packaging the
      subprime loans into dangerously complex and ultimately
      hard to value financial instruments.

      “I’d characterized this as the deux ex machine theory
      of financial products,” Jakabovics said. “He views
      this as a market problem that manifests at the local
      level as housing, meaning he’s more likely to argue in
      favor these guys when they argue for deregulation.”

      Wall Street firms are increasingly under scrutiny for
      contributing to the economic downturn by packaging and
      selling risky mortgage securities. When the home loans
      tied to the mortgages defaulted, investors and the
      banks lost billions, contributing to a widespread
      credit crunch.

      “I think [McCain’s] attitude is the market can
      basically handle this and government doesn’t need to
      be heavily involved,” said David Wyss, chief economist
      at Standard and Poor’s.

      McCain and Gramm have a long political history. The
      two became close when they worked together as senators
      to defeat Hillary Rodham Clinton’s 1993 health care
      plan, holding meetings at hospitals and clinics across
      the country.

      In 1996, McCain was national chairman of Gramm's
      unsuccessful presidential bid.

      In 2000, the duo had a rare parting when Gramm backed
      his home-state governor, George W. Bush, for president
      instead of McCain. But they’ve reunited in this
      presidential race.

      Gramm stood by his former Senate colleague in his
      worst days last summer when his campaign went broke
      and his candidacy was all but written off by political
      observers.

      Gramm, who had joined the campaign in March as a
      domestic policy adviser, was among those who helped
      cut staff and shrink the budgets. He traveled with
      McCain in Iowa, New Hampshire and South Carolina and
      stumped for him in Georgia.

      Staff writer Victoria McGrane contributed to this
      story.
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