Former Republican Sen. Phil Gramm on Friday blamed monetary policy and politicized mortgage lending - not deregulation - for the current market crisis.

Speaking before an audience at the American Enterprise Institute, Gramm, a vice chairman of UBS Investment Bank, said regulators had the "massive power to intervene" in the crisis but chose not to budge because of government policies and political pressure to grant mortgage loans to people who could not afford them.

"It wasn't that the regulators weren't there. It wasn't that the regulators didn't have the authority," said Gramm. "It was that the regulators didn't have the concern. In no area of the subprime lending related to mortgages did regulators lack authority."

During his tenure as the Senate Banking Committee chairman, the former Texas senator was one of the chief architects behind the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act - two bills that some policy and lawmakers say deregulated the financial sector and paved the way for the crisis.

The Gramm-Leach-Bliley bill repealed the Glass-Steagall Act to allow for the merger of commercial and investment banks, and was passed in 1999 following the announced merger of Citicorp and Travelers Group to form Citigroup Inc. (C). A year later, Gramm helped pass the Commodity Futures Modernization Act, which prevented the Commodity Futures Trading Commission from regulating swap products.

In the wake of the financial crisis, Gramm's bills have often been blamed for contributing to a regulatory breakdown that failed to prevent the collapse or near-collapse of many investment banks.

But Gramm didn't waiver in his support for that past legislation Friday, asserting instead that the bills didn't deregulate anything.

In fact, he disputed former Securities and Exchange Commission Chairman Christopher Cox's assertion that Gramm's legislation prevented the SEC from regulating credit-default swaps, suggesting the agency has had the authority all along.

"Something had to be done legislatively to eliminate this cloud over whether or not swaps were legal," he said. "We removed the cloud with a bill which gave it legal certainty, but we didn't eliminate anybody's ability to regulate swaps as bank products or as securities," he said.

Gramm instead said he believes that monetary policy implemented during the 2001 recession, coupled with strong political pressure to lend to unworthy borrowers, is the root cause of the crisis that has shaken the global economy.

That monetary policy, he said, "inadvertently stimulated" the housing industry, which was already booming.

Then, the Community Reinvestment Act, he said, "came to be used as a vehicle to pressure banks to make loans to people with moderate to low income."

Gramm conceded that the credit-default swap market is too opaque and needs more transparency to help restore trust in the marketplace. But he disagreed that such instruments have caused the crisis, saying the credit-default swap market has proved to be resilient and that such instruments are better predictors of the creditworthiness of another company than the credit-rating agencies.

"I think you can make a case that more financial institutions would have failed without credit-default swaps," he said.

He said he does believe some reform is in order for mortgage lending, including a push to require a 5% down payment on a loan and requiring that lenders verify the data on mortgage applications.

He also noted that adjustable-rate mortgages should not be securitized, and that subprime borrowers should be required to prove they can make monthly payments if interest rates rise.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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