WASHINGTON – Sen. Maria Cantwell wants to use state gambling laws to regulate parts of Wall Street, saying someone needs to police financial markets where “casino capitalism” involving highly speculative trades she likens to sophisticated betting continue unabated and threaten to create yet another financial crisis.
“She’s going for their jugular,” said Michael Greenberger, a University of Maryland law professor who, as a top official at the Commodity Futures Trading Commission during the Clinton administration, unsuccessfully fought to regulate such trading.
The Washington Democrat wants to repeal parts of a 2000 law that barred states from using their gambling laws to help rein in the nearly $600 trillion derivatives market.
The senator’s effort comes as Congress is just now starting to consider tightening federal regulation of financial markets in the wake of the current economic downturn. Cantwell said she’s not convinced Congress will take strong enough action and, as a backup, wants to give state attorneys general the power to act.
“They are the last line of defense,” Cantwell said. “I don’t want them neutered.”
Derivatives essentially began as a form of insurance, offering a hedge for such companies as airlines that wanted to lock in the cost of jet fuel to avoid sharp increases. But over the years, derivatives became more exotic, allowing investors to place what were essentially side bets on such things as whether people would default on their subprime mortgages or whether the price of oil or natural gas would go up or down.
Greenberger likened it to buying insurance on your neighbor’s home expecting it to burn down or your neighbor’s car expecting it to be totaled in an accident.
“It’s nothing else than betting,” he said.
Such well-known financiers as Warren Buffett and Felix Rohatyn have called derivatives “financial weapons of mass destruction” and “financial hydrogen bombs.”
There is precedent for state gambling laws being applied to financial transactions.
In the early 1900s, gaming establishments known as “bucket shops” allowed people to place wagers on whether a stock would go up or down without actually buying the stock. But states banned such betting after the economic crash and panic of 1907.
In 2000, Congress attached the Commodity Futures Modernization Act to a must-pass, 11,000-page omnibus spending package that provided funding for a handful of cabinet departments and other federal agencies. The bill essentially deregulated the commodities markets and pre-empted the states from applying their “bucket shop” or other gambling laws.
Among those supporting the deregulation of the commodities markets were Alan Greenspan, who was then chairman of the Federal Reserve Board; Larry Summers, who was a treasury secretary in the Clinton administration and now is a top economic adviser to President Barack Obama; and Robert Rubin, another Clinton-era treasury secretary.
Greenberger, who was among those fighting the 2000 deregulation, said lobbyists for Wall Street and large banks essentially wrote the Commodity Futures Modernization Act and clearly recognized the need to pre-empt state gambling laws as the derivatives market took off.
“Las Vegas casinos were regulated but betting on Wall Street wasn’t,” Greenberger said.
Cantwell said the deregulation led to the spread of “dark” markets, where such things as “naked credit default swaps” could be traded with little or no government oversight. She called the decision to pre-empt state laws an “Achilles’ heel that blew out our economy. It could happen again.”
Cantwell said such state attorneys general as Richard Blumenthal in Connecticut and Andrew Cuomo in New York have been aggressive in pursing financial- related cases.
“They bust things up that aren’t on the up and up,” she said. “They have great investigators.”
The senator’s office said that she had not contacted Blumenthal or Cuomo, but that she intended to.
Cantwell, a detail-oriented former high-tech executive, has a reputation as one of Capitol Hill’s toughest watchdogs of the nation’s financial markets.
After West Coast electricity prices rose 500 percent in 2000-01, she took on the Federal Energy Regulatory Commission, and along with a Washington state utility released secret audio tapes in which Enron officials bragged about schemes dubbed “Fat Boy,” “Get Shorty” and “Ricochet” to manipulate energy markets.
More recently she has been highly critical of the failure of the Commodity Futures Trading Commission to rein in speculators who she alleged were mostly responsible for the sharp increase in gas and oil prices last year.
“She is relentless,” said Greenberger.
Earlier this month, Cantwell introduced legislation that would allow state gambling regulators and attorneys general to examine unregulated derivatives trading. Within hours, Greenberger said, Wall Street was knocking on Cantwell’s door seeking to convince her not to push the measure.
Greenberger, who has been in touch with Cantwell, said the industry was apparently willing to accept some reforms, but it still wanted roughly 30 percent of the derivative market to remain unregulated.
Industry groups said Cantwell’s bill goes too far.
“We’ve been focused on legislation that will bring greater regulatory transparency and oversight to derivative markets and products,” said Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association. “We’re concerned, however, that this legislation would harm an entire market.”
Cantwell described the Commodity Futures Trading Commission as a “toothless tiger” and said a strong, uniform set of federal regulations was needed. If that doesn’t happen, she said, the states should be allowed to step in.
The senator has spoken with the White House economic team about the need to regulate the derivatives market and with Sen. Christopher Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee.
But Cantwell is concerned that the issue is so complicated that lobbyists for the financial markets may be able to dilute any reform package.
“Some think it is so complicated for lawmakers to understand that lawmakers will just approve the status quo,” Cantwell said. “But why should the guys on Wall Street be able to operate in the dark?”
Les Blumenthal: 202-383-0008
lblumenthal@mcclatchydc.com
