Enron proved, among other things, that lobbying and large donations are an excellent way to rewrite the corporate rulebook. The list of the company's political victories is long and diverse. Electricity deregulation, the power to essentially veto appointments at the Federal Energy Regulatory Commission, passage of a law that exempted EnronOnline from all oversight -- these are just a few of the perks that Enron claimed on its way up the Fortune 500 ladder.
But perhaps no single instance demonstrates Enron's success better than its influence over the CFTC. The commission could have and should have been Enron's key regulator. The CFTC is the agency most closely aligned what turned out to be one of Enron's primary profit centers: derivatives trading.
The term "derivatives" is used to describe a class of financial contracts that are derived from another asset and priced according to that asset's value. Also known as a form of "risk management," over the past 20 years derivatives trading has become increasingly popular on Wall Street as a way to "hedge" risk, to protect yourself from an investment bet that goes sour or from swings in interest rates or currency prices. Enron, although once primarily a trader in actual physical commodities such as gas and electricity, rapidly developed in the late '90s into a serious trader of derivatives based on a vast array of commodities.
The question of how to regulate derivatives has been at the heart of a vigorous, if abstruse, debate for the past 20 years between Wall Street and Washington. Enron has been in the middle of the battle, and until its demise, won every skirmish.
The first victory came in 1993. At that time, Enron's primary business was selling actual energy but the Houston company wanted to get involved in selling energy derivatives. But rather than put up with the oversight requirements of the CFTC, Enron lobbied for an exemption -- the right to trade energy derivatives without being subject to CFTC jurisdiction.
Wendy Gramm, chairwoman of the CFTC from February 1988 to January 1993, agreed. She shepherded the exemption through, and in April of 1993 -- after Gramm quit the CFTC and took a seat on Enron's board of directors -- the CFTC approved the policy Enron favored.
Enron took its exemption to the bank. Its derivatives business grew enormously over the next few years. Eventually, however, the exemption came up once again for debate. By the end of 1997, derivatives contracts of all kinds represented more than $25 trillion in real assets, and many in Congress -- and at the CFTC -- wanted to know more about their effects. Brooksley Born, a Clinton appointee who became the head of the CFTC in 1996, called for oversight.
"In late 1997 and early 1998, she said the emperor has no clothes," says Greenberger. "She said that derivatives are futures contracts and that the CFTC had jurisdiction."
But once again, Enron carried the day. A handful of legislators, including Sen. Phil Gramm, R-Texas (husband of Wendy Gramm), defeated the forces of regulation, with no small help from the U.S. Treasury Department, the Federal Reserve and the Securities and Exchange Commission. All three government agencies, though headed by Born's fellow Clinton appointees, scorned her new CFTC proposal. They even issued a rare joint statement declaring, "We have grave concerns about this action and its possible consequences. We seriously question the scope of the CFTC's jurisdiction in this area."
After a report favoring less regulation rather than more reached both houses, Congress acted. In December 2000, the Commodities Futures Modernization Act (CFMA) became law. The CFMA essentially established derivatives as a new, unregulated form of finance.
"The CFMA made it clear that this kind of trading would be exempted," Greenberger says. "Only a handful of congressmen and senators probably realized that they were enacting this deregulatory provision."
For those working under the law, however, the CFMA has proven hard to ignore. Thomas Erickson, a Clinton-appointed commissioner, says that the law has severely undermined the agency's ability to keep track of the economy. Not only does the law let companies deal in derivatives without maintaining established levels of capital (to protect against overextended investing), as banks are required to do; the law also protects companies from having to disclose information about their derivatives business.
"It's a black hole of information," says Erickson. "It's off our radar completely."
Ultimately, he adds, the law makes it much harder for the CFTC to do its job -- to hold companies accountable.
"It's a real challenge," Erickson says. "We've got so many built-in hurdles to an investigation that you have the possibility of having your jurisdiction questioned at every stage. Where we are today, I believe that we would be hard pressed to be able to reach the same kinds of settlements as we did before the CFMA, like with Sumitomo, a case where the commission earned a $150 million settlement for the manipulation of copper prices."
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