WASHINGTON – Today, the House Agriculture Committee held the first in a series of hearings to review legislation addressing the derivatives markets. The Committee heard today from stakeholder groups about the Derivatives Markets Transparency and Accountability Act of 2009, draft language circulated last week by Chairman Collin C. Peterson of Minnesota. The bill is designed to bring greater transparency to futures markets and to bring a sense of order to the over-the-counter market for swaps and other credit derivatives.

“The effort to strengthen oversight and improve transparency in derivative markets, whether regulated or unregulated, whether they are physically based commodities or financial commodities, has been a top priority of this Committee,” said Chairman Peterson. “As we did last year, this Committee will hear from all sides and spend a lot of time working through these issues in an open, public manner so we can build on last year’s bipartisan bill that passed the House. It is my intent to move expeditiously this month with this series of hearings because every day we delay is another day where markets operate without the oversight and transparency they desperately need.”

“No one can argue with the concept of transparency,” said Committee Ranking Republican Frank Lucas of Oklahoma, “I support greater transparency and accountability with respect to over-the-counter transactions. However, I also believe any legislation to regulate financial markets has to strike a balance between protecting the economic workings of the country and creating opportunities for economic growth, business expansion, and risk management.”

The Committee heard from two panels of industry stakeholders representing exchanges, farm groups, academics, energy users, and institutional traders. The draft legislation represents a broadened version of a bipartisan bill which the House passed last September with more than 280 votes (H.R. 6604). The Committee also held three hearings in late 2008 on the proliferation of over-the-counter credit derivatives, including credit default swaps.

Witness testimony for this hearing as well as the draft language and outline circulated by Chairman Peterson are available on the Committee website: http://agriculture.house.gov. A full transcript of today’s hearing will be posted on the Committee website at a later date.

Committee hearings on credit derivatives legislation will continue tomorrow at 10:30 a.m.

Witness List:

Panel I

• Mr. Tom Buis, President, National Farmers Union, Washington, D.C.
• Mr. John Damgard, President, Futures Industry Association, Washington, D.C.
• Mr. Michael Greenberger, Law School Professor, University of Maryland School of Law, Baltimore, Maryland
• Mr. Michael A. Gooch, Chairman and Chief Executive Officer, GFI Group Inc., New York, New York
• Mr. Sean Cota, President, Cota & Cota Inc., on behalf of Petroleum Marketers Association of America and New England Fuel Institute, Bellow Falls, Vermont
• Mr. Terrance A. Duffy, Executive Chairman, CME Group Inc., Chicago, Illinois

Panel II

• Mr. Daniel J. Roth, President and Chief Executive Officer, National Futures Association, Chicago, Illinois
• Mr. Tyson Slocum, Director, Public Citizen’s Energy Program, Washington, D.C.

As several news reports have indicated, the notion is gaining steam that speculation in the U.S. commodities market has had an inflationary effect on oil prices. The current conventional wisdom is that 70% of the oil trades are made by financial players. If commodities speculation has taken center stage, the spotlight is on loopholes such as the notorious “Enron loophole” opened by Phil Gramm and the Republican congress in 2000, which allowed commodities trading to go on without regulatory scrutiny on so-called “dark markets.”

the Commodity Futures Trading Commission is the regulatory body responsible for overseeing US trading in oil futures. Interestingly, the CFTC’s recent fact sheet on speculation suggests that the 70% number being kicked around includes so-called swap dealers, the market makers in the commodities market. CFTC will report to congress by September 15th on the true effect of commodities speculation. Interestingly, the CFTC’s fact sheet only comments on trades made on the New York Mercantile Exchange (NYMEX). It makes no mention of other exchanges such as the Intercontinental Exchange (ICE), a trading firm registered in London but headquartered in Atlanta, whose regulation the CFTC has ceded to Great Britain.

In testimony to the House Energy and Commerce Subcommittee on Oversight and Investigations, former Clinton Administration CFTC chairman Michael Greenberger (now at the University of Maryland School of Law) claims that ICE accounts for 30% of trades in West Texas Intermediate (WTI) crude oil, and that Dubai Mercantile Exchange (DME) in affiliation with NYMEX would also be able to trade WTI oversight-free according to a recent CFTC no-action letter.

The CFTC under the Bush Administration appears to be playing word games here. Sure, in the market they regulate (NYMEX), there may not be a meaningful impact from speculation. What impact does unregulated trading have on the Intercontinental Exchange? Do we even have the data to know? What impact would an unregulated DME have? Greenberger’s testimony is a scathing rebuke of the current CFTC’s behavior in the current market.

Given the current economic conditions, the coming scarcity of fossil fuels, and the impact of fossil fuels on our climate, we need to take action that is strategic for the short term and the long term. So here are a few ideas that might help us do just that:

First, close the Enron loophole. While we’re at it, let’s close the London/Dubai loophole, and the Swaps Dealer loophole. Energy commodities trading in the United States should occur in the full light of day, and the CFTC should not cede jurisdiction. We need the ability to measure the effect of speculation on the cost of energy. Allow (or should I say command?) the CFTC to gather the data they need to understand that effect. Why? (Meaningful) data is good. Any business person will tell you “you can’t control what you can’t measure.” Plus, anyone with a legitimate reason for investing in energy commodities will continue to do so under regulatory conditions. Demand for energy will not decrease, and the natural market forces of supply and demand will not be hurt by data collection. If speculation is affecting cost without adding real value to the supply chain, then it is taking value out of other markets, which is not in the public interest.

In his Jun 23rd testimony, Greenberger endorsed the Prevent Unfair Manipulation of Prices Act of 2008 as a means of closing these loopholes. Congressman Bart Stupak’s act was introduced in both houses of congress (as H.R. 6341 and S.3185) on June 24th.

Second, Don’t take away tax breaks for big oil. Instead, repurpose them to create incentives for anyone willing to invest in clean energy research and development. We don’t need to take away windfall profits from big energy companies, as long as they put that profit to forward-looking use. We all know that fossil fuels are a finite resource. We must put the power of the purse to use in crafting an end-game strategy that allows the global economy to grow and prosper in a post-fossil fuel world.

Me too.

And it doesn’t have a damn thing to do with drilling.

Watch this:

Did you catch this passage about the “Enron Loophole”?

OLBERMANN: The Enron loophole applied to all energy commodities, oil, propane, natural gas. So, today, oil futures are driven by speculators, free from any regulatory oversight. Now, you can‘t just blame OPEC any more. British Petroleum paid 303 million dollars to settle charges it cornered the propane market in 2004, inflating heating costs for seven million American homes.

Two years ago, a Republican Senate report recognized what speculators have done and blamed the Enron loophole. Two weeks ago, the Senate Commerce Committee heard testimony about the Enron loophole‘s effect on the price of a barrel of oil.

MICHAEL GREENBERGER, FMR. CFTC DIR OF TRADING & MARKETS: The speculators are not just placing bets in these futures markets, they‘re saying, gosh, if I can control the price of heating oil, I‘ll go out and buy heating oil. So you have Morgan Stanley as the biggest heating oil owner in New England.

SEN AMY KLOBUCHAR (D), MINNESOTA: The idea is to put the words energy back in so that we can actually go back to where we were before this, what Dr. Cooper calls the foolish but affectionately called Enron loophole.

GREENBERGER: Yes, overnight that will bring down the price of crude oil to get at least a 25 percent drop in the cost of oil and a corresponding drop in the cost of gasoline. Some people estimate 50 percent.

Pissed off? You should be. Read this.

And then tell everybody you know. John McCain doesn’t support drilling to drop gas prices.

Actually, you’re a fool if you think he gives a fuck about you.

Today is Day 1 of the new blog. My pre-WordPress blog posts are available through the ‘OLD BLOG’ button at the top of each page. I have so much news to report that I don’t know where to begin. The most important task for today is to relaunch The Underdog Theorem Blog from its new home, so I’ll get things going with an excellent quote I heard a little while back about good ol’ Wall Street and fabulous Las Vegas.

“Nobody, including the Fed, can go and say ‘Well how many of these bad bets are there out there?’… It is as if a bunch of Las Vegas bookies started taking bets and never bothered to write them down or record them, or, as you know a bookie will try and have a balanced book so that if it loses one side of the bet it will cover by another side and make their money on the commissions… Here, these banks didn’t bother to hedge themselves… We would have been better off if Las Vegas had handled this operation than having Bear Stearns handle it.”

You can hear the full interview here:
http://www.npr.org/templates/story/story.php?storyId=89338743

Law professor Michael Greenberger on Wall Street’s financial crisis of 2008. Greenberger is a professor at the University of Maryland School of Law and the director of the University’s Center for Health and Homeland Security.

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John McCain has done well with candor, so when he talks about the economy, the long-time legislator can get away with things his juniors cannot:

“The issue of economics is something that I’ve really never understood as well as I should. I understand the basics, the fundamentals, the vision, all that kind of stuff.”

The other stuff is the worry of McCain’s economics team, folks like Phil Gramm who is rough-and-ready’s chief economic adviser, and that is worrisome.

Back in the 90’s, at the same time Gramm was a Texas senator, his wife Wendy was the Chair of the Commodity Futures Trading Commission which, under her watch at the end Bush Sr.’s presidency, freed up companies like Enron from pre-existing regulatory oversight.

Mrs. Gramm then left her spot at the CFTC and was elected to Enron’s board of directors.

As you can see the ‘old boys’ club’ is, strictly speaking, a myth.

In 2000, Sen. Gramm introduced legislation that gave companies in the energy industry, such as Enron, added leeway in derivatives (bets on prices) trading which allowed their reckless, ingenuous financing schemes.

That didn’t end all that well.

I’m drawing this from Nomi Prins’s book “Other People’s Money” and an interesting interview on National Public Radio this morning with Michael Greenberger, a one-time public overseer of financial markets.

Aside from his role as McCain’s adviser, Gramm is the vice-chairman of the investment arm of UBS which has gotten roughed up pretty badly – losing $19 billion is bad, isn’t it? – by the credit crisis.