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Celebrating Ten Years of Derivatives Deregulation

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Today marks the tenth anniversary of President Clinton's signing of the Commodity Futures Modernization Act (CFMA). At passage, the bill was said to establish "legal certainty" for derivatives. In other words, the bill assured bankers that they wouldn't face any legal consequences in the United States when they manipulated, defrauded, and colluded their way to billions in profits using financial derivatives that no one understood.

The CFMA led to serious consequences for the rest of us, including the exacerbation of the housing bubble and the subsequent bank bailouts and foreclosure crisis; the California electricity crisis; periodic food and energy price spikes that have hit consumer pocketbooks hard; and, of course, the continued reign of an unaccountable shadow banking sector over the economy.

The legislation was a bipartisan effort, but Clinton Treasury Secretary Larry Summers -- who will soon be leaving the Obama White House -- deserves the bulk of the credit for its passage. Summers, along with Robert Rubin and Alan Greenspan, had prevailed over CFTC chair Brooksley Born two years earlier when she attempted to subject derivatives to regulatory oversight. Born was essentially forced out by Summers & co, who then went to work putting together the deregulatory gift basket that later became known as the CFMA. Summers worked Congress in the year preceding the bill's passage, and testified in June 2000 that it was his "very great hope" that the bill should pass.

Democrats have blamed Republican Senator Phil Gramm for one of the more controversial measures in the bill, the so-called "Enron loophole," which has enabled destructive energy speculation of the sort that caused California's electricity crisis and the fuel price spikes of 2008. The story goes that Gramm used an extraordinary legislative maneuver to slip the loophole into the bill at the last minute, unbeknownst to other senators or the Clinton Treasury. During the 2008 presidential race, the Obama campaign suggested that Gramm, a McCain adviser, was the creator of the loophole. Journalists ran with that story.

This version of events is extremely far-fetched. Summers and his lieutenants deserve just as much of the credit, if not more, for the inclusion of Enron's language in the final bill. As early as August 2000 -- four months before the passage of the CFMA -- Summers lieutenant Lee Sachs, who handled energy negotiations for Summers, indicated to Enron lobbyists that Treasury would support the Enron language, which appeared in the House bill (but not the Senate bill). Here is Enron lobbyist Chris Long describing the meeting to higher-ups in an email from the Enron archive:

I told Lee that we shared his desire to move the legislation as long as it contains a full exclusion for all non-agriculture commodities (including metals). He said that we would have a difficult time defending the metals provision politically. But, Lee said "we would not find Treasury opposition to the House Commerce Committee language" (which includes favorable language on energy and metals). This is a positive development, because it isolates the CFTC from its key defenders and I hope ensures no veto threat on our issues. However, I do not expect Treasury to be vocal in support of our position.

Enron spent much of the next several months strategizing to get Gramm -- whose wife sat on Enron's board -- to recognize how important the legislation was to Enron, support it, and ensure its passage. Gramm was opposed to the bill on the grounds that it didn't go far enough to deregulate banking products unrelated to Enron's business. The Clinton administration's support was never in question. The plan, all along, was to go with Enron's language despite some opposition in the Senate.

It helped that the Clinton Treasury was very cozy with Enron. Just four days before Congress passed the CFMA, Summers awarded Enron lobbyist Linda Robertson -- formerly an assistant secretary in the Summers Treasury -- Treasury's highest honor, the Alexander Hamilton award. Summers had recommended Robertson, who now works at the Federal Reserve, for the lobbyist job at Enron. Enron CEO Ken Lay later offered Summers a seat on the board of Enron, as he had done with the previous Treasury Secretary, Robert Rubin, at the close of the Clinton administration; Summers turned it down in light of his appointment as president of Harvard. Summers had also famously assured Lay that "I'll keep my eye on power deregulation and energy market infrastructure issues" shortly after becoming Treasury Secretary, in hand-written scrawl at the bottom of a letter.

Enron lobbyist Robertson later recommended Lee Sachs -- who served in the Geithner Treasury from 2009 to 2010 -- for a spot on Enron's advisory committee in an email to Lay assistant Steve Kean and lobbyist Richard Shapiro. The email is worth printing in full (she also mentions the Summers board appointment at the beginning):

As you know, Ken has talked to Larry Summers about serving on Enron's Board of Directors. Larry told Ken that in light of his selection to head Harvard,
he wants to hold off going on any corporate boards for now. My understanding
is that Larry will most likely accept Ken's offer at the end of the year.

In the meantime, let me suggest a candidate for Enron's Advisory Committee. Lee Sachs was Assistant Secretary of Treasury for Financial Markets under Bob Rubin and Larry. Lee coordinated the energy negotiations for Larry at the end of the Clinton Administration. You probably met Lee at those meetings. Lee is brilliant. He was a Managing Director at Bear Sterns before joining the Treasury team. He is a huge fan of Enron and is constantly telling me how extremely well positioned Enron is for the future. He has done considerable research on our business model and is constantly talking to his buddies on Wall Street about us. Lee will undoubtedly be a significant player in any future Democratic Administration. I know he would be an invaluable addition to this Committee. He has not decided what he is going to do next, but has several extremely good offers on the table from large investment firms and hedge funds. None of these would conflict with this type of activity. I thought I would plant this suggestion with you not knowing exactly how these things are done. [emphasis mine]

Sachs went on to work for Perseus LLC, a private equity firm run by top Democratic insiders Jim Johnson, Richard Holbrooke, and Frank Pearl. He later joined the hedge fund Mariner Investment Group, where he sold toxic CDOs to investors. In 2009 he became Geithner's right-hand man at Treasury, but left in March 2010 in the wake of controversy surrounding those CDOs, and landed on his feet at Brookings.

When he leaves the Obama administration, Summers will inevitably slip out the revolving door and land some lucrative consulting contracts with investment firms that he helped bail out. The deep corporate consensus in this age of deep corporate capture will be the same as it was when Summers last exited a presidential administration -- that he did a heckuva job, in Obama's words. The markets are modernized! The bailouts are booking profits! -- and other such nonsense.

It's enough to make one hope for another data dump in the style of the Enron email archive, one that would contain insider communications between bank executives and government officials, thereby further illuminating the wholly captured and compromised state of our political system, where individuals like Larry Summers and Lee Sachs are ascendant, and corporations are able to secure legislation like the CFMA on the strength of powerful friends and bottomless pockets. One can hope...

I'd like to share one last email from the archive, in case you were still on the fence about whether the Summers Treasury was completely captured by Enron. The following email, from Enron lobbyist Linda Robertson to her higher-ups in the summer of 2001, recounts a conversation between Lee Sachs and NYT reporter Jeff Gerth in which Sachs defends Enron's favored regulatory exemptions and answers questions related to Enron's influence of the bill:

Lee Sachs was contacted for a second interview by Girth [sic]. Lee concluded from this interview that Girth is going down the "Enron influence" path. Girth did not probe the question of whether derivatives drive the physical commodity market, which as noted below was a big part of the first interview. Girth asked Lee extensive questions about Enron's involvement in the legislation and who talked to whom and when. Girth said that he had talked to the CFTC who said they got steamrolled on the energy exemption by the Hill. Lee reminded Girth how the CFTC got themselves into this bind when they first issued the "Concept Release" paper, which the President's working group immediately denounced. Lee said that the Working Group constantly told the CFTC that they should work out the issue with the Hill and to do so quickly because the CFTC had made a massive mistake with the Concept Release document. Lee reminded Girth that while the Working group did not get into the specifics of the energy exemption, that in fact energy was already exempted prior to reauthorization and that it continued to meet the criteria laid out in the President's report. I can go into that part of the discussion more thoroughly, but just suffice it to say Lee meticulously walked Girth through the safe harbor test and the background of the issue. Girth asked Lee if I had talked to Lee about the issue after leaving Treasury, to which Lee said we talked but not about this subject and that he instead talked to Chris Long. Girth asked if Ken Lay had talked to either Summers or Phil Gramm. Lee said he did not think Ken talked to Summers about the CFTC reauthorization (but mentioned Ken's very constructive engagement on the Calif energy talks) and that as far as Ken talking to Gramm, Lee had no idea but assumed two Republican Texans would have lots of reasons to talk to each other. Girth told Lee he would soon go on vacation and that they story would come after Labor Day.