Phil Gramm, the Enron Loophole, and oil speculators on Wall Street

Posted by AzBlueMeanie:

Remember this past summer when John McCain and his Republican goons were blaming high gas prices on a shortage of oil supplies in the world, and chanting "drill baby drill"? As I wrote at the time, the surge in gas prices had nothing to do with actual supply and demand but was driven by rampant speculation among investors in the commodity futures trading markets and unregulated spot oil markets.

CBS' 60 Minutes aired a must-see report on Sunday confirming that it was speculators, not supply and demand, that was responsible for the surge in gas prices. 60 Minutes: Speculation Affected Oil Price Swings More Than Supply And Demand Correspondent Steve Kroft reported it was a speculative bubble, not unlike the one that caused the housing crisis, that had more to do with traders and speculators on Wall Street than with oil company executives or sheiks in Saudi Arabia.

Dan Gilligan is the president of the Petroleum Marketers Association and represents more than 8,000 retail and wholesale suppliers, from home heating oil companies to gas station owners.

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.

Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're trying to make money on the market for oil?" Kroft asked.

"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."

"The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going in to these markets."

Asked who was buying this "paper oil," Michael Masters told Kroft, "… Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money – sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."

In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.

Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. "We believe that high energy prices are fundamentally a result of supply and demand," he said in his testimony.

As it turns out, not even J.P. Morgan's chief global investment officer agreed with him. The same that day Eagles testified, an e-mail went out to clients saying "an enormous amount of speculation" ran up the price" and "140 dollars in July was ridiculous."

If anyone had any doubts, they were dispelled a few days after that hearing when the price of oil jumped $25 in a single day. That day was Sept. 22.

Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.

Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Greenberger said.

A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.

"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft.

"So you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during the same period. However, the only thing that makes sense that lifted the price was investor demand."

Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.

This would be the same Wall Street investment banks that the U.S. Treasury just bailed out to the tune of more than $350 billion and counting. You, the U.S. taxpayer, got screwed coming and going by Wall Street bankers and their allies in Congress and the Bush White House.

View the full report here:

So how was this investor speculation to drive up oil prices made possible?

Senator Phil Gramm (R-TX), better known as the Senator from Enron (pictured here with John McCain who called Gramm his "economics guru." Gramm was McCain's chief economics advisor until he called his fellow American citizens "a bunch of whiners.")

Phil Gramm was responsible for surreptitiously slipping the "Enron loophole" into the Commodity Futures Modernization Act of 2000. The Daily Kos provides an excellent summary of what occurred. Daily Kos: The Enron Loophole (I have added emphasis):

The Texas Observer has a great write-up on what happened:

In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call "a stunning departure from normal legislative practice," the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm.

There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment–also known as the Commodity Futures Modernization Act–along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.

"The work of this Congress will be seen as a watershed where we turned away from an outmoded Depression-era approach to financial regulation and adopted a framework that will position our financial services industry to be world leaders into the new century," Gramm said.

Watershed indeed. With the U.S. economy now battered by a tsunami of mortgage foreclosures, the $30-billion Bear Stearns Companies bailout and spiking food and energy prices, many congressional leaders and Wall Street analysts are questioning the wisdom of the radical deregulation launched by Gramm's legislative package. Financial wizard Warren Buffett has labeled the risky new investment instruments Gramm unleashed "financial weapons of mass destruction." They have fed the subprime mortgage crisis like an accelerant. While his distracted peers probably finalized their Christmas gift lists, Gramm created what Wall Street analysts now refer to as the "shadow banking system," an industry that operates outside any government oversight, but, as witnessed by the Bear Stearns debacle, requiring rescue by taxpayers to avert a national economic catastrophe.

While the nation's investment bankers are paying a heavy price for their unbridled greed (in billions of dollars of write-offs), Gramm has fared quite nicely. He currently serves as a vice president at UBS AG, a colossal, Swiss-owned investment bank, the post, no doubt, a thank you for assiduously looking out for Wall Street interests during his 23 years in public office. Now, with the aid of his longtime friend Arizona Sen. John McCain, Gramm may be looking at a quantum leap in power and influence.

But even more damning are Gramm's intimate ties, through his wife, Wendy, to Enron, whose mainpulation of the markets was made possible by Gramm's bill:

In an apparent response to a 1992 plea from Enron, Dr. Wendy Gramm, then chair of the federal Commodity Futures Trading Commission, moved to exempt the company's energy-swap operation from government oversight. By then, the Houston-based Enron was a major contributor to Senator Gramm's campaign.

A few days after she got the ball rolling on the exemption, Wendy Gramm resigned from the commission. Enron soon appointed her to its board of directors, where she served on the audit committee, which oversees the inner financial workings of the corporation. For this, the company paid her between $915,000 and $1.85 million in stocks and dividends, as much as $50,000 in annual salary, and $176,000 in attendance fees, according to a report by Public Citizen, a group that has relentlessly tracked Enron, which in turn has called the report unfair.

Meanwhile Enron had become Phil Gramm's largest corporate contributor–and according to Public Citizen, the largest across-the board donor in its industry. Between 1989 and 2001, the company tossed Gramm just under $100,000.

In 1998, Wendy Gramm cashed in her Enron stock for $276,912.

You remember Enron and George W. Bush's best buddy "Kenny Boy" Lay, don't you? Enron's manipulation of California's energy markets nearly bankrupted the state. But this was only a test run for the manipulation of the world's oil markets that we have witnessed in recent years. Remember when George W. Bush and Congress promised us that lessons had been learned after Enron's collapse? Yeah, they learned all the wrong lessons, how to do it better on a grander scale. The legislation that Phil Gramm sneaked through Congress is still on the books. It is long past time to repeal every piece of legislation and administrative rule that Phil and Wendy Gramm ever had a hand in.

And Phil and Wendy Gramm, along with their white collar criminal friends on Wall Street, should be brought to justice and forced to disgorge every dime of their ill-gotten gains to the American taxpayers. I understand that Guantanamo Bay will soon be available to house these criminals who destroyed the U.S. economy.