Warm in Winter and Cool in Summer Act - Motion to Proceed

Floor Speech

WARM IN WINTER AND COOL IN SUMMER ACT--MOTION TO PROCEED--Continued -- (Senate - July 24, 2008)

BREAK IN TRANSCRIPT

Ms. CANTWELL. Madam President, I came to the floor yesterday to talk about how our Nation must move forward on a new energy future and explain how even if we drilled off all our coastlines it would still meet only 1 percent of our future oil needs. Instead we should be moving toward a renewable energy future and new energy technologies that could actually reduce our dependence on foreign oil by over half.

But today I come to the floor to talk about the proper policing of oil markets because we are in a crisis that is literally bankrupting families and businesses and even threatening entire industries.

Now, I don't often agree with President George Bush, but I have to say in his latest economic analysis, I actually agree with him, because I think it explains part of the reason why we are in a crisis today.

That is right, the President said that ``Wall Street got drunk.'' That is right, the President acknowledged that something was wrong with Wall Street and that ``Wall Street got drunk.''

Now, I don't know if the President meant to say that publically, but it got captured on the Internet. I don't know if he plans to keep saying that or all the intentions he has about trying to sober up Wall Street. But I know elaborating on the President's point, White House press secretary Dana Perino explained:

Well, you know, I actually haven't spoken to him about this, but I imagine what he meant, as I have heard him describe it before in both public and private, was that Wall Street let themselves get carried away and that they did not understand the risks that the newfangled financial instruments would pose to markets.

That is what she said.

I don't know why the Bush administration and the

regulatory team that they put in place wasn't doing something about this situation. We do know the administration supported deregulation of the financial markets.

And to me, the issue is that while Wall Street was getting drunk, it's really America and the American middle class that is feeling the hangover.

Today the Federal Reserve is struggling to contain what is almost one of the most severe credit crises since the Great Depression, and American families and businesses are paying dearly for the poor decisions and inactions of this administration.

During the past decade, the financial economy seems to have repeated some of the excesses our country has gone through before. So I wonder when we are going to learn the lessons of history and make sure that we in Congress do our job and that regulatory agencies do theirs.

In many ways, today's situation is a repeat of the 1920s when too much borrowing to underwrite too many speculative bets using too much of other people's money set up an the entire economy up for a crash.

Well, in 1999, Congress repealed key parts of the Glass-Steagall Act of 1933. It allowed banks to operate any kind of financial businesses they desired. And it set up a situation where they had multiple conflicts of interest. And several economists and analysts have cited the repeal of this Act as contributing to the 2007 subprime mortgage crisis. In fact, Robert Kuttner, cofounder and co-editor of the American Prospect magazine wrote in September 2007:

Hedge funds, private equity companies, and the subprime mortgage industries have two big things in common. First, each represents financial middlemen unproductively extracting wealth from the real economy. Second, each exploits loopholes in what remains a financial regulation.

Then, in 2000 we also deregulated a new and volatile financial derivative that is at the heart of today's housing credit crisis--credit default swaps. As White House press secretary Dana Perino would describe it, these newfangled financial instruments that posed a risk to the market actually grew into a $62 trillion industry.

And Warren Buffett has called these credit-swaps financial weapons of mass destruction. So the proliferation of these newfangled financial instruments has resulted in huge profits and losses without any physical goods changing hands.

So now, I come to the floor asking my colleagues when are we going to learn the lessons of the past? When are we going to realize that the the 1929 stock market crash has the same root cause as the recent housing bubble? Both were financed by dangerously, highly leveraged borrowing, and after the crash many banks failed causing a ripple effect that devastated our Nation's economy. Well, after the 1929 crash, Congress stepped up and changed the banking laws to eliminate some of the abuses that had led to the crash.

That is right, only after the crisis did Congress act. What I want to know is whether we are going to learn that vital lesson and legislate consumer protections in advance, or only after a bubble bursts.

The savings and loan crisis of the 1980s and 1990s when 747 savings and loan associations went under provides a similar lesson. Like before, much of the mess can be traced back to deregulation of the savings and loans which gave them many of the capabilities of banks, but failed to bring them under the same regulations as banks. Congress eliminated regulations designed to prevent lending excesses and minimize failures.

Deregulation allowed lending in a distant loan markets on the promise of higher returns, and it also allowed associations to participate in speculative construction activities with builders and developers who had little or no financial stake in the projects.

The ultimate cost of this crisis is estimated to have totaled around $160 billion, with U.S. taxpayers bailing out the institutions to the tune of $125 billion. This, of course, added to our deficit of the early 1990s.

So I ask my colleagues: When are we going to learn this lesson?

As George Soros wrote in his book documenting the credit crisis:

At the end of World War II, the financial industry--banks, brokers, other financial institutions--played a very different role in the economy than they do today. Banks and markets were strictly regulated .....

Unfortunately, today's banking and credit crisis teaches us we have failed again to learn the hard lessons. We have failed to see that oversight and transparency are always critical, and when Congress makes reforms, they cannot disregard these important fundamentals.

The only encouraging news I have seen lately is that Treasury Secretary Paulson is now working to increase regulation over investment banks, hedge funds, and other financial institutions.

I could go on and on for my colleagues on my own personal experience with the western energy crisis that happened in electricity in 2000 and 2001. We saw that during the electricity deregulation experience which started in the mid 1990s, people argued that electricity was just another commodity. But it is really a very vital element to our economy. Many experts cautioned that electricity was too vital a part of our economy and way of life to let these markets go without the transparency and oversight that is essential.

We all know the rest of the story. We saw that deregulation set the table for some of Enron's spectacular manipulation schemes of 2000 and 2001 among other bad actors, which all told caused more than $35 billion in economic loss and over 589,000 jobs were lost because of this crisis.

Again, only after the crisis was over, Congress stepped in and gave the Federal Energy Regulatory Commission and now the FTC more regulatory authority on energy markets.

But again, Congress is doing its job after the fact.

So I ask my colleagues: When are we going to learn? When are we going to quit deregulating these critical markets without much thought to the transparency and oversight that is critical for markets to operate and function correctly? When are we going to learn that when we give Wall Street an inch, as the President says, Wall Street gets drunk?

We are here today. We are here today to talk about the oil futures market and hopefully enact some meaningful legislation. But the real reason we are here is that we deregulated the energy futures market in 2000, which helped spark today's price bubble that is driving our markets to no longer be based on supply-and-demand fundamentals. In one fell swoop, this deregulation did a number of things that enabled today's perfect storm to brew.

We let newfangled financial instruments--called credit default swaps--go unregulated and made it too easy to use bad debt to finance home mortgages. We also let newfangled crude oil trading--called energy swaps--go unregulated and essentially allow Wall Street to trade without any transparency. And we allowed electronic trading of energy commodities to emerge as a new form of trading. In a nutshell, we let Wall Street rewrite the rule book for all the traditional exchanges, like as NYMEX and the Chicago Merc, which were previously subject to considerable CFTC oversight.

The consequences of allowing these energy speculators to move into this market, as my colleagues on the floor have said, in spades, shows it is similar to a casino game, instead of playing in the legitimate trading market. And the consequences are the American people paying hand over fist for our lack of regulatory oversight.

Why are we talking about the futures market? Because it should be a key price discovery method to establish the true price based on supply and demand. As the Government Accountability Office has said:

The prices for energy commodities in the futures and in the spot or physical markets are closely linked because they are influenced by the same market fundamentals in the long run.

That is right, the prices for the energy commodities in the futures and in the spot or physical markets are closely linked because they are influenced by the same market fundamentals in the long run. So why is that so important? Well, it is important because the facts are clear: Speculation, and excessive speculation, have driven up oil prices over 100 percent in a year, and energy market experts are telling us the price should be more like $60 a barrel.

So people are questioning why the futures market is so high, driving the price people pay at the pump today. Well, as Ed Wallace, with the Dallas Star Telegram, said:

Record high prices without record low oil inventories, analysts saying that so much money flows into the oil commodities that it gives the impression of shortages, when in fact no shortage exists.

So that is to say that when you have record-high prices without the record-low inventories, and I note we haven't had a supply disruption, so much money flows into the oil commodities it gives the impression of a shortage when, in fact, a shortage doesn't actually exist.

Now, I learned this phenomenon the hard way because that's how Enron manipulated the electricity markets coming up with various names for these various schemes--Darth Vader, Get Shorty--where Enron created the perception in the futures market that there was somehow not enough supply and then went in the physical market and signed people up for contracts at exorbitant rates. Thank God, through the hard work of people in my office, a little utility in Washington state actually recovered a tape of a trader talking to one of the individuals from Enron doing a contract and actually saying on the phone: No, this isn't true about the future price, but go ahead and tell your buyer it is so they will sign this contract.

So now we are seeing the same thing happening again. To quote again from the Dallas Star Telegram, in an article called ``ICE ICE BABY'':

Investors know that if they invest huge amounts in the commodities futures, they can create a shortage on paper, driving prices up just like an actual shortage.

That is right, investors know they can invest huge amounts in commodities futures and they can create a shortage on paper and drive up the price just like an actual shortage. So, yes, we are concerned.

In fact, that article goes on further, speaking about the Intercontinental Exchange, better known as ICE--that this ICE platform has been a big problem because we have allowed it to operate in the dark without the same regulator oversight as other exchanges. Ed Wallace is also quoted in that article as saying:

What kept traders from cornering the market in the past where the government's anti-manipulation rules.

He is talking about what kept bad actors in check in the past, but once we deregulated in 2000, they didn't have the same tools in place to keep the manipulation from happening. So we are here today, on the floor now, talking about whether we are going to move ahead on a speculation bill to deal with this problem.

Compounding this problem is that we have a CFTC and an administration that is watching out more for Wall Street than for Main Street. It is up to us to make sure we are going to pass legislation that puts transparency and tough rules in place to make sure the markets work for consumers and that both the future price and physical price of oil today are truly based on supply and demand.

Americans may be surprised to learn that our oil futures markets were further deregulated--besides this 2000 Act. I am talking about a CFTC decision made by staff behind closed doors who decided to take no action against a London-based trading exchange that actually trades U.S. oil products. As my colleague from Maryland likes to call it, the London loophole. It is like driving on a U.S. highway but only applying the same speed limits as the German Autobahn.

It is abundantly clear to me that the CFTC is doing everything it can to continue to operate this way without thinking about its job, which is to protect the American consumers from oil price manipulation. So that's why I am making no secret of the fact that I am holding up the renomination of CFTC commissioners. And I am holding up new appointments to the CFTC until Congress gets to the bottom of this and we can get Commissioners who are going to enforce the law on the books.

Hardworking Americans are counting on us and are suffering in this crisis. Congress is their last resort as an oversight agency to make sure there are functioning markets and not the manipulation of supply based on the fact that we have created dark markets without proper oversight. But don't just listen to me on this subject about the CFTC. Listen to what other people have said about our CFTC, our Commodity Futures Trading Commission. Others have been critical as well. In fact, William Engdahl, who is an expert and an author on oil markets, wrote in May of this year:

The CFTC seems to have deliberately walked away from their mandated oversight responsibilities in the world's most important traded commodity--oil.

So there is one expert who doesn't think the CFTC is doing its job. Another expert, Steven Briese, who is a futures market analyst and author of the ``Commitments of Traders Bible,'' which is a futures market trade publication, wrote in May of this year as well:

Congress has provided the CFTC the power to control this unlimited speculation--the law is very specific about establishing position limits. The problem is they have abdicated this role.

He is talking about the ``behind the closed door'' situation where the CFTC said: We are not going to enforce the laws we have on the books.

We have heard from other people, Mark Cooper, of the Consumer Federation of America, recently testifying before Congress, because the Consumer Federation of America focuses on protecting consumers. He had something to say about the CFTC's poor performance. In fact, he said the CFTC's poor performance is ``the regulatory equivalent to FEMA's response to Hurricane Katrina.''

What he is basically saying is they dropped the ball, at least at the beginning of this crisis, and have not responded.

So there are other people who have said things, like the trucking industry. They have a big stake in making sure the markets function properly. They say: ``There's oversight that's lacking or not taking place--so the private market is taking advantage of that.''

So, Madam President, I am not the only person. I know The Washington Post has also talked about this. They said, in an article: ``The CFTC has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that needed to lock in future fuel costs.''

So it is clear the CFTC has abdicated its authority and responsibility. It has abdicated its authority and responsibility, and we have been trying to clean this up and to push forward on important efforts in this regard.

Madam President, I would like at this time to reference for the record a document prepared by Professor Michael Greenberger that responds to information from the Senate Permanent Subcommittee on Investigations. I know the SPI staff analysis of Professor Greenberger's recent testimony before Congress on this topic has been discussed on the floor, and I would like to make my colleagues aware of his rebuttal to that PSI staff report.

Now, I am sure many of my colleagues probably didn't realize I was going to come and talk so much about the history of Congress deregulating markets, the crises that have ensued--billions of dollars paid by taxpayers--and Congress finally coming in and doing its job and making sure oversight agencies are performing their proper role and responsibility. But I thought it was important context so that we do not repeat the same mistakes.

Some of my colleagues today talked about the CFTC's recent investigation that uncovered oil market manipulation, which underscores the point. The CFTC could only take action against traders that are using exchanges regulated under their purview. What we need to ask is: what are we going to do about the dark markets, the markets that operate within the United States with U.S.-traded products that have been given an exemption and loophole in oil futures that we are not regulating and are probably also causing the problem? We want to know what they are doing about that.

So what is the American consumer saying about this? I know my colleagues have been saying a lot about Americans and what their preferences are. But it is clear to me that the American public wants us to act. In fact, 80 percent of the American public believes that oil commodities speculation and manipulation of the oil markets are taking place. That is right. They want Congress to act. Eighty percent of Americans polled said they believe oil commodities speculators are manipulating the price of oil. So Americans are very concerned.

Two-thirds of Americans believe we should pass legislation that creates new regulations governing all oil speculators. They want us to put back in place the rules we had before we threw them out in 2000. So two-thirds of Americans polled believe we should pass legislation that creates the necessary regulations, and that is what we need to be doing today.

I wish to make sure I am clear to my colleagues. We have done a great service by having an open debate on these issues. And just this week, experts said the Senate action is one of the reasons prices have fallen $20 below where they were, because we have had this discussion what a more regulated marketplace should look like.

But I want to make sure my colleagues are clear that we need to pass legislation that really will crack down on excessive speculation. We cannot have a study bill, we cannot punt this to the future. We have to pass a bill that really addresses all areas of potential for excessive speculation. We need a bill that has aggregate speculation limits across all exchanges. It has to be transparent, and it has to be enforced on all markets.

We cannot have a bill on the Senate floor that has all the right words in it but none of the important words in the proper places. That is what I am going to continue to fight for. I am going to continue to fight to make sure we put real teeth back into the law, to make sure the American consumer is protected from the manipulation of oil markets in the future.

We can give the CFTC the tools it needs, and we must insist that it use them, but we will have to do our job here and pass this important legislation. Wall Street may be drunk, but it is America that is suffering the hangover, and we must help them recover. We need a new, tough law on the books, and it is imperative that we learn from the past mistakes of Congress in their attempt to lighten the load on some of these financial institutions with tools, only to find it wreaking havoc with housing oil speculation bubbles that is causing our country great distress. I hope we get this right in the next couple of days, and I am going to continue to fight until we do.

I yield the floor.

BREAK IN TRANSCRIPT

Source