With Wall Street in crisis, the campaigns of both John McCain and Barack Obama are going to have to address the situation meaningfully.
What caused the problems we're seeing? Well, among others, there have been some very risky investments and economic sleight-of-hand made by some of the top financial institutions.
And so far, the taxpayers have had to pay considerably to help with bailouts. Just like what happened in the 1980s...
In the 1980s, Savings and Loans (S&Ls) were all the rage. This is because S&Ls could typically offer a higher rate of return on deposits than typical banks could. You see, in 1980, a new law deregulating S&Ls took effect. This law was known as Depository Institutions Deregulation and Monetary Control Act. This law with an unwieldy name basically allowed S&Ls to make riskier investments with the money of their investors. After all, as the argument went, higher risk meant higher reward.
One particular S&L, based out of Irvine, California, was known as Lincoln Savings and Loan Association. The Chairman of this particular company was Charles Keating, who would go on to make very risky investments with depositors' money. These investments and the company's business practices started to gain some attention from federal regulators, particularly the Federal Home Loan Bank Board (FHLBB). After all, money deposited in S&Ls was insured by the government (and thus, the taxpayers).
So the FHLBB started to incorporate some regulations to try and limit the risky investments being made by S&Ls. One such rule stipulated that only 10% of an S&L's funds could be used toward "direct investments," which was a measure to help limit risk. Charles Keating had tried to fight this particular regulation, by getting Ronald Reagan to appoint someone sympathetic to Keating's cause to the FHLBB. But that didn't stop the regulations from being passed.
And sure enough, the FHLBB began to investigate Lincoln S&L and discovered that it most certainly was not complying with the regulations. As Lincoln's fate was being determined, there was a midterm election cycle and Keating began making some substantial political contributions. During the rather prolonged investigation, Keating pleaded for leniency from the FHLBB, noting that Lincoln S&L was planning on moving into a safer form of investment: mortgage lending. Nonetheless, it was becoming increasingly apparent that the government might seize Lincoln S&L for financial insolvency once the investigation was complete.
By April of 1987, a meeting of the FHLBB was held in San Francisco with its chairman, Edwin Gray, and five senators: Alan Cranston, Dennis DeConcini, John Glenn, Donald Riegle, and John McCain. The senators made it clear that they were strongly opposed to penalties for Lincoln. The regulators felt that the meeting was highly unusual and that they were being pressured to leave Lincoln S&L alone.
The investigation was eventually completed, and while the regulators made the recommendation that Lincoln should be seized by the government for unsound lending practices, action on this recommendation was nonetheless deferred. During this time, in the late 80's, Lincoln's parent company, American Continental Corporation, had become desperate for funds to offset its investment losses. Lincoln began a bait-and-switch, convincing customers to replace their CDs (which were federally insured), with higher-yield bond certificates -- which, as customers later learned to their devastation, were not insured.
American Continental went bankrupt in April of 1989, and was seized by the FHLBB. The Federal government was liable for about $2 billion dollars in this seizure. But not everyone was covered by this government insurance -- approximately 21,000 investors, consisting primarily of the elderly, lost their life savings when the American Continental went under.
In the aftermath that followed, it was brought to light that five senators -- the Keating Five -- had interceded on behalf of Charles Keating to keep the S&L from being seized, and these five senators faced intense scrutiny.
John McCain claimed he was just working on behalf of a constituent, Charles Keating, and noted "I have done this kind of thing many, many times." It turns out that Keating and McCain had become close friends in 1981, and between 1982 and 1987, McCain had received approximately $112,000 in campaign contributions from Keating and his associates. McCain and his family -- even his baby-sitter -- took nine trips at Keating's expense, sometimes on Keating's jet. These trips, later valued at over $13,000, were only paid back by McCain once news of the scandal got out.
Charles Keating was asked whether his campaign contributions had bought him influence with the senators. His response: "I want to say in the most forceful way I can: I certainly hope so."
Why is this important?
By now, it should be obvious. The parallels between the S&L scandal and today's collapsing Wall Street behemoths are striking. Large corporate entities playing loose and fast with investments in a highly deregulated market. The same organizations that lobbied strongly against any sort of financial regulation then need government bailouts to ensure some level of financial solvency.
Ultimately, it's not the CEOs who end up in dire straits, but rather, the typical middle-class investor, someone who has a 401(k) or a small portfolio. People can see their life savings disappear in the blink of an eye because some financial institutions decided to get creative with their accounting.
And yet we still see it today: the lobbying against any sort of regulation. The right-wing parroting talking points about the benefits of privatization, particularly that of social security -- without noting the risks.
John McCain himself has said he's in favor of social security privatization. Perhaps someone like John McCain doesn't need to worry about the value of his 401(k) or investment fund, or his child's college fund.
But the rest of us do.
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