In 1988, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (traditional mortgage loans have long maturities and are illiquid), lenders were expected to set aside substantial reserves; however, marketable securities that could theoretically be sold easily would not require much in the way of reserves.
To free up reserves for more productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a securitized form.
That lessened asset-quality considerations and ushered in the new era of asset-liquidity considerations.
Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm (wife of then-U.S. Sen. Phil Gramm (R-Tex.)) as chairman would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation.
These actions would turn out to be consequential in the reign of terror that was to come
In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. (Wait a minute; I did say she was on the audit committee, right?)
Of course, Enrons fraud and implosion became the poster child for deregulation run amok.
It ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues, but nonetheless has prevented all kinds of fraud and inappropriate behavior on account of the fact that top executives have to attest to the veracity of, and sign off on, all financial documents and other stuff.
Now, dont lose any sleep over the fact that of all the CEOs and CFOs and other muckety-muck multi-multi-millionaire executives that ran and still run the too-big-to-fail banks and the banks and investment banks that did fail or were merged (because they failed but were valuable to banks who wanted to make themselves bigger so they would never be allowed to fail) ever were charged with any crime under Sarbanes-Oxley.
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The Fed, under Chairman Greenspan, along with Robert Rubin and Larry Summers, was methodically deconstructing the foundation of the Depression-era Glass-Steagall Act.
The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers.
The deal married Citibank, a commercial bank, with Travelers Solomon, Smith Barney investment bank, and the Travelers insurance business.
There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound.
Phil Gramm the fire breathing free-marketer, Texas senator, and then-chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs (and loving husband of Wendy) rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions.
In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (NYSE:C) as the new King of the Hill.
From his position of power, Sen. Gramm consistently leveraged his Ph.D. in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: I look at subprime lending and I see the American Dream in action.
If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices.
