The Enron Loophole

You hear a lot of buzz words these days about shady deals and speculation on oil futures. So, what exactly is this Enron Loophole so many refer to which allows all of this trading on energy to go on with no accountability or regulation?

From Professor Greenburger:

it has been widely understood that, unless properly regulated, futures markets are easily subject to distorting the economic fundamentals of price discovery (i.e., cause the paying of unnecessarily higher or lower prices) through excessive speculation, fraud, or manipulation.

Investigations (SPI) staff represent what is now conventional wisdom: hedge funds, large banks and energy companies, and wealthy individuals have used exempt commercial energy futures markets to drive up needlessly the price of energy commodities over what economic fundamentals dictate, adding, for example, what the SPI estimated to be @ $20-$30 per barrel to the price of a barrel of crude oil at a time when that commodity had reached a then record high of $77

Today the Senate Committee on Commerce, Science and Transportation held a Hearing titled: Energy Market Manipulation and Federal Enforcement Regimes. What came up over and over again was the Enron Loophole as one of the main reasons the market is seemingly in a speculative bubble.

What are they talking about? Well, in 2000, the Commodity Futures Modernization Act of 2000 created a derivative single-stock future and exempts most over-the-counter energy trades and trading on electronic energy commodity markets from U.S. regulation.

There is even an entire website devoted to closing this loophole, Close the Enron Loophole, although they maybe a little too enthusiastic about current Congressional efforts to "do" just that.

From Oil WatchDog:

We'll never know exactly how the trick was pulled off, or by who, because so much energy trading is done in unregulated markets created by the corporate criminals of Enron. Congress has in its hands a partial cure for the speculative excess. If lawmakers don't have the guts to act now, closing the loophole opened by Enron, they should have their heads handed to them by consumers

Most interesting was the testimony and analysis presented by Mr. Michael Greenburger. He testified the new House and Senate Bills attempts to close the Enron loophole put the proof of the need for regulation onto the public instead of onto the traders. He said that only about 1% of these futures contracts would actually be affected. So, once again it appears Trojan Horses abound and while it may seem there is progress in regulation of the United States energy markets, oops, guess what, it's all fluff.

On May 22, 2008, the Food Conservation and Energy Act of 20086 (the ―Farm Bill) was enacted into law by a Congressional override of President Bush‘s veto. Title XIII of the Farm Bill is the CFTC reauthorization act, which, in turn, includes a provision that was intended to ―close the Enron Loophole.
Rather than returning to the status quo ante prior to the passage of the Enron Loophole by simply bringing all energy futures contracts within the full U.S. regulatory format with exceptions to regulation granted on a case-by-case basis under section 4 (c) of the CEA, the Farm Bill amendment requires the CFTC and the public to prove on a case-by-case basis through lengthy administrative proceedings that an individual energy contract should be regulated if the CFTC can prove that that contract serve[s] a significant price discovery function in order to detect and prevent manipulation.
This contract-by-contract process will take months, if not years, to complete and it will then only apply to a single contract

Smoke and Mirrors anyone? I think we need to pay much more attention to Professor Greenburger and his insights from watching the Q&A of this hearing.

By the way, once again we see the favorite threat from these private equity, futures trading houses, and so forth. The tireless threat mantra is to say now if you stop us from doing whatever we want, we'll just go offshore! Right o, you're already offshore and the only reason you are in the United States doing business at all is simply because you have to. This constant threat from corporations is a Non sequitur.

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Comments

Futures speculation/going offshore

The threat of "going offshore" is one best dealt with by collective uniform regulation by the EU, US, Canada, Japan etc. It would come in extremely handy in the labor and environmental areas as well. And seeing as everybody is in the same globalization boat ....

I won't pretend to be anything close to a commodities trading expert, but I don't understand how futures trading in paper (i.e, gambling/hedging where the delivery of the commodity is never done) can lead to an actual difference in the spot (i.e., delivery) price. That's where Krugman's point about the necessity to prove hoarding makes the most sense.

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offshore threat

one of the testimony pieces showed that they literally cannot go offshore if they regulate it in the US markets and even if they do, because it's US futures markets, they would still be subject to regulation. There is a webcast of the hearing and I believe where this is covered is in the Q&A.

The offshore threat is used also to get more cheap labor (oops) guest worker Visas but the truth of the situation is those Visas are used to facilitate the technology transfer to offshore. They cannot offshore outsource major pieces of their technology without them.

Another threat is corporate tax code. Corporations threaten to move their headquarters offshore if the US removes the tax incentive to keep capital/profits offshore for US corporations. Well, if it was more amenable to move offshore, incorporate elsewhere, they would have done it by now. There are reasons they are in the US and it's not loyalty or altruism.

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The ONLY answer is localization

Until we consumers get smart and buy locally *ONLY*, the race to the bottom will continue. And that goes for *EVERY* market- it's either take control of your freedom and that of your neighbors- or let other countries buy you out and own your slavery.

It's high time every corporation that does not show "loyalty or altruism" to the community looses the right to sell in the market of that community- entirely.

Until we do that, we're just slaves to the rest of the world- they've defeated the US without firing a shot.

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Maximum jobs, not maximum profits.

The ONLY answer is localization

Localization has many benefits from keeping jobs at home, to being more fuel efficient and less environmentally damaign as there is less need for long distance transport.

Higher fuel costs may actually be the friend of localization

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"If the hand of the Free Market is invisible, how come we can see it?" Tom Tomorrow

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Energy costs

I think I heard that on CNBC that it's dawning on a few moving cheap plastic buckets for Wal-mart around the globe might actually not be cheaper. How do these people get these jobs even? Unreal they don't count the supply chain costs.

Service jobs, esp. those that can be done over the Internets, we're in big trouble. Blinder estimated $40M are vulnerable to be offshored.

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Energy costs

Several months ago I caught a piece on The Nightly Business report - they were interviewing India's finance minister. He said that India was aggressively putting the infrastructure in place to accept up to 40 million outsourced jobs over the next decade.

No economy no matter how "resilient" can absorb that kind of job loss.

40 million - isnt that about 20% of the total US workforce?

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yup

and they have bought many a Senator, President and Congress Representative in order to do it. I believe the actual workforce in the US is more like 100M so more like 40%. I wrote on here a blog piece "FET - Fictional Employment Theory" and I'm sad to report, I have seen both Obama and McCain quote the insanity that if one displaces Americans that magically creates jobs. They don't even recognize there is a huge reason NASSCOM and India itself lobby and push heavily for guest worker Visas. It facilitates offshore outsourcing and they consider Indian workers "part of trade", i.e. they are "services" to be traded and work hard to put these into WTO GATS mode 4.

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yup

Which brings up an entirely new aspect of this discussion. Some 60% of H1Bs are granted to outsorucing firms according to Tonelson. In this fashion foreign workers and companies can come here learn as much about US business practice , culutre and intellectual property as possible - go back to india to either open an offshore facility for the sponsoring corp., or go back and start up a competing firm - absolutely insidious. It was never about "attracting the best and brightest" - US workers are the most productive and best educated in the world - yet some 350,000 annual college grads have to compete with H1B workers for the 140,000 give or take job openings - no wonder we have degreed engineers installing cable or fixing copy machines instead of engineering.

As far as the complete lie that outsorucing magically creates jobs - I have asked the supply side global free marketeers on other boards numerous occassions to name some jobs created - they always stammer - change the subject -or attack me personally, have yet to hear exactly what those jobs are.

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