Up In Smoke

Enron used political ties to rid itself of regulators. But in the end, its supposed free-market trailblazing only burned investors.

"I don't question that you've had extensive hearings," Gramm snapped. He recited a list of opponents to the FASB standard, which included Chase Manhattan Bank and Citicorp. "Are these people against the public's right to know?…If we are going to maintain generally accepted accounting principles, part of your job, it seems to me, is getting general acceptance."

"The focus of the FASB is on consumers," Jenkins argued, "users of financial information such as investors, creditors and others." He explained that corporate reports need to give accurate finances and "not influence behavior in any particular direction."

Soon after, Wendy Gramm told the House banking committee that derivative markets would suffer from "unnecessary or overly burdensome regulatory costs." Gramm, a professor at George Mason University's James Buchanan Center for Political Economy, described her views as "comments that reflect the public interest rather than any special interest."

What she didn't put on record, however, was any mention of her job as paid director for a company that planned to become the world's largest corporation by dealing over-the-counter derivatives. Gramm is currently on the board of two other firms that put investor funds to work in the derivatives market: Invesco Funds and Longitude, a company that develops software to help dealers keep track of prices and trading positions.

In 1998, antiregulation forces advanced with the GOP's new majority in both the House and Senate. Phil Gramm was elevated to chairman of the Senate banking committee, which oversees legislation on any financial regulations.

Merton Miller, an economics professor and 1990 Nobel-winner, told a roundtable discussion in spring 1999 that the Texas senator would be influential with the Securities and Exchange Commission in weakening financial derivative controls.

To unanimous agreement, Miller said that the way to weaken such regulations was "not by rational arguments, of which we have immense numbers. But by a fellow named Phil Gramm…" To persuade the SEC "to take this medicine," he said, "you've got to be able to get to the supervisor of [SEC Chairman] Arthur Levitt, who is, in effect, Phil Gramm, and I think you can fully expect him to listen."

As the general, Gramm raked in enormous contributions from those who stood to gain the most from derivatives deregulation: Enron and those in the banking and securities industry.

Enron donated more than $100,000 in individual and corporate contributions to Gramm's political campaigns, including $10,000 from Ken and Linda Lay, according to the nonpartisan Center for Responsive Politics. (Lay was also regional chairman of Gramm's failed presidential bid in 1996.) The banking and securities industry provided him with more than $2 million since 1989.

Michael Greenberger, the former chief of the CFTC's trading and marketing division, says the debate over off-exchange derivatives has been smothered by special interests. Even modest attempts to study the issue trigger a rush of lobbyists to Capitol Hill.

"The Enrons of this world, the investment banks, the commercial banks individually and through trade associations, are lobbying the congressional branch and the executive branch and whoever they need to lobby 24 hours a day, seven days a week for this kind of stuff," says Greenberger.

Enron, tasting victory, launched Enron Online. The computerized trading platform would standardize the company's long-term derivatives contracts, to close such deals in seconds rather than the hours formerly needed. That would increase trading volume exponentially.

That online debut was diminished by a November 1999 White House capital management task force report recommending more financial disclosures from hedge funds. The report also recommended proceeding slowly with unproven online markets such as Enron Online. And then-futures trading commission chairman Brooksley Born also echoed those sentiments about derivatives trading.

Gramm argued that risk to individual investors was small. It is up to institutional investors, such as banks, to make sure their money is safe, he explained. "People who lend money ought to know who they're lending money to," he said at the time.

Fueled by objections from the securities industry to the continuing debate, Gramm led an effort to impose a moratorium on new derivatives regulations. That ended in May 2000 when the senator agreed to co-sponsor the Commodity Futures Modernization Act.

Gramm signed on to the bill after the original sponsor, Senator Richard Lugar of Indiana, agreed to amend it to allow sweeping deregulation of the over-the-counter derivatives market. The bill also exempted companies that trade derivatives electronically, such as Enron Online, from disclosing details of trades. It became known as the Enron Exemption.

In December 2000, five months after Phil and Wendy Gramm made their triumphant entry into Enron's reception in Philadelphia, then-president Bill Clinton signed the measure into law.

Some of the derivative-trading ranks hardly celebrated the supposed victory. The nation's established commodity exchanges tried unsuccessfully for a provision that would allow them to compete with Enron in limited over-the-counter commodity markets.

"To be perfectly frank, in my opinion, Enron's behavior in this instance was completely shameless," says Neal Wolkoff, executive vice president of the New York Mercantile Exchange. "It was just obnoxious. Every time I called a congressional aide or one of the committees to offer some input, they said the same thing: 'I'll have to run it past Enron and Goldman Sachs first.' We were trying to be heard and were just getting blown away."

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