Gretchen Morgenson's Sunday New York Times story on the hedge fund Amaranth, commodities regulation, and the legacy of Enron proved to me, once again, why she's my favorite business reporter. I've always liked her because she is cynical and equally adept at on the ground reporting of breaking news along with connecting the dots that make up the Big Picture. But this piece was particularly nice.
Amaranth announced losses of six billion dollars this week betting the wrong way on natural gases. The natural question for those not familiar with hedge fund speculation might be, uh, shouldn't there be rules about that kind of thing? Well no. The kind of over-the-counter electronic energy derivatives trading that Amaranth was engaging in was specifically exempted from the oversight of commodity regulators.
The role of Enron in ensuring that electronic energy trades were exempt from government watchdogs has been reasonably well reported. Salon's Damien Cave wrote about it here, four years ago, and I've mentioned it numerous times in my own obsessive coverage of Enron. But Morgenson adds another piece of the puzzle. She connects Enron's success in getting the rules bent to the rampant speculation by commodities traders that helped pump up energy prices over the last couple of years.
Peak oil theory aside, some observers have argued that energy prices rose much faster in the last three years than external circumstances (hurricanes, wars, et cetera) merited. The continuing rise, even as inventories of oil and gas surged upwards, pointed to one main culprit: speculation, in large part by hedge fund traders looking to profit on short term price increases. And guess what? That speculation, which in some cases may have come quite close to flat-out market manipulation, didn't show up, as Morgenson writes, "on the radar screens" of regulators because, well, it was unregulated.
Morgenson's article does a far better job of telling the whole story than this blog post. But neither the offline nor online version of the story provides a link to the best part, a June report by the Senate's Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs titled "The Role of Market Speculation in Rising Oil and Gas Prices: A Need To Put the Cop Back On The Beat." At this very moment, early on a Sunday evening, my rather tired printer is pushing out the last words of this sixty-page report. More delightful Monday morning reading I cannot imagine. Thanks, Ms. Morgenson!
As for Enron, well, the company may be long gone, but the evil that it did lives after it.