The person responsible was Senator Phil Gramm. Read below:
The Cause of the Economic Collapse
I believe it was years of irresponsible legislative tinkering that turned the banking system into a structure so fragile that was ready to fall with smallest jolt. It was this weakened economic structure that was not able to support the huge amount of activity in the derivatives market which amplified the impact of the faltering housing market.
I see it as those who would tinker with something like the I-35W Bridge in Minneapolis. It would be like replacing its one inch gusset plates with half inch plates. This design mistake is what contributed to its collapse. It was not the fault of the thirteen people killed and 145 injured that the bridge collapsed. It was not the fault of the Head of the Minnesota State Transportation Dept. It was the fault of those who live off the public money who design things (or in this case, tinker) without considering the unintended consequences.
The Obama Administration has ignored the cause of the economic failure and has used it to justify a spending spree that will cause further economic turmoil due to inflation and increased taxation. When the Democrats blame the economic collapse on the Bush Administration, tax cuts for the rich and greedy Capitalists they are purposely ignoring the true cause. All we hear is the continuous mantra that it was President Bush’s fault. However, as you read below, you will be convinced that there is a deeper fault with our economy that needs to be addressed.
In the late nineteenth and early twentieth century, the little guy who wanted to trade stocks usually did it in a bucket shop rather than through a stockbroker. Bucket shops were set up in all sorts of premises, such as drug stores, hotels, cafés, etc. A bucket shop is a brokerage firm that books retail customer orders without actually having them executed on an exchange. Basically they were places where people could place bets on the performance of Wall Street. Joseph Kennedy made his fortune in Bucket Shops.
The bank panic of 1907 ended when J.P. Morgan forced all the bankers to stay in a room until they agreed to contribute to fixing the crisis. What has been forgotten is the major cause of the crisis ¬was the unregulated speculation on the prices of securities by people who did not own them. These betting parlors, or fake exchanges, were called bucket shops because the bets were literally placed in buckets. The states responded in 1908 by passing anti-bucket shop and gambling laws. Lawmakers ended this activity that helped ruin the economy.
Since then, Bucket Shop laws were passed essentially prohibiting the making or offering of a purchase or sale of security, commodity, debt, property, options, bonds, etc., upon credit or margin, without intending a bona fide purchase or sale of the security, commodity, debt, property, options, bonds, etc.
What has that got to do with today’s crisis? Credit default swaps are the rocket fuel that turned the subprime mortgage fire into a conflagration. They were the major cause of AIG’s – and by extension the banks’ – financial collapse. AIG Financial Products, the unit that sold almost $500 billion of them, may therefore be viewed as the biggest bucket shop in history. Billions suddenly became worthless and the largest economic catastrophe in history began.
New York State Insurance Commissioner Eric Dinallo’s testimony shocked the Senate Agriculture committee October 14, 2008 when he called the credit default swap markets Bucket Shops.
Who made the Bucket Shop activity legal? It was Senator Phil Gramm who came up with his 262-page amendment called the Commodity Futures Modernization Act, in December of 2000. This amendment, stuck in a government re-authorization bill, gave birth to the $62 trillion market for credit default swaps (CDSs). It was one of the last bills that President Clinton was to sign. Gramm’s amendment freed financial institutions from the risks and oversight of their CDS transactions which before they were solely responsible. This opened up the hedge fund and derivatives trade market which became the Achilles heel to our economic system. We should have known from history that it caused a similar world economic collapse in the Panic of 1907. What this tells us is that back in 1909, 100 years ago, people understood the risks and potential instability that comes from gambling on securities prices.
People who forget history repeat it. Wall Street firms like Bear Stearns, Lehman Brothers, Merrill Lynch, etc. started selling what they called derivatives, which were bets on how the market would do. Would it go up or down? One type of derivative was created which would bet on whether mortgage owners would pay or default. So, when the mortgage crises hit, the credit markets went upside down because there were a huge number of derivatives that bet on mortgage payments. The people who bet on mortgages would not get paid. These were people who were supposed to be paid off when a default occurred. Many of these people were banks who had huge amounts of money betting on these derivatives. But the folks who invented these derivatives had not set aside enough money to do that, and so it all came crumbling down like a house of cards.
For a good look into Gramm’s destabilization of the US economy, here is this post by Peter Cohan, President of Peter S. Cohan & Associates:
Also, during the Clinton Administration, the passage of the Gramm-Leach-Bliley Financial Services Modernization Act which repealed parts of the 1933 Glass-Steagall Act. This bill was signed November 12, 1999 by Bill Clinton. Specifically, provisions in the 1933 Glass-Steagall act that prohibit a bank holding company from owning other financial companies were repealed. Economists Robert Ekelund and Mark Thornton have criticized the Act as contributing to the 2007 subprime mortgage financial crisis.
Person responsible is who signed the bill.