by Gail Collins
Perhaps it’s a coincidence that Texas presidents keep getting us into conflicts abroad. To be fair, American involvement in Vietnam started before Lyndon Johnson came into power and ratcheted things up. The first Gulf War under H. W. was a limited engagement. You could argue that the fact that W. got us into Iraq and Afghanistan had more to do with W. than with the grand Texas love affair with dramatic gestures. And maybe it’s beside the point that people called Afghanistan “Charlie Wilson’s war” after the Texas congressman who was so deeply gung-ho to get America involved in the Afghani guerrilla war against the Soviet Union.
Just sayin’.
By the Obama era, Tom DeLay was a political wreck, appealing a three-year sentence for money laundering and licking his wounds after being forced to retreat from Dancing with the Stars due to stress fractures in both feet and a bad samba performance. (We bid a temporary adieu to DeLay in his immortal words from the final TV appearance: “What’s a little pain when we can party?”) But Dick Armey had never been more ready to roll. He became head of FreedomWorks, which turned the town hall meetings that members of Congress traditionally hold during summer recess into raucous protests against Obama’s health care reform. Then he and the FreedomWorks organizers staged the Tea Party’s big coming-out party, the Taxpayer March on Washington, in the fall of 2009. “Armey and FreedomWorks have been the invisible hand behind much of the recent conservativism in this country,” Republican political consultant Mark McKinnon told the New York Times.
Texas Congressman Ron Paul, another libertarian, became the closest thing the Tea Party had to an intellectual guide. Paul, who ran as a presidential candidate in 2008 and 2012, differed from other high-profile Republicans in his adamant opposition to an activist American foreign policy. He called for a return to the gold standard and a federal government that was small to the point of itsy-bitsy. He was a perfect empty-places politician—critics might argue that his ideas, if implemented, could turn the entire country into one large empty place. But Paul’s anti-war, anti-drug war, and general anti-authoritarian message won him a devoted following, particularly among young people.
It was the new political flavor, one that was nearly as hostile to traditional mainstream Republicanism as it was to the Democrats, although of course when it came to things to complain about, the Democrats and Barack Obama got top billing. “Nearly every important office in Washington DC today is occupied by someone with an aggressive dislike for our heritage, our freedom, our history, and our Constitution,” Armey told his crowds.
It really was a declaration of political war. No surrender! No retreat! What could be more Texas?
PART TWO
HOW TEXAS CHANGED
THE NATION
4
Financial Deregulation—
the Texas Angle
“In a Gramm administration,
we will keep the cake”
Becoming a Republican worked very well for Phil Gramm, who not only won the 1983 special election to replace Democrat Phil Gramm in the House, but then moved on up to the Senate two years later. Waving his PhD in economics everywhere he went, Gramm got himself appointed to the Senate Budget Committee and became both a kind of economic guru to some conservatives and a recipient of mammoth campaign contributions from wealthy Texans. In February of 1995, armed with his huge bag of cash, he announced his candidacy for president of the United States.
Almost instantly, the Gramm luck ran out. As a presidential candidate, he was awful. We’ve already taken note of the state’s talent for producing deeply unsuccessful White House contenders. (Outside of Lyndon Johnson’s post-Kennedy-assassination victory in 1964, the only native-born Texan ever elected president was Dwight Eisenhower, who moved to Kansas when he was two.) But even by that standard, Gramm’s presidential run was pretty dismal. In the end he won all of ten delegates, at an average cost of $2.1 million apiece.
One of the many terrible things about candidate Gramm was his campaign stump speech, in which he told his audience, “What we have to share with a hungry world is not our cake but the recipe that we use to bake that cake.” (Finally, we had a public figure even less sympathetic than Marie Antoinette, who at least never suggested that the state let the starving poor eat the recipes.)
“That recipe is private property, free enterprise, and individual freedom,” Gramm would continue. He is a tall, balding man with a rather long neck that he would stick forward as he peered at the crowd with his tiny little eyes. The general effect was of a turtle, wearing glasses and a really good suit.
“In a Gramm administration, we will keep the cake and share the recipe!” the candidate concluded triumphantly, often to deafening silence from his listeners. Nobody really got the part about the cake. The audiences may have been wondering whether the hungry nations had enough sugar and eggs and butter to follow the cookbook.
Gramm is important to this story because he represents what happened when the empty-places philosophy turned toward financial regulation—be it of savings and loan associations, commercial banks, energy markets, or all those inexplicable investments we have come to think of under the fits-all term of “swaps.” A former economics professor at Texas A & M, Gramm was in love with the vision of endless financial prairies where Americans could enjoy the blessings of a free market, roaming unfettered by federal regulation like happy mustangs on the range. “When I am on Wall Street and I realize that that’s the very nerve center of American capitalism and I realize what capitalism has done for the working people of America, to me that’s a holy place,” he said in 2000 after a visit to New York.
“The worst in the nation and
that’s saying something”
Gramm became a key player in setting the national agenda on financial deregulation. But this story started earlier, back in the 1970s, when Texas began applying the principles of the wide open economic spaces to its state-chartered savings and loan associations. The S & Ls—which we can never mention without pointing out that Jimmy Stewart ran one in It’s a Wonderful Life—had traditionally taken in deposits for a modest fixed rate and then lent out mortgage loans for slightly more. That hardly allowed for much elbow room, let alone free range-roaming. So the state decided to let them loan more money with fewer assets to back up the loans. It also permitted the S & Ls, which had formerly been all about home ownership, to lend money on commercial properties.
The results were spectacular—profits soared—and then spectacularly disastrous. Texas S & L owners—some of them crooked, some of them just inept—loaned money at very high interest rates to people with no capacity, and sometimes no intention, to repay. They invested in stuff that was wildly speculative at best, and at worst, total theft. One historic state thrift spent depositors’ money to send its president and his friends on a luxury tour of France under the theory that it was research for a high-end restaurant the thrift planned to open in Dallas. A collective of crooked Texas S & Ls shuffled their bad loans around, creating paper profits for the edification of the accountants.
Meanwhile, the Reagan administration was trying to figure out what to do with the federally chartered S & Ls, which were floundering in a world of double-digit inflation. They had already been effectively permitted to set their own interest rates, and by 1981 were paying depositors an average of 11.53 percent. But they were only taking in 10.02 percent from all those mortgage loans. The Federal Home Loan Bank Board, which regulated the S & Ls, went looking for a new economic model that would allow them to get their income and outgo back in balance. At the time, state-chartered thrifts in Texas, which were less regulated than the federal S & Ls, were thriving. When it came to profits, “Texas was at the top of the charts,” said Bill Black, who worked for the Bank Board in the 1980s and had a ringside seat for the chaos that was to come.
Of course, Black added, that was “because more of its savings and loans engaged in accounting fraud than anywhere else.”
The Bank Board team wrote up a bill, which became the basis of the G
arn–St. Germain Act, pretty much deregulating the S & Ls. If Black is right about the inspiration, they wanted to go where Texas had gone—without, of course, the still-unnoticed fraud.
In fact, the feds went even further, in hopes that if they gave the S & Ls enough leeway, they could grow their way out of their huge losses. That created what Black called “a race to the bottom” when it came to control and oversight. First out of the box was California, which attempted to lure business back to the state by making its charters even more permissive than those of the feds. Texas upped the ante, deregulating its already pretty well deregulated thrifts even further.
Black was head of litigation at the Bank Board and then deputy director of the Federal Savings and Loan Insurance Corporation, the agency that was on the hook for compensating depositors when an S & L went under. He came to have a painfully detailed knowledge of the Texas S & L scene, with its cowboy-culture rules and skimpy oversight. “Its state regulatory system was the worst in the nation and that’s saying something,” he concluded.
The most infamous of the Texas S & Ls was Vernon Savings and Loan, which the regulators fondly referred to as “Vermin.” It lives on in history for the theory that using S & L funds to hire a prostitute to entertain a bank regulator wasn’t a bribe if the regulator was unable to rise to the occasion. (The lawyer for the thrift’s former president made that argument at his trial.) But for a time, Vernon was, on-paper-by-its-own-accounting, the most profitable S & L in America. Its owner, Don Dixon, was a real estate developer who discovered innumerable advantages in the Texas thrift business. One was that acquiring Vernon cost him no actual money—like all the crooked insiders in this game, he paid for his investments with borrowed funds from other insiders, who kept the Ponzi chain going until the string ran out. Among the disadvantages was that running Vernon Savings and Loan involved working in Vernon, a humble city north of Wichita Falls that was, until its moment of infamy, best known as the birthplace of Roy Orbison. Dixon overcame that problem by investing depositors’ money in vacation houses, a mini-fleet of jets, and a yacht, which he kept on the Potomac due to lack of available docking space in landlocked Vernon. (“It served as a floating lobbying platform. Yes, the prostitutes showed up here as well,” wrote Black in his account of the S & L meltdown, The Best Way to Rob a Bank Is to Own One.) It was also Dixon who invested bank money in a fact-finding tour of top-notch French restaurants. (Dixon’s wife kept a diary of the tour, entitled “Gastronomique Fantastique!”) There was not, however, any long-term solvency in the game plan, and Dixon was eventually convicted of twenty-three counts of bank fraud.
“Very Texas instincts”
Athough Texas had swung hard for Reagan in the presidential elections, at the time the S & Ls were imploding, the state’s biggest power in Washington was a Democrat, House Speaker Jim Wright of Fort Worth, and Wright became a go-to guy for Texas thrift officials seeking protection from regulators who wanted to pull the plug on their doomed institutions. “The Speaker had very Texas instincts—these folks call themselves entrepreneurs who are beset by government, so they must be right,” said Black.
When the Bank Board needed money to cover all the failing S & Ls, regulators believed Wright was holding up authorization while he demanded more leeway for home state businesses. (At one point, he requested more time for “Vermin.”) Wright wound up being brought before the House Ethics Committee on a range of allegations, ranging from misusing his power in relation to the S & Ls, to using a congressional aide to help him write his memoirs. Wright claimed he was simply doing his duty to aid his constituents in the first case. When it came to the book, he told the committee that the aide in question was so eager to have a part in the creation of Reflections of a Public Man that he volunteered to do it on his own time, in the evenings and on weekends.
The Ethics Committee decided that Wright’s efforts on behalf of the Texas S & Ls, while “intemperate,” fell within the normal course of legislative business. Whether this makes you feel better about Wright or worse about Congress is another one of those natural-optimism tests. However, the committee did agree to pursue some of the other charges, which appeared to cluster around the sins other members were less likely to dabble in. In response, the Speaker resigned from office in 1989. It was the last time Texas would get its power on the national level through a Democrat.
For the rest of us, the repercussions of the Texas part of the S & L debacle were multitudinous. Wright’s main accuser, a hitherto little-known Georgia Republican named Newt Gingrich, was catapulted into political stardom, and began his quest to turn the Republican minority into an ideologically unified attack force. At his side were allies like Tom DeLay, who turned out to be as bloodthirsty in partisan House politics as he was in Sugar Land extermination projects. Gingrich would eventually wind up before the Ethics Committee himself, topping Wright by becoming the first Speaker to be officially sanctioned by the House. But not before he, DeLay, and Armey had turned the clubby House of Representatives of yore into the partisan battlefield we all know and loathe today.
And then there was the price of Texas bidness itself. By the time the thrifts stopped imploding in the 1990s, 237 Texas S & Ls had failed, more than twice as many as in next-place California. In the end, more than half of all the money lost in the nationwide debacle was lost in Texas. As Robert Bryce notes in his Texas book, Cronies, Texas got $4,775 per capita in federal bailout funds, while New Jersey lost $1,074 per capita. It was one of those times when Texas politicians did not complain about massive government spending.
“I want our America back”
But back to Phil Gramm.
The other memorable point in Gramm’s presidential candidacy speech was biographical—the story of how he had failed the third, seventh, and ninth grade, and how his algebra teacher told his mother that little Phil would never graduate high school. How, in a last-ditch effort to save her son’s future, his mom sent him to military school under a federal program that provided scholarships for even the least promising offspring of dead servicemen. There, Gramm was turned around; his mother’s fondest hopes were realized and he went to college and then graduate school, all on government money. “Too many mothers’ dreams are dying too easily in America today,” he would conclude. “I want our America back.”
He told this story often, and once the speech was over, everyone would proceed to a press conference where reporters would get to point out that as a US senator, Gramm had supported legislative proposals that would lead to draconian cuts in federal spending on education.
“The debate is not about how much money should be spent on education and housing and nutrition,” Gramm would say. “The debate is about who should do the spending. Bill Clinton wants the government to do the spending, and I want the families to do the spending.”
And off he went to the next stop.
“He’s been asked that one for years and he still hasn’t come up with a good answer,” one of the Texas reporters on the presidential tour plane said.
Gramm threw all his hopes on the Iowa Republican caucus, where he came in fifth. Even the conservative caucus-goers, it turned out, didn’t want a guy who opposed food stamp spending because “all our poor people are fat” and joked that he did indeed have a heart—which he kept in a jar in his office. Ronald Reagan occasionally made weird or offputting remarks, but he had a lovely smile. Gramm just had that turtle thing.
“I look at subprime lending and
I see the American dream”
So much for the presidency. But Gramm did not go away. No, he had promises to keep, and miles to go before he retired from public service to become a lobbyist for an international megabank. He went back to the Senate, where he later became chairman of the Banking, Housing, and Urban Affairs Committee, and where his continuing quest for wide open markets played a central role in creating several major economic earthquakes for the entire nation.
When predatory lending—the practice, basically, of making home loans t
o people who could not afford to keep up on the payments—began to create an uptick in foreclosures in 2001, Gramm led the fight to beat back any attempts to crack down. Once again, he brought back his poor widowed mother, who he claimed was able to put a roof over her children’s heads thanks to a 1950s’ version of subprime lending. “Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action,” he said. It was not perhaps the most devastating blow to the nation’s economic balance that he helped deliver, but it did kind of set a pattern.
Meanwhile, Gramm was a major player in writing the Commodity Futures Modernization Act of 2000, which would modernize commodities trading so thoroughly that by 2008 the nation’s major banks were able to trade fiercely and unregulatedly in credit default swaps and other financial instruments so exotic that even their CEOs did not understand them. These major banks were much larger, much more too-big-to-fail than they had been in the 1980s, when the government had encouraged them to acquire failed savings and loans, some of which were, of course, in Texas.
And Gramm was also the Gramm of the Gramm–Leach–Bliley Act, which dismantled the Depression-era regulations that kept a wall between commercial and investment banks. This law was blamed by many for ushering in the crazed trading by commercial banks that led to the economic collapse of 2008. To be fair, Gramm–Leach–Etc. was the work of half of Washington. Gramm at one point even threatened to destroy the whole project because he was angry over the section of the act that required banks to make loans in poor communities, some perhaps clotted with struggling widows trying to cope with a semi-delinquent son who failed ninth grade.
In the end, Gramm did help write the bill, which was a regulatory nightmare that split up the job of watching what the newly liberated banks were doing among different agencies, creating so many loopholes and untended corners that the traders themselves could not have done it much better. That could not have been a mistake, since Gramm had made it a practice to reject requests by the Securities and Exchange Commission for more money to make sure Wall Street was obeying the law. “We have learned government is not the answer,” Gramm intoned as he shepherded the massive bill through the Senate and out into the world, where it would prove that unfettered markets were definitely not the answer either.