by David Corn

As the news broke of the Lehman Brothers meltdown [1] and the rest of the latest financial crisis, John McCain, speaking at a campaign rally in Florida on Monday, angrily declared,

And in a statement released by his campaign, McCain called for greater "transparency and accountability" on Wall Street.

If McCain wants to hold someone accountable for the failure in transparency and accountability that led to the current calamity, he should turn to his good friend and adviser, Phil Gramm.

As Mother Jones reported [2] in June, eight years ago, Gramm, then a Republican senator chairing the Senate banking committee, slipped a 262-page bill into a gargantuan, must-pass spending measure. Gramm's legislation, written with the help of financial industry lobbyists, essentially removed newfangled financial products called swaps from any regulation. Credit default swaps are basically insurance policies that cover the losses on investments, and they have been at the heart of the subprime meltdown because they have enabled large financial institutions to turn risky loans into risky securities that could be packaged and sold to other institutions.

Lehman's collapse threatens the financial markets because of swaps. From Bloomberg [3]:

Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern than the $62 trillion credit-derivatives market will unravel....

Lehman, the fourth-largest securities firm until last week, has been one of the 10 largest counterparties in the market for credit-default swaps, according to a 2007 report by Fitch Ratings. The market, which is unregulated and has no central exchange where prices are disclosed, has been the fastest-growing type of so-called over-the-counter derivative, according to the Bank for International Settlements.

"The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,'' Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with Bloomberg Radio yesterday. "It induces a tremendous amount of volatility and uncertainty.''

Barclays Capital analysts have estimated that if a financial institution with $2 trillion in credit-default swap trades were to fail, it might trigger between $36 billion and $47 billion in losses for institutions that traded with the firm. So the Lehman fiasco--caused in part by the use of unregulated swaps--could lead to ruin elsewhere in the economy.

Gramm is responsible for the rise of the wild and woolly $62 trillion swaps market. And he was chairman of the McCain campaign and a top economic adviser for McCain--until he dismissed [4] Americans worried about the economy as "whiners." After that comment, McCain dumped Gramm. But was Gramm truly excommunicated from McCain land? Last month, he attended [5] a meeting of McCain's top supporters in Aspen, Colorado. And at a dinner that day, McCain singled out Gramm for praise. Last week, failed Republican presidential candidate Ron Paul revealed [6] that Gramm, now an exec for Swiss banking giant UBS (which also lost billions of dollars due to subprime loans and swaps), had recently called him as part of a McCain effort to win Paul's endorsement. Paul turned Gramm down. (Both Gramm and Paul are Texas Republicans.) Gramm's Paul-courting effort seems to indicate that the fellow who has done much to cause the current financial troubles (and who was once considered a possible Treasury secretary should McCain win the White House) is back in the good graces of the McCain campaign.

Shortly after McCain promised he would "clean up" Wall Street, Alaska Governor Sarah Palin, his running mate, appeared at a Colorado rally on Monday morning and proclaimed that "John McCain and I will put an end to the abuses in Washington and Wall Street that have resulted in this financial crisis." She promised a McCain administration would "reform the way Wall Street does business." (She was short on details and spent more time discussing Colorado sports stars from Alaska.) What neither she nor McCain has explained is how they plan to be able to reform Wall Street when they are being assisted by 177 lobbyists [7] and the guy who greased the way to the current crisis with a backroom legislative maneuver. If McCain and Palin are serious about never putting America "in this position again," they ought to consider seriously writing down any economic advice they get from Phil Gramm.