John McCain: Crisis Enabler

[babylonsister]

John McCain: Crisis Enabler
By Mark Sumner

September 21, 2008

Sumner: The dereguation binge that tanked global markets is a bullet deliberately fired into the economy by ideologues, heedless of the ultimate cost to taxpayers. And John McCain cheered them on.

Once is happenstance. Twice is coincidence. Three times is Enemy Action. --Auric Goldfinger


James Bond's wealthy nemesis may have had an obsession with gold, but he judged, quite correctly, that if people keep putting your plans awry, that was likely their intent.

In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the savings and loan industry. The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry--including John McCain's warm-up speaker at the Republican National Convention, Fred Thompson. The official description of the bill was "An act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." Considering where things stand in 2008, that's enough to make you wince. It should.

Seven years later, the S&L industry was collapsing. What was the cause? Garn-St. Germain had handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it hadn't handed them the bank's regulations. Left to operate in an anarchistic gray area, S&Ls had chased profits, indulged in amazing extravagances and cranked out enough cheap mortgages to fuel a real estate boom. They had also experimented with lots of complex, creative--and risky--investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?

It wasn't a foregone conclusion. In 1985, three years after the deregulation of the S&Ls, the chairman of the Federal Home Loan Bank Board saw that the situation was already looking bad, with potential to get much worse. To try to head off disaster, he instituted a rule to limit the amount and types of investments S&Ls could carry on their books. However, many savings and loans--among them Lincoln Savings & Loan Association of Irvine, California, which was headed by a fellow named Charles Keating--promptly ignored these rules.

Now enters a familiar cast of characters. First to pop up was the universally beloved Fed-chief-to-be Alan Greenspan. Greenspan argued against the loan board's new rules, and persuaded Reagan to appoint one of Keating's pals to the board to blunt the requirements. A quintet of senators, among them John McCain, began having meetings with both the management at Lincoln and the regulators at the loan board. With their help, Lincoln was able to stay in business an additional two years, at the end of which they failed--taking the life savings of 21,000, mostly elderly, investors with them.

How involved was John McCain? McCain and Keating had known each other since 1981 and had become fast friends. Of all the "Keating Five," it was McCain who really moved into the life of the Lincoln S&L chief. The two men vacationed together multiple times, with the whole McCain clan (babysitter included) heading out for Keating's private Caribbean property on Keating's private jet. McCain didn't think to actually report these trips, or pay for them, until the investigators were breathing down his neck. And McCain took payment in more than just vacations. Keating and other members of Lincoln's parent company padded McCain's pockets with $112,000 in campaign contributions.

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http://www.thenation.com/doc/20081006/sumner