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"We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob." -FDR 1936

So, if we minimize government and leave things to the private sector things go right, right? Well, evidence says otherwise.

The Commodity Futures Act of 2000 was the legislation that led to out of control energy speculation. This piece of legislation led to both high gas prices and the Enron crisis that gave the state of California rolling blackouts and crippled it's economy.

For simplicity I'll refer to the legislation as CFA2000 from now on.

So what is a future?  A future is an agreement on a commodity (gas, electricity, grain, ect) to be delivered on a specific price up to a certain time.  The idea behind this is to stabilize prices, consumers would be a little upset if they went to a gas station on Monday to pay $3.25 a gallon only to return that Friday and find that the price was down to $2.25 a gallon.

Ok, let's break this down.  How did the California energy market work before the Commodity Futures Act of 2000?  Electricity was sold much as it is in the rest of the nation, we utilize private power companies or power co-ops who are heavily regulated and must apply for rate hikes.

What did the new rules mean?  The new rules allowed a company like Enron to buy and sell energy on a privately owned and operated market.  And this trading was immune from regulation by the Securities Exchange Commission (SEC), a federal watchdog that looks for price gouging and price manipulation.

The "Enron loophole" in the bill was in Section 2(h) which listed 2 exemptions from the CEA2000: "oil and other 'energy' products." were excluded.  And this addition in the legislation sealed the deal.

Here's footage of the CFA2000 before the House.

And it wasn't even 6 months later when things began to quickly unravel, as you can see below.

When the Enron trader tapes surfaced, you had energy traders talking about these sorts of things:

Trader: “If you took down the steamer [from a generating unit], how long would it take to get it back up?”
Supervisor: “Oh, it’s not something you want to just be turning on and off every hour. Let’s put it that way,” another says.
Trader: “Well, why don’t you just go ahead and shut her down.”

Here's another:

Trader 1: “They’re fucking taking all the money back from you guys? All the money you guys stole from those poor grandmothers in California?”
Trader 2: "Yeah, Grandma Millie man. But she’s the one who couldn’t figure out how to fucking vote on the butterfly ballot."
[Laughing from both sides]
Trader 1: "Yeah, now she wants her fucking money back for all the power you've charged right up, jammed right up her ass for fucking $250 a megawatt hour."
[Harder Laughing]


Watch CBS News Videos Online

::::GASP!:::: This means there is evidence with less regulation private entities will in fact gouge consumers?  My heart be still!  I've heard all of my life that the government is the bad guy has no place in the economy, does this mean that a corporation can exert force against people and shut down an entire state's economy?

One of my lifelong mentors and I have conversations/discussions about the government's role in the marketplace, he feels as if the government should be minimized in the marketplace.  When I bring up things like Enron, his response his something along the lines of "well that's an extreme example, what about all the times that companies don't fraud consumers?"  Yeah, and my response to that is this, if one company is able to commit a level of fraud so large that it cripples the world's eighth largest economy and sends it into a major economic crisis we better rethink how much power individual corporations have over our lives, the fraud perpetrated on California cost the state in between $40bn to $45bn.  That's the equivalent of saying "well look at all the nuclear weapons we've produced and only used them twice."  Yeah, and when we used those weapons, the consequences became so apparently awful we did everything within our power to make sure we didn't have to use them again.

Want to go a step further and add insult to injury?  This same piece of legislation also deregulated and relaxed restrictions on over the counter (OTC) derivatives.

They were behind the 2008 Financial collapse and there was criticism of this deregulation from the beginning.  These derivatives are basically bets against a default.  The scenario I'm about to set up would be equal to an insurer selling fire insurance to a fire prone area with no ability to pay the insure when their building burns down.  So in our model, when the housing market began to burn down in 2007, our fire insurer started to pay on those policies but when the a great deal of the fire spread the insurer couldn't cover all of the building policies and the government had to step in and loan the fire insurance company money to cover all of the buildings it didn't have the money to insure.  Sound kidda nutty?  Yeah it really should.

Here's a simple model from one of my favorite movies, Ocean's 11 (the new one).  Remember, the team knew there would be a certain amount of money in the casino's vault, Nevada state law told the casino for every chip you have in your house and table there has to be a corresponding amount of cash in your vault to cover it in case the you're forced to cash out.  The problem with OTCs was there was no regulation forcing the banks to follow the same sane rules. Then, when the players at the casino "Wall Street" bet against the Lehman Brothers collapse cashed in, AIG didn't have the money to cover the Wall-Street winnings.

Can we get even crazier? WHY YES! We can! Under current law (as of April 4th 2010) there has been no reform requiring transparency to the holders of OTCs, to the government, or the general public.

Let's go just a step further down the path of psychosis, those who placed bets against Lehman Brother's demise actually made money.

That's right folks, we've invented and fostered a system in which people were lured through fraud (so said the FBI) into houses they couldn't afford:  "The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, <span style="font-weight:bold;">80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.</span>"

They were then evicted from those houses because they couldn't pay, the banks who backed those mortgages (ie Lehman Brothers) failed because they couldn't carry the massive amount of defaulted mortgage debt (toxic assets), the insurance banks (AIG) that were there to save the investment banks couldn't pay because they didn't have the leverage against their OTCs, basically there were too many chips out on the table and not enough money in the vault.  So to save the stock market and the toxic mortgages-OTCs the federal government (you and I) stepped in to prop this clearly broken system back up and make a bunch of rich people even richer.

And if nothing is done in regards to reform, this will happen again.  I for one think we have a President who is smart enough to see this system needs a massive overhaul, we went through this once before in the 1930's.

PBS' Frontline has a great piece below called The Warning there were those in the Clinton administration who saw trouble on the horizon and tried to warn us; Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] tried to raise a red flag but was silenced by those who advocated deregulation and less government interference.

So, when people scream about "big government" ask them to pick a history book up and instruct them to find the 'boom and bust' economies, they didn't exist under a regulated market.

Originally posted to sshepard06 on Sat Apr 24, 2010 at 02:02 PM PDT.

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Comment Preferences

  •  When people failed to react to the Enron tapes (9+ / 0-)

    I knew our country was in trouble.

    As to your friend's dismissal of this as an extreme example, I would ask him how he knows this.  It only makes sense to assume that not getting caught is more common than getting caught. For all we know, Enron was typical.

    What is also frustrating is the way the corporate corruption that led to many CA difficulties is still, to this day, often laid at the feet of politicians rather the corporations who were caught red-handed.

    Finally, you've got some cleaning up to do in the diary.  Take time to proofread.  Other than that, good job.

    The problem after a war is the victor. He thinks he has just proved that war and violence will pay. Who will now teach him a lesson?

    by geomoo on Sat Apr 24, 2010 at 02:14:46 PM PDT

    •  Also, there was state deregulation (1+ / 0-)
      Recommended by:
      geomoo

      of the utility market that Republicans pushed through before Congress also passed the derivatives deregulation that allowed traders to massively benefit from the poorly structured new energy "market" in California.  

      •  The CA legislature, with Dems in control, (0+ / 0-)

        voted unanimously for the deregulation bill.  

        As the Enron trainwreck developed, the Dem governor and legislature took no effective action to stop it; instead, Gov Davis signed contracts to lock in the sky-high prices for 5 years or more.  

        That's why the voters kicked the Dems out of the Governor's office and took a chance on Schwarzenegger.  

  •  Don't forget the bond rating industry (5+ / 0-)
    Recommended by:
    kurt, yella dawg, geomoo, maggiejean, DrFitz

    The financial effect of different grades is enormous.  Higher rated bonds are more valuable, so the people who rate bonds have a lot of power.  We now suspect some were corrupt.

    The ratings companies used to be paid by those who bought bonds.  Not any more.  Now the people who sell bonds pay the ratings companies, and they all want higher ratings.  Since there are several large ratings companies, those who sell bonds can shop around for ratings.  Guess what happened?  Crappy stuff got better ratings than they deserved, but the ratings companies who falsely rated these securties made a lot of money.

    I'm just a consumer and don't pretend to understand all the details, but this is how I see it.  Experts?    

    Is 11 dimension chess really just magical thinking?

    by Zinman on Sat Apr 24, 2010 at 02:24:57 PM PDT

    •  I've been trying to find an anwer: (0+ / 0-)

      I've been trying to find an answer to this, for the same experts you ask:

      Why won't any of the bond companies, or even some upstart give me a numerical-based risk assessment?

      I want to know that a bond has a .05% chance of default in the next 10 years, for instance.

      If a ratings company did that, we could simply look back and see how accurate they were.

      I know that they have financial reasons not to do that, but the raw risk number is the only thing that I want, and only thing that will make me trust the ratings agencies.

      It is curious to see the periodical disuse and perishing of means and machinery, which were introduced with loud laudation a few years or centuries before. -RWE

      by Gravedugger on Sat Apr 24, 2010 at 02:48:00 PM PDT

      [ Parent ]

  •  regulation is a major difference between parties (6+ / 0-)

    ...or used to be. "Regulatory capture" is apparently viewed as a necessary evil by "pragmatic" Dems these days.

    But if the party has any political courage left, it would be good for it to stress its historic pro-regulation stance and back up the rhetoric with action.

    The GOP made a total mockery of government regulatory agencies during the Bush years. But the Democrats' lack of horn-tooting on cleaning out and rebuilding these agencies makes me wonder just how much progress has been made toward things like flushing the fossil fuel lobbyists out of the EPA and the Interior.  Anyone know?

    •  Without regulatory capture, (3+ / 0-)
      Recommended by:
      opinionated, kurt, Pris from LA

      the damage is not just neutral.  The government aids and abets the transfer of funds from the masses to the wealthy.  By purporting to enact reform and protect consumers, fake regulation militates against real reform.

      Additionally, under the name of reform, powerful corporations are protected by government from true competition.  Despite their screaming, corporations actually hate competition.  Regulatory capture enables them to transfer all competition from the market place to the government, where the competition is between Dems and Reps for the right to represent their interests.  Both the health care and the financial industries are examples of this state of affairs.  Lack of true competition leads to what we see today:  immense profits flowing to companies with mediocre performance records and absolutely no incentive to serve the public.

      As I see it, the Dems under Obama and a Dem congress are just as active as the Reps have been in abetting regulatory capture in exchange for corporate dollars.

      The problem after a war is the victor. He thinks he has just proved that war and violence will pay. Who will now teach him a lesson?

      by geomoo on Sat Apr 24, 2010 at 02:35:02 PM PDT

      [ Parent ]

      •  Oops. I meant "Without true regulation" natch. nt (1+ / 0-)
        Recommended by:
        blueoregon

        The problem after a war is the victor. He thinks he has just proved that war and violence will pay. Who will now teach him a lesson?

        by geomoo on Sat Apr 24, 2010 at 02:40:34 PM PDT

        [ Parent ]

      •  Good insight (0+ / 0-)

        Despite their screaming, corporations actually hate competition.  Regulatory capture enables them to transfer all competition from the market place to the government, where the competition is between Dems and Reps for the right to represent their interests.

  •  Worldcom......Madoff.....Savings and loan..... (4+ / 0-)
    Recommended by:
    kurt, yella dawg, Pris from LA, DrFitz

    How is that deregulation workin for ya GOP!

    Yup, Reagan had Savings and Loan.  Bush had WorldCom/Enron/Wall Street.

    Just keeps getting better and better!

  •  Higher natural gas prices here in Georgia. (4+ / 0-)
    Recommended by:
    kurt, yella dawg, Pris from LA, DrFitz

    It was deregulated more than ten years ago.  Prices shot up.

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