The Enron Loophole 17 comments
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Prior to listening to the weekend replay of the congressional testimony
of George Soros and others from last Tuesday, I must admit I had never
heard of the “Enron Loophole”. But it didn’t take too long to realize
that this multi dimensional topic is economic and political dynamite.
Let me start with what I understand the key aspects of the “Enron Loophole” to be.
The provision, allegedly at the behest of Ken Lay of Enron, exempted from regulation energy trading on electronic platforms. This provision is believed to be the primary reason for the spike in electricity costs in California in 2001 and is at the heart of the debate re the speculation in oil prices today.
The most vociferous of the expert witnesses at last Tuesday's congressional event was I. Michael Greenberger, professor of law at Maryland University and former CFTC Director of the Division of Trading & Markets (1997 – 1999). Professor Greenberger argued that the “Enron Loophole” provision in the CFMA produced a change in the supervision of certain commodities (energy, for example) that had been in place since 1922 thereby enabling Enron to engage in their trading practices (with led to the electricity crisis in California in 2001) and the development of “dark markets” (Intercontinental Commodities Exchange in Atlanta, for example) enabling unlimited positions and limited transparency to be established by speculators. All outside the purview of the US regulatory bodies such as the CFTC.
Currently, an attempt to eliminate the “Enron Loophole” has been attached to the massive farm bill (amendment by Sen. Carl Levin) that was passed with a veto proof majority and has been threatened with a veto by President Bush for stated reasons that are suspect, at best.
There are several dimensions to this dynamic issue and they will be explored in the coming days. But let me leave you with a few initial observations:
1 - There is a real probablity that investment banks will be at risk as last week’s testimony makes abundantly clear. One point illustrates the danger – Professor Greenberger noted that the largest holder of heating oil for New England residents is Morgan Stanley. Related to this, George Soros and other panelists noted that hoarding is taking place, as the incentive to convert a rising and controllable asset such as heating oil to US dollars (which is in a structural decline in value and not controllable) is not in the investment banks' interest.
2 – The obvious direct economic impact cannot be overstated. From consumers to industries (airlines, for example) are being effected by the speculation of indexers and hedgies. With consumers stressed and industries on the verge of bankruptcy, the uproar in an election year will not go unnoticed. To that end, consider the following point re the upcoming presidential election.
3 – Former Senator Phil Gramm is acknowledged as the key economic advisor to Senator John McCain. Senator McCain has joined President Bush in opposing the current farm bill for the same apparent reasons. However, in Senator McCain’s case the reason may be more ignorance by relying on his economic advisor, Sen. Gramm, than the more nefarious supporting of the Enron Loophole. The bottom line is there is real risk that McCain will look more than a touch clueless on the key economic matter of the price of energy.
Investment Strategy Implications
At last week’s congressional hearing, several experts testified to what the fair value of oil might be – a subject that I wrote about last week, without knowledge of the actual testimony. It was interesting to hear that my rather simplistic calculation of where the fair value of oil might be (approx. $80) matched very closely to several expert witnesses’ estimates, as well as the more sophisticated analysis conducted by Exxon Mobil and Shell Oil.
The coming weeks will be telling as the farm bill works its way into law. And then we shall see if $130 oil is really only about real economy supply and demand and not the supply and demand of the speculators.
Let me start with what I understand the key aspects of the “Enron Loophole” to be.
Back in December 2000, Congress passed and President Clinton signed into law the “Commodities Futures Modernization Act of 2000 [CFMA]”. While the CFMA attempted to resolve the dispute over jurisdiction between the SEC and the CFTC, two elements of the bill appear to have a direct impact on the markets and the financial services industry, specifically investment banks and hedge funds.
I will save the second point for a later report, as it requires further research before I feel comfortable commenting on the derivatives portion of the bill. What I do want to get to is what has come to be known as the “Enron Loophole”, a provision that was slipped into the bill literally in the dead of night by then-Senator Phil Gramm [R – TX].
The provision, allegedly at the behest of Ken Lay of Enron, exempted from regulation energy trading on electronic platforms. This provision is believed to be the primary reason for the spike in electricity costs in California in 2001 and is at the heart of the debate re the speculation in oil prices today.
The most vociferous of the expert witnesses at last Tuesday's congressional event was I. Michael Greenberger, professor of law at Maryland University and former CFTC Director of the Division of Trading & Markets (1997 – 1999). Professor Greenberger argued that the “Enron Loophole” provision in the CFMA produced a change in the supervision of certain commodities (energy, for example) that had been in place since 1922 thereby enabling Enron to engage in their trading practices (with led to the electricity crisis in California in 2001) and the development of “dark markets” (Intercontinental Commodities Exchange in Atlanta, for example) enabling unlimited positions and limited transparency to be established by speculators. All outside the purview of the US regulatory bodies such as the CFTC.
Currently, an attempt to eliminate the “Enron Loophole” has been attached to the massive farm bill (amendment by Sen. Carl Levin) that was passed with a veto proof majority and has been threatened with a veto by President Bush for stated reasons that are suspect, at best.
There are several dimensions to this dynamic issue and they will be explored in the coming days. But let me leave you with a few initial observations:
1 - There is a real probablity that investment banks will be at risk as last week’s testimony makes abundantly clear. One point illustrates the danger – Professor Greenberger noted that the largest holder of heating oil for New England residents is Morgan Stanley. Related to this, George Soros and other panelists noted that hoarding is taking place, as the incentive to convert a rising and controllable asset such as heating oil to US dollars (which is in a structural decline in value and not controllable) is not in the investment banks' interest.
2 – The obvious direct economic impact cannot be overstated. From consumers to industries (airlines, for example) are being effected by the speculation of indexers and hedgies. With consumers stressed and industries on the verge of bankruptcy, the uproar in an election year will not go unnoticed. To that end, consider the following point re the upcoming presidential election.
3 – Former Senator Phil Gramm is acknowledged as the key economic advisor to Senator John McCain. Senator McCain has joined President Bush in opposing the current farm bill for the same apparent reasons. However, in Senator McCain’s case the reason may be more ignorance by relying on his economic advisor, Sen. Gramm, than the more nefarious supporting of the Enron Loophole. The bottom line is there is real risk that McCain will look more than a touch clueless on the key economic matter of the price of energy.
Investment Strategy Implications
At last week’s congressional hearing, several experts testified to what the fair value of oil might be – a subject that I wrote about last week, without knowledge of the actual testimony. It was interesting to hear that my rather simplistic calculation of where the fair value of oil might be (approx. $80) matched very closely to several expert witnesses’ estimates, as well as the more sophisticated analysis conducted by Exxon Mobil and Shell Oil.
The coming weeks will be telling as the farm bill works its way into law. And then we shall see if $130 oil is really only about real economy supply and demand and not the supply and demand of the speculators.
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This article has 17 comments:
Play the entire C-Span video of the hearing again. Listen carefully to all the testimony. It will be the best 2 hours and 18 minutes you'll spend this year.
I also watched most of the testimony after reading your first paragraph and seeing some of the highlights. What GH is getting at is not that the loophole does not exist, but that it wasn't truly closed. Indeed, Greenberger referred to it as a joke. The joke of it is the CFTC has to prove that commodities trades they wish to regulate require regulation before they can regulate it. There will be red tape hurdles to jump before CFTC can do what it did previously without such requirements. Also, oil was essentially left out of the "fix," and on preview what hippypaul said - those problems still exist.
I've said it a million times...there is no supply problem. Everyone who wants oil, has it.......you just have to pay the hedgies their cut.
I have been shouting in the wilderness for a couple of years on this topic. Please read my blog at texasenergyaggregation....
This is real. Let's see what gets done about it. And who does it. It is the biggest story this year, the fleecing of America.
futuresource.quote.com...=
futuresource.quote.com...=
General Motors,Ford, Chrysler and the like are also getting their just desserts/deserts...wha... There is absolutely no ecuse for having carried these SUV's into the 21st century when we ahve the best engineers, marketers, designers and whatnot here.
We have been delivered an old-fashioned spanking for our misbehaviors in this regard....because smart is as smart does. Collectively , we desrve it, because it could not have happened without our wholesale participation.....peri... or otherwise.
We'll just have to be the laughing stock of the entire G-8 community while dust ourselves off dis-employ several hundered thousand folks...because that's what it'll take to do this...and move on down the road.
Now maybe we can ungergird those roads and bridges, shake up our transportation, energy grids etc. etc.
Some old-fashioned Smart Actions...that what I mean.
Now let the Church say Amen!
On Jun 23 09:24 AM TexasGator wrote:
> Sorry - here is the link to futuresource to see what it has done
> to natural gas prices.
> futuresource.quote.com...=
www.msnbc.msn.com/id/3...
On Jun 25 12:23 AM TexasGator wrote:
> Now that the press has found a Republican scapegoat (Phil and Wendy
> Gramm)tied to McCain and Obama has uttered it, it is now news. This
> is a great, in depth story, but it works way too hard to slam McCain
> and gives Clinton the slip. McCain needs to can Phil Gramm NOW.