The US Commodity Futures Trading Commission is kicking up more dust than a calf scramble at the annual Houston Livestock Show and Rodeo, where a large group of teenagers chase a small herd of calves across the arena's dirt floor. Those who can catch and harness a calf, then pull or push it across a goal line, win a heifer to raise for display at a future livestock show.
Having declared in a previous study there was no evidence that speculators in the oil futures market drove up energy prices last year, CFTC under a new chairman appointed by a new president seems now determined to tackle and drag some bawling offenders before an indignant public to be branded as scapegoats for a faulty economy.
In late July and early August, CFTC hosted public hearings to justify its desire to impose position and other limits on participants in the futures markets under its control. Although the commission has no alleged speculators in its cross-hairs yet, still its press office seems to be ramping up news releases on other malefactors.
On Aug. 6, it announced a California court imposed $25 million in fines and sanctions against a limited partnership in that state for ripping off funds it was supposed to invest in commodities. On Aug. 7, the commission issued a notice to suspend or modify the registration of an indicted Illinois broker of treasury note futures.
That same day, CFTC charged a couple with operating a $22.5 million foreign currency Ponzi scheme. On Aug. 10, it obtained an order freezing the assets of the wife of an alleged operator of a $1.3 billion investment scam. Prior to that, CFTC announcements were limited to the three public hearings on the futures market and Chairman Gary Gensler's opening statements.
CFTC's sudden flurry of crime-related releases reminds this reporter of the late 1970s when the Department of Justice unleashed a flood of notices of probable violations (NOPVs) accusing various oil companies of violating the "new" oil-"old" oil price categories imposed to prevent producers from reaping any additional rewards for oil already in production at $5/bbl before the market jumped to $12-14/bbl. Invariably the DOJ releases reached the newsroom at the close of a business day when it would be difficult to get a response from the accused oil company.
Moreover, when contacted, the companies had not yet received copies of the NOPVs; DOJ had leaked those to the media before notifying the companies. NOPVs are not the same as formal charges. And any former police-beat reporter turned business writer knows one never hints at accusations before charges are officially filed. So NOPVs were spiked by this reporter, pending formal charges.
That wait-and-see decision was later justified. Every oil company that negotiated a settlement rather than go to trial ended up paying much less than the billions claimed in the NOPVs. And every company that fought the NOPVs in court won when federal attorneys failed to prove their case.
Faulty assumption
Analysts at the Centre for Global Energy Studies (CGES), London, recently reported, "The presumption that there are regular suppliers of oil futures contracts (those oil producers who hedge) and ‘investors' who are eager to purchase these contracts, has led the CFTC, under pressure from the politicians to do something, to consider placing position limits on investor-speculators and to review the exemptions from such limits granted to firms specializing in certain hedging operations.
"The hope is that the imposition of such limits on the demand side of the futures market will lead to lower oil prices than otherwise would have been the case—but this is wishful thinking," CGES said.
"Speculators, large and small, are both buyers and sellers of oil futures, as are the hedgers. Restricting the positions speculators can take when they wish to go further short will keep futures prices high. The CFTC's plan to provide information on the open interest positions held by swaps dealers and hedge funds, along with a close examination of the efficacy of existing firewalls between the investment banks' trading floors and research groups, seems to us a more sensible move than interfering with the volumes of contracts held by any specific group of futures players," CGES said.
"The guiding principle should be more transparency and less restraint. As doctors are always taught: whatever you do, first do not harm the patient."
