Financial Weapons of Mass Destruction - Part 2

I've written about the risks of financial chaos created by the $58 trillion market in Credit Default Swaps (CDS), and the role the Commodity Futures Modernization Act of 2000 (CFMA) in allowing them to go totally unregulated, severely damaging our economy (see Financial Weapons of Mass Destruction).

How this misguided piece of legislation became law is a story in itself, and points to the responsibility of our elected officials in this crisis. It's not just "Wall Street greed," it's also "Washington, D.C. stupidity." [Disclaimer: this applies to both political parties]

The Commodity Futures Modernization Act of 2000 was first introduced in both Houses of Congress (S.2697, H.R.4541) in June, 2000. At the time, cosponsor Sen. Phil Gramm proclaimed that the "bill eliminates the legal uncertainty that today hangs as an ominous cloud over the $7 trillion financial swaps markets."

In testimony on the bill before a joint Senate Committee (June 21, 2000), SEC Chairman Arthur Levitt commented:

I can appreciate that to some our securities laws may appear to be just more government regulation. But to study our securities laws is to discover the rich history of U.S. financial markets. Your predecessors did not write these laws in a vacuum. They enacted these statutes in response to significant problems that cried out for practical solutions.

History proves that these laws have worked for the securities markets. Not only our securities markets, but also our derivatives markets, such as the options markets, have thrived under this framework. To me, the question posed by this bill is whether the benefits of the securities laws that investors have come to expect should continue to apply to these markets. Unequivocally, the Commission’s answer to that question is yes.

To Gramm and the "deregulators," however, the answer was "No." They saw government regulation as an obstacle, not a benefit, and they wanted the obstacle removed.

The original bills were going nowhere, and they were becoming impatient. So, they were repackaged ((H.R.5660, S.3283) and reintroduced just before the Christmas 2000 recess. Thanks to Gramm, the bills were eventually tacked on to an appropriations bill (H.R. 4577), and the Commodity Futures Modernization Act of 2000 cleared Congress on December 17, 2000. It was signed into law a few days later. There was no debate on the floor, and it seems likely most Congressmen hadn't even read the 262-page bill.

SEC Chairman Arthur Levitt, who had served longer that any other SEC Chairman, announced his plans to retire (without completing his second term) on December 20, 2000. A new era of deregulation had begun.

So, the bill that mandated no regulation over a market that is now nearly four times the size of the entire U.S. stock market didn't come into being after careful deliberation. It was shoehorned into an appropriations bill that was passed hours before the end of the 106th Congress.

John McCain has called his economic advisor, Phil Gramm, "one of the smartest people in the world on the economy." As Gramm's role in causing the current economic meltdown becomes more obvious, I'd suggest McCain get his advice from someone else.