WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
June 6, 2008
The high cost of oil continues to be a focus in Washington. During a Senate Commerce Committee hearing on energy market manipulation, Sen. Maria Cantwell (D-WA) said if the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) do not effectively protect energy commodities and the overall futures markets from manipulation and excessive speculation, she will draft legislation creating additional regulation of the futures markets.
The Senate Banking Committee held a hearing on a number of pending nominations, including the nominations of Elisse Walters, Troy Paredes and Luis Aguilar to be commissioners of the Securities and Exchange Commission (SEC).
The Senate Agriculture Committee held a confirmation hearing on the nominations of Walter Lukken to be Chairman and Bart Chilton and Scott O’Malia to be commissioners of the Commodity Futures Trading Commission (CFTC).
During a follow-up to a March Senate Banking Committee hearing on the state of the banking industry, Ranking Member Richard Shelby expressed concern the Federal Reserve set a precedent with the actions it took to prevent Bear Stearns from filing for bankruptcy.
During the House Judiciary Subcommittee on Commercial and Administrative Law hearing this week, Judiciary Committee Chairman John Conyers (D-MI) said he would like to find a mutual and effective compromise on the Protecting Employees and Retirees in Business Bankruptcies Act (H.R.3652).
Rep. Gregory Meeks (D-NY) asked Secretary of State Condoleezza Rice to develop expedited procedures to bring foreign business professionals into the U.S. for brief visits by creating a provision for expeditious processing of applications based on specialized occupations, such as financial services.
In a report on Individual Retirement Accounts (IRA), the Government Accountability Office (GAO) suggested the Department of Labor (DOL) examine ways to encourage employer sponsorship of IRAs.
Cantwell Threatens Additional Regulation for Futures Markets
Sen. Maria Cantwell (D-WA) said if the Commodity Futures Trade Commission (CFTC) and the Federal Trade Commission (FTC) do not effectively protect energy commodities and the overall futures markets from manipulation and excessive speculation, she will draft legislation to add additional regulation of the futures markets. Cantwell told witnesses at a Senate Commerce Committee hearing on energy market manipulation, the CFTC is not doing all it can to protect consumers from possible oil price manipulation. She said she would prevent the confirmation of the chairman of the CFTC unless the agency acts to regulate U.S. crude-oil contracts traded on foreign boards of trade. Sen. Byron Dorgan (D-ND) said he believes hedge funds and investment banks are adding to the market pressures for oil beyond supply and demand fundamentals. Sen. John Sununu (R-NH) said the U.S. regulatory agencies need to understand the reasons for the oil price increases, determine if manipulation is present, and prosecute the offenders. He said the U.S. exchanges need to be transparent and demonstrate integrity to maintain their competitiveness with foreign exchanges.
George Soros, chairman, Soros Fund Management, said he believes there are four major factors contributing to the current price of oil: 1) the increasing cost of discovering and delivering new reserves combined with the accelerating depletion of existing oil fields; 2) the presence of a backward-sloping supply curve; 3) countries with the fastest growing demand keeping domestic energy prices artificially low through subsidies; and 4) trends following speculation and institutional commodity index buying, which reinforces the upward pressure on prices. Michael Greenburger, professor, University of Maryland School of Law, said the Food Conservation and Energy Act of 2008, does not close the foreign board of trade (FBOT) exemption. Greenburger suggested the FTC investigation into crude oil market futures be expedited, and he said the FTC has the power to investigate the futures trading subsidiaries of banks. Gerry Ramm, president, Inland Oil Company, testifying on behalf of the Petroleum Marketers Association of America (PMAA), recommended Congress consider 1) closing the administrative foreign boards of trade loophole by reviewing or eliminating CFTC “no-action” letters to overseas trading platforms; 2) raising margin requirements, or necessary collateral, for non-commercial entities; 3) requiring non-commercial traders to have the ability to take physical delivery of at least some of the product; 4) banning any participant that does not have the ability to take physical possession of a commodity from the market; and 5) significantly increasing CFTC funding.
Senate Banking Committee Holds Confirmation Hearing on SEC Nominees
During the Senate Banking Committee hearing on a number of pending nominations, the nominees for the Securities and Exchange Commission (SEC) said they were committed to ensuring thorough oversight of the credit rating agencies. Senate Banking Committee Chairman Christopher Dodd (D-CT) outlined areas the SEC’s proposed rules on credit rating agencies may include—such as information on rating methods, default rates, timely updates and conflicts of interest—and asked if other areas should be examined. SEC nominee Elisse Walters said these issues need to be addressed and added the SEC should look at its own rules and to what extent SEC rules rely on credit ratings. Troy Paredes said the SEC should also examine steps to promote competition in the rating industry. Ranking Member Richard Shelby (R-AL) suggested underwriters did not conduct sufficient due diligence, particularly on subprime loans. Fellow SEC nominee, Luis Aguilar, agreed with Walters and Paredes that due diligence, particularly with regard to structured finance products, is important. The nominees also agreed regulatory gaps need to be examined. Chairman Dodd said he would like to move forward on the nominations as soon as possible.
Hearing on CFTC Nominees
The Senate Agriculture Committee held a confirmation hearing on the nominations of Walter Lukken to be chairman, and Bart Chilton and Scott O’Malia to be commissioners of the Commodity Futures Trading Commission (CFTC). Lukken said he does not think there is manipulation or fraud in the commodities market, but a lot of money is flowing into these markets, which has the potential to create a bubble. Lukken said the CFTC does not have the kind of regulatory tools to spot that sort of situation. He said the CFTC is asking for better data and will be discussing the issue with the Presidents Working Group on Financial Markets (PWG). Chilton said the CFTC does not know if the presence of speculators in commodity indexes has had an impact. Chilton said the CFTC cannot look at things the way they have in the past, they need additional information to better understand what is occurring in the markets. O’Malia said he strongly believes regulators are critical in ensuring markets operate in a fair and transparent manner and to achieve this, regulators must be provided with the appropriate authority and tools to respond to the constant evolution of market behavior and products. Senate Agriculture Committee Chairman Tom Harkin (D-IA) said the full Senate could confirm the nominees as early as the end of this week.
Part II: An Examination of the Banking Industry
During a follow-up to a March Senate Banking Committee hearing on the state of the banking industry, Donald Kohn, Federal Reserve Vice Chairman, said he thinks the major investment banks have learned from the Bear Stearns situation, have recognized the risks and are now taking the necessary steps to proactively protect against risks. John Dugan, Comptroller of the Currency, said the credit markets are somewhat better, while credit quality is worse. He noted there is more liquidity in the money markets and the spreads on credit default swaps have narrowed, but there is still uncertainty among market participants about the strength of the economy and the ongoing effects the recent market disruption and economic downturn are having on financial counterparties, consumers and commercial borrowers. Sheila Bair, Chairman, Federal Deposit Insurance Corporation (FDIC), said the strained liquidity in the capital markets and realized and unrealized portfolio losses can be attributed to a lack of transparency in the structured finance market and a failure by investors to ask what the collateral was that served as the primary source of repayment. Bair said the FDIC plans to issue guidance on liquidity risk and issues related to investments in structured credit products. Bair commended the Senate Banking Committee for approving The Federal Housing Finance Regulatory Reform Act of 2008. She also encouraged Congress to provide multiple tools for addressing rising foreclosures, including the FDIC's Home Ownership Preservation (HOP) proposal, which would allow the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The hearing was cut short by a procedural objection preventing committees from meeting two hours after the Senate convened for the day.
House Judiciary Committee Examines Protecting Employees and Retirees in Corporate Bankruptcies
The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on the Protecting Employees and Retirees in Business Bankruptcies Act (H.R.3652), introduced by House Judiciary Committee Chairman John Conyers (D-MI). Subcommittee Chairwoman Linda Sanchez (D-CA) said H.R.3652 will help preserve jobs and balance the needs of companies with their employees and retirees. Michael Bernstein, Arnold & Porter, said H.R.3652 would increase the cost of Chapter 11 and complicate corporate restructuring by creating additional challenges for companies. He said provisions of the bill which limit executive compensation would damage the company’s ability to attract and retain management, which would harm the company beyond repair. Karen Friedman, Pension Rights Center, told Sanchez debtor companies are under significant pressure from shareholders and creditors to shed pensions, and the creditors also pressure bankruptcy judges to do the same. Babette Ceccotti, Cohen, Weiss and Simon, testifying on behalf of the AFL-CIO, said companies use bankruptcy as leverage during negotiations and may concurrently litigate as a strategy. Judiciary Committee Chairman Conyers said he would like to work with those opposed to the bill to create a mutual and effective compromise on H.R.3652.
Meeks Sends Letter to Secretary Rice Regarding Business Visas
Rep. Gregory Meeks (D-NY) sent a letter asking Secretary of State Condoleezza Rice to develop expedited procedures to bring foreign business professionals into the country for brief visits by creating a provision for expeditious processing of applications based on specialized occupations, such as financial services. Meeks said for the U.S. to remain the leading global financial center, U.S. financial firms must be able to regularly bring in their foreign clients for brief, specified business purposes to educate investors or to attend U.S. based conferences. Meeks noted many senior foreign executives have been turned down from getting a visa, even as U.S. financial services firms and major securities extended the invitation were awaiting their visit to attend conferences and conduct business.
GAO Releases Report on IRAs
In a report on Individual Retirement Accounts (IRAs), the Government Accountability Office (GAO) suggested the Department of Labor (DOL) examine ways to encourage employer sponsorship of IRAs and evaluate ways to determine whether employers offering IRAs are in compliance with the law and ways to collect additional information on IRAs. The report which was sent to House Ways and Means Chairman Charles Rangel (D-NY) and Ranking Member Jim McCrery (R-LA), found millions of employees of small firms lack access to a workplace retirement plan and several barriers may discourage small employers from establishing employer-sponsored IRAs and offering payroll-deduction IRAs to their employees. The GAO found examples of such barriers include perceived lack of flexibility for employers seeking to promote IRAs based on the DOL’s guidance, costs that some employers may incur for offering payroll-deduction IRAs, limited incentives to employers to offer IRAs, and a lack of awareness about how IRAs work. Retirement and savings experts reported increased worker access to payroll-deduction IRAs could help many workers save for retirement. The GAO recommended Congress consider determining whether direct oversight is needed for payroll deduction IRAs.
Bills Introduced This Week
Prior to the Memorial Day recess, Rep. Rob Andrews (D-NJ) introduced the Pension Protection Act ERISA Amendments of 2008 (H.R.6143), which would make technical corrections to the Pension Protection Act of 2006. Among the technical changes included in the bill, are a clarification of parties in interest affected by the prohibited transaction exemption for block trading; clarification of the scope of the prohibited transaction exemption for electronic communication networks; and clarification as to which entities need to increase fidelity bond coverage.
Rep. Bill Pascrell (D-NJ) introduced legislation (H.R.6194) that would allow private-activity bonds issued to finance facilities for furnishing water and sewage facilities to not be counted against the private-activity volume cap.
The Week Ahead
- On Tuesday, June 10, the Senate Banking Committee will hold a hearing on securities underwriting practices.
- Also on Tuesday, June 10, the House Transportation Committee will examine financing infrastructure investment.
- The Senate Foreign Relations Committee will hold a hearing on sovereign wealth funds on Wednesday, June 11.
- Also on Wednesday, June 11, the Securities and Exchange Commission (SEC) will hold an open meeting to consider whether to propose rules relating to National Recognized Statistical Rating Organizations (NRSROs) and credit ratings.