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When the Gramm-Leach-Bliley Act was enacted in 1999, its architects promised the financial services world would be a lot different in a decade. They were right, but not in the way they intended.
November 9
WASHINGTON — Though former Sen. Phil Gramm staunchly defends the legacy of the Gramm-Leach-Bliley Act, he acknowledges he could have done more to prevent the crisis during his tenure as chairman of the Senate Banking Committee.
In a wide-ranging interview, the Texas Republican turned UBS AG vice chairman said he regrets not clamping down on mortgage lending standards, blamed Alan Greenspan for fueling the housing bubble, and offered his view of what's wrong with the current regulatory reform debate.
"In hindsight I wish that I had been more vocal about my concern with the growth of subprime lending and with variable-rate mortgages," said Gramm, who was the committee's chairman from 1999 to 2001. "We should have figured out [in 2001] that, when the Fed was cutting interest rates to stimulate the economy, that there was going to be an unintended consequence in mortgages. We should have raised mortgage standards and down payments, and raised the quality of mortgages at the time. It would have been the right moment to do it, and it should have scared us to death as more and more mortgages became variable-rate, hair-triggering the whole process."
Gramm said he did speak out on the other primary cause of the crisis, the government's politicization of housing lending, but said Congress is still missing a chance to set minimum underwriting standards for mortgages.
"It's almost unimaginable that, in a crisis which clearly was produced by the collapse in value of securitized subprime loans, … Congress is not considering legislation," he said. "I would simply say, 'If you are going to securitize a mortgage, it has to have a minimum down payment.' You have to have verification of the capacity of the person getting the mortgage to make the payments, and I would probably put some restrictions on the capacity to securitize things like reverse amortization mortgages and things of that nature."
He said he is perplexed by the current drive to make the Federal Reserve Board the systemic risk regulator because from his point of view it was given that power under GLB. "They are the systemic risk regulator," said Gramm, who is a former economics professor. "Under Gramm-Leach-Bliley we gave them regulatory authority over financial services holding companies. One of the products of this financial crisis is that almost every significant company became a financial services holding company. It's a debate about something that is already a reality. So I don't see it as the issue as many people in Congress see it."
Gramm's views on the Fed appear to cut both ways. On the one hand, he defends the agency, arguing that former Fed Chairman Alan Greenspan was the only regulator to sound warning bells in the run-up to the subprime crisis, particularly problems related to Fannie Mae and Freddie Mac.
But he also suggested that Greenspan played a major role in fueling the housing bubble and that the Fed did not adequately use the authority it had. "The criticism of Greenspan is that we discovered he was not a god," he said. "Judged on his overall record, he's still the greatest central banker in history. But he was fallible like all other human beings."
Gramm also attributed some blame to problems in the Basel capital standards. "Basel II was supposed to be an improvement over Basel I as a basic structure for reserve requirements of big financial institutions because it focused on how risky the investment of banks were," he said. But "banks lost money by doing things that were deemed by regulators to be virtually risk-free, and the point is, you don't know in advance what will turn out to be risky."
He said the international capital accord "needs to be completely reexamined."
Named by People magazine as one of the 25 major contributors to the financial crisis, Gramm said his own role and that of the financial reform law he helped write have been overblown.
"I'm not defensive about anything I did in government, and if I thought there were a big problem here, I would say it because I never claimed to be infallible," he said. "I make mistakes every day."
