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Despite the Bush Administrations opposition to price controls at the height of the energy crisis in California, Enron’s demise came as a result of California re-regulating and “the Federal Energy Regulatory Commission (FERC), under enormous political pressure from Congress and California state officials, finally imposed strict, round-the-clock price controls for the entire Western electricity market. At that point Enron's flawed business model soon collapsed and the company suffered because it could no longer manipulate the market and price-gouge consumers. As a consequence of its business model the company lacked significant asset ownership to offset its losses” causing Enron's unregulated power auction to quickly accumulate massive debts. At the same time, the curtailed revenue flow made it more difficult for executives and members of the Board to conceal the firm's accounting gimmicks.” 6
“Enron’s collapse left thousands of people jobless, many of whom lost virtually their entire retirement accounts. It has cost investors -- from individuals saving for retirement to large institutions -- tens of billions of dollars in equity as the company's stock dropped from $90 a share to less than $1. It has cost leading banks billions and has rippled through the economy. And California consumers are stuck with dramatically higher electricity bills for the next decade.” 6
“California state investigators, sifting through confidential wholesale price information, have calculated that …top energy corporations overcharged California's utilities and ratepayers more than $9 billion. FERC has acknowledged (prior to Enron's collapse) that billions in refunds are to be collected from Enron and other energy corporations but with their collapse Enron of course never paid.” 6
“60 Minutes” did not mention whether Congress had considered or taken any actions to resolve the deregulation issue but following what had ensued from the Enron scandal recommendations were made to Congress to close what had become known as the “Enron Loophole.” 5 6 7 Obviously policy makers were aware there were major flaws.
Several attempts were made by legislators from 2000 thru 2006 to close the loopholes but were unsuccessful. Finally “in September 2007, Senator Carl Levin (D-MI) introduced Senate Bill S. 2058 specifically to close the "Enron Loophole" This bill was later attached to H.R. 6124, the Food, Conservation, and Energy Act of 2008, aka “The 2008 Farm Bill.” President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18, 2008 the bill was enacted into law, public law 110-246.”
Let’s return now to the “60 Minutes” expose, and evaluate it incorporating the information we’ve just covered.
According to “60 Minutes” it is suspected “…[that] investment banks facilitated [the]demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.” 1
Investment firms advise their clients, as any good firm should, on where to invest, ideally before a market swings up or goes down. And invest their client’s money accordingly and in this case into oil and other commodity future contracts. These clients as reported by “60 Minutes” were entities like:
• "The California pension fund…Harvard Endowment…lots of large institutional investors…and other investors, hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds - in the futures markets as well”. 1
What are “sovereign wealth funds” (SWF)?
• They are “…state-owned investment funds composed of financial assets such as stocks, bonds, property, precious metals, other financial instruments. Sovereign wealth funds have gained world-wide exposure by investing in several Wall Street financial firms including Citigroup, Morgan Stanley and Merrill Lynch. These firms needed a cash infusion due to losses resulting from the subprime mortgage crisis.
• Some sovereign wealth funds are held solely by central banks, which accumulate the funds in the course of their management of a nation's banking system; this type of fund is usually of major economic and fiscal importance.”
This puts an entirely new face on the frequently used but rather non-descript verbiage of investors. Do you see any potential conflicts of interest here?
And as CFTC Chairperson Brooksley Born had warned in 1997, 5 according to “60 Minutes” no one knows for sure if there was “price manipulation:”
• “Our federal regulators don't have access to the data…they don't know who holds what position…they don’t know …because federal law doesn't give them the jurisdiction to find out…it's impossible to tell exactly who was buying and selling all those oil contracts because most of the trading is now conducted in secret, with no public scrutiny or government oversight. Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.” 1
As reported by “60 Minutes” "…approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities...not by companies that need oil, not by the airlines, not by the oil companies…but by investors that are looking to make money from their speculative positions…they're trying to make money on the market for oil…on the volatility that exists in the market…they make it going up and down." 1
• “In a five year period (the) amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion.” 1
“60 Minutes” sights two studies, one from the government itself that:
• “…from quarter four of '07 until the second quarter of '08 the Energy Information Administration (EIA), [reported]…that supplies went up, worldwide...[while]worldwide demand went down….which generally means prices [should be] going down" 1
However consumers globally were informed via the media that the reasons for the huge increases in the price of fuel, ranging from over $10 per gallon in England to over $4 in the US, was because of an increase in worldwide demand.
• “The price of oil went from somewhere in the $60s to $147 in less than a year. And we were being told, on that run-up, its supply-demand…supply-demand…supply-demand.” 1
With eerie similarities to the Enron episode were energy prices spiked following deregulation then collapsed once California re-regulated and the FERC imposed price controls, the oil price bubble of 2007 -2008 referred to by “60 Minutes” as “behaving erratically” began its run up in September 2007 hitting a high in June - July of 2008 of $148 per barrel and ironically the price decline coincides that of the enactment of H.R. 6124. Interestingly, the price trend of other commodities follows similar patterns during this same time frame.
Per “60 Minutes,” "…from July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds…In fact, gasoline demand went down by roughly five percent over that same period of time...yet the price of crude oil dropped more than $100 a barrel…it dropped 75 percent." 1
• “…the largest oil company in America? [not whom you might typically expect] but Morgan Stanley.” 1
[They] are not… an oil company in the traditional sense of the word [they don’t]…own or control oil wells or refineries, or gas stations. But according to documents filed with the Securities and Exchange Commission, Morgan Stanley is a significant player in the wholesale market through various entities controlled by the corporation. 1
• “Goldman Sachs also has huge stakes in companies that own a refinery in Coffeyville, Kan., and control 43,000 miles of pipeline and more than 150 storage terminals.” 1
• “At the end of 2007, two of the largest dealers in energy swaps, Morgan Stanley and Goldman Sachs, reported that the fair value of their commodity derivatives totaled $41.2 billion and $28.8 billion, respectively.” 7
How did analysts with these firms and others know prices were going up and therefore a good bet - was it simply lucky forecasting?
• As reported by “60 Minutes” “…analysts at both investment banks contributed to the oil frenzy that drove prices to record highs: Goldman's top oil analyst predicted last March that the price of a barrel was going to $200; Morgan Stanley predicted $150 a barrel.” 1
Seems Morgan Stanley forecasted it pretty darn well!
Into whose pockets did all these profits go? During a time when these investment firms have been writing off massive losses amounting to billions of dollars every quarter over the past year and needing to raise capital in a very bad way we have this speculative run up in oil prices as well as other commodities - a run up in defiance of supply vs. demand – potentially profiting as Enron had over eight years ago - while every gas consuming customer around the globe paid record high prices at the pump - as California had in higher electric charges over eight years before. It is worth noting that this run up also coincides with the needs of central banks to raise capital to fund their various bailout initiatives.
So far to date each of the following firms have received bailout funding, essentially transferring their losses to the U.S. tax payer. For all intense and purposes American taxpayers are paying in a multiple of ways, at the pump, to the IRS, and in interest on potential loans extended through bailout funding:
• JP Morgan - $25 Billion
• Morgan Stanley - $10 Billion
• Goldman Sachs - $ 10 Billion
