July 05, 2012 America's Petro-Terrorists Wall Street and Washington conspire to destablize the U.S.

economy, one barrel o f oil at a time. By Pete Kotz On July 11, 2008, the price of oil rose to $147 per barrel, a record high. Gas s tations engaged in hot pursuit as the price of a gallon rocketed past $4. All he ll was about to break loose. The country's largest banks had already begun to implode through arrogance and i neptitude. Now the oil market had moved in with a thundering uppercut. Airlines and trucking firms watched their costs punch through the roof. So did e very other business great and small, since 90 percent of American goods are ship ped in some form or another. "That was the breaking point of the economy," says Tyson Slocum, director of the energy program at Public Citizen, a Washington, D.C. government watchdog group. "That's when businesses said they could no longer fuel their trucks, and that f uel costs were overwhelming their payroll." So began a surge of layoffs that would push well into the next year. America's political leaders could only muster a simpleton's response. Demand had outstripped supply, they claimed. And it was all the fault of radical environme ntalists. If they'd only let us drill for more riches offshore or on protected l ands in Alaska we could all go back to cranking Toby Keith in our Chevy Tahoes. It was a fabulous, made-for-TV narrative. Who can forget Sarah Palin shaking her fist at the Republican convention, exhorting the legions to "Drill, baby, drill !" What began as a rallying cry soon became an article of faith at cafes and kit chen tables, executive suites and editorial meetings. There was just one tiny problem: Absolutely none of it was true. In four short years, the price of oil had risen nearly 400 percent. For this to be a natural occurrence, it would have required a sudden, massive increase in wo rld oil consumption coupled with equally massive shortages in production. None o f which had happened. "I asked the senior official at Goldman [Sachs] at the time. There were no suppl y-and-demand issues that could remotely explain the doubling and doubling again of oil prices," says Dennis Kelleher, a former international securities lawyer. "In order to justify that, it would literally take the discovery of China on the demand side, or the loss of Saudi Arabia on the supply end." And those politicians who were bleating about environmentalists? What they conve niently forgot to mention was that millions of acres had already been approved f or drilling in the U.S., but remained untouched. The demand just wasn't there. The boys on Wall Street must have had a hearty laugh over this. After all, they knew oil prices had ceased to have anything to do with supply and demand. Eight years earlier, they'd been granted the right to make huge, unregulated bets in t he oil markets. Now they'd driven gasoline to the brink, just as they had with t he mortgage industry.

The funniest part: All those finger-pointing politicians were their accomplices. This was an inside job. A SENATOR GOES WHORING It happened on the night of December 15, 2000. The country was in tumult over th e Bush-Gore election. This diversion offered Republican Senator Phil Gramm of Te xas an exquisite opportunity to push American financial stability back 100 years . That evening, Gramm inserted a 262-page amendment into the Commodities Futures M odernization Act. Leaked emails would later reveal that it had been written by l obbyists for Enron, Goldman Sachs and the Koch brothers, Kansas billionaires who would later fund the Tea Party movement. Gramm had turned his office into a subsidiary of Wall Street. From 1997 to 2002, the securities and banking industries had lathered him with $640,000 in campaig n contributions. His biggest sugar daddies weren't from Texas; they were Credit Suisse, Morgan Stanley, Bank of America and Goldman. And he was more than willin g to step-and-fetch-it on their behalf. Big oil, big banks and big speculators like the Kochs wanted to make monster bet s in the futures markets. But they wanted to do it in secrecy without any govern ment regulation. The futures markets are where the world trades its raw materials, from wheat to oil, coffee to cattle. They were designed not as toys for banks or speculators, but for merchants who actually use those products. Before a farmer plants his oats in spring, he can agree to sell them to Kellogg' s at a set price come fall, the same way Southwest Airlines can lock in a price now for a delivery of fuel in January. This allows companies to set their costs and income long-term, so their businesses and their customers aren't regularly b lown up by wild price swings. Everyone has a stake in keeping prices stable. Which is why futures had been heavily regulated since the 1930s, when Wall Stree t last incinerated the U.S. economy. Up till then, speculators had regularly ter rorized the country by artificially driving up prices and hoarding things like g rain. But the stock market crash of 1929 offered Congress a teachable moment. The men of Wall Street could not be trusted. It wasn't just their eagerness to screw the ir fellow countrymen. Their occasional bouts of breathtaking incompetence made t hem dangerous to themselves as well. So rigorous laws were enacted to protect bo th the nation and the banks that ran it. The futures market would be policed for the next 70 years until that night in 20 00, when Phil Gramm handed the keys to Enron, Goldman and the Kochs. The amendme nt passed without hearings or public notice. Democrats, practicing their patente d brand of acquiescence, were happy to ride shotgun. President Bill Clinton sign ed it into law. They were "bipartisan, effete snobs who thought they knew better than everybody, " says Mark Cooper of Congress. He's the director of research for the Consumer F ederation of America, among the many who warned Washington that it was playing w ith matches near dynamite. He'd soon be proven spectacularly correct. Gramm's amendment became known as the "Enron Loophole," named for the criminal e mpire that was then America's seventh largest company. Though Enron would soon c

rumble in a heap of avarice and fraud, Gramm & Co. had unleashed the parasites, allowing them to prey on American commerce. Prior to the change, speculators were generally kept to no more than 30 percent of any given market. Anything beyond that became dangerous. That's because they have no concern for the things they're buying or the people who use them. They'r e simply betting on price swings. The more volatile the market, the more money t hey make. Most sell well before they'll ever take delivery of, say, a load of su gar. Yet Congress had set them free. Banks like JP Morgan and Lehman began to rally l arge, institutional investors to bet on oil. It took them just five years to per vert the market's very purpose. By 2005, they'd set off a buying frenzy that lau nched prices into the stratosphere. Sherri Stone, vice president of the Petroleum Marketers Association of America, likens it to buying a home. Under normal conditions of supply and demand, you mi ght have a few other people bidding for the same house. "But with speculation, n ow you have 200 other people bidding for that house. You're going to pay an enor mous price for this house." By the time the economy began to collapse in the summer of 2008, speculators had cornered a stunning 81 percent of the oil market. Some had even begun to hoard fuel, just as the robber barons had done a century before. Olav Refvik, a top tr ader at Morgan Stanley, became known as the "King of New York Harbor" because he was leasing so much storage space. Yet the bankers' incompetence would once again prove dangerous to themselves and everyone else. They'd already sabotaged the housing market. Artificially high f uel prices were the second prong of their attack. The U.S. economy was officially in free fall. MEET AMERICA'S DUMBEST BOOKIES Think of Wall Street banks as not much different from your neighborhood bookie. After all, there's little difference in betting on Starbucks stock or a Dodgers game. The smart ones realize they can make a handsome living just sitting back, wisely setting odds and making a killing off the transaction fees. But what separates the two is that bankers violate a cardinal rule of the bookma king trade: They're degenerate gamblers themselves. And history says they're ver y much in need of adult supervision. In just the last 25 years, the financial industry has gone from the savings and loan crisis to the tech stock bubble to the accounting fraud scandals to the mor tgage industry collapse. Pepper in a ceaseless string of criminality from Drexel Burnham Lambert to MF Global and you realize the industry has routinely set off large bombs in the U.S. economy for a quarter century. Worse: The pattern is accelerating. This reign of depravity just happens to correspond with deregulation, the legacy of Ronald Reagan. Surely he was right to reduce the red tape and paperwork garr oting small business, the nation's largest and most stable employer. But his dis ciples took it as a one-size-fits-all theory. The people benefiting most were th ose who could afford to buy senators like Phil Gramm. Deregulation of the futures markets would solely serve America's greatest welfar e queens, Big Oil and Big Finance. Over the years both had purchased competitive

advantages from Congress, making a mockery of the free market. America's five l argest oil companies receive $20 billion in welfare annually, largely through ta x breaks afforded to no other industry. Big Financiers pay half the personal tax rates of their brethren at community banks. Despite buying off the umpires, the y still couldn't stand on their own two feet. "Nine of the largest financial institutions in the world failed" in 2008, says W illiam Black, a former bank regulator turned economist at the University of Miss ouri-Kansas City. "That should petrify people. All of them pulled the pin on the ir own grenades." When the economy collapsed, speculators found themselves with a small problem. N o one could afford to buy gas. In just a few short months, the price plunged fro m $147 to $30 a barrel. Some good came from this. President Barack Obama would soon follow Sarah Palin's charge, increasing drilling in the U.S. He also strong-armed Detroit into produ cing more fuel-efficient cars as part of their bailout. Finally, the simple fact that we're still broke four years later has caused U.S. consumption to steadily decline. Today, America exports more oil than it import s for the first time since the 1940s. Yet the heirs to Phil Gramm have done their best to protect speculators, hosing the nation in the process. "Every time the economy starts to show signs of risin g, the oil speculators jump in," says Joseph Kennedy II, a former congressman fr om Massachusetts. "They suck the life out of the economy." As analysts spoke of recovery in April 2011, the price of gasoline approached th e $4 mark. The wicked swings had resumed. Last spring, it topped out once more a t $3.96 a gallon. But this time it had become difficult to screech about environmentalists or supp ly and demand with a straight face. Even the banks were confessing their sins. A n analyst for Goldman Sachs admitted that banks like his had added an artificial 40 percent to the price of a barrel. Everyone from the Federal Reserve to the C EO of ExxonMobil has conceded much the same. That led Bart Chilton to do a little math. He's a commissioner with the Commodit y Futures Trading Commission, which is supposed to oversee oil trading. By his c alculations, the owner of a Honda Civic is sending $7.30 to JP Morgan and men li ke the Kochs every time she fills up her tank. For an F-150 pickup owner, the ba nker fee is $14.56 a tank. Chilton believes the annual cost to the trucking industry is a whopping $29.1 bi llion. For airlines: $9.8 billion. That means every time you fly, every time you buy an apple or a beer, the nation's thirstiest welfare queens take a cut. Your neighborhood gas station doesn't get a piece of anything, says Sherri Stone of the Petroleum Marketers Association, which represents 8,000 convenience stor es and oil wholesalers. Typically, a gas station makes just seven cents a gallon , all of which is eaten up by credit card fees. Yet it's the elderly who take the greatest beating. In 1979, Joe Kennedy founded Citizens Energy, a nonprofit that provides heating oil to the poor and aged in 22 states. Three years ago, it cost $1,200 per winter to heat a normal house. To day, it's $4,000, he says. To hear Kennedy tell it, Gramm's amendment shouldn't be called the "Enron Loophole." It should be known as the "Let's Try to Starve G randma Act."

Osama bin Laden could only have dreamed of causing such widespread damage to the U.S. economy. But both parties in Congress remain willing to protect Wall Stree t at all costs even if it means terrorizing the country. "We're going right back to the robber baron days," says Kennedy. "And it's eatin g away at our heart and soul." WALL STREET: A HIGH-CRIME AREA The late 1980s were a quaint period, when the admirals of finance were still eli gible for punishment under criminal law. Savings-and-loans were collapsing, just as their larger counterparts would 20 years later, pillaged by executive incomp etence and fraud. So federal prosecutors did something that would never happen today: They convict ed 1,000 of the biggest and worst offenders. They also filed some 800,000 civil suits, and banned sleazebags from ever working in banking again. But Washington didn't grasp the bloodbath's obvious lesson: Bankers still couldn 't be trusted. Reagan's "Government Bad, Private Sector Good" mantra had become the nation's official business plan. Instead of watching the wicked more closely , deregulation allowed Big Finance to rampage untethered. By the time George W. Bush reached office, the philosophy was so entrenched that , without fanfare or any official change in law, the feds decided that Wall Stre et basically had immunity under fraud statutes. That was clear by the early 2000s, when accounting fraud became the height of fa shion in executive suites across the land. The feds would prosecute the most egr egious chieftains at WorldCom, Tyco and Adelphia. But some of the country's bigg est names were caught rigging their books as well, firms like Merck, Halliburton and AOL. All were allowed to walk. The game had become fully rigged. Economist William Black, a former bank regulator and author of The Best Way to R ob a Bank Is to Own One, says there are 1 million law enforcement officers in Am erica today. Only 1,300 are devoted to white-collar crime. Most police departmen ts don't have a single detective working the country-club set. When Enron implod ed under the largest fraud in Texas history, the Houston PD was busy rousting ch eck bouncers. With local investigations rare and the feds purposefully averting their gaze, ba nkers were allowed to take down the housing market in a scheme 70 times the magn itude of the savings-and-loan collapse. "Wall Street is a high-crime area in which we basically have no cops on the beat ," says former securities lawyer Dennis Kelleher, head of Better Markets, a nonp rofit devoted to protecting taxpayers from the Too Big to Fail crowd. One might expect this to occur under George W., who made no bones that his presi dency was all about aiding his fellow trust-fund swells. But it would only get w orse under the self-styled change agent, Barack Obama. The appointment of Attorney General Eric Holder said it all. He'd been a partner at the law firm of Covington & Burling, whose clients included Goldman, JP Morg an, Citigroup and Bank of America. The year before he joined the Obama administr ation, he made $2.5 million through fees from the very people he was supposed to prosecute. Even more comical: Lanny Breuer was named head of the Justice Department's crimi nal division. He'd previously chaired the white-collar defense unit at Covington

. Prosecutions on Wall Street slammed to a halt. Black estimates that at the height of the mortgage crisis, two million fraudulen t loans were being written each year, largely through lenders inflating buyers' incomes. But not a single major figure was ever prosecuted. Had those 1,000 savi ngs-and-loan criminals from the 1980s practiced their larceny under Bush II or O bama, they would have been given million-dollar bonuses and retired to beach hom es in the Hamptons. It was under these pleasant skies that oil speculators launched their attack on America. In 2008, when their assault became evident, even some Republicans calle d for investigations. But that quickly ended when Obama became president. Senate Minority Leader Mitch McConnell, not one for subtlety, announced that his party 's Mission One was sabotaging Obama. Democrats managed to pass the Dodd-Frank Act in 2010. One of its goals was to ha nd the oil market back to actual users and allow the feds to crack down on exces s speculation. Kennedy believes this alone would have reduced the price of gas b y $1 a gallon. But after Congress announced its great triumph over Wall Street, it quietly team ed with bankers to gut the law. The Commodity Futures Trading Commission, which was supposed to spearhead the crackdown, saw its budget slashed. Speculators fil ed suit, essentially arguing that they had the inalienable right to violate the country. The financial industry would eventually spend $100 million to stave off regulati on, buying congressmen, setting up fake public interest groups and funding acade mics to produce laughable studies. Two years after Dodd-Frank passed, the feds have yet to touch a single hair on a speculator's head. The propaganda campaign has worked. "What they've really won is the intellectual struggle," says Black. "People can't conceive of a world without these massive institutions, and can't believe they're a negative influence." Take the Tea Party movement. Its followers are largely concentrated in the red s tates, statistically the nation's poorest and the most easily damaged by high ga s prices. Yet their greatest benefactors, the Koch brothers, have boasted of bei ng among the top five speculators in the world. So while the Tea Partiers rally against regulation and government interference, the Kochs steal $14 from them every time they fill up their Fords. "This is all part of the same formula of lower taxes and less regulation," says Kennedy. "That formula wins elections and ruins the country." SORRY, BUT IT COULD GET SCARIER As gas prices neared $4 this spring, Republicans reprised their Great Campaign o f Idiocy from 2008. Once again the environmentalists and liberals were to blame, this time for blocking construction of the Keystone Pipeline, a massive project that would allow the shipping of oil from Canada to Texas. Presidential aspirants Newt Gingrich and Michele Bachmann claimed they'd lower g as prices to $2 if elected, presumably by magic. Congressman Paul Ryan of Wiscon sin, considered the party's brightest financial mind, proposed cutting the Commo dity Futures Trading Commission's staff by two-thirds, just in case they might d ecide to grab coffee in the general vicinity of Wall Street. Mitch McConnell sai

d he'd be happy to address speculation but only if Democrats agreed to allow dri lling on environmentally sensitive lands. "They believe nothing was wrong with the markets in 2008," says Mark Cooper of t he Consumer Federation. Obama, meanwhile, was doing an inverse impression of Teddy Roosevelt. Instead of walking softly and carrying a big stick, he brayed noisily and brandished a twi g. When gas prices approached $4 in April 2011, the president announced the creatio n of the Oil and Gas Price Fraud Working Group. This was Obama's grand plan to f inally strike a blow against our enemies within. But while the announcement came with fireworks, these new crime fighters would m eet just a few times over the next year. Malevolence uncovered: zero. "Anybody who looks at the non-activity of that working group knows that the only fraud was in naming it," says Kelleher. "I think their non-record speaks for it self." Some senators like Sherrod Brown of Ohio and Bernie Sanders of Vermont have push ed earnestly for the feds to step in. But Republicans say they'll block any move against Wall Street with swing-state Democrats there to serve the appetizers. "There's a free-market philosophy that continues to exist," says Mark Williams, a former Federal Reserve examiner now at Boston University. "If you're a trader, you should have the right to trade. But if the greater community is harmed, you shouldn't have that right. We still live in a democracy, right?" Michael Greenberger is among the few who believe a reprieve is in store. He's a law professor at the University of Maryland and a former director at the Commodi ty Futures Trading Commission. He believes Wall Street's relentless ineptitude m ay finally do it in. Two months ago, JP Morgan was the latest to set itself aflame. One of its trader s managed to gamble away $2 billion in just a few weeks. The damage is expected to reach $7 billion by the time the cinders go out. "The JP Morgan episode really struck at the nerve of the American psyche about b anks and what kind of damage they can do," says Greenberger. "These people who a re doing nothing productive for the economy are walking away and, even in failur e, collecting millions and millions of dollars." Then again, the same people have been doing the same thing for 25 years. Yet reg ulation just keeps getting weaker. "You will know that somebody's serious when t hey put 500 FBI agents and a dozen of our best prosecutors on Wall Street," says Kelleher. In the meantime, it could all get a lot worse if Mitt Romney is elected. Even af ter the JP Morgan fiasco, he reiterated his plan to repeal Dodd-Frank, which als o contains measures guarding against future bank bailouts. Writes Politico: "Romney's reaction is the equivalent of putting out a small fir e in your house, then deciding that the lesson is you need to stuff your house w ith matches, throw out your fire extinguisher and cancel your fire insurance. An d doing all this after the house nearly burned to the ground less than four year s ago." These days, the oil market has again begun to dive through no help from our lead

ers. A stalled Chinese economy plus fears of serial bank crashes in Europe has c aused speculators to scatter. Prevailing theory: The world may soon be too broke to buy gas. But at some point, the economy will show signs of recovery. And Washington has e nsured that the speculators will return, there to suffocate it in its infancy.

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