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Close The "Anything Goes" Accounting Loopholes And Regulate All Transactions

Enron and other companies rely on loopholes in accounting rules to keep its liabilities hidden in off-the-books, offshore partnerships. Enron and other companies use loopholes to make their accounting statements say whatever they want them to say. Congress needs to make sure that all material facts are disclosed and disclosed clearly.

Enron used political muscle to exempt its complicated energy-trading transactions from oversight by either the SEC, the Commodities Futures Trading Commission or any other agency. Congress also needs to make sure that all transactions, including derivatives, are regulated, not exempted by loopholes.

Derivatives are highly-leveraged transactions, many of which are extremely complex and difficult to understand—even for seasoned securities traders and investors. The financial world uses these contracts to hedge against the risk of price fluctuations or to speculate. Enron also used them to inflate its balance sheet and hide debt. So-called over-the-counter derivatives have grown sevenfold during the past decade and are now a key risk-management tool for nearly every business, from automakers wanting to pin down future borrowing costs to banks wanting to minimize losses from interest-rate changes.

Energy derivatives were regulated until just two years ago. In December 2000, Senator Phil Gramm (R-TX) co-sponsored the Commodity Futures Modernization Act, which exempted energy-derivatives-trading and electronic-trading platforms from regulatory oversight. In the words of James Ridgeway of the Village Voice, it passed "without undergoing the usual committee hearings and preliminary votes. (The act) was immediately attached as a rider to an 11,000-page appropriations bill. It passed and was signed into law by President Clinton six days later."

Enron used over-the-counter derivatives extensively in order to hide the nature of what it was doing to make money. Now, far too many former employees, investors and retirees are paying the price for Enron's desire to operate through murky, confusing, and unregulated transactions. In addition, as the stock market roils, energy companies are having difficulty raising capital to fund investments in future energy production. Given the misunderstanding pervading the investor community over derivatives and the precipitous collapse of Enron, derivatives merit closer scrutiny by federal regulatory authorities.

Legislation To Close The Derivatives Loopholes:

The state PIRGs' Enron Watchdog campaign supports legislation to repeal the 2000 legislation and restore oversight to energy-derivatives trading. A proposed amendment to an energy bill legislation on the Senate floor in March 2002, by Sens. Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Maria Cantwell (D-WA), is intended to do that. Some of the largest banks, securities firms and financial companies in the country oppose the amendment.

Further Reading On Closing The Loopholes:

See the Enron Watchdog report "Industry Associations Oppose Senate Legislation to Prevent 'Another Enron'" released March 11, 2002. It documents over $48 million in lobbying and campaign contributions by nine powerful industry associations opposing the amendment.

Read the news release accompanying the report.

Read a letter from U.S. PIRG, the Consumer Federation of America, Consumers Union (publishers of Consumer Reports magazine) and the think tank, the Derivatives Study Center, urging Senators to support the original version of the Feinstein amendment.

Go to the Derivatives Study Center website to learn more about derivatives: http://www.financialpolicy.org.

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