Uniquely Suited: Gramm at UBS
Remarkably, the things I came to Washington to do are done. Now, I know that no victory is ever final…I will leave the Senate in 15 months, being very proud that I came, and extraordinarily proud in what I’ve done while I’ve been here… But I feel comfortable with this decision. I believe I’m making the right decision for me, for the 20 million people I represent, and for the things I believe in.
We are troubled by the recent appointment of former U.S. senator Phil Gramm as a Vice Chairman of UBS. Mr. Gramm’s professional and personal connections to Enron have disgraced his reputation. We believe that UBS’s association with Gramm seriously undermines your company’s professed commitment to corporate responsibility. At a time when investors and the general public need reassurance that our financial institutions are scrupulous, we ask UBS to place Mr. Gramm on leave until all criminal and civil investigations into Enron’s wrongdoing are complete. During his tenure in Congress and as a member of the Senate Banking Committee, Senator Gramm was the most vocal advocate for Enron, pushing legislation that removed government regulatory authority over the company and exposing it to negligence and fraud..
Together, the Gramms facilitated Enron’s misdeeds, which victimized thousands of U.S. consumers. Ethical leadership was clearly lacking as well in that company. Especially in these economically beleaguered times, UBS has a duty to both promote and demonstrate corporate ethics—to truly make, as Mr. Ospel says on the UBS website, “corporate responsibility part of our culture and part of our identity.” As consumer advocates, civil society groups, and unions, we urge UBS to disassociate itself with the corporate deceit which Phil Gramm represented in Congress. We urge you, Mr. Ospel and Mr. Wuffli, to renew your company’s commitment to corporate integrity by removing Mr. Gramm from his position as Vice Chairman until he is cleared of any involvement in Enron’s transgressions.
In addition to obtaining the business, UBS Warburg acquired two Enron skyscrapers and took aboard 650 former Enron employees, including executives John Lavorato and Louise Kitchen, who had taken the company’s largest bonuses after the bankruptcy ($5 million and $2 million), and Greg Whalley, Enron’s former president.
Led by Wendy Gramm, Governor Perry collected more than $2 million from 14 of the 18 people he tapped as A&M Regents. Other A&M regents who gave the governor more than $200,000 apiece are:
- Clear Channel Communications founder Lowry Mays (father-in-law of Congressman Michael McCaul),
- insurer Phil Adams,
- Ex-TXU Corp. chief Erle Nye, and
- the late Dallas car dealer J.L. Huffines.
“Dead peasant” insurance is such a deal that Wal-Mart and lots of big companies do it. See, a company like Wal-Mart takes out life insurance on low-wage employees (that would be Texas teachers), then it gets to deduct the premiums from its taxes. And when the employee dies, the company gets a benefit between $64,000 to more than $250,000…Under the UBS plan, the Retirement System would buy annuities and life insurance policies on retired teachers and keep the proceeds when they die. Of course, the investment and insurance industries would profit from the premiums and brokerage fees.
The meeting notes show Insurance Commissioner Jose Montemayor, a Perry appointee … claiming that “this arrangement” was already being utilized by “some very rich people” who had set up similar plans to benefit the University of Texas and Texas A&M….The source says the claim involving a similar program benefiting the Texas universities turned out to be untrue… Montemayor, as insurance commissioner, would have had to waive “insurable interest” regulations to allow the schools to buy life insurance on their professors. There is no public record that he did so. The University of Texas and Texas A&M did not return requests for comment.
His role in the scheme had the appearance of banal corruption and cronyism. Although Gramm wasn’t in on the first meeting with teacher groups, he played an active role in subsequent efforts to push the scheme. It was Gramm who could make the plan a financial reality. He left the U.S. Senate in November 2002 for a lucrative vice president post at UBS. After Morrissey, Montemayor and Perry budget aide Brian Guthrie first articulated the plan on Nov. 12, Gramm came to Austin to help push the deal. That move eventually prompted Texas Democrats to file an ethics complaint against Gramm for making a the pitch without registering as a lobbyist.
Gramm was hoping to put together a new package of complex assets for speculators to gamble on. Corporations had been using mass purchases of life insurance policies on their employees for years as part of an elaborate tax avoidance scheme (the government doesn’t tax insurance premiums or death benefits). The employees themselves — affectionately referred to as “dead peasants” among insurance experts — received no benefit. Only the companies who bought the policies would receive payouts when these “peasants” died. Gramm wanted to convince investors to bet on peoples’ lives by purchasing pools of life insurance and annuities taken out on individuals.
It should be noted that the Perry-Gramm scheme is a take-off on similar private-sector plans… These private sector schemes also have come under fire from critics who note that they work only because of the tax breaks that accrue to the companies when they buy the life insurance. In effect, the companies are using the taxpayers to fund their benefit programs rather than using their corporate profits.It doesn’t take much imagination to realize that if the Perry-Gramm scheme is adopted, the Texas taxpayers will end up footing the bill not only to shore up the retirement system health plan, but also to pay millions of dollars in commissions and fees to UBS.
Montemayor was happy to bend the law. He agreed to grant a special waiver on insurance regulations that would allow the deal to go through, according to meeting notes.”There was some worry about the legality,” recalled the attendee. “[Montemayor] said ‘Don’t worry about it.’ He could take those questions off the table as the insurance commissioner.”
Another scheme Gramm as a federally registered lobbyist for UBS, attempted to foist on the good people of Texas was the sale of the Texas lottery to a private company. According to the New York Times,
Called “Project Lonestar” within UBS, a long-term lease of the Texas lottery could generate at least $10.1 billion for the state, according to an internal UBS document obtained through a Freedom of Information Act request from The New York Times.
The billions of dollars that investors would pay to run the Texas Lottery would come out of the pockets of Texas families. While some of the proposals that the governor’s office received say that they would target the middle class rather than the poor, the state has repeatedly failed to accomplish such a shift. Last year the Texas Lottery Commission introduced a $50 scratch-off ticket to attract higher-income players. Subsequent studies by the Houston Chronicle and the San Antonio Express-News showed that people residing in zip codes with median incomes of $20,000 or less were 22 percent more likely to buy these tickets than those who lived in zip codes earning more than $90,000.The bulk of the billions of dollars that Texas would make privatizing the Texas Lottery would come out of the pockets of Texas’ poorest families. And these Texans are the ones most likely to require additional public services when their pockets are picked.
Wall Street firms, which already enjoy close relationships with state governments nationwide as underwriters of municipal bonds, stand to earn at least $100 million in fees from leasing the California lottery alone — which is why they have quietly emerged as prime architects of the idea.
As this one-year chart shows, UBS’s stock lost nearly 70 percent of its value and now stands at levels not seen since 2002, when Gramm signed up.
Critics have charged that Gramm’s action as a senator helped lay the groundwork for some of the problems in the housing and oil markets. But it’s hard to pin any of the UBS debacles on the former Texas senator. At UBS, Gramm held the post of vice chairman, a position Michelle Leder dubbed in these pages as “the greatest job in business” for its combination of high status and low work rate. Gramm was a lobbyist and adviser, not an operating executive. And he had nothing to do with the forces that impelled banks and banking executives into foolish behavior in recent years; cheap money, greed, and a bubble mentality are far bigger than Gramm. But UBS’s continuing travails should lead us to wonder how effective Gramm is as an elder statesman. As an adviser, an economist, an expert in the ways of Washington and in the American financial system, part of Gramm’s job surely was to advise the bank how to stay out of investment and regulatory trouble.
As Bloomberg reported in 2008, the Fed secretly provided selected banks, brokerage houses, and even non-financial firms (such as General Electric and Ford) with at least $1.2 trillion in loans, often with minimal collateral required and at below market interest rates.
UBS AG, Switzerland’s biggest bank by assets, received a capital injection of 6 billion Swiss francs ($7.12 billion) from the Swiss government in October 2008. The next month, the Zurich-based lender borrowed $77.2 billion from the Federal Reserve after customers removed a net 83.6 billion francs from its money-management units in the hree months through September… A UBS spokeswoman declined to comment on whether the bank also tapped the Swiss National Bank or other central banks for liquidity.
The trial of George Ryan, a former governor of Illinois charged with fraud and racketeering, got a jolt on November 17th, thanks to the testimony of a former senator. In 1995, Mr Ryan, then Illinois’s secretary of state, endorsed the presidential campaign of Phil Gramm, a Republican senator from Texas. Prosecutors charge that Mr Gramm’s campaign paid Mr Ryan an $11,000 “consulting fee” in exchange for his endorsement; Mr Ryan claims he earned the fee by introducing Mr Gramm to local political figures. In court, Mr Gramm testified that he did not know his campaign was paying Mr Ryan for consulting, nor would he have approved such a payment, because, he explained, “it’s sort of like the difference between love and prostitution. You don’t pay people to like you.”The comment caused a ruckus in the courtroom and beyond: the judge asked Mr Gramm to curb his thoughts on prostitution, while Mr Ryan lashed out by telling television crews that Mr Gramm may have been involved in the scandal over Enron, adding testily, “If Senator Gramm wants to use the word prostitute, perhaps he should look within.”
“Why are you just so afraid to say this whole system is bankrupt and the whole thing should just be reorganized?” someone from the audience asked after Gramm finished his lecture. “Why don’t you just let it go?”
“First of all I think that’s a good question,” Gramm responded. But then he offered something of a personal credo: “I would be a little concerned about letting capitalism go, because it made me prosperous and free and it made my country prosperous and free.”
“In a state filled with tales of legendary statesmen, Sen. Phil Gramm stands in a league of his own. It’s hard to imagine where this state would be without the fearless, dedicated service of this man. He has been a spirited protector of the men and women of this state and the ideas they hold dear. I have been proud to call him my senator, and even prouder to call him my friend. I know without a doubt that even though Sen. Gramm is leaving his role in the U.S. Senate, he will continue to work for the greater benefit of our state and our nation.”
In the next posts, we will turn our spotlight upon Phil Gramm’s wife, Wendy, whose own extraordinary achievements, while nothing to be be proud of, at least, prove her to be a worthy match to her husband.