An excerpt from a CNN Money article, contributed by Nomi Prins, an analyst at the public policy group Demos. She's also a former managing director at Goldman Sachs, and she authored the book Other People's Money: The Corporate Mugging of America.
The problem is that the futures market has gotten so big, and the trading rules in the markets so lax, that it's not easy to dismiss the speculation theory.
The infamous December 2000 "Enron loophole" is the topic du jour in Congress. That legislation didn't just make it easier for savvy traders to buck the system. It exempted entire over-the-counter electronic exchanges (where trading takes place directly between parties, without an intermediary broker) from regulatory oversight by the Commodity Futures Trading Commission.
As a result, capital zoomed to new unregulated exchanges like Atlanta-based ICE, an American firm operating under U.K. regulation, where trading volume tripled from 2005 to 2008, representing 47.8% of global oil futures trading. And participants in the new electronic markets didn't even have to file "large trade reports" with the CFTC, obscuring trading details across the fastest growing exchanges. That's scary murkiness.
In addition, while the 1936 Commodity Futures Exchange Act once curtailed excessive speculation, the Enron loophole redefined who a speculator was, and more importantly, wasn't. If investment banks could claim they were "hedging" certain derivative trades, they could avoid speculation limits set by the exchanges altogether.
"In dark markets, more paths of manipulation are available," says former CFTC trading division head and University of Maryland Law Professor Michael Greenberger. "That may not be happening now, but we just don't know."
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