A Reason To Be Afraid
Lehman and Merrill Lynch's digestion, while disruptive and indeed sad, is not an end-of-world kind of thing. There is a bigger potential failure however: American International Group, the insurance giant. It poses a much larger threat to the financial system because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds. For instance, it is a central player in the unregulated credit default swap market that is reported to be at least $60 trillion in size (no idea of this market? Neither is John McCain). Ominously, last Monday AIG. was downgraded by the credit rating agencies which could require AIG to post billions of dollars of additional collateral for its mortgage derivative contracts (the Federal Reserve is trying to arrange $70B of emergency loans as I write). AIG nor Wall Street has this kind of money presenting the possibility that AIG goes bust. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression, forcing a chain of events depressing financial institutions further, causing defaults and more failure. The US government won't allow this to happen so you and I, Dear Brother, will pay. Oh boy, Northern Rock is cheap at £50B.
So who can we thank for this mess? None other than Phil Gramm, John McCain's presidential campaign co-chair and his most senior economic adviser from summer 2007 to July 18, 2008 (a time BTW when Gramm was paid by UBS to lobby Congress about the U.S. mortgage crisis). Gramm of course spearheaded efforts to pass banking reform laws, including the Gramm-Leach-Bliley Act in 1999, which served to reduce government regulations in existence since the Great Depression separating banking, insurance and brokerage activities. Between 1995 and 2000 Gramm, who was the chairman of th U.S. Senate Committee on Banking, Housing and Urban Affairs, received $1,000,914 in campaign contributions from the Securities & Investment industry. Can you spell c - o - n - f - l - i - c - t ? (Photo from Getty Images)
"You've heard of mental depression; this is a mental recession. We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline." Phil Gramm, July 9, 2008
John McCain, February 19, 2008
