Americans are fuming about retention bonuses paid to executives at bailed-out American International Group; they're sore from the stock market crash, and they still remember sky-high gasoline and home-heating costs of not so long ago. In other words, "the people are not happy," a Washington, DC, lawyer told energy traders in Houston last Thursday before letting them in on the "craziness that's going on in Washington with respect to your business."
Congress intends to not "let a good crisis go to waste," said energy lawyer George Baker, principle with Williams & Jensen, and tighter regulation of financial and commodities markets is in the offing.
Most germane to traders and their kin at the University of Houston Global Energy Management Institute annual conference is that lawmakers are taking a skeptical view of commodities markets; they don't trust the Commodities Futures Trading Commission (CFTC) to regulate, and they generally think that speculation is "evil," Baker said.
On the global stage, it's America's march toward deregulation -- which dates back to the Reagan years -- that is blamed for the global financial meltdown. A United Nations report issued last Thursday called for global regulation of commodities markets to curb speculation (see related story). Politicians in the European Union are in a mood to reregulate, Baker said, and so are a good number of their counterparts in the U.S., which sets up speculators and over-the-counter (OTC) traders to be scapegoats, he said. The thinking among lawmakers: "'I don't represent Wall Street or Greenwich, CT, so I don't care what they think.' This is a major political factor that you have to understand."
Baker said he finds particularly troubling Congress' mistrust of the CFTC. Legislation introduced in both houses would have significant consequences for traders in the energy patch. Among proposed provisions are mandatory clearing for OTC trades, speculative position limits for physical commodities, reporting of OTC transaction data, making the CFTC inspector general a presidential appointee, and imposing a fee on futures transactions to bolster the budget. The latter is something included in previous Bush administration budgets but later quashed. While it's not in the Obama administration's budget, it could be, Baker warned.
Further, the CFTC could be directed to reexamine past actions with a revisionist bent. "If you've been relying on a favorable no-action letter or some kind of exemption they gave you at the staff level, I think you better pay attention to this space because you could wind up not having your deal anymore," Baker warned.
"Congress is basically showing a willingness to rethink the basic underpinnings of the Commodity Futures Modernization Act of 2000...which basically liberated the markets to explode, to do creative things, to innovate. Congress is willing to rethink that. One of the things they're rethinking is this notion that sophisticated investors can be trusted to take care of things. [Former Federal Reserve Chairman] Alan Greenspan did not do you a great favor a few months ago when he said that he was wrong that you guys would act rationally with respect to due diligence and things of this nature, and the Congress has picked up on that.
"Prospects for significant regulatory changes are high. Play the game. Don't be victims...If you don't participate, you'll get all the government you deserve."
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