Reidblog [The Reid Report blog]

Think at your own risk.
Thursday, June 19, 2008
John McCain, the Enron loophole, and your gas tank
Last night, "Countdown" did an exceptional investigative piece that should be required viewing for any American who wants to know why gas prices are so high. In essence, it isn't simple supply and demand: it's speculation, or in Bushian terms, the enronization of everything. Watch:



For those who prefer to read, the Texas Lawyer Blog explains:
Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.


The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as cftc chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

Read the full article at Mother Jones Magazine.

Of course there are other factors contributing to high energy costs, most notably global demand (see India and China) and the weak U.S. dollar. But regulating speculation is within the direct control of Congress, and the recent slew of media coverage has finally pushed members of Congress, including Sen. Carl Levin (MI) to act, including putting a provision closing the Enron loophole into the recently passed farm bill (which is why John McCain voted against it.) That might not be enough, however. This month, former CFTC Trading and Markets Division head Michael Greenberger testified on the Hill about speculation's role in boosting energy prices, and stated that closing the Enron loophole could reduce gas prices dramatically -- perhaps by 25% overnight:
Michael Greenberger, the former head of the CFTC's Division of Trading and Markets, testified yesterday before the Senate Commerce Committee on the topic of Energy Market Manipulation. He stated that the investment banks, namely Goldman Sachs (GS) and Morgan Stanley (MS), control the price of oil and natural gas through the ICE futures market. He cited that Morgan Stanley currently owns 27% of the natural gas futures.

He stated that former Senator Phil Gramm of Texas sneaked the Enron loophole through a large piece of insignificant legislation years ago: the result was that regulations upon the futures industry were abandoned. This loophole eventually allowed the current CDO-subprime crisis, and the current energy market crisis because regulations, which once protected the market from manipulation, are no longer enforcable.

Greenberger suggested that the current attempt of closing the Enron loophole by Senator Levin through the Farm Bill, would not work - as it would leave the government with the constant burden of proof to prove manipulation was occurring. Also it would only be enforcable on domestic market manipulators and not international ones. ...


Wall Street is lobbying hard to prevent Congress from taking further action (surprise, surprise.)

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