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I know this might be a rare event, but lets congratulate one of our Democratic Senators who has really achieved greatness. Every time you fill up at the gas station, you should thank Senator Levin. We all heard endlessly about the Enron loophole. Well did you know Senator Levin closed it? I didn't until yesterday when I was digging around in the the Commodity Futures Modernization Act of 2000, also known as the "Enron Loophole." Senator Levin worked tirelessly to close it,

and succeeded when the bill overrode President Bush's veto on June 18, 2008. Since then gas prices have dropped by over 60%.

the Commodity Futures Modernization Act of 2000

has received criticism for the so-called "Enron loophole," , which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by lobbyists for Enron working with senator Phil Gramm seeking a deregulated atmosphere for their new experiment, "Enron On-line."

Several Democratic legislators introduced legislation to close the loophole from 2000-2006 but were unsuccessful.

In September 2007, Senator Carl Levin (D-MI) introduced Senate Bill S.2058 specifically to close the "Enron Loophole" This bill was later attached to H.R. 6124, the Food, Conservation, and Energy Act of 2008, aka "The 2008 Farm Bill". President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18, 2008 the bill was enacted into law. One specific reason behind its introduction was to address the record high oil prices of the 2000s energy crisis.

And look what happened to Gas Prices once Democrats like Carl Levin stepped in to stop this madness. When this bill became law is indicated by the red line on this graph.

Senator Levin first introduced this bill on Sep 17, 2007. Though his subcommitee had since 2001,

investigated the vulnerability of U.S. energy markets to price manipulation and excessive speculation.

Now of course Senator Levin didn't do this on his own. There was a widespread outpouring of concern about this Enron loophole by the progressive community. I'm sure most of you remember, but if not check this out...It was eventually passed by all but 15 Senators once it was tucked into the "Farm Bill."

OK, so now lets take a look at the life of the Enron Loophole.

I added the blue line that starts at about $1.60 in December of 2000, when lame duck President Clinton signed into law the CFMA. That image really speaks for itself. Talk about spreading the wealth, that's years of bloated prices.

I'd like to say no one knew about it. But the New York Times had a story the next day which was ominous. Dec 21, 2000.

At the eleventh hour last Friday night, Congress passed a measure that will benefit Wall Street at the expense of the average investor...
The bill, the Commodity Futures Modernization Act of 2000, which passed after an intense push by Wall Street lobbyists, changes the financial markets in two ways. First, it lifts a longstanding ban on futures trading in individual stocks, thus allowing investors to buy shares through brokers with very little money down. Second, it protects a lucrative business for bankers -- the private financial contracts known as swaps -- from being regulated, for the most part. Investors are affected by swaps because they are used by many mutual funds and publicly traded companies. (In a swap, one party bets that an economic variable -- interest rates, for instance -- will go up, while the other bets on its going down.)...
It's not surprising that Wall Street lobbied for the new rules. The major banks and investment houses, chock-full of investment bankers, brokers and traders, will earn big commissions and trading profits on single-stock futures contracts. As always, they will make money regardless of whether their customers do.

But the new single-stock futures bill could be dangerous -- for the market as well as for individual investors. As the vast literature on behavioral economics shows, people aren't all that rational when it comes to financial risk. And there's the danger that investors who bet wrong will simultaneously dump their portfolios to pay their debts to brokers, causing stocks to crash...
Think of the 1920's, when investors borrowed heavily to speculate -- their collective debt 10 times the value of their collective down payments. We all know what happened after that...
Wall Street makes much more money from these unregulated transactions than it does from futures trading, and the pressure on legislators intensified in Congress's waning hours. At a minimum, the question of swaps regulation deserved more scrutiny by lawmakers...
As for the question of single-stock futures trading, next year, you can expect more calls from your broker, who may try to sell you on what Oscar Wilde once said: ''The only way to overcome a temptation is to yield to it.''

Keith goes through the whole story here about six months ago..

The results were blatant from the beginning. Two questions remain, one I think I know the answer to- Why did Clinton sign into law the CFMA and the Gramm/Leach/Bliley? (If it had been solely Republican handiwork this would be easier to stick to them) Second Question: What do we do now? This is just like the Iraq war, torture argument. Do we press for investigations and punish those that abused their power ( Gramm and Mrs Gramm I'm looking at you )? CNN Identifies the Top 10 Culprits of the Crisis I don't know about that list or the order... but what now... do we just turn the page and move forward, educating to prevent recidivism? Does anyone feel overextended? There's so much that needs to be done, where do we start...? Beyond repeating the story I just told, I think we need to inform people about who sets the price for oil. It's not OPEC, it's Wall-Street and other financial markets.

UPDATE: That last part about OPEC not controlling prices can really be seen in the actions of late. OPEC announced a 2.2 million barrel per day cut in output. Yet the price of oil still dropped about $11/barrel in the 9 days afterward to a four-and-a-half year low of $33.87/barrel. February futures are around $42/b, but things are looking bright for oil prices as we move into an era where we can use less and less oil.

UPDATE 2: Rebuttals to the Conservative argument that the gas prices decreased with the financial collapse. The Dow Jones only lost 28% of its value in the time since Gas prices have shed 60+%. (And you'd think gas would have the less elastic demand (less sensitive to change)). Also, Demand hasn't dropped that greatly

Global oil demand is now expected to contract in 2008 for the first time since 1983, shrinking by 0.2 mb/d, with the total this year revised down by 350 kb/d to 85.8 mb/d. 2009 demand will grow again to a downward‐adjusted 86.3 mb/d. This forecast is based on the IMF assumption that the global economy will gradually recover from 2H09.

First Timers Confession: Rec List? Thank you all! Three Cheers for Senator Carl Levin and all that worked to bring light to this issue!
FINAL UPDATE: I'm goin' to sleep. Let me stick a disclaimer here, I am not an expert, I've got a degree in Economics with a specialization in International Economics. But I don't work in the industry. I don't have any inside info. This is my opinion that Senator Levin deserves our cheers and Phil Gramm our jeers. Is it a 1:1 causation the closing of the loophole to your decreased fuel costs? Certainly not, the degree of correlation is up for debate. The numbers are certainly headed in the right direction ~6 months later.
Some Independent Analysis which shows the relationship of the closing of the loophole to electronic trading:

By that time, Sprecher owned a small Atlanta company that had software resembling what he had already designed. His exchange initially drew trading volume by giving energy companies and banks equity stakes in ICE.

"Jeff figured out the secret was to get the participants in the marketplace to buy into the exchange that was being set up," said Eric Meier, managing director of the Chicago trading firm Transmarket Group.

Renamed the IntercontinentalExchange, the Internet-based market filled a void in electricity trading after Enron imploded in 2001. Enron unexpectedly helped ICE on the regulatory front as well. The "Enron loophole" contained in a 2000 law exempted energy trading on electronic platforms from regulation, which pumped trading volume into ICE.

During the summer, ICE agreed to meet Commodity Futures Trading Commission regulations at its London operations in order to mute concerns that the loophole enabled manipulators to push oil close to $150 a barrel. Sprecher defended the speculators on his exchange against congressmen who blamed them for inflating crude oil prices. "If there are no bankers and pension funds trading, only oil companies will be setting the price of oil," he said in an interview over the summer.

Originally posted to CornSyrupAwareness on Sat Dec 20, 2008 at 10:58 PM PST.


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