'It would be wise for us to limit the amount pension funds can put in the commodities market'

Sen. Sam Brownback (R-Kan.), during debate on S. 3268, Majority Leader Harry M. Reid's (D-Nev.) bill to enact energy commodities trading reforms, late in the afternoon of July 22.

Sen. Sam Brownback (R-Kan.), during debate on S. 3268, Majority Leader Harry M. Reid's (D-Nev.) bill to enact energy commodities trading reforms, late in the afternoon of July 22:

"I am the ranking [minority] member on a subcommittee that has held hearings on this particular bill, the Appropriations subcommittee that funds the Commodity Futures Trading Commission. We have looked at these issues. And while we are having an important debate here, I think the hearings we have held have been very positive in reflecting on how much money has been coming into a number of places in the futures market.

"Yet if we are going to get the answer to the basic question here of trying to reduce price, the clear way is to deal with the supply-and-demand equation and not just say: Okay, it is all because of speculation that these prices are going up.

"I do believe it would be wise for us to limit the amount pension funds can put in the commodities market, but primarily as a feature of how you help the pension funds because commodity markets are inherently volatile, moving wildly at various times, and it seems not to be a wise place to put large amounts of pension funds.

"But this bill goes far beyond that, to the point that the Kansas City Board of Trade (it is on the Missouri side of Kansas City, but a number of people working there live in Kansas) is strongly opposed to this and thinks it will hurt the commodity futures market rather than help it. You are going to hurt the price discovery mechanism, and you may well, in the long term, end up driving up prices through these features.

"They have been in my office previously drawing attention to outside funds coming in and saying this is something that ought to be looked at, but when they look at this answer, they are saying it is way over the top. It doesn't fit the need that we have of the day.

"I wish to make the point on where we need to limit the pensions funds in the commodity futures market. As public pension funds have grown in size and expanded their investment portfolios beyond traditional equity and bond investment activities, significant losses by some major pension funds have led to greater calls for scrutiny and investigation.

"For example, the San Diego County pension fund lost about half of its $175 million investment in a hedge fund when the fund crashed due to what turned out to be a disastrous bet on natural gas, getting into a commodity market. All told, approximately 20% of the pension fund's assets are invested in alternative strategies through hedge funds and other money managers.

"That is my point here. I think the right place to look is a limitation on the total amount of monies that can be put in hedge funds, into the commodities futures markets, to protect the pension funds, rather than saying this is the silver bullet that is going to cure the increase in energy prices that we have."

Contact Nick Snow at nicks@pennwell.com

More in Economics & Markets