On Friday, Republican presidential candidate Ted Cruz snagged the endorsement of former Texas Senator Phil Gramm and announced that Gramm will serve as a senior adviser to the campaign on economic issues.
Gramm has a long history of railing against regulation, particularly in the financial industry, and the legislation he helped pass through during his time in the Senate have been connected to the financial crisis.
Deregulating banks, paving the way for the financial crisis
Gramm was perhaps Congress’ biggest proponent of financial deregulation, allegedly telling former Securities and Exchange Commission (SEC) Chairman Arthur Levitt, “Unless waters are crimson with the blood of investors, I don’t want you embarking on any regulatory flights of fancy.”
Gramm served as chairman of the Senate Banking Committee from 1995 to 2000, where he oversaw and advocated for a number of measures that weakened the government’s oversight of the finance industry. He was an architect of a key measure bearing his name, the Gramm–Leach–Bliley Act, which repealed parts of the Glass-Steagall Act of 1933. Glass-Steagall enacted a firewall within banking companies between their vanilla commercial activities and the riskier activities of investment banking and insurance. After its passage, commercial banks catering to everyday clients and investment and securities firms consolidated, and their far larger size contributed to the problem of too big to fail firms during the crisis. Many also argue that bringing commercial and investment banking under one roof led to greater and greater risk taking, which eventually led to the financial crisis.
The act also created a big regulatory gap for large investment banks for a period of time by failing to give the SEC or another agency authority to regulate them. Instead, they could submit to voluntary oversight, but many simply opted not to.
Weakening Glass-Steagall was just one of the ways Gramm can be tied to the financial crisis, however. He inserted a provision in the Commodity Futures Modernization Act in 2000 that exempted complex derivatives — such as credit-default swaps — from regulatory oversight by the Commodity Futures Trading Commission. The lack of regulation meant that as the use of credit-default swaps grew in the lead up to the crisis, banks weren’t required to create backstops in case they failed, and once they all came crashing down amid the housing bubble’s burst, it left financial institutions exposed. Credit-default swaps took down AIG, leading to its bailout.
But even as some of the ground he helped lay began to unravel the global financial system, Gramm made questionable comments about the impending recession. Acting as a presidential adviser to John McCain in July of 2008, three months after the failure of investment bank Bear Stearns, Gramm called the impending crisis a “mental recession,” saying the economy was doing much better than the naysayers claimed. He also said the U.S. has “become a nation of whiners” over the economy. He was asked to resign from McCain’s campaign shortly afterward.
Continuing to stand up for big banks
Gramm has long had close ties to the industry. His wife sat on the board of Enron, the company taken down by a scandal over executives lying about its financials that led to mass layoffs and the loss of billions for investors, and executives fundraised for him. Those connections have continued since he left the Senate. In 2003, he joined UBS to become vice chairman of its investment banking division and was there until 2012, coinciding with the time that the bank manipulated a key interest rate that enriched large banks at the expense of the public (for which it was later fined). He also helped build the bank’s public policy office in Washington, DC.
He’s continued to fight against attempts to bring the industry back under regulatory oversight. He testified before Congress last year against the Dodd-Frank reform act, arguing the “regulatory burden has exploded” since its enactment, “its measures are “shackling economic growth” and “imperiling our freedom,” and compared some regulators to Soviet officers.
Attacking the social safety net
In announcing Gramm’s endorsement, Cruz took great care to point out that Gramm was a staunch opponent of Bill and Hillary Clintons’ efforts during the 90s to pass health care reform. He was a leader of the Republican opposition to it, saying at the time it would only pass “over my cold, dead political body.” He’s since continued the theme, writing op-eds in opposition to the Affordable Care Act, saying it “has made many problems in health care worse.”
Gramm was also the mastermind behind a particularly punitive part of the 1996 welfare reform bill, which automatically and permanently banned those who commit a drug crime from both food stamps and welfare benefits unless their states opt out of the measure. For over a decade, the majority of Americans were subject to those bans, although they are now starting to be repealed in many places. The bans have been linked to recidivism, as people who are released from prison and then cut off from the safety net have fewer options for financial stability, and taking other desperate measures like simply going hungry.