Foxes guarding the chicken coop

Immediately after Enron's bankruptcy, Sen. Dianne Feinstein, D-Calif., drafted legislation that aimed to close the loophole in the CFMA that allows energy trading to be exempt from regulatory oversight. The law would have put electronic energy exchanges like Enron's EnronOnline under CFTC jurisdiction: Companies would have to disclose information on trading volumes, players, profits and losses while also keeping capital reserves.

There is no guarantee that CFTC oversight could have prevented Enron's collapse. But experts argue that it would have made Enron's troubles more visible. Regulators have learned only recently that Enron controlled about 25 percent of all U.S. wholesale energy trades during its peak, and that during the California energy crisis, the company -- according to its own internal documents -- used its market power to manipulate the market. Feinstein maintains that her proposal, which would have put energy and metal trades under CFTC jurisdiction, would prevent a similar scenario from occurring elsewhere.

"In terms of energy derivatives, there seems to have been real gaming of the market, so it's clear that there needs to be some basic oversight," says Howard Gantman, a Feinstein spokesman. "It existed in the past -- until the CFMA -- and we'd like it to be returned."

But in order to achieve this goal, Feinstein has been forced to go up against many of the same forces that kept the CFTC impotent for much of the '90s. So far, she's lost. Her attempt to tie the legislation to the Senate energy bill failed in April by two votes.

"At present, there is no constituency for reform in the derivatives world, and there won't be until a major financial institution collapses -- which will happen," says Mayer, author of "The Fed" and more than a dozen other finance books. "Until then, the Fed, the SEC, the CFTC, the Treasury, Congress and the White House will all accept the industry's lunatic claim that the tightening of links between markets, the elimination of friction and the loss of redundancy improves the reported profits of derivatives transactions and stabilizes the system."

Bush's nominations to the CFTC add insult to injury for critics looking for real reform.

Brown-Hruska started her career as an economist whose Ph.D. thesis argued that markets self-correct against price manipulation -- no regulation or disclosure required. In 2001 she co-wrote an article for Barron's that argued against an SEC proposal that would force brokers to reveal how much they paid for exclusive market information.

She also served as chief economist at the CFTC from 1990 to 1995 under then-chairwoman Wendy Gramm. She now works as an assistant professor of finance at George Mason University's Mercatus Center -- a free-market think tank headed by Gramm, and which has received $50,000 from Enron since 1996.

Given the degree of outrage over Enron, says Greenberger, "the idea that a protigi of Wendy Gramm could be placed on the commission that will investigate this issue is mind boggling."

Lukken's record is similarly tainted. A former legislative assistant to Sen. Richard Lugar, R-Ind., Lukken has one major piece of legislation associated with him: the CFMA, a law which current CFTC commissioner Erickson describes as "Swiss cheese," meaning "there are so many holes that let you get out of the block."

"[Lukken and Brown-Hruska] don't represent any new thinking that will provide a remedy," says Randall Dodd, director of the Derivatives Study Center. "What needs to be done is broad rethinking of where the system has failed, and how to come up with new solutions. These people have never supported a government regulation in their life. And at this juncture, that's not the type of narrow-minded thinking that's needed."

Brown-Hruska declined to comment on her appropriateness for appointment to the CFTC.

Seth Boffelli, a spokesman for Sen. Tom Harkin, D-Iowa, who is chairing the hearings on the pair of Bush nominees, said only that "I'm sure there will be some tough questions asked and depending on what they say, we'll go from there."

To critics, Bush's nomination of two people who are the epitome of the deregulatory thinking that allowed Enron to get away with financial murder is a clear indication that no substantive changes can be expected from the current administration. But some potential critics are holding fire.

"I haven't seen significant change yet, but I think the jury is still out," says Brooksley Born, now in private practice. "Congress is still working on a number of things, and the administration itself is also in the process of working out some issues. So we have to wait and see."

But some critics argue that we are waiting and seeing our way into a continued financial meltdown. The signs are obvious, they say: The energy industry has been battered in the stock market; the NASDAQ is at lows not seen since Sept. 11.

"There's a crisis of confidence in the market, in energy in particular," says Erickson. "The participants no longer trust each other or have confidence in each other. I'm as interested as anyone else in seeing the markets grow and I think there are a few simple things that you can attach that instill confidence -- transparency, disclosure requirements. Those are the kinds of things that are the cornerstones of markets."

Robert Shiller, author of "Irrational Exuberance," agrees. "In the long run, business people are better off if we have good strong regulations in place to prevent shenanigans from happening," he says. "If people are getting upset, we need to take measures that have some teeth. The mood is souring; we need to do something."

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