By Zwick, Steve
Futures (Cedar Falls, IA) , Vol. 31, No. 4
Much mud has been slung toward both former CFTC Commissioner Wendy Gramm and her husband and Senator Phil Gramm for the regulatory exemptions that purportedly allowed Enron to wreak havoc on itself, its stockholders, its employees and the OTC energy markets. A careful review of the bureaucratic changes that provided the fuel for Enron's business plan help clarify the role those changes may have played in its failure.
The jovial new chairman of the Commodity Futures Trading Commission (CFTC), Jim Newsome, has a membership in what he believes to be the most effective little environmental group in his patch of Mississippi: a hunting club called Ducks Unlimited.
"Hunters know more about the environment in which ducks thrive than the regulators do," he says. "And the hunters care more about it, too."
An unabashed Libertarian, Newsome inserts at least one down-home appeal to give these ol' market participants the room they need to do their thing into every speech he delivers, but he's careful to top off those appeals with the unequivocal caveat that their "thing" doesn't include fraud and manipulation. In fact, the words "while avoiding fraud and manipulation" seem pre-programmed to form in his mouth every time he mentions the avoidance of that other bugaboo, micromanagement. It's like a mantra, the way the phrase erupts -- or at the very least, it's like a mandatory disclaimer.
But in 1993, one of Newsome's predecessors, Wendy Gramm, exempted OTC energy contracts from a key aspect of the CFTC's anti-fraud regulations. She did so at the behest of a rapidly-growing Texas concern called Enron, which happened to maniacally trade those products. Writing up the exemption was one of the last things she did before handing in her resignation, and the company's CEO, a friendly Missourian named Ken Lay, offered her a spot on the Enron board five weeks later.
Ralph Nader's watchdog group Public Citizen issued a scathing report in December accusing Gramm and her husband, Sen. Phil Gramm (R-Texas), of almost double-handedly giving Enron carte blanche to lie, cheat and steal its way to prosperity before gloriously imploding last November. Barron's even dubbed the couple "Mr. and Mrs. Enron," both for the exemptions that Wendy gave to the energy industry and for Phil's failed attempt to essentially legalize non-regulated energy futures as part of the Commodity Futures Modernization Act (CFMA) of 2000.
But is such criticism fair? After all, Phil Gramm did fail to get Enron's version of the CFMA passed, and it wasn't just Enron backing his efforts but a whole gaggle of bilateral trading platforms. And at the Jan. 29 hearing before a congressional committee investigating the debacle, both Newsome and New York Mercantile Exchange Chairman Vincent Viola stressed that Enron's demise caused barely a blip, let alone a ripple, in the exchange-traded derivatives world that the CFTC is charged with regulating. Newsome -- who, despite his Libertarian pedigree, opposed Gramm's more radical wishes -- used that market resilience to support his contention that laws regulating futures and options actually had kept the markets on even keel while the sea in which they functioned roiled. The only noticeable seismic activity was a flight to exchange-traded quality, while actual prices -- both on and off regulated exchanges -- remained steady.
Viola praised Newsome and the Energy Committee for "quite courageously" challenging Enron during the CFTC's reauthorization hearings.
"The energy market conditions arising from Enron's bankruptcy could have been far different had the unwise proposal to nearly completely eliminate regulatory oversight of energy and metals futures and options contracts traded on electronic trading platforms been adopted as it was originally proposed," Viola said, stressing that Enron's problems were related to shenanigans on the accounting side and not to trading. "The facts to date do not indicate that the failure of Enron was related to rules or the absence of rules governing trading m energy contracts. …