WASHINGTON — Sen. Maria Cantwell wants to use state gambling laws to regulate parts of Wall Street, saying someone needs to police financial markets where "casino capitalism" involving highly speculative trades she likens to sophisticated betting continue unabated and threaten to create yet another financial crisis.
"She's going for their jugular," Michael Greenberger, a University of Maryland law professor, said of the effort by Cantwell, a Washington state Democrat. Greenberger was a top official at the Commodity Futures Trading Commission during the Clinton administration who unsuccessfully fought to regulate such trading.
Cantwell wants to repeal parts of a 2000 law that barred states from using their gambling laws to help rein in the nearly $600 trillion derivatives market.
The senator's effort comes as Congress is starting to consider tightening federal regulation of financial markets in the wake of the current economic downturn. Cantwell said she's not convinced Congress will take strong enough action and, as a backup, wants to give state attorneys general the power to act.
"They are the last line of defense," Cantwell said. "I don't want them neutered."
Derivatives essentially began as a form of insurance, offering a hedge for such companies as airlines that wanted to lock in the cost of jet fuel to avoid sharp increases. Over the years, however, derivatives became more exotic, allowing investors to place what were essentially side bets on such things as whether people would default on their mortgages or whether the price of oil or natural gas would go up or down.
Industry groups said Cantwell's bill goes too far.
"We've been focused on legislation that will bring greater regulatory transparency and oversight to derivative markets and products," said Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association. "We're concerned, however, that this legislation would harm an entire market."
Such well-known financiers as Warren Buffett and Felix Rohatyn have called derivatives "financial weapons of mass destruction" and "financial hydrogen bombs."
There is precedent for state gambling laws being applied to financial transactions.
In the early 1900s, gaming establishments known as "bucket shops" allowed people to place wagers on whether a stock would go up or down without actually buying the stock. States banned such betting after the economic crash and the panic of 1907.
In 2000, Congress attached the Commodity Futures Modernization Act to a must-pass, 11,000-page omnibus spending package that provided funding for a handful of cabinet departments and other federal agencies. The bill essentially deregulated the commodities markets and pre-empted the states from applying their "bucket shop" or other gambling laws.
Among those supporting the deregulation of the commodities markets were Alan Greenspan, who was then chairman of the Federal Reserve Board; Larry Summers, who was a Treasury secretary in the Clinton administration and is now a top economic adviser to President Barack Obama; and Robert Rubin, another Clinton-era Treasury secretary.
Greenberger, who was among those fighting the 2000 deregulation, said lobbyists for Wall Street and large banks essentially wrote the Commodity Futures Modernization Act and clearly recognized the need to pre-empt state gambling laws as the derivatives market took off.
"Las Vegas casinos were regulated but betting on Wall Street wasn't," Greenberger said.
Cantwell said the deregulation led to the spread of "dark" markets, where such things as "naked credit default swaps" could be traded with little or no government oversight. She called the decision to pre-empt state laws an "Achilles heel that blew out our economy. It could happen again. There are other bubbles out there."
Cantwell has a reputation as one of the toughest watchdogs of the nation's financial markets on Capitol Hill.
After West Coast electricity prices rose 500 percent in 2000-2001, she took on the Federal Energy Regulatory Commission, and along with a Washington state utility released secret audio tapes in which Enron officials bragged about schemes dubbed "Fat Boy," "Get Shorty" and "Ricochet" to manipulate energy markets.
More recently she has been highly critical of the failure of the Commodity Futures Trading Commission to rein in speculators who she alleged were mostly responsible for the sharp increase in gas and oil prices last year.
"She is relentless," Greenberger said.
Earlier this month, Cantwell introduced legislation that would allow state gambling regulators and attorneys general to examine unregulated derivatives trading. Within hours, Greenberger said, Wall Street was knocking on Cantwell's door seeking to convince her not to push the measure.
Greenberger, who's been in touch with Cantwell, said the industry was apparently willing to accept some changes, but it still wanted roughly 30 percent of the derivatives market to remain unregulated.
MORE FROM MCCLATCHY
Goldman's chief executive apologizes for part in fiscal crisis
Republicans berate Geithner, call for him to resign
Obama orders financial fraud task force beefed up
Financial crisis investigators are taking Wall Street names
Federal Reserve in crosshairs, but many experts say hold fire
Follow the latest politics news at McClatchy's Planet Washington