As one might imagine, the relationship between industry leaders, the exchanges, and CFTC has been contentious for years with the CFTC defending its right to exist each time it comes under Congressional review for reauthorization with the debate for regulation versus deregulation beginning anew.
Few major changes were made however until the CFTC reauthorization in 1992 with the “Futures Trading Practices Act of 1992” (FTPA 1992), which granted “increased regulatory authority, bigger monetary penalties, and forcing the exchanges to develop a better "audit trail" of trading floor transactions as well as granting the CFTC the authority to decide whether the contracts should be regulated.” 2 4 The strengthening of authority was an outcome stemming from a lengthy FBI sting in 1989 that uncovered abuses and other scandals that “brought federal grand jury brought indictments against 45 traders and a clerk at the Chicago Board of Trade and the Chicago Mercantile Exchange.” 2
In February 1997 Congress, under the influence of lobbying efforts by industry leaders who claimed deregulation was necessary because “they were facing increased competition in the booming financial futures market from less-regulated foreign exchanges and over-the-counter firms, convened to consider a bill Senator Richard Lugar (R-IN) had drafted based on these desires for less regulation.” 6 But the issue stalled without reaching a compromise in both the Senate and the House.
However deregulation was of great importance to Enron and for other industry leaders not mentioned by “60 Minutes.” “Enron spent $3.45 million in lobbying expenses in 1999 and 2000 to deregulate the trading of energy futures, among other issues. But other corporate giants such as Mobil, Exxon, BP, J.P. Morgan, Morgan Stanley, Goldman Sachs, Citibank, and Chase Manhattan, followed Enron’s lead in lobbying for deregulation.” 6
Enron was a “pioneer in OTC energy trading and developed an electronic market, known as Enron Online, for trading physical and derivative contracts based on a number of energy products.” “Their business model was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant.6
“On November 16, 1992 Enron petitioned the CFTC, to explicitly remove energy derivative contracts and interest rate "swaps" from government oversight as the first step in its business plan to profit on the speculation of energy. Although eight other companies subsequently submitted letters of support, Enron was the only company that signed the original request to Wendy Gramm.” 6
“Just one week after Clinton's election in November 1992 with her chairmanship now about to end, Gramm acted to “curtail her own Commission's authority by muscling through a radical rule-making procedure requested by -- and benefitting -- Enron. Normally a rule-making procedure as technical and legally complex as this takes a year or more of deliberations and open debate among commission members. However in less than two months she brought the process to a vote in January 1993. At the time of the vote, the commission had two of its five seats vacant and Wendy Gramm voted in the majority of a 2-to-1 decision to prohibit the government from regulating energy commodity contracts and swaps.” 6
“Six days later, upon Clinton’s oath to office, she resigned her position at the CFTC. Five weeks after her resignation, Enron appointed her to its Board of Directors, where she served on the Board's Audit Committee which made her responsible for verifying Enron's accounting procedures and other detailed financial information not available to outside analysts or shareholders. Enron paid her between $915,000 and $1.85 million in salary, attendance fees, stock option sales and dividends from 1993 to 2000. The value of her Enron stock options grew from about $15,000 in 1995 to as much as $500,000 by 2000.” 6
Senator Phil Gramm in December 2000 co-sponsored along with Senator Lugar the “Commodity Futures Modernization Act of 2000” (CFMA 2000) and pushed it through Congress without a committee hearing. The Legislation contained language deregulating energy trading by excluding companies like Enron and others from both the Commodity Exchange Act and Commodity Futures Trading Commission jurisdiction.6
When CFMA 2000 was first introduced to the Senate in June 2000 the bill was S. 2697 and it “languished in the Senate, too controversial to get a committee hearing.” However its sister bill H.R. 4541, introduced to the House in May 2000 by Rep. Thomas Ewing (R-IL) was approved in October 2000. Not to be deterred Gramm resubmitted the measure on December 15 under S. 3283 and attached it to an appropriations bill H.R. 4577 8 submitted in June. In the House Rep. Ewing again followed suit by submitting H.R. 5660 on December 14. H.R. 4577 passed both the Senate and House on December 15, and signed by President Clinton on December 21, becoming public law 106-554. 6 Enron and other industry leaders finally got the deregulation they had paid for.
Gramm's legislation was in “conflict with the explicit recommendations of the President's Working Group on Financial Markets, which is composed of representatives from the Department of Treasury, the Board of Governors of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working group had expressly recommended against deregulating energy commodity trading because the traders would be in strong positions to manipulate prices and supply.” 6
In a speech in March 1997 CFTC Chairperson Brooksley Born spoke of the dangers of pending deregulation stating “the Commission strongly opposed the pending bills” being considered by Congress at that time. She warned that “should these rule changes be enacted …the Commission's market surveillance over the 11 U.S. futures and option exchanges would be eliminated, as would requirements such as speculative position limits, large trader reporting, and exchange recordkeeping….the Commission would not have the data to analyze aberrational price movements on the markets including suspected price manipulation.” 5
Senator Phil Gramm was “the second largest recipient in Congress of Enron campaign contributions, receiving $97,350 from 1989 though 2001. Enron was the single largest source of campaign contributions from any corporation in the Energy/Natural Resources sector, giving $5.3 million to federal candidates from 1993 through 2001 - 40 percent more then No. 2 on the list over that time period, Southern Company. These amounts, however, do not include the money Enron spent to influence state-based deregulation efforts, since state disclosure laws are not uniform.” 6
“Enron gave more than $1.1 million to Bush's presidential campaign: $127,525 directly to his campaign, and $713,200 to the Republican National Committee, which served as an arm of the Bush presidential campaign. Enron and Lay also gave $300,000 to the Bush-Cheney 2001 Presidential Inaugural Committee.” 6
Enron was a bit player in the energy market by comparison to other industry leaders prior to deregulation generating revenues in 1992 of $6.4 billion. But following deregulation “the company's revenues quadrupled - from $12 billion in the first quarter of 2000 to $48.4 billion in the first quarter of 2001. This remarkable revenue increase came on top of the record revenue gain that Enron posted from 1999 to 2000, when full-year "Wholesale Services" revenues increased from $35.5 billion to $93.3 billion - a 163 percent increase.” 6 Wholesale Services was the network through which Enron delivered a record amount of physical natural gas, electricity, bandwidth capacity and other products in 2000.
“Since the passage of the CFMA in 2000, an exchange-like market for energy derivatives has come into being. Trading occurs on electronic platforms among eligible commercial entities. Under the CFMA, the CFTC had no substantive regulatory authority over these electronic trading facilities.” 7 “The combination of unregulated state wholesale electricity markets and federal deregulation of commodity exchanges has removed accountability and transparency from the energy sector, allowing corporations to manipulate price and supply of electricity and natural gas through the exercise of significant market power.” 6
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