07.24.08
Congress Must Bring Sanity Back to the Oil Markets
Cantwell: "Wall Street Got Drunk, Now Middle Class Americans Suffer the Hangover"
Congress Must Bring Sanity Back to the Oil Markets
WASHINGTON, DC – Thursday, U.S. Senator Maria Cantwell (D-WA) spoke on the Senate floor about S. 3268, the Stop Excessive Energy Speculation Act of 2008, and the need for Congress to learn from deregulation failures of our nation’s past.
“While ‘Wall Street got drunk,’ it's really middle class Americans who now are suffering the hangover,” said Cantwell. “More than 80 percent of Americans believe that oil commodities speculators are manipulating the price of oil, and more than two thirds of Americans want Congress to re-regulate these critical markets. During the past decade, the financial industry has repeated some of the excesses that our country went through during the 1930s and the Savings and Loans disasters, highlighting the failures our experiments with deregulation. I wonder when we are going to learn these lessons and stop deregulating critical sectors of our economy. We must act now to correct the market failures brought on by deregulation.”
Last week Majority Leader Harry Reid (D-NV) introduced S. 3268, the Stop Excessive Energy Speculation Act of 2008, a comprehensive bill that addresses excessive speculation in the oil futures markets that some experts believe are adding $30 - $60 per barrel of oil. The bill adopted many of the ideas that Cantwell has championed for months to bring more transparency and oversight over the oil and gas markets.
On June 12, Cantwell introduced the Policing United States Oil Commodities Market Act of 2008 along with Senator Olympia Snowe (R-ME), which would shed light on dark markets where some oil futures are traded. On June 23, she introduced the Prevent Unfair Manipulation of Prices (PUMP) Act, which takes a comprehensive approach to address the loopholes that allow energy traders to evade federal oversight. And earlier this month, she joined Senators Joseph Lieberman (I-CT) and Susan Collins (R-ME) in introducing the Commodity Speculation Reform Act to add transparency to futures markets and close the door to excessive speculation by tightening key investment laws and clarifying the oversight mission of the Commodities Futures Trading Commission (CFTC).
On June 3, Cantwell chaired a Senate Commerce Committee hearing which served to highlight many of the oil futures market loopholes. And in April, she called on the Department of Justice to create an Oil and Gas Market Fraud Task Force to examine fraud and manipulation of oil and gas markets. She has repeatedly called on federal agencies including the Federal Trade Commission and the CFTC to use their existing authority to conduct oversight over the oil and gas markets.
[Cantwell’s Floor Statement]
“Thank you, Madam President. I came to the floor yesterday to talk about how our nation must move forward on a new energy future and explain how even if we drilled off all our coastlines it would still only provide 1 percent of what our future oil needs. Instead we should be moving towards a renewable energy future and new energy technologies that could actually reduce our dependence on foreign oil by half. But today I come to the floor to talk about the proper policing of oil markets because we are in a crisis that is literally bankrupting families and businesses and even threatening entire industries.
“Now, I don't often agree with President Bush, but I have to say in his latest economic analysis, I actually agree with him, which I think explains part of the reason why we are in a crisis today. That's right, the president said that Wall Street got drunk. The president acknowledged that something was wrong with Wall Street and that Wall Street got drunk.
“Now, I don't know if the president meant to say that publicly, but it got captured on the Internet. I don't know if he plans to keep saying that or all the intentions he has about trying to sober up Wall Street. But I do know that elaborating on the president's point, White House press secretary Dana Perino explained that -- quote -- "you know, I actually haven't spoken to him about this, but I imagine what he meant, as I have heard him describe it before in both public and private, was that Wall Street let themselves get carried away and that they did not understand that the newfangled financial instruments would pose to markets. That is that, she said "Wall Street let themselves get carried away and that they didn't understand that the risks that these newfangled financial instruments would pose to the markets."
“So I don't know why the Bush Administration and the regulatory team that they put in place wasn't doing something about this. We do know the administration supported deregulation of the financial markets. And, to me, the issue is that while Wall Street was getting drunk, it's really America and the American middle class that is feeling the hangover. Today the Federal Reserve is struggling to contain what is almost one of the most severe credit crisis since the Great Depression, and American families and businesses are paying dearly for the poor decisions and inactions of this administration.
“During the past decade, the financial economy seems to have repeated some of the excesses that our country has gone through before. So I wonder when we are going to learn the lessons of history and make sure that we in Congress do our job and that regulatory agencies do theirs.
“In many ways, today’s situation is a repeat of the 1920's when too much borrowing, to underwrite too many speculative bets, using too much of other people's money set up an entire economy for a crash. Well, in 1999, Congress repealed key parts of the Glass-Steagall Act of 1933. It allowed banks to operate any kind of financial businesses they desired. And it set up a situation where they had multiple conflicts of interest. And several economists and analysts have cited the repeal of this Act as contributing to the 2007 subprime mortgage crisis. Robert Kuttner, co-founder and co-editor of The American Prospect magazine wrote in September 24, 2007 -- quote -- "Hedge funds, private equity companies, and sub prime mortgage industries have two big things in common.
“First, each represents financial middlemen unproductively extracting wealth from the real economy. Second, each exploits loopholes in what remains of financial regulations."
“Then in 2000 we also deregulated a new and volatile financial derivative that is at the heart of today's housing credit crisis – credit default swaps. As White House press secretary Dana Perino would describe it, these newfangled financial instruments that pose a risk to the market actually grew into a $62 trillion industry. And Warren Buffet has called these credit-swaps financial weapons of mass destruction. So the proliferation of these newfangled financial instruments has resulted in huge profits and losses without any physical goods changing hands.
“So now I come to the floor asking my colleagues, when are we going to learn the lessons of the past? We are we going to realize that the 1929 stock market crash has the same root cause as the recent housing bubble? Both were financed by dangerously high levels of leveraged borrowing, and after the crash many banks failed, causing a ripple effect that devastated our nation's economy. Well, after the 1929 crash, Congress stepped up and changed banking laws to eliminate some of the abuses that had led to the crash. That's right, only after the crisis did Congress act. What I want to know is whether we're going to learn that vital lesson and legislate consumer protections in advance, or only after a bubble bursts.
“The savings and loan crisis of the 1980's and 1990's when 747 savings and loans associations went under provides a similar lesson. Like before, much of the mess can be traced back to deregulation of the savings and loans which gave them many of the capabilities of banks but failed to bring them under the same regulations as banks. Congress eliminated regulations designed to prevent lending excesses and minimize failures. Deregulation allowed lending in distant loan markets on the promise of high returns and it also allowed association to participate in speculative construction activities with builders and developers who had little or no financial stake in the projects. The ultimate cost of this crisis is estimated to have totaled around $160 billion, with U.S. taxpayers bailing out these institutions to the tune of $125 billion. And this, of course, just added to our deficit of the early 1990's.
“So I ask my colleagues: when are we going to learn this lesson? As George Soros wrote in his new book documenting the credit crisis -- quote -- "At the end of World War II, the financial industry --banks, brokers, and other financial institutions-- played a very different role in the economy than they do today. Banks and markets were strictly regulated." Unfortunately, today's banking and credit crisis teaches us that we have failed again to learn the hard lessons. We have failed to see that oversight and transparency are always critical, and when Congress makes reforms, they can't just disregard these important fundamentals. The only encouraging news I have seen lately is that Secretary Treasury Paulson is now working to increase regulation over investment banks, hedge funds and other financial institutions.
“Well, I could go on and on for my colleagues on my own personal experience with the Western energy crisis that happened in electricity in 2000 and 2001. We saw that during the electricity deregulation experience which started in the mid 1990s, people ignored that electricity was just another commodity. It is really a very vital element to our economy. Many experts cautioned that electricity with too vital a part of our economy and way of life to let these market issues go without the transparency and oversight that is essential.
“Well, we all know the rest of the story. We saw that deregulation set the table for some of Enron's spectacular manipulation schemes of 2000 and 2001 among other bad actors which all told caused more than $35 billion in economic loss and over 589,000 jobs. Again, only after the crisis was over, Congress stepped in and gave the Federal Energy Regulatory Commission and now the FTC more regulatory authority on energy markets. But, again, Congress is doing its job after the fact.
“So I ask my colleagues: when are we going to learn? When are we going to quit deregulating these critical markets without much thought to transparency and oversight that are critical for markets to operate and function correctly? When are we going to learn that when we give Wall Street an inch, as the president says, ‘Wall Street gets drunk’.
“We are here today to talk about the oil futures market and hopefully enact some meaningful legislation. But the real reason we are here is that we deregulated the energy futures market in 2000 which allowed today’s price bubble that is driving our markets to no longer be based on supply-and-demand fundamentals. In one fell swoop this deregulation did a number of things that enable today’s perfect storm to brew. We let newfangled financial instruments called swaps go unregulated and made it too easy to use bad debt to finance home mortgages. We also let new fangled crude oil trading called energy swaps to go unregulated and essentially allow Wall Street to trade without any transparency. And we allowed electronic trading of energy commodities to emerge as a new form of trading. In a nutshell, we let Wall Street rewrite the rule book for all the traditional exchanges like NYMEX and the Merc which were previously subject to considerably more CFTC oversight.
“The consequence that allows these energy speculators to move into this market as my colleagues on the floor have said, in spades, shows that, really, it's like a casino game instead of playing in the legitimate playing market. And the consequences are the American people are paying hand over fist for our lack of regulatory oversight. Why are we talking about the futures market? Because it should be a key price discovery method to establish the true price based on supply and demand. As the Government Accountability Office has said, “the prices for energy commodities in the futures and in the spot or physical markets are closely linked because they are influenced by the same market fundamentals.”
“That's right, "the prices for energy commodities in the futures and in the spot or physical markets are closely linked because they are influenced by the same market fundamentals in the long run." why is that so important? Well, it's important because the facts are clear: speculation and excessive speculation have driven up oil prices over 100 percent in a year and energy market experts are telling us that the price should really be more like $60 a barrel. So people are questioning why the future market is so high, driving the price that people pay at the pump today.
“Well, as Ed Wallace put it, and he is with the Ft. Worth Star Telegram -- quote -- "record high prices without record low oil inventories…it gives the impression of a shortage when no shortage exists." so that is to say, when you have record high prices without record low inventories, and I note we have not had a major catastrophe, so much money floats into the commodities that it gives the impression of a shortage, when, in fact a shortage doesn’t actually exist. I learned this phenomenon the hard way because that’s how Enron manipulated the markets, coming up with various names for the various schemes -- Darth Vader, Get Shorty, where Enron created the perception in the futures market that there was somehow not enough supply and then went in the physical market and signed people up for contracts at exorbitant rates.
“Thank God the hard work of people in my office and in a little utility in Washington state actually recovered a tape of a trader talking to one of the individuals from Enron doing a contract, actually saying on the phone, I know this isn't true about the future price but go ahead and tell your buyer it is so they will sign this contract." So now we are seeing the same thing happening again. And investors know as was also written about in the Ft. Worth Star Telegram, if they invest huge amounts in the commodities future they can create a shortage on paper, driving up the prices just like an actual shortage.
“That's right, the "investors know that if they invest huge amounts in commodities futures, they can create a shortage on paper -- driving prices up just like an actual shortage." yes, we're concerned. We are concerned. In fact, that article further goes on to say about the Intercontinental Exchange or ICE., this ICE platform has been a big problem because we allowed it to operate in the dark without the same regulatory oversight as other exchanges, that basically is what Ed Wallace is saying –quote-- "what kept traders from cornering the market in the past were the government's anti-manipulation rules." He is talking about what kept bad actors in check in the past, but when we deregulated in 2000 they didn't have the same tools in place to keep the manipulation from happening. So we're here today, now, on the floor, talking about whether we will move ahead on a speculation bill to deal with this problem.
“Compounding this problem is we have a CFTC and an administration that is watching out more for Wall Street than for Main Street. It's up to us to make sure that we are going to pass legislation that puts transparency and tough rules in place to make sure that the markets work for consumers and that both the future price and physical price of oil today are truly based on supply and demand.
“Now, Americans may be surprised to learn our oil futures market were further deregulated besides the 2000 act I'm talking about an CFTC decision made by staff behind closed doors who decided to take no action against a London-based trading exchange that actually trades U.S. oil products. As my colleague from Maryland likes to call it, the London loophole. It is like driving on a U.S. highway but only applying the same speed limits as the German autobahn. It is clear to me the CFTC is doing everything it can to continue to operate this way without really thinking about its job which is to protect the American consumers from oil price manipulation.
“So that’s why I am making no secret of the fact that I'm holding up the re-nomination of CFTC commissioners. And I am holding up new appointments to the CFTC until Congress gets to the bottom of this and we can get commissioners who are going to enforce the law on the books. Hard working Americans are counting on us and are suffering in this crisis and Congress is their last resort as an oversight agency to make sure there are functioning markets and not the manipulation of supply based on the fact that we have created dark markets and not the proper oversight.
“But don't listen to me about this subject with the CFTC, listen to what other people have said about our CFTC, our commodities futures trading commission. Others have been critical. William Engdahl, an expert on oil markets, wrote in May of this year "the CFTC seems to have deliberately walked away from their mandated oversight responsibilities in the world's most important traded commodity, oil." so there's one expert that doesn't think the CFTC is doing its job. Another expert, Steve Briese, author of the Commitment of Traders' Bible, a futures market trading publication, wrote in May of this year as well: "Congress has provided the CFTC the power to control this unlimited speculation -- the law is very specific about establishing position limits. The problem is they have abdicated this role." he is talking about the behind the closed door situation where the CFTC said we're not going to enforce the laws we have on the books.
“We have heard from other people, the Consumer Federation of America, which recently testified before Congress, Mark Cooper, because the Consumer Federation's focus is on protecting consumers. He had something to say about the CFTC’s poor performance. He said their performance was "the regulatory equivalent to FEMA’s response to Hurricane Katrina." What he is basically saying is they have dropped the ball at least at the beginning of this crisis and have not responded. So there are other people who have said things, like the trucking industry. They have a big stake in making sure the markets function properly. They say "there's oversight that's lacking or not taking place – so the private market is taking advantage of that."
“Madam President, I'm not the only person. I know the Washington Post has also talked about this. They said in an article -- quote -- "the CFTC has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs." so it's clear the CFTC has abdicated its authority and responsibility. It's abdicated its authority and responsibility and we've been trying to clean this up and to push forward on important efforts in this regard. And I'd like at this time, Madam President, to submit testimony into the record a document by Professor Michael Greenberger that responds to information from the Senate Permanent Subcommittee on Investigations.
“Now I am sure many of my colleagues probably didn't realize I was going to talk so much about the history of deregulating markets, the crises that have ensued, billions paid by taxpayers, Congress finally coming in and doing the job and making sure that oversight agencies are doing their proper role and responsibility. But I thought it was important context so that we can not repeat the same mistakes. Some of my colleagues have talked about the CFTC’s recent investigation that uncovered oil market manipulation which underscores the point.
“The CFTC could only take action against traders that are using exchanges regulated under their purview. We need to ask is what are we going to do about the markets that operate within the united states with U.S. traded products that have been given an exemption in oil futures that you are not regulating and are probably also causing the problem? We want to know what they are going to do about that. So what is the American consumer saying about this because I know my colleagues have been saying a lot about Americans and what their preferences are. But it is clear the American public want us to act. 80 percent of the American public believes that oil commodities speculation and manipulation of the oil markets are taking place. That's right, they want congress to act: 80 percent of Americans polled said they believe that oil commodities speculators are manipulating the price of oil. So Americans are very concerned.
“Two thirds of Americans believe that we should pass legislation that creates new regulations governing oil speculators. They want us to put back in place the rules that we had before we threw them out in 2000. So two-thirds of the Americans believe that we should pass legislation that creates the necessary regulations and that's what we need to be doing today. Now, Madam President, I want to make sure that I am clear to my colleagues. We've done a great service by having an open debate on these issues. And just yesterday experts said that the Senate’s action is one of the reasons that prices have fallen $20 below of where they were because we had this discussion of what a more regulated marketplace should look like. But I want to make sure my colleagues are clear that we need to pass legislation that really will crackdown on excessive speculation. We can't have a study bill or punt this to the future. We have to pass a bill that includes all speculation. That has aggregate spec limits across exchanges. It has to be transparent and has to be enforced on all markets.
“We can't have a bill on the Senate floor has all of the right words on it, but none of the important words in the proper places. And that is what I'm going to continue to fight for. I'm going to continue to fight to make sure that we put real teeth back into the law to make sure the American consumer is protected from the manipulation of oil markets in the future.
“We can give the CFTC the tools that they need and we must insist that they use them. But we will have to do our job here and pass this important legislation. Wall Street may be drunk, Mr. President, but it is America that has the hangover and we must help them recover. We need a new tough law on the books and it's imperative that we learn the past mistakes of Congress in their attempts to lighten the load on some of these financial institutions and tools, only to find it wreaking havoc with housing and oil speculation bubbles that is causing our country great distress.
“Mr. President, I hope we get this right in the next couple of days, and I'm going to continue to fight until we do.
“I thank the President, and I yield the floor.”
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