A Credit to Mother Jones for an excellent piece by David Corn on former Sen. Phil Gramm’s role in deregulating the financial industry and how that led to the current financial debacle.

Presenting the Texan’s history of bending over backward to help out Wall Street and the banking industry in general, Corn fingers Gramm as a “lead perp” in causing the “biggest financial catastrophe of our time.” He bolsters his case by digging out an intriguing and largely unnoticed piece of legislation that Gramm pushed through Congress in December 2000: the Commodity Future Modernization Act.

Thanks to contemporaneous distractions like Bush v. Gore, almost nobody read the legislation, which prevented regulation of derivatives called credit-default swaps—contracts that insure against the default of a security. Corn says we’re all paying for that now because the consequences were disastrous—and his case is strong.

For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed…

But the Enron loophole was small potatoes compared to the devastation that unregulated swaps would unleash…

In essence, Wall Street’s biggest players (which, thanks to Gramm’s earlier banking deregulation efforts, now incorporated everything from your checking account to your pension fund) ran a secret casino.

That casino now has $62 trillion worth of bets on swaps and it’s far from transparent: The solvency of the counterparties to most of the contracts is unknown. They helped inflate the housing and overall credit bubble by giving banks the ability to offload risk onto the buyers of swaps, who didn’t know what junk they were getting.

So what happened to Phil Gramm, who helped create this mess?

Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain’s presidential campaign and advises the Republican candidate on economic matters. He’s been mentioned as a possible Treasury secretary should McCain win.

This is good reporting and analysis by Mother Jones, whose substantial Washington bureau is good news for readers.

Corn’s piece leads us to a related Credit: a New York Times article explaining the role credit-default swaps are playing in the regulation of bond insurer MBIA.

The piece, by Gretchen Morgenson and Vikas Bajaj, offers an interesting view of Wall Street deal-making, and demonstrates the complexity of now trying to regulate a system that has been allowed to break down because the watchdogs were never put on patrol.

It turns out that MBIA’s staggering $137 billion in swaps gives it a big bargaining chip in its current negotiations with the New York State insurance department.

MBIA has promised to shore up its insurance unit with $900 million in capital, money it raised in February with the stated intent to send “downstream” to the unit but now says it won’t because that unit has been downgraded by all the major agencies. As the Times’s own Floyd Norris
Blogged
, MBIA has a serious credibility problem on the issue, despite what Portfolio’s Felix Salmon
says
. But it may be able to go back on its word thanks to the credit-default swaps, which have made it hard for the state to move in.

Most of these contracts [the swaps] stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York state insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.

In short, it’s clearly in the interest of policyholders that MBIA’s shaky insurance unit receive a cash infusion, but the company hasn’t acted, and the state of New York hasn’t forced its hand.

The Times does well in explaining to readers, in language accessible to everybody, why this is the case.

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Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.