US Senator Maria Cantwell (D-WA) is leading an effort to employ the same kinds of laws that states use to regulate casino operations and apply them on a much bigger financial stage: Wall Street. Senator Cantwell is proposing that the kind of “casino capitalism” that led to the downturn in the mortgage markets late last year may lead to another financial collapse due to unrestrained trading and financial instruments rife with risk.
As the major emphasis of her platform, Senator Cantwell is seeking to repeal sections of legislation passed in 2000 that prohibit states from restraining the market for derivatives trading. She has stated that the behavior among derivatives traders, as well as those of other financial speculators, is no different than a gambler betting on which football team will win the Super Bowl.
Senator Cantwell’s efforts will seek to use the office of the individual states’ attorneys general to police derivatives trading, which generates trillions of dollars. In addition to the most recent financial crisis, the unregulated trading of derivatives also led to the downfall of the Houston-based Enron Corporation in late 2001. Before its collapse, energy traders with Enron manipulated electricity prices in California, which caused massive rolling blackouts and a statewide energy crunch.
Derivatives are different from actual stocks in that they form a “hedge” against the price of a certain commodity, such as oil or soybeans. In recent years, derivatives have become popular as a “side bet” on the true price of either a commodity or a financial movement, such as a stock index or the mortgage market. Many people maintain that the collapse induced by this form of speculation contributed significantly to the current economic crisis.
The practice of trading derivatives is similar to a practice outlawed in the US a century ago. In addition to the regular casino games, some establishments, called “bucket shops”, allowed patrons to bet on the direction of a stock price without the need to purchase the stock itself. After the stock market collapse of 1907, states banned the practice.
Michael Greenberger, a law professor at the University of Maryland, likened Wall Street to the Las Vegas Strip. The difference, he pointed out, was that the casinos in Las Vegas were among the most regulated business in the world, where regulators turned a blind eye to the “gambling” happening at the Wall Street investment banks.
