McCain defends 'Enron loophole'
By Jason Leopold
Online Journal Contributing Writer
May 20, 2008, 00:28
Sen. John McCain says he opposes the $307 billion farm bill
because it would dole out wasteful subsidies, but his chief economic adviser
Phil Gramm also wants to stop its proposed regulation of energy futures
trading, a market that was famously abused when Enron Corp. manipulated
California�s electricity prices in 2001.
Clearing the way for that California price gouging, Gramm,
as a powerful US senator from Texas, in 2000, slipped an Enron-backed provision
into the Commodities Futures Modernization Act that exempted from regulation
energy trading on electronic platforms.
Then, over the next year, Enron -- with Gramm�s wife Wendy
serving on its board of directors -- worked to create false electricity
shortages in California, bilking consumers out of an estimated $40 billion.
Gramm left the Senate in 2002 but now has emerged as what
Fortune magazine calls �McCain�s econ brain,� not only filling the Arizona senator�s
acknowledged void on economic expertise (�I don�t know as much about the
economy as I should�) but recognized as one of McCain�s closest friends in
politics. The two men talk daily.
A McCain aide told me that the Arizona senator opposes the
farm bill because it �rewards lobbyists� by granting rich farmers lucrative
subsidies, although he would support �a reasonable level of assistance and risk
management to farmers when they need America's help.�
But the aide, who spoke on condition of anonymity, acknowledged
that the presumptive Republican presidential nominee also opposes the farm bill
because Gramm advised McCain that he should resist its regulatory language on
the energy futures market.
Democrats have dubbed that gap in energy futures regulation
the �Enron loophole,� but it played a part, too, in the more recent attempt by
the Amaranth Advisers hedge fund to corner the national gas market by shifting
trades to the unregulated �dark markets� of the Intercontinental Exchange.
The �Enron loophole� also has become part of the debate over
the soaring price of oil. Last week, a study sponsored by Sen. Carl Levin,
D-Michigan, concluded that speculative futures markets were partly to blame for
the surge in oil prices that have pushed gas at the pump toward $4 a gallon
At a May 15 news conference, Levin said the skyrocketing
price of oil is �not the result of supply and demand. Speculators have taken
over most of the futures market."
However, the 673-page farm bill, containing the regulatory
provisions on electronic energy trading, still faces obstacles amid overall
concerns about the bill�s largesse to farmers at a time of rising food prices.
President George W. Bush has vowed to veto the bill,
although it cleared the House and Senate by margins wide enough for an
override, assuming Republicans don�t rally behind Bush and McCain, their
current and future standard bearers.
Gramm and Enron
The battle over the �Enron loophole� also could draw
attention to McCain�s dependence on Gramm as his chief economic adviser and
Gramm�s key role in passing legislation that let Enron trade commodities on
electronic platforms without federal oversight.
In 2000, with the Republicans in charge of Congress and
Gramm chairing the Senate Banking Committee, the exemption on electronic
trading was approved without a Senate hearing.
Internal Enron documents, which were released in 2002,
revealed that the Houston-based company helped write the legislation, which was
signed into law by President Bill Clinton in December 2000.
Freed from regulatory interference, Enron then used
manipulative trading practices to game the California electricity market and
drive up electricity prices across the state.
While California consumers were getting fleeced, the new
Bush administration shielded Enron from early accusations of market
manipulation. President Bush personally joined the fight against imposing caps
on the soaring price of electricity, buying additional time for Enron although
the company�s house of cards collapsed anyway in fall 2001. [For details, see
In 2006, the �Enron loophole� allowed Amaranth Advisers
hedge fund to shift its trades from the regulated New York Mercantile Exchange
(NYMEX) to the unregulated Intercontinental Exchange (ICE) in Atlanta.
That let Amaranth corner the natural gas market, betting
that futures prices would rise. The hedge fund lost about $6 billion and
imploded as natural gas prices fell to a two-year low in September 2006.
Last July, the Federal Energy Regulatory Commission (FERC)
and the Commodity Futures Trading Commission charged that Amaranth manipulated
prices paid in the physical natural gas markets. FERC has proposed $291 million
in penalties and the forfeiture of �unjust profits.�
�Unregulated markets are known as �dark markets� because
there is very little oversight of the trades,� said Rep. Bart Stupak,
D-Michigan, chairman of the Subcommittee on Oversight and Investigations,
during a hearing on energy speculation last December.
By trading on the �dark� ICE market, traders can avoid the
Commodity Futures Trading Commission�s rules which are in place to prevent
price distortions or supply squeezes.
Stupak said trading volumes on ICE �have skyrocketed in the
past three years and are now as large or even larger in some months than the
volumes traded on the regulated futures market.�
The lack of oversight �makes it difficult for regulators to
detect excessively large positions which could lead to price manipulation,�
Gramm, who is now a vice chairman of financial services
company UBS, began advising McCain in 2005 when the Arizona senator indicated
he planned to run for president.
Since then, McCain has adopted much of Gramm�s anti-tax,
anti-regulatory agenda. Most strikingly, McCain shifted to support Bush�s tax
cuts, which McCain had voted against in 2001 and 2003. He now vows that, if
elected president, he would make them permanent.
Yet Gramm�s influence over McCain�s economic agenda -- and
the checkered political-business history of Gramm and his wife Wendy -- have
largely escaped media scrutiny.
Gramm received more than $34,000 in campaign contributions
from Enron and served as one of the company�s key legislative allies in
Washington, including his help in 2000 removing federal oversight from energy
trades on electronic platforms.
At the height of the Enron scandal in January 2002, Gramm�s
press secretary, Larry Neal, told The New York Times that Gramm did not �recall
a conversation� he apparently had with Enron�s chairman Ken Lay in 2000 to
discuss that Enron legislative priority.
An internal Enron e-mail dated Aug. 10, 2000, under the
subject �CFTC Reauthorization� -- sent by Enron�s top lobbyist Richard Shapiro
to Steve Kean, Enron�s executive vice president -- said the company needed to
get Lay on the phone with Gramm so the bill could be passed.
�The bill is not moving quickly in the Senate due to Senator
Phil Gramm's desire to see significant changes made to the legislation (not
directly related to our energy language),� Shapiro said.
�Last week at the  Republican Convention, I asked the
Senator about the bill and he said they were working on it, but much needs to
be changed for his support. More telling perhaps, were Wendy Gramm's comments
that she would rather the current bill die if a better bill can be passed next
�What this means is that we must, at the least, remove
Senator Gramm's opposition to the bill to move the process and more importantly
seek to gain his support of the legislation.�
Shapiro added: �However, with less than 20 or so legislative
days left, we need Senator Gramm to engage.
�A call from Ken Lay in the next two weeks to Senator Gramm
could be an impetus for Gramm to move his staff to resolve the differences.
Gramm needs to fully understand how helpful the bill is to Enron.
�Let me know your thoughts on this approach. I am prepared
to assist in coordinating the call and drafting the talking points for a Ken Lay/Sen.
Several other internal Enron e-mails briefed company
staffers on the status of Gramm�s position and Enron�s lobbying of the senator.
Gramm finally removed a �hold� on the bill in December 2000, reintroduced the
bill under a different number, and forced a vote on it without floor debate.
It was then attached to an appropriations bill that was
signed by President Clinton on Dec. 21, 2000.
Less than a month later, California began to experience
rolling blackouts due to artificial electricity shortages which, according to
documents later released by federal energy regulators, were the result of
manipulative trading practices employed by Enron.
The California crisis centered on Enron�s energy trades
through a new platform called EnronOnline, which had been freed from regulatory
oversight by the legislation pushed by Gramm.
In April 2002, Gramm blocked an amendment by Sen. Dianne
Feinstein, D-California, that would have closed the loophole that Gramm had
Gramm�s wife, Wendy, also had played a role in the
anti-regulatory policies that contributed to the Enron scandal.
On Jan. 14, 1993, in the final days of the first Bush
administration, Wendy Gramm -- as chairwoman of the Commodity Futures Trading
Commission -- pushed through a key regulatory exemption removing energy
derivatives contracts and interest rate swaps from federal oversight.
That was a major financial boon to Enron, where Wendy Gramm
landed five weeks later as a member of the board of directors. She also became
a member of the audit committee that signed off on another one of Enron�s
fraudulent schemes, partnerships that hid the company�s growing debt.
Even after Enron had collapsed in fall 2001, Sen. Gramm
continued to resist congressional efforts at tightening up the rules.
In 2002, despite the accounting scandals at Enron, WorldCom
and other major companies, Sen. Gramm objected to the Sarbanes-Oxley corporate
reform bill designed to hold executives accountable for inaccuracies in
Now, the Gramm family�s anti-regulatory agenda is returning
via McCain�s presidential campaign.
As Fortune�s editor-at-large Shawn Tully wrote, �economic
conservatives should take heart. McCain�s chief economic adviser -- and perhaps
his closest political friend -- is the ultimate pure play in free market faith,
former Texas Sen. Phil Gramm. . . . Most of [McCain�s] current positions are
vintage Gramm indeed.� [Fortune, Feb. 19. 2008]
The first test of McCain�s commitment to Gramm�s
anti-regulatory purity may come in the looming battle over the �Enron loophole�
that the farm bill seeks to close.
Leopold is the author of "News Junkie," a memoir. Visit
www.newsjunkiebook.com for a
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