While purporting to fight market manipulation, some Senators have suggested basically creating rules—such as using margin—to manipulate the market. Creating uneven rules on margin as was suggested during one of these hearings to try and affect market activity is a manipulation regardless of its intent. We ended the blog half jokingly by suggesting that with the equity markets under such pressure that it would be ironic if Congress tried to manipulate activity in one market one way and in another—equities—in a different manner. We quipped, “It could happen.”

Well today Securities and Exchange Commission (SEC) Chairman Christopher Cox announced before a Congressional hearing that the SEC would issue an emergency order that will provide that all short sales in the securities of primary dealers, Fannie Mae and Freddie Mac be subject to a pre-borrow requirement.

The announcement highlights the depth of the problems in the banking industry, coming a day after the government needed to prop up mortgage lenders Freddie Mac and Fannie Mae and has a smell of desperation to it.

While it is not exactly what we suggested might happen, it is close enough to give us a chill, especially given that our attempt included a measure of sarcasm and cynicism.

Thursday the House of Representatives passed the Energy Markets Emergency Act. The bill requires the Commodity Futures Trading Commission (CFTC) “to utilize all its authority, including emergency powers, to take steps to curb excessive speculation in the energy futures markets.” It passed overwhelmingly by a vote of 402-19.
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The bill falls far short of some of the draconian measures being recommended in recent hearings such as manipulating futures’ margins to direct market activity and restricting pension money from investing in commodity index funds. Basically it directs the CFTC to do its job and authorizes it to use the authority inherent to it—including emergency powers—to do it.

“A growing number of people believe a flood of speculative money into energy futures is driving the record prices in crude oil,” said House Agriculture Committee Chairman Collin C. Peterson (D-Minn) in a release. “CFTC must take immediate steps to ensure that index and hedge fund money is not the cause for price manipulation and should take any necessary action to curb excessive speculation in the markets.”

The CFTC has indicated that it has already done this and found supply and demand the driver of energy prices but Congress didn’t like that answer so the regulator has committed to studying the matter further.
While the legislation—if you can call it that—takes no real action, which may be it most important attribute other than its comedic value, it does threaten further action. “In July, the House Agriculture Committee will examine legislative proposals that would affect CFTC’s authority over energy futures and swaps markets. Several bills affecting regulation of the energy futures and swaps markets have been introduced and referred to the Committee in the 110th Congress,” noted the release.

Legislative experts at the recently concluded Managed Funds Association (MFA) conference in Chicago noted that despite all of the bluster coming out of Washington regarding commodity speculators, there was little chance any legislation would pass before the fall elections and that hopefully it would allow the current furor to die down. Perhaps they are right but it may not be likely as crude oil just closed above $140 per barrel for the first time ever.

On another note the Dow Jones Industrial Average continued to free fall on Friday, dropping nearly 500 points on the week and more than 1,000 points for the month of June with one day left. If Congress feels compelled to address this issue it could really get interesting. There has already been legislation proposed calling for higher margins (performance bonds) on futures contracts; wouldn’t it be interesting if some member of Congress intent to take action to help a sagging equity market proposes lowering margin on equities. I wouldn’t bet against it.