Apr 26

Bill Clinton Part II – Starring Barack Obama

Obama and ClintonWe all remember the wonderful carefree days of the Clinton Administration, notably the second lame-duck term during which much was accomplished, for good and for bad. The economy was growing, unemployment was low, and the stock market performed swimmingly. Congress impeached the President, but most of the balding white men involved in the Broadway production secretly played intern with their Bill Clinton action figures. President Clinton did not embroil us in some meaningless conflict murdering innocent civilians and upending an entire civilization for no good reason. Instead, although late and saturated with poor political and policy decisions, he brought an end to the bloody and disturbing conflict in former Yugoslavia.  With this and other foreign policy successes and a humming economy, it was peaches and cream in the United States. At least we thought it was.

What was overlooked  at the time was the legislative unraveling of significant and efficacious financial regulation that took place in the final years of the Clinton Presidency. Following a decade of banking deregulation, Glass-Steagall was demolished by the Gramm–Leach–Bliley Act, the depression era law that had kept banks and investment houses separate entities, and ensured that bank deposits were not ultra-leveraged and gambled with on risky Frankensteinesque financial products cooked up by some MIT graduate using complicated algorithms. The benign sounding and exceptionally complex Commodity Futures Modernization Act of 2000 also passed and was signed into law by President Clinton. The law ensured that over-the-counter derivatives, you know, those adorable little weapons of mass financial destruction that helped fuel the financial crisis and sank AIG into bankruptcy, would not be regulated by the SEC or the CFTC, or by anyone else for that matter. Each of these laws was boosted by Republican lawmakers, specifically Senator Phil Gramm, and his financial backers. Unfortunately, the economic and financial markets advisers that held Clinton’s ear signed on to the right wing plan willingly as well.

Times were great, and after more than a decade of lesser financial regulation, the conventional wisdom was that more regulatory downsizing would ultimately juice the system to yet new highs, lifting all ships and dominating the world’s financial system. Nothing could go wrong, well, at least that’s what President Clinton’s advisers counseled, notably Larry Summers, Alan Greenspan, Arthur Levitt, and William J. Rainer. Each man an imbecile in his own unique way. The first signs that the The Commodity Futures Modernization Act was a flop came not one year later when Enron Corporation crashed due to the collapse of unregulated single-stock futures and over-the-counter energy futures given the stamp of approval by the act. Continue reading

Apr 23

Petty Settlement Reached by CFTC with Oil Price Manipulator

The CFTC settled a case late Thursday with a multinational liquidity provider for alleged oil and gasoline futures manipulation. While this settlement comes nearly five years too late, it may mark a turning point in the Obama administration’s general reluctance to take on Wall Street.

Late Thursday, the CFTC announced the $14 million settlement with Optiver over oil and gasoline futures manipulation in March 2007. The CFTC said that traders in Optiver’s Chicago office engaged in a trading scheme where they accumulated large positions in Trading at Settlement contracts in NYMEX light sweet crude, heating oil or gasoline contracts and then offset those positions by trading futures contracts shortly before and during the closing period for those contracts, a scheme known as “banging” or “marking” the close, according to the CFTC.

It has been no secret that the administration has been under significant pressure from the left and the right alike to initiate investigations into what many experts have been reporting are inconsistencies between the market price for oil and gasoline and market forces. Political instability in the Middle East, primarily surrounding Iran, has long been the straw man used by the mainstream media and those with ties to Wall Street to distract the public from oil speculators and their effect on oil prices.

While the $14 million cash portion of the settlement is a relatively insignificant sum to a firm the size of Optiver, the settlement also includes a provision forbidding current and former members of the firm from commodities trading for as long as four years, a substantial penalty. The trading ban almost assuredly is intended to send a message to individual traders and managers to watch their step.

The settlement prohibits van Kempen from trading commodities for two years, Randal Meijer, who was then Optiver’s head of trading, for four years and Christopher Dowson, Optiver’s head trader, for eight years. Dowson is the only defendant that Optiver still employs, according to the CFTC.

The investigation has been ongoing for more than three years. The CFTC claimed in response to questions from the media that the announcement of the settlement was timed to coincide with a speech by President Obama in which he called for investigations into oil speculation and more funding for investigators and staff. I am inclined to believe the administration in this regard. Investigations of this sort, once initiated, tend to take on a life of their own, and settlements are generally reached when both sides have sufficiently vetted each other and are satisfied that the agreement fairly represents either’s chances of success or failure on the merits.

Optiver may not be a household name, but it is well known in Chicago and Amsterdam.

According to the CFTC, Optiver reaped a $1 million profit in 2007 by “banging the close” in crude, gasoline and heating oil markets with a rapid-fire trading program nicknamed “the hammer.”

Optiver is a household name in Chicago’s and Amsterdam’s electronic trading communities, where it is known for high-speed market making and arbitrage strategies in options and other derivatives using super-fast computer algorithms.

Evidence in the CFTC case includes emails and phone recordings showing efforts by traders at Optiver’s Chicago branch to “move,” “whack” and “bully” oil prices in 2007.

High-frequency trading has come under scrutiny in commodity markets in 2011 following a series of violent and seemingly inexplicable price moves that many traders have blamed on its growth.

While I am far from satisfied that the CFTC and the Department of Justice–which has apparently been on sebatical since 2008–has done enough to protect world consumers from predatory commodities trading practices, this settlement and accompanying trading ban is certainly a step in the right direction. It didn’t include any of the usual cast of unscrupulous equity sucking characters as Goldman Sachs or Morgan Stanley, but perhaps further investigations are underway. I wouldn’t hold out hope in that regard, but perhaps this settlement will encourage the big boys to tread lightly.

As far as Optiver is concerned, I believe a recent company job announcement says it all:

For our Trading department we are looking for final-year students or recent graduates from a an analytically related field of study such as Finance, Economics, Econometrics, Financial Engineering, Engineering, Mathematics, Computer Science or Physics. A flair for numbers, a passion for finance and the markets, and a hugely competitive streak are also a must.  (emphasis added).

“A flair for numbers.” Well, that’s rich, but refreshingly honest.

Apr 18

Obama attempts to Overcome Institutional Insolence on Oil Prices?

Yesterday President Obama stood at the White House with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Federal Trade Commission (FTC) Chairman Jon Leibowitz, and proclaimed that he will be putting “more cops on the beat” to investigate Wall Street oil price speculation and potential wrongdoing. I have written on this subject before here, here, and here. While I have little confidence that anything will come of this third call by the President for the Department of Justice, the FBI, and the CFTC to investigate oil futures speculation and other speculation in the commodity derivatives markets, he is at least taking his act public this time.

“We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher, only to flip the oil for a quick profit,”

Many argue that the President can not do much at all to influence oil prices. Many simply buy the Wall Street rhetoric hook, line and sinker, and even go so far as to turn sheer conjecture into fancy charts in order to confuse the public. I disagree. First, there is no greater motivator than personal freedom, and under current law Eric Holder can punish those found to have run afoul of the law by sending them to federal prison. Moreover, while the fines currently permitted are small change, the embarrassment that would accompany fines has consequences. I do not have any explanation for the extraordinary impotence and insolence at the Department of Justice under Eric Holder. The entire soap opera could just as easily be an elaborate act wherein the President calls for investigations of this thing or the other thing, and subsequently sends Eric Holder privately on his way with instructions to do nothing.

I find it extraordinarily difficult to believe that if Eric Holder made the decision to call in the FBI and begin interviewing the big Wall Street players in the commodity futures derivatives markets and put a few of them in prison, that the oil prices wouldn’t drop in an instant. I envision FBI agents and federal regulators walking through hallways at Goldman Sachs, owner of the Goldman Sachs Gold Index, and other large firms carrying lawfully issued subpoenas and search warrants. I have a hunch that some of the more egregious activities would stop immediately if people realized they might actually be sent to prison. Exxon Mobil, the Saudi Oil Minister, among others, are on record as believing that the current price of oil has no basis in the realities of supply and demand nor the potential disruption in delivery that could ensue following a conflict with Iran. Holder’s behavior with regard to oil futures speculation is not dissimilar from his approach to both the larger mortgage and financial instrument fraud which caused the recession, and his utter infecundity with regard to prosecuting those responsible for the BP oil spill. It is as if the entire Department of Justice loathes prosecuting anyone, for anything, at any time.

What is particularly troublesome about Obama’s footing on oil prices is that it is not Republicans who are obfuscating efforts to initiate investigations, make arrests, and prosecute those responsible. It is his own administration and administration officials who stand in his way. It is cerytainly true that Republicans, Mitch McConnell in particular that are placing the blame at Obama’s feet, but the President has the tools to demonstrate through concrete actions that he takes Wall Street fraud and price manipulation seriously. One man, let alone the President of the United States, can alone control the world price of oil, but one man can use the tools available to him to take action. Some time ago CBS’s 60 Minutes ran a piece in which it interviewed the chief prosecutor at the Department of Justice concerning the lack of criminal prosecutions stemming from the financial collapse. His response was a contemptuous “just wait.” Well, the American people have been patiently waiting for nearly four years for the administration to show that it will prosecute wrongdoing perpetrated by the golden boys of Wall Street. My guess is that the wait will continue.

Ian Masters interviewed Michael Greenberger, the former Director of Trading and Markets at the Commodity Futures Trading Commission, on this subject yesterday. It’s worth a listen.

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Apr 11

Oil Speculation

I have written on the subject of oil speculation before, here, and here. Kendaleth C. VanLue, a guest blogger over at Think Progress published a piece today in which he lays out each of the recent indicators that oil speculation on Wall Street in indeed driving up the price of oil, affecting gasoline prices and heating oil dramatically.  Shippers, parcel delivery companies, and airlines among other trade groups have repeatedly called on the administration to crack down on the practice, or at the very least open investigations. Experts have offered testimony to Senate and House leadership. However, other than veiled threats in recent stump speeches from President Obama, there has been no action from the Department of Justice or the CFTC.

The article lays out a sample of recent indicators of rampant oil speculation:

Think Progress has links to the data to back up each of the indicators.

Apr 06

Avoiding the Cause of Oil Spike

The fight over oil prices among the top two presidential candidates is afoot. The Obama campaign has just released a new campaign add in which he touts his administration’s accomplishments in increasing domestic oil supply and raised fuel efficiency standards for automobiles. Romney has been fighting back, claiming that Obama and his henchman, including the Secretary of Energy, have colluded with tree huggers and failed alternative energy manufacturers like Solyndra to purposefully drive up the price of oil.

This spectacle would be politically entertaining if it were not for one glaring omission: derivative futures speculators on Wall Street account for a plurality of the recent spike in the price of oil. This didn’t come from some left wing progressive algae farmer, it came from the fucking Federal Reserve. If Obama were to even intimate that CFTC and DOJ investigations of illegal futures trading were coming down the pike, the price of oil would decline quickly as speculators take profits in hopes of avoiding regulatory action. Romney has also failed to go after Wall Street on this matter. One can be left only to conclude that neither party has an interest in having the backs of hard working Americans as they struggle to purchase gasoline and heating oil and find enough left over for food and other necessities.