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.