Liberalscum Buster

August 20, 2008

THE ENRON LOOPHOLE & AND OIL FUTURES TRADING AND PHIL GRAMM

The Commodity Futures Modernization Act of 2000 deregulated the market for energy futures. This is what is commonly referred to as “the Enron loophole.” It has led to malpractice and manipulation of these unregulated dark markets resulting in price spikes far beyond what the normal law of supply and demand would dictate.

Excerpt From The Star-Telegram:

The late, infamous Enron head, Ken Lay, realized in the eighties that he could make more money bidding up energy in the futures market than by actually creating and selling energy. But, under then-current rules, how much you could make swapping paper was limited. Fortuitously, Lay had excellent Texas political connections; and in November of 1992, the head of the Commodities Futures Trading Commission moved to exempt energy-derivative contracts and related swaps from any government oversight.

A vote was hurriedly put together before the Clinton White House would take over, and so Lay could finally start “dark” – unregulated – futures trading. The head of the CFTC was Wendy Gramm, wife of Texas Senator Phil Gramm; five weeks after she left, she became a board member of Enron in Houston.

Fast-forward to late 2000 and H.R. 5660, the Commodity Futures Modernization Act of 2000, sponsored by Republican Congressman Thomas Ewing of Illinois. That bill went nowhere, even though Tom Delay’s wife Christine was then working for a Washington lobbying firm, Alexander Strategies – which Enron had paid $200,000 to push through legislation for permanent energy deregulation in these “dark” markets.

Six months later came Senate Bill 3283, also named the Commodity Futures Modernization Act of 2000. This time around the sponsor was Republican Sen. Richard Lugar of Indiana, and now Phil Gramm was listed as one of the bill’s co-sponsors. Like it had in the House, this bill was destined to go nowhere until, late one night, it was attached as a rider to an 11,000-page appropriations bill – which was signed into law by President Clinton.

Now traders had an officially deregulated market for energy futures. Worse, that bill also deregulated many financial instruments – including the collateralized debt obligations that are at the center of today’s mortgage crisis, which may well cost us more than $1 trillion before it’s over.

Everybody Was Warned!

As USA Today wrote of this fiasco in January of 2002, “But, as a power marketer, [Enron] could buy enough energy-futures contracts in a region to create a virtual monopoly.” That’s right: As early as the winter of 2002, it was widely known that the 2000 Commodities Futures Modernization Act had created a monster, capable of running up energy prices outside of the normal law of supply and demand. Worse, our government had been warned this was going to happen. Representatives of the Federal Reserve, the Securities and Exchange Commission and the CFTC had already told Congress not to deregulate energy because “the market was ripe for manipulation.” Everybody was warned; that’s why this deregulation bill was stealthily inserted into that appropriations bill without a floor debate.

Phil Gramm’s office denied that he had anything to do with writing the section of that bill that actually deregulated energy. And yet Prof. Michael Greenberger, formerly a CFTC board member himself, said that Gramm’s wife Wendy, along with a few lobbyists and Wall Street attorneys, had rewritten it. When Robert Manor of the Chicago Times wrote about this situation on January 18, 2002, neither Gramm could be reached for comment.

Kill It Before It Multiplies

When Enron failed and took its private, unregulated energy exchange to the grave, another rose to take its place. The Intercontinental Exchange (ICE) was the brainchild of Morgan Stanley, Goldman Sachs, British Petroleum, Deutsche Bank, Dean Witter, Royal Dutch Shell, SG Investment Bank and Totalfina. In 2001 ICE purchased the International Petroleum Exchange in London; renamed ICE Futures, it now operates as an “exempt commercial market” under section 2(H)(3) of the Commodity Exchange Act. As the Senate hearings pointed out in the summer of 2006, “Both markets operate outside of any CFTC oversight.”

If you reread the quotes at the start of this story again, you find that many officials in the government warned against what would happen in a deregulated energy market, because it was so easy to manipulate. We already know this to be true thanks to Enron’s California misdeeds. And, as we pointed out last week, British Petroleum was busted for manipulating the propane market and fined over $300 million; and Amaranth Partners was caught manipulating the natural gas market, unconscionably causing the futures price for natural gas to raise every Texan’s electric bills. (It took two years for Amaranth to be exposed.) And yes, the manipulation happened in the new “dark” and unregulated exchanges, making it almost impossible to uncover. So it’s not a question of “if” some “theoretically possible” manipulation and distortion of the market will result from this bill, championed by Phil Gramm, his wife Wendy and Christine Delay’s employer, Alexander Strategies. The reason it is not theoretical is because we keep catching well-known companies doing it on a regular basis.

No Conscience in Congress?

All you hear daily is that the world has a severe shortage of oil, or you can buy only 200 pounds of rice at one time, or we will have a gasoline crisis this summer, etc. But it takes only a minute to find hundreds of quotes from highly respected oil and economic analysts, (not to mention CEOs of the major oil companies), that completely dismiss the claim of oil, gas or food shortages that have been headlining the news.

Even more troubling is that within months of the CFMA’s going into effect, we knew it had enabled easy manipulation of any energy market, but nothing was done to fix it. Nor was anything done when the Senate held its hearings on this matter in 2006, or in the House hearings last December.

Today we call this situation the “Enron Loophole,” but that’s untrue. It’s not a loophole: it was a new law passed in 2000 – and far more individuals than Ken Lay have used that law to line their pockets with hundreds of billions of American consumers’ hard-earned dollars. That’s not my opinion, that’s direct testimony by numerous experts before both the House and Senate.

Professor Greenberger warned about our “New American Economy” far better than I could:

“Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society and make it more productive? We are rewarding people for sitting at their computers and punching in bets. That’s not the way our economy is going to be built, and India and China, with their focus on science and industry and building real businesses, are going to eat our lunch, unless the American public wakes up and puts an end to an economy that praises and makes heroes out of speculators.”

Greenberger’s statement explains why Detroit and other American manufacturers suffer while Wall Street speculators make a fortune — and your rapidly shrinking checkbook pays for it, every time you buy food, fuel or feed.

All because there is no shortage of these goods, you’re just being told there is because it’s more profitable – for a few – that way.

© 2008 Ed Wallace

Everybody was warned; that’s probably why this deregulation bill was stealthily inserted into that appropriations bill without a floor debate.

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4 Comments »

  1. So what was the actual Senate designation of the bill to which this rider was attached. And why did Bill Clinton sign the bill? I am _NOT_ a Clinton basher. I am aware of the origins and the history of this cheese. But what made it to where Clinton signed this bill? Was it the impending necessity of working with Republicans in the Senate facing the Democratic party that led him to sign this or was he simply on the way out the door and angry over the theft of the elections? What motives can I possibly assign to this if I do not know what the rest of the actual bill contained? What was the actual bill so I can look it up?

    Comment by Michael Coburn — August 31, 2008 @ 9:31 pm

  2. Here is the explanation of the time-line you seek..

    Briefly as to why Clinton signed it:

    The Omnibus Bill covered funding for the Health and Social Services and Education for the fiscal year beginning September 30, 2000. This spending bill had been passed by the House on June 15th of 2000, and by the Senate on June 30th of 2000… It went into conference committee two months before the money ran out…

    As September 30th came and went, the bill still sat in the conference committee.

    Funds were pulled from other areas of government, including the Pentagon, to keep operations afloat…until the bill could be released from the Conference Committee.

    October passed, and then November… no action on the funding Bill.

    December’s first week, then second week passed by… no action on the funding Bill?

    All questioned whether Congress would adjourn December 15th with no action? Across Washington, if you may remember, only necessary services were being paid. There was concern as to whether government workers would get paid before Christmas?

    Then on December 14th, HR5660 was introduced in the House and killed by death to committee.. On December 15th, its companion bill was introduced in the Senate, and killed by death to committee as well..

    (Interestingly enough, the sections removing the controversial provisions of the 1933 and 1934 acts) were not listed in the two versions introduced in the House and Senate, but were as one astute reader noted, included buried in the section preceding it.. Only a close study of the original text, by an expert of energy derivatives, would have chanced upon a random finding of the loophole.)

    The conference committee included it in the Omnibus Bill HR 4577, using the version placed in the House, which was then passed by a voice vote in the Senate… 99 to 1 and by a overwhelming vote in the House…

    The bill was signed by Clinton on December 21st. I remember hearing about some concerns with the Commodities Act, which held up the signing for 5 full days, but one has to take into factor the political situation as it was then occurring…

    For it was on December 12th, just 3 days before passage, that the Supreme Court decided Florida would be decided in favor of the Republicans…

    Clinton, if he even knew the damage contained within the Commodities Futures Modernization Act, would be well aware that if he vetoed it, the Republican Congress and newly determined Republican president could pass it in the opening days of the next session just two weeks away… Likewise if he vetoed it, none of his staunchest supporters would have any money to spend over the December holidays…

    WE think all decisions are made with black or white choices. Sadly enough very few are… Although this bill eventually is what allowed derivatives to move into unsecured mortgages and eventually bring the United States economic structure to is knees, considering the circumstances, I would have done the same… I’m sorry to say….

    Comment by kavips — September 30, 2008 @ 8:28 pm

  3. […] energy futures caused the Enron collapse, and that is what this post speaks of. However, this talk show host was speaking of how trading in DEBT futures, allowed by this bill, is […]

    Pingback by The True Source Of The Economic Collapse: It Wasn’t Poor Minorities Trying To Buy Homes! « Jesus Christology — March 26, 2009 @ 2:36 am

  4. Terrific writing=D Will come back soon

    Comment by Fabammofelm — May 20, 2009 @ 6:09 pm


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